-----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, GocY15uX5zON0pdtjvalcZsLWJSEvpQ/LcV8JpjHP1PVRzVgaJQDAKELEMh12cIo RJx48r8Gi0JbSDJZHX194w== 0001047469-99-022420.txt : 19990624 0001047469-99-022420.hdr.sgml : 19990624 ACCESSION NUMBER: 0001047469-99-022420 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 32 FILED AS OF DATE: 19990527 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COBALT GROUP INC CENTRAL INDEX KEY: 0001036290 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 911674947 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-79483 FILM NUMBER: 99636300 BUSINESS ADDRESS: STREET 1: 2030 FIRST AVE STE 300 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2063867535 S-1 1 S-1 As filed with the Securities and Exchange Commission on May 27, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE COBALT GROUP, INC. (Exact name of registrant as specified in its charter) Washington 7375 91-1674947 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
------------------------ 2030 First Avenue, Suite 300 Seattle, WA 98121 (206) 269-6363 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ Geoffrey T. Barker Co-Chief Executive Officer The Cobalt Group, Inc. 2030 First Avenue, Suite 300 Seattle, WA 98121 Telephone: (206) 269-6363 Fax: (206) 269-6350 (Name, address, including zip code, and telephone and facsimile numbers, including area code, of agent for service) ------------------------------ COPIES TO: Ronald J. Lone Alan K. Austin Christopher J. Voss Mark L. Reinstra Ivan A. Gaviria John L. Whittle Marc S. Marchiel Daniel K. Yuen Stoel Rives LLP Wilson Sonsini Goodrich & Rosati 3600 One Union Square Professional Corporation 600 University Street 650 Page Mill Road Seattle, WA 98101 Palo Alto, CA 94304-1050 Tel: (206) 624-0900 Tel: (650) 493-9300 Fax: (206) 386-7500 Fax: (650) 493-6811
------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. 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, check the following box. / / If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
Proposed Maximum Title of Each Class of Aggregate Offering Amount of Securities Registered Price(1) Registration Fee Common stock, $0.01 par value........................................................... $86,250,000 $23,978
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o). ------------------------------ THE REGISTRANT AGREES THAT THE SECURITIES AND EXCHANGE COMMISSION MAY CONSIDER IT TO HAVE FILED AN AMENDMENT TO THIS REGISTRATION STATEMENT ON THE DATE NECESSARY TO DELAY THIS REGISTRATION STATEMENT'S EFFECTIVE DATE UNTIL EITHER (1) THE REGISTRANT FILES AN AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE UNDER SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED; OR (2) UNTIL THE DATE THAT THE SECURITIES AND EXCHANGE COMMISSION DECLARES THIS REGISTRATION STATEMENT TO BE EFFECTIVE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED MAY 27, 1999 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 SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. THE COBALT GROUP, INC. [LOGO] SHARES COMMON STOCK The Cobalt Group, Inc. is offering shares of its common stock. This is Cobalt's initial public offering. We have applied for the common stock to be quoted on the Nasdaq National Market under the symbol "CBLT." ------------------------ Investing in our common stock involves risks. See "Risk Factors" beginning on page 4. ---------------------
Per Share Total ------------- ------------- Public Offering Price.............................................................. $ $ Underwriting Discounts............................................................. $ $ Proceeds to Cobalt................................................................. $ $
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. We have granted the underwriters the right to purchase up to an additional shares of common stock to cover over-allotments. BancBoston Robertson Stephens expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ BANCBOSTON ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. SG COWEN WIT CAPITAL CORPORATION The date of this prospectus is . Graphic of Cobalt Group Solution depicting information sources, systems and service offerings We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. 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. Information contained on the Cobalt Group, DealerNet and YachtWorld Web sites are not part of this prospectus. The information in this document is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Except as the context otherwise requires, the terms "Cobalt," "we," "us," and "our" as used in this prospectus refer to The Cobalt Group, Inc. and its subsidiary PartsVoice, LLC. Until , 1999 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ------------------------ TABLE OF CONTENTS
Page --- Prospectus Summary.......................................................................................... 1 Risk Factors................................................................................................ 4 Use of Proceeds............................................................................................. 12 Dividend Policy............................................................................................. 12 Capitalization.............................................................................................. 13 Dilution.................................................................................................... 14 Selected Financial Data..................................................................................... 15 Unaudited Pro Forma Combined Financial Information.......................................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 21 Business.................................................................................................... 31 Management.................................................................................................. 45 Recent Acquisition.......................................................................................... 53 Certain Transactions........................................................................................ 53 Principal Shareholders...................................................................................... 54 Description of Capital Stock................................................................................ 56 Shares Eligible for Future Sale............................................................................. 58 Underwriting................................................................................................ 60 Legal Matters............................................................................................... 62 Experts..................................................................................................... 62 Additional Information...................................................................................... 62 Index to Financial Statements............................................................................... F-1
------------------------ DEALERNET-REGISTERED TRADEMARK-, PARTSVOICE-Registered Trademark- and YACHTWORLD-Registered Trademark- are our registered trademarks. Additionally, COBALT-TM-, COBALT GROUP-TM-, WEBEDGE-TM-, ADWIZARD-TM-, DEALER'S CHOICE-TM- and INSTANT INCENTIVES-TM- are our trademarks. This prospectus contains other product names and trade names and trademarks of Cobalt and of other organizations. SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THIS ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. Our Company We are a leading provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. We enable our clients to develop and implement effective e-business strategies and to position themselves to capitalize on the increasing use of the Internet by consumers to research, evaluate and initiate purchases of new and pre-owned vehicles, parts and accessories, and automotive-related services such as financing and insurance. We currently offer our clients: - comprehensive Web site design, development and maintenance services; - data extraction, aggregation and management services; - Internet advertising and promotional services; and - Internet marketing, training and support. We currently manage and maintain more than 3,300 Web sites for clients holding more than 4,700 new vehicle franchises. Our clients include more than 50 of the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE NEWS, and we are the manufacturer-endorsed provider of Web site solutions for the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. Our vehicle parts data services are used by clients holding more than 9,000 new vehicle franchises. We also provide vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi, Subaru and Toyota. In total, we provide our services to clients holding more than 12,000 new vehicle franchises. Automotive retailing is one of the largest retail trade sectors in the United States with revenues totaling more than $1 trillion annually. The industry is highly competitive with more than 22,000 automotive dealerships representing more than 49,000 new vehicle franchises in the United States. Manufacturers and dealerships spend heavily on traditional marketing and advertising. According to the National Automobile Dealers Association, or NADA, dealerships spent more than $5.0 billion on advertising in 1998. The emergence of the Internet as a commercial medium has created an opportunity for automobile manufacturers and dealerships to market cost-effectively to and communicate with a large and growing pool of online consumers. Forrester Research projects that automobile dealerships alone will increase their annual spending on Internet marketing to more than $600 million by 2002. We believe our suite of services enables our clients to capitalize on the multiple marketing opportunities that the Internet creates by allowing them to: - rapidly deploy a comprehensive Internet presence; - create an online identity and leverage existing brand assets; - increase the return on investment in traditional advertising media; - improve customer acquisition and retention; and - enhance internal efficiencies. In April 1999, we acquired PartsVoice, LLC, a provider of automobile parts inventory and service record data aggregation services. The addition of PartsVoice expands our service offerings and substantially increases our client base of automobile manufacturers and dealerships. We believe Cobalt's acquisition of PartsVoice provides us with significant opportunities to cross-sell within our existing client base, increases the attractiveness of our services to potential clients and enhances our ability to develop additional value-added services. 1 The Offering Common stock offered............................ shares Common stock to be outstanding after this offering...................................... shares Use of proceeds................................. For repayment of indebtedness, payment of accrued dividends on preferred stock and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.......... CBLT
Common stock to be outstanding after this offering is based on shares outstanding as of March 31, 1999. This number does not include: - 2,090,206 shares issuable upon exercise of stock options outstanding under our 1995 Stock Option Plan as of March 31, 1999, at a weighted average exercise price per share of $0.62, - 61,500 shares issuable upon exercise of warrants outstanding as of March 31, 1999, at a weighted average exercise price per share of $0.45 and - 1,323,338 shares available for future grant or issuance under our 1995 Stock Option Plan. See "Management--Employee Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to The Cobalt Group, Inc. Financial Statements, or Cobalt Financial Statements, beginning on page F-2. ------------------------ Our headquarters are located at 2030 First Avenue, Suite 300, Seattle, Washington, 98121 and our telephone number is (206) 269-6363. Our Web site address is www.cobaltgroup.com. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND REFLECTS THE CONVERSION OF ALL OUTSTANDING PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING. 2 Summary Financial Data (in thousands, except per share data)
Actual --------------------------------------------------------- Since Inception Three Months Pro Forma (March 17, Year Ended Ended ------------------------------ 1995) to December 31, March 31, Year Ended Three Months December 31, ------------------------ --------------- December 31, Ended March 31, 1995 1996 1997 1998 1998 1999 1998 1999 ------------- ------ ------- ------- ------ ------- ------------ --------------- (unaudited) (unaudited) (unaudited) Statement of Operations Data: Net revenues............................ $ 70 $ 312 $ 1,711 $ 6,245 $1,079 $ 2,453 $ 15,773 $ 5,009 Gross profit............................ 54 261 1,426 5,046 928 1,913 12,430 3,886 Loss from operations.................... (415) (826) (2,428) (4,590) (422) (2,008) (5,129) (2,121) Net (loss) income....................... $ (415) $ (828) $(2,398) $(8,117) $1,203 $(2,000) $(10,604) $(2,612) Basic net (loss) income per share....... $(0.24) $(0.24) $ (0.69) $ (2.95) $ 0.35 $ (1.74) $ (3.88) $ (2.19) Diluted net (loss) income per share..... $(0.24) $(0.24) $ (0.69) $ (2.95) $ 0.13 $ (1.74) $ (3.88) $ (2.19)
March 31, 1999 ----------------------------------------- Pro Forma Actual Pro Forma As Adjusted --------- ----------- ----------------- (unaudited) Balance Sheet Data: Cash and cash equivalents...................................................... $ 3,876 $ 876 $ Working capital................................................................ 3,129 (23,088) Total assets................................................................... 10,665 38,141 Long-term obligations, net of current portion.................................. 1,376 1,376 Mandatorily redeemable convertible preferred stock............................. 31,753 -- Total shareholders' (deficit) equity........................................... (26,767) 9,367
The pro forma columns in the Statement of Operations Data present information as if Cobalt's acquisition of PartsVoice had occurred on January 1, 1998. The pro forma column in the Balance Sheet Data presents information as if Cobalt's acquisition of PartsVoice had occurred on March 31, 1999 and also gives effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering. The pro forma as adjusted column in the Balance Sheet Data gives effect to the receipt and application of the estimated net proceeds from the sale by us of the shares of common stock that we are offering at an assumed initial public offering price of $ per share and after deducting underwriting discounts and estimated offering expenses. See "Use of Proceeds," and "Capitalization," and "Unaudited Pro Forma Combined Financial Information." See Note 1 of Notes to Cobalt Financial Statements for an explanation of the methods used to compute basic and diluted net (loss) income per share data. 3 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT. We face risks because we are an early stage company in a new and rapidly changing market. We began operations in March 1995. Accordingly, we have only a limited operating history and our business is in an early stage of development. Before investing, you should evaluate the risks and challenges that an early stage company like ours will face in the rapidly changing and competitive environment of the Internet. We may not successfully meet the challenges of growing our company. We have a limited sales history and an unproven, evolving business model. We began offering our services to automobile dealers in November 1995. We must achieve broad market acceptance of our services and continue to expand our service offerings for our business to succeed. Our client base represents only a small percentage of the total new automobile dealer community in the United States, and many of our dealer clients have been clients for only a short time. We cannot assure you that our new and planned future offerings will be successful or that our broader business model, as it evolves, will succeed. We may never achieve or maintain profitability. We have incurred net losses each year since we began operations and we expect that we will not be profitable at least through 2000. We cannot guarantee that our business strategy will be successful or that we will ever achieve or maintain significant revenues or profitability. After giving pro forma effect to Cobalt's acquisition of PartsVoice, we had a net loss of $10.6 million for the year ended December 31, 1998. As of March 31, 1999, on a pro forma basis we had an accumulated deficit of $26.6 million. We have not had operating profits on a quarterly or annual basis. We expect to continue to incur significant operating expenses and, as a result, we will need to generate significant quarterly revenue increases to achieve and maintain profitability. We face challenges in integrating the PartsVoice acquisition and will encounter similar challenges if we make future acquisitions. To execute our business plan, we must integrate the operations and services of PartsVoice and Cobalt into a cohesive, combined operation. Cobalt's acquisition of PartsVoice has significantly increased the size of our workforce and has expanded our physical facilities and the geographic dispersion of our employees and operations. Integrating any newly-acquired businesses or technologies, including PartsVoice, may be expensive and time-consuming. We may fail to manage these integration efforts successfully. In addition, we may pursue additional acquisitions of businesses, products and technologies that complement or expand our business. The negotiation of potential acquisitions or strategic relationships as well as the integration of future acquired businesses, products or technologies could divert our management's time and resources. To finance any acquisitions, it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms that are not favorable to us and, in the case of equity offerings, may result in dilution to our shareholders. We may not be able to operate any acquired businesses profitably or otherwise implement our growth strategy successfully. If we are unable to integrate any newly acquired entities or technologies effectively, our business and results of operations could suffer. Acquisitions may cause us to incur contingent liabilities and to amortize expenses related to goodwill and other intangible assets, which could adversely affect our results of operations. 4 Our future success depends on building strong relationships with current and prospective automobile dealership, multi-franchise dealer group and automobile manufacturer clients. For our business model to succeed, we must continue to develop relationships with multi-franchise dealer groups and franchised dealerships. We derive a substantial portion of our revenues from fees paid by our automobile dealership clients. Our service agreements with dealerships generally are short-term and cancelable on 30 days' notice. To be successful, we also will need to maintain low dealership client turnover. During 1998, 262 Web sites, or approximately 8.0% of our total Web sites as of year end, were terminated. A material decrease in the number of dealerships purchasing our services, or slower than expected growth in the number of our dealership clients, could have a material adverse effect on our business, results of operations and financial condition. In addition to our relationships with individual dealers and dealer groups, it is critical to our success that we maintain close working relationships with manufacturers. While we have established relationships with a number of manufacturers, these relationships are relatively new and we have little experience in maintaining them. In addition, manufacturers may elect to implement their own Internet strategies, which could reduce our potential client base. Sales cycles can be longer than expected. The time, expense and effort of securing dealership engagements may exceed our expectations. The length of the sales cycle varies by dealership and dealer group, but can range from four to eight months. Because the decision to purchase Web site development and Internet marketing services often involves adoption by a dealership of a new way of thinking about the automobile sales process, we often devote significant time and resources to a prospective dealership client, including costs associated with multiple site visits and demonstrations, without any assurance that the prospective client will decide to purchase our services. Larger engagements and efforts to secure manufacturer endorsements have a longer sales cycle. We will face intense competition and, if we are unable to compete successfully, our business will be seriously harmed. The market for Internet marketing and data aggregation services is very competitive. We face competition from Internet development firms, automobile sales lead generation services and data aggregation businesses. Our parts inventory data services, for example, face competition from data aggregation service providers such as The Reynolds and Reynolds Company and Automatic Data Processing, Inc., or ADP. Similarly, our Web site design, development and maintenance services face competition from local and national Internet development firms. In addition, we compete indirectly with automobile sales lead generation service companies, such as autobytel.com, AutoVantage, CarPoint and Autoweb.com, and advertising agencies because their service offerings compete with ours for a share of the automobile dealership's Internet marketing budget. It is possible that in the future some or all automobile manufacturers may attempt to provide services comparable to those that we provide to our clients. If this were to occur, our ability to retain our client base and revenues would be impaired. In 1997, DaimlerChrysler Corporation announced an internal initiative to bring elements of our parts locator service in-house. If implemented, this initiative could significantly reduce our contract revenues from parts data services that we currently provide to DaimlerChrysler dealers. In 1998, DaimlerChrysler elected to host the parts locator data internally, although we continue to extract and aggregate parts inventory from its dealers. In 1998, revenues from parts data services provided to the MOPAR division of DaimlerChrysler represented approximately 25% of PartsVoice's total revenues. We anticipate that competition in the market for automotive industry Internet services will increase significantly over time. Barriers to entry on the Internet are relatively low, and we expect to face competitive pressures from numerous companies, particularly those with existing data aggregation capabilities that may be readily integrated with Internet services. Furthermore, our existing and potential competitors may develop offerings that equal or exceed the quality of our offerings or achieve greater market acceptance than ours. 5 Many of our current and future competitors have and will continue to have substantially greater capital, resources and access to additional financing than we do or will. We cannot assure you that we will be able to compete successfully against our current and future competitors or that competition will not have a material adverse effect on our business, results of operations or financial condition. Any failure to manage our growth effectively will adversely affect our business and results of operations. We are experiencing rapid growth that, if it continues, will place significant strain upon our management and operational systems and resources. Failure to manage our growth effectively would have a material adverse effect upon our business, results of operations and financial condition. Our ability to compete effectively as a provider of Internet marketing services to the automobile industry and to manage future growth will require us to continue to improve our operational systems, software development organization and our financial and management controls, reporting systems and procedures. We may fail to make these improvements effectively. Additionally, our efforts to make these improvements may divert the focus of our personnel. For example, our conversion to a new database system in late 1998 through early 1999 diverted the focus of our sales personnel from selling our services to maintaining current client relationships. We believe that this diversion contributed to the lower revenue growth rate that we experienced during the first quarter of fiscal 1999, as compared to the fourth quarter of fiscal 1998. We recently have hired a significant number of new employees, including key executives, and we will continue to add personnel to maintain our ability to grow in the future. For example, our Chief Financial Officer and Vice President of Operations, as well as our Vice Presidents of Development, Business Development and Marketing, each have been with us for less than one year. We must integrate our key executives into a cohesive management team and at the same time increase the total number of employees and train and manage our employee work force in a timely and effective manner to expand our business. We cannot guarantee that we will be able to do so successfully. Our quarterly results likely will fluctuate, which may subject the market price of our common stock to rapid and unpredictable change. Our quarterly operating results likely will fluctuate due to many factors, including: - the level of demand in the automotive industry for Internet marketing and data aggregation services; - the rate and volume of additions to our client base; - the amount and timing of expenditures by clients for our services; - the introduction of new products or services by us or our competitors; - our ability to attract and retain personnel with the necessary technical, sales, marketing and creative skills required to develop our services and to service our clients effectively; - technical difficulties with respect to the Internet or infrastructure; and - economic conditions generally and those specific to the automotive industry. We expect our business to experience seasonality, reflecting seasonal fluctuations in the automotive industry, Internet and commercial online service usage and advertising expenditures. Our expenses are relatively fixed in the short term and are based in part on our expectations of future revenues, which may vary significantly. If we do not achieve expected revenue targets, we may be unable to adjust our spending quickly enough to offset any revenue shortfall. If this were to occur, our results of operations could be significantly affected. 6 We may fail to retain our key executives and to attract and retain technical personnel, which would adversely affect our business and prospects. The loss of the services of one or more of our executive officers could have a material adverse effect on the development of our business and, accordingly, on our operating results and financial condition. We generally do not enter into employment agreements with our key executive officers and cannot guarantee that we will be able to retain them. Qualified technical personnel are in great demand throughout the Internet industry. Our future growth will depend in large part upon our ability to attract and retain highly skilled technical and engineering personnel. Our failure to attract and retain the technical personnel that are integral to our expanding service development needs may limit the rate at which we can develop new services, which could have a material adverse effect on our business, results of operations and financial condition. Our success depends on our ability to expand our sales and marketing infrastructure. Our business, results of operations and financial condition will be materially adversely affected if we fail to expand our sales and marketing infrastructure and resources. We recently reorganized our sales force to include a distributed field sales organization covering a large number of geographic territories and regions. We have very limited experience operating and managing a distributed sales organization. In addition, we expect to continue expanding our headquarters-based sales and customer support organization. Our future revenue growth will depend in large part on our ability to recruit, train and manage sales and marketing personnel and expand those organizations. We have experienced and may continue to experience difficulty in recruiting qualified sales and marketing personnel. We may not be able to successfully expand and manage our direct sales force and distribution channels and this expansion, if it occurs, may not result in increased revenues. If the use of the Internet as a commercial medium does not grow as we anticipate, our business will be seriously harmed. We depend heavily on the growth and use of the Internet. Automobile manufacturers and dealerships will not widely accept and adopt an Internet strategy if the Internet fails to provide consumers with a satisfactory experience. For example, transmission of graphical and other complex information may lead to delays. If data transmission speeds do not increase in step with the complexity of the information available, consumers may become frustrated with their Internet experiences, which could lead users to seek alternatives to Internet-based information retrieval. Furthermore, the recent growth in Internet traffic generally has caused periods of decreased performance. If Internet usage continues to increase rapidly, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. If Internet delays occur frequently, overall Internet usage or usage of our clients' Web sites could increase more slowly or not at all. Our future success and revenue growth will depend substantially upon continued growth in the use of the Internet in the sales and service process. The Internet may prove not to be a viable commercial marketing medium for vehicles and related products and services. If use of the Internet does not continue to increase, our business, results of operations and financial condition would be materially and adversely affected. If we become unable to extract data from our clients' internal management systems, the value of our services would decrease dramatically. A significant component of our business and revenues depends on our ability to extract various data types from our clients' internal management systems. Most dealership information management systems have been developed and sold by The Reynolds and Reynolds Company and ADP and our ability to interface with these systems is essential to the success of our data aggregation service offerings. It is possible that new 7 products, services or information management systems installed by dealerships could limit or otherwise impair our ability to collect data from dealerships. This could have a material adverse effect on our business, results of operations and financial condition. We must continue to improve our systems and infrastructure to manage our growth and business expansion. We depend on the continued performance of our systems and network infrastructure. Any system or network failure that causes interruption or slower response time for our services could result in less traffic to our clients' Web sites and, if sustained or repeated, could reduce the attractiveness of our services to clients. An increase in the volume of Internet traffic to sites hosted by us could strain the capacity of our technical infrastructure, which could lead to slower response times or system failures. Any failure of our servers and networking systems to handle current or future volumes of traffic would have a material adverse effect on our business and reputation. In addition, our operations depend upon our ability to maintain and protect our computer systems, which are located at our facilities in Seattle, Washington; Portland, Oregon; and Austin, Texas. Our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain secondary back-up systems and capabilities and also maintain insurance against fires, floods, earthquakes and general business interruptions, our secondary systems and our insurance coverages may not be adequate in any particular case. The occurrence of a catastrophic event could have a material adverse effect on our business, results of operations and financial condition. Unknown software defects may adversely affect our services. Our service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are created. Although we conduct extensive testing, we may not discover software defects that affect our new or current services or enhancements until after they are deployed. These defects could cause service interruptions, which could damage our reputation or increase our service costs. They also could cause us to lose revenue and divert our development resources. We may be unable to keep pace with the rapid technological change of the Internet. The market for Internet services is characterized by rapid technological developments, evolving industry standards and customer demands and frequent new service introductions and enhancements. Our future success will significantly depend on our ability to continually improve the quality of our data aggregation and management, product development, Web site maintenance, management and related services as well as content on our client's Web sites. In addition, the widespread adoption of developing multimedia-enabling technologies could require fundamental and costly changes in our technology and could fundamentally affect the nature of Internet-based content, which could adversely affect our business, results of operations and financial condition. Our business may be adversely affected by economic conditions that affect the automotive retailing industry. Economic trends that negatively affect the automotive retailing industry may result in a decrease in the number of automobile dealers purchasing our services, a decrease in the amount our clients spend on our services, or both. Purchases of new vehicles are typically discretionary for consumers and may be particularly affected by negative trends in the economy. The success of our business will depend upon a number of factors influencing the spending patterns of automobile dealerships and manufacturers for marketing and advertising services. These patterns are in part influenced by factors relating to discretionary consumer spending for automobile and automobile-related purchases, including economic conditions affecting disposable consumer income, such as employment, wages and salaries, business conditions, interest rates and availability 8 of credit for the economy as a whole and in regional and local markets. Because the purchase of a vehicle is often a significant investment, any reduction in disposable income and the impact such reduction may have on our clients may affect us more significantly than businesses serving other industries or segments of the economy. We will face risks related to international expansion as our business grows. Part of our growth strategy includes entering international markets, which will require significant management attention and financial resources. We have no experience operating internationally and cannot be certain that our business model is transferable to foreign markets. If we pursue international expansion, the proportion of our revenues denominated in foreign currencies will increase. We could also be subject to difficulties in staffing and managing international operations and general economic and currency exchange rate conditions in foreign countries. Protection of our intellectual property and proprietary rights may be inadequate. Our success depends in part on our ability to protect our proprietary rights. To protect our proprietary rights, we rely primarily on a combination of trademark, service mark, copyright, and trade secret laws, and contractual restrictions on their use by licensees and others. Although from time to time we may apply for registration of our trademarks, service marks, and copyrights with the appropriate U.S. agencies, we do not rely on such registrations for the protection of these intellectual property rights. We often enter into confidentiality agreements with our employees and consultants and with third parties in connection with our business operations and service offerings. These confidentiality agreements generally seek to control access to, and distribution of, our technology, documentation, and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use or disclose to others our confidential information without authorization or to develop similar technology independently. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related businesses are uncertain and still evolving, and we cannot predict the future viability or value of any of our proprietary rights. We also cannot assure you that the steps that we have taken will prevent misappropriation or infringement of our intellectual property rights and confidential information. Our business activities may infringe upon the intellectual property rights of others and other parties may assert infringement claims against us. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any litigation might result in substantial costs and diversion of resources and management attention. In addition, if we infringe upon the rights of others, we may be required to pay substantial amounts and may be required to either license the infringed intellectual property or to develop alternative technologies independently. We may not be able to obtain suitable substitutes for the infringed technology on acceptable terms or in a timely manner, which could adversely affect our business, results of operations and financial condition. We have filed for federal trademark protection for our trademark "Cobalt," which we use in both word and logo form. Other organizations within the computer and software industries also have filed trademark registration applications for "Cobalt." We have filed an opposition proceeding before the Trademark Trial and Appeal Board of the United States Patent and Trademark Office with respect to two of these competing registration applications. That opposition is pending and we are in discussions with a third party applicant regarding a potential trademark use consent agreement. We may be unsuccessful in these proceedings or negotiations and may be required to limit the use of the tradenames or marks around which we have attempted to build brand identities. We could face liability for information retrieved from or transmitted over the Internet and liability for products sold over the Internet. We could be exposed to liability with respect to third-party information that is accessible through Web sites we create. These claims might assert that, by directly or indirectly providing links to Web sites operated 9 by third parties, we should be liable for copyright or trademark infringement or other wrongful actions by third parties through these sites. It is also possible that if any information provided on our clients' Web sites contains errors, consumers and our clients could make claims against us for losses incurred in relying on this information. We access the systems and databases of our clients and, despite precautions, we may adversely affect these systems. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims and our reputation could suffer dramatically. While we believe our insurance is adequate, our general liability insurance and contractual indemnity and disclaimer provisions may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition. Increasing government regulation could limit the market for Internet services, which could seriously harm our business. Due to concerns arising from the increasing use of the Internet, a number of laws and regulations have been and may be adopted covering issues such as user privacy, pricing, acceptable content, taxation and quality of products and services. This legislation could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications and commercial medium. Further, due to the global nature of the Internet, it is possible that multiple federal, state or foreign jurisdictions might attempt to regulate Internet transmissions or levy sales or other taxes relating to Internet-based activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. We cannot assess the impact of any future regulation of the Internet on our business. Year 2000 problems may adversely affect us. We may not accurately identify all potential Year 2000 problems that could affect our business, and the corrective measures that we implement may be ineffective or incomplete. Any Year 2000-related problems could interrupt our ability to provide services to our clients, process orders or accurately report operating and financial data. Similar problems and consequences could result if any of our key suppliers and clients experience Year 2000 problems. To the extent that our clients rely on hardware or software that may not be Year 2000 compliant, our ability to provide our services, in particular our data extraction, aggregation and management services, could be materially and adversely affected. Our failure or the failure of our significant suppliers and clients to adequately address the Year 2000 issue could adversely affect our business, operating results and financial condition. For more information about our Year 2000 compliance efforts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000." A substantial number of shares of our common stock will be eligible for future sale in the market. Future sales of substantial amounts of our common stock in the public market could adversely affect the market prices for our common stock. Of the shares of our common stock outstanding after this offering, all of the shares sold in this offering will be freely tradable. Substantially all of the remaining shares of common stock outstanding after this offering are subject to lock-up agreements that prohibit the sale of these shares for 180 days after this offering. Immediately after this 180 day period, shares will become available for sale. The remaining shares of common stock will become available for sale at various times thereafter upon the expiration of one-year holding periods. Investors in this offering will suffer substantial dilution. The assumed public offering price is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, purchasers of the common stock in this offering will incur immediate, substantial dilution in the amount of $ per share. To the extent that outstanding options or warrants to purchase our common stock are exercised, there will be further dilution. We have in 10 the past granted a substantial number of options to purchase common stock to employees as part of compensation packages at exercise prices per share lower than the price per share in this offering, and we expect that we will continue to grant options in the future. We also may issue shares of common stock in connection with strategic acquisitions or alliances. Any of the foregoing could also result in additional dilution to shareholders. Certain of our shareholders will continue to own a large percentage of our voting stock after the offering. Prior to this offering, E.M. Warburg, Pincus & Co., LLC beneficially owned approximately 66% of our outstanding common stock. After this offering, Warburg will beneficially own approximately % of our common stock and will be able to exercise significant influence over us, including on matters submitted to our shareholders for a vote, such as: - the election of our board of directors; - the removal of any of our directors; - the amendment of our articles of incorporation or bylaws; and - the adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. Actions taken by Warburg could conflict with interests of other shareholders. As a result of Warburg's significant shareholdings, a potential acquirer could be discouraged from attempting to obtain control of us, which could have a material adverse effect on the market price of our common stock. See "Management" and "Principal Shareholders." Our articles of incorporation and bylaws and Washington law contain provisions that could discourage a takeover. Certain provisions of Washington law and our articles of incorporation and bylaws could have the effect of delaying or preventing a change in control. For a description of these provisions, see "Description of Capital Stock--Antitakeover Effects of Certain Provisions of Our Articles of Incorporation and Bylaws and under Washington Law" on page 57. Our stock price may be volatile. The market price of our common stock is likely to be highly volatile following this offering and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of new services by us or our competitors, market conditions in the automobile industry, changes in financial estimates by securities analysts or other events or factors, many of which are beyond our control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology and services companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. We have not designated a specific use for all of the net proceeds. Our management will have significant discretion in applying a substantial part of the net proceeds of this offering. In addition to repayment of indebtedness and payment of accrued dividends on our outstanding preferred stock, we currently expect to use the net proceeds for general corporate purposes, including capital expenditures and working capital. We also may use a portion of the net proceeds for the acquisition of companies, technology or services that complement our business or for strategic alliances with, or investments in, companies that provide complementary products and services. 11 USE OF PROCEEDS We estimate our net proceeds from the sale of the shares of common stock in this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $ . If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ . The principal purposes of this offering are to repay indebtedness to obtain additional working capital, to create a public market for our common stock and to facilitate future access to public equity markets. We expect to use the net proceeds of this offering as follows: - $23.0 million to repay indebtedness incurred in connection with Cobalt's acquisition of PartsVoice. This indebtedness bears interest at an annual rate of 8.75%, and is due and payable on the earlier of completion of this offering or July 30, 1999 (with respect to $8.0 million of this indebtedness) or January 25, 2000 (with respect to $15.0 million of this indebtedness). See "Recent Acquisition" and Note 14 of Notes to Cobalt Financial Statements; - up to $5.0 million to repay principal and interest under our secured line of credit, which bears interest at prime plus 2.0%, currently 9.75%, and is due on the earlier of completion of this offering or December 31, 1999; and - approximately $2.0 million to pay accrued and unpaid dividends on our outstanding preferred stock. The remaining balance of approximately $ will be used for general corporate purposes, including continued investment in services development, expansion of sales and marketing activities and working capital. We may, when the opportunity arises, use an unspecified portion of the net proceeds to acquire or invest in complementary businesses, services and technologies. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of product development efforts, marketing and sales activities, the amount of cash generated by operations and competition. Pending use of the net proceeds for the above purposes, we intend to invest the net proceeds from this offering in short-term, interest bearing, investment grade securities. DIVIDEND POLICY We have not paid any cash dividends since our inception and, except with respect to the payment of accrued dividends on the outstanding shares of our preferred stock as described above, do not intend to pay any cash dividends in the foreseeable future. 12 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999 (a) on an actual basis, (b) on a pro forma basis to reflect Cobalt's acquisition of PartsVoice as if it had occurred on March 31, 1999 and the conversion of all outstanding shares of preferred stock into shares of common stock upon the closing of this offering, and (c) on a pro forma as adjusted basis to reflect the receipt and application of the estimated net proceeds from the sale by us of shares of common stock pursuant to this offering at an initial offering price of $ per share after deducting underwriting discounts and estimated offering expenses and after repayment of the notes payable issued in conjunction with Cobalt's acquisition of PartsVoice.
March 31, 1999 --------------------------------- Pro Forma, Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Long-term debt: Software financing contract, non-current portion.............................. $ 405 $ 405 Capital lease obligations, non-current portion................................ 971 971 -------- --------- ----------- Total long-term debt............................................................ 1,376 1,376 -------- --------- ----------- Mandatorily redeemable convertible preferred stock(1)........................... 31,753 -- -------- --------- ----------- Shareholders' (deficit) equity: Preferred stock, $0.01 par value per share; 100,000,000 shares authorized, 9,153,902 issued and outstanding as mandatorily redeemable convertible preferred stock; no shares issued and outstanding, pro forma and pro forma as adjusted..................................................................... -- -- Common stock, $0.01 par value per share; 200,000,000 shares authorized, 1,821,979 issued and outstanding; 11,475,881 and shares issued and outstanding pro forma and pro forma as adjusted, respectively(2)......... 18 115 Additional paid-in capital.................................................... -- 36,037 Notes receivable from shareholders............................................ (144) (144) Accumulated deficit........................................................... (26,641) (26,641) -------- --------- ----------- Total shareholders' (deficit) equity........................................ (26,767) 9,367 -------- --------- ----------- Total capitalization...................................................... $ 6,362 $ 10,743 $ -------- --------- ----------- -------- --------- -----------
- --------- (1) See Note 9 of Notes to Cobalt Financial Statements. (2) This number does not include (a) 2,090,206 shares issuable upon exercise of stock options outstanding under our Option Plan as of March 31, 1999, at a weighted average exercise price per share of $0.62, (b) 61,500 shares issuable upon exercise of warrants outstanding as of March 31, 1999, at a weighted average exercise price per share of $0.45, and (c) 1,323,338 shares available for future grant or issuance under our Option Plan. See "Management--Employee Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to Cobalt Financial Statements. 13 DILUTION The pro forma net tangible book value of Cobalt at March 31, 1999 was $ , or $ per share of common stock, assuming the conversion of all outstanding shares of preferred stock into shares of common stock. Pro forma net tangible book value per share represents the amount of our shareholders' equity, less intangible assets, divided by the total number of shares of common stock outstanding for the period immediately prior to this offering. After giving effect to the sale of the shares of common stock offered in this prospectus at an assumed offering price of $ per share and after deducting estimated underwriting discounts and offering expenses, the pro forma net tangible book value of Cobalt as of , 1999 would have been $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: Initial public offering price per share.......................................... $ Pro forma net tangible book value per share as of , 1999............. Increase per share attributable to new investors................................. --- Pro forma net tangible book value per share after this offering.................. --- Net tangible book value dilution per share to new investors...................... $ ----------- -----------
The following table summarizes as of , 1999, on the pro forma basis described above, the number of shares of common stock purchased from Cobalt, the total consideration paid to Cobalt and the average price per share paid by existing shareholders and by investors purchasing shares of common stock in this offering (before deducting underwriting discounts and estimated offering expenses):
Total Shares Purchased Consideration Average ---------------- ---------------- Price Number Percent Amount Percent Per Share ------ ------- ------ ------- --------- Existing shareholders....................................... New shareholders............................................ ------ ------- ------ ------- --------- Total................................................... 100% 100% ------- ------- ------- -------
The foregoing discussion and tables assume no exercise of any stock options or warrants after March 31, 1999. As of March 31, 1999, there were options and warrants outstanding to purchase a total of 2,151,706 shares of common stock. To the extent that any of these options or warrants are exercised, there will be further dilution to new public investors. See "Capitalization," "Management--Employee Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to Cobalt Financial Statements. 14 SELECTED FINANCIAL DATA The following selected financial data of Cobalt should be read together with the financial statements and related notes, "Unaudited Pro Forma Combined Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The statement of operations data for each of the years in the three year period ended December 31, 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from the audited financial statements of Cobalt included elsewhere in the prospectus. The balance sheet data as of December 31, 1996 is derived from audited financial statements of Cobalt, which are not included in the prospectus. The statement of operations data for the period from inception (March 17, 1995) to December 31, 1995 and for the three months ended March 31, 1998 and 1999, and the balance sheet data as of December 31, 1995 and March 31, 1999 are derived from our unaudited financial statements. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations as of and for the respective periods. Our pro forma results of operations in the table below assume that Cobalt's acquisition of PartsVoice had occurred on January 1, 1998. The pro forma balance sheet data reflects adjustments for transactions related to Cobalt's acquisition of PartsVoice assuming the transaction had occurred on that date and also gives effect to the conversion of all outstanding shares of preferred stock into common stock upon closing of this offering.
Actual ------------------------------------------------------------------------ Pro Forma Since ------------------------ Inception Three (March 17, 1995) Three Months Ended Months to Year Ended December 31, March 31, Year Ended Ended December 31, ------------------------------- -------------------- December 31, March 31, 1995 1996 1997 1998 1998 1999 1998 1999 ---------------- --------- --------- --------- --------- --------- ------------ --------- (in thousands, except per share data) (unaudited) (unaudited) (unaudited) Statement of Operations Data: Net revenues.................. $ 70 $ 312 $ 1,711 $ 6,245 $ 1,079 $ 2,453 $ 15,773 $ 5,009 Cost of revenues.............. 16 51 285 1,199 151 540 3,343 1,123 ---------------- --------- --------- --------- --------- --------- ------------ --------- Gross profit.............. 54 261 1,426 5,046 928 1,913 12,430 3,886 Operating expenses Sales and marketing......... 55 286 1,740 4,048 564 1,650 5,710 2,170 Product development......... 39 125 361 961 157 401 961 401 General and administrative............. 375 676 1,753 4,627 629 1,870 10,888 3,436 ---------------- --------- --------- --------- --------- --------- ------------ --------- Total operating expenses................. 469 1,087 3,854 9,636 1,350 3,921 17,559 6,007 ---------------- --------- --------- --------- --------- --------- ------------ --------- Loss from operations.......... (415) (826) (2,428) (4,590) (422) (2,008) (5,129) (2,121) Gain on sale of HomeScout..... -- -- -- 1,626 1,626 -- 1,626 -- Common stock repurchase premium..................... -- -- -- (5,202) -- -- (5,202) -- Interest expense.............. -- (2) (17) (93) (7) (49) (2,107) (552) Other income, net............. -- -- 47 142 6 57 208 61 ---------------- --------- --------- --------- --------- --------- ------------ --------- Net (loss) income............. $ (415) $ (828) $ (2,398) $ (8,117) $ 1,203 $ (2,000) $ (10,604) $ (2,612) ---------------- --------- --------- --------- --------- --------- ------------ --------- ---------------- --------- --------- --------- --------- --------- ------------ --------- Basic net (loss) income per share....................... $ (0.24) $ (0.24) $ (0.69) $ (2.95) $ 0.35 $ (1.74) $ (3.88) $ (2.19) Diluted net (loss) income per share....................... $ (0.24) $ (0.24) $ (0.69) $ (2.95) $ 0.13 $ (1.74) $ (3.88) $ (2.19)
December 31, March 31, 1999 -------------------------------------- --------------------- 1995 1996 1997 1998 Actual Pro Forma ----------- ----- ------- -------- -------- ----------- (unaudited) (unaudited) Balance Sheet Data: Cash and cash equivalents........................................... $ 2 $ 4 $ 241 $ 5,756 $ 3,876 $ 876 Working capital..................................................... (235) (712) (1,264) 5,534 3,129 (23,088) Total assets........................................................ 22 168 1,951 10,062 10,665 38,141 Long-term obligations, net of current portion....................... -- 51 424 557 1,376 1,376 Mandatorily redeemable convertible preferred stock.................. -- -- 2,439 31,162 31,753 -- Total shareholders' (deficit) equity................................ (219) (651) (2,897) (24,242) (26,767) 9,367
15 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The unaudited pro forma combined financial information set forth below gives effect to Cobalt's acquisition of PartsVoice as if it had occurred on January 1, 1998. The historical financial information set forth below has been derived from the financial statements of Cobalt and PartsVoice, and should be read in conjunction with those financial statements and the notes thereto included elsewhere in this prospectus. We acquired all of the equity interests in PartsVoice on April 30, 1999. Immediately prior to the closing, PartsVoice distributed to its owners certain assets and liabilities. At closing, we paid aggregate purchase consideration for PartsVoice of: - $3.0 million in cash; - promissory notes in the principal amount of (a) $8.0 million, due on the earlier of completion of this offering or July 30, 1999 and (b) $15.0 million, due on the earlier of completion of this offering or January 25, 2000; - 500,000 shares of Series C Convertible Preferred Stock at $8.00 per share; and - warrants to purchase 160,000 shares of Cobalt common stock at $6.00 per share, which have a fair market value of $381,000. Our obligations under the promissory notes are secured by a pledge of the PartsVoice equity interests. We incurred transaction expenses of approximately $217,000. See "Recent Acquisition" and "Management-- Executive Agreements." We have accounted for the PartsVoice acquisition using the purchase method of accounting. These pro forma financial statements have been prepared on the basis of assumptions described herein. We expect to incur integration expenses to merge administrative functions and to combine marketing efforts. The Pro Forma Combined Statement of Operations does not include the costs of integration, as these costs will affect future operations and do not qualify as liabilities in connection with a purchase business combination under EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." The unaudited pro forma combined financial information set forth below combines Cobalt's balance sheet as of March 31, 1999, and statements of operations for the year ended December 31, 1998 and for the three months ended March 31, 1999 with the balance sheet and statements of operations of PartsVoice as of and for the same periods. These pro forma financial statements reflect certain adjustments, including adjustments to reflect the amortization of intangible assets and goodwill acquired, interest expense related to acquisition indebtedness and the impact of certain related agreements that become effective with the acquisition. These adjustments are preliminary and are based on our best estimates. A third party valuation of the assets acquired will be used to finalize these adjustments. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes to the financial statements of Cobalt and PartsVoice which are included elsewhere in this prospectus. The unaudited pro forma combined financial information set forth below does not purport to represent what the consolidated results of operations or financial condition of Cobalt would actually have been if the PartsVoice acquisition and related transactions had in fact occurred on such date or to project the future consolidated results of operations or financial condition of Cobalt. 16 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1999
Pro Forma Cobalt PartsVoice Combined Adjustments Total -------- ---------- -------- ----------- -------- (in thousands) Assets Current Assets Cash and cash equivalents........................................... $ 3,876 $ 461 $ 4,337 $ (461)(1) $ 876 (3,000)(2) Short term investments.............................................. 983 398 1,381 (398)(1) 983 Accounts receivable, net............................................ 1,401 1,081 2,482 (1,081)(1) 1,401 Other current assets................................................ 1,172 8 1,180 (8)(1) 1,050 (122)(6) -------- ---------- -------- ----------- -------- 7,432 1,948 9,380 (5,070) 4,310 Capital assets, net................................................... 2,806 106 2,912 9(1) 2,921 Intangible assets, net................................................ 416 -- 416 217(6) 30,899 30,266(7) Other assets.......................................................... 11 213 224 (213)(1) 11 -------- ---------- -------- ----------- -------- $ 10,665 $2,267 $ 12,932 $25,209 $ 38,141 -------- ---------- -------- ----------- -------- -------- ---------- -------- ----------- -------- Liabilities and Shareholders' Deficit Current Liabilities Accounts payable.................................................... $ 665 $ 211 $ 876 $ (211)(1) $ 665 Accrued liabilities................................................. 1,316 -- 1,316 95(6) 1,411 Deferred revenues................................................... 1,505 -- 1,505 -- 1,505 Software financing contract, current portion........................ 257 -- 257 -- 257 Capital lease obligations, current portion.......................... 560 -- 560 -- 560 Distribution payable to owners...................................... -- 825 825 (825)(1) -- Payable to owners................................................... -- 80 80 (80)(1) -- Notes payable....................................................... -- -- -- 23,000(4) 23,000 -------- ---------- -------- ----------- -------- 4,303 1,116 5,419 21,979 27,398 -------- ---------- -------- ----------- -------- Noncurrent liabilities................................................ 1,376 7 1,383 (7)(1) 1,376 -------- ---------- -------- ----------- -------- Mandatorily redeemable convertible preferred stock.................... 31,753 -- 31,753 4,000(3) 35,753 -------- ---------- -------- ----------- -------- Shareholders' deficit Common stock........................................................ 18 -- 18 -- 18 Additional paid-in capital.......................................... -- -- -- 381(5) 381 Notes receivable from shareholders.................................. (144) -- (144) -- (144) Owners' equity...................................................... -- 1,259 1,259 (1,029)(1) -- (230)(12) Accumulated deficit................................................. (26,641) (115) (26,756) 115(12) (26,641) -------- ---------- -------- ----------- -------- (26,767) 1,144 (25,623) (763) (26,386) -------- ---------- -------- ----------- -------- Total liabilities and shareholders' deficit........................... $ 10,665 $2,267 $ 12,932 $25,209 $ 38,141 -------- ---------- -------- ----------- -------- -------- ---------- -------- ----------- --------
17 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
Pro Forma Cobalt PartsVoice Combined Adjustments Total ---------- ----------- ----------- ----------- ---------- (in thousands, except share and per share data) Net revenues...................................... $ 6,245 $ 9,528 $ 15,773 $ 15,773 Cost of revenues.................................. 1,199 2,144 3,343 3,343 ---------- ----------- ----------- ---------- Gross profit.................................. 5,046 7,384 12,430 12,430 ---------- ----------- ----------- ---------- Operating expenses Sales and marketing............................. 4,048 1,662 5,710 5,710 Product development............................. 961 961 961 General and administrative...................... 4,627 1,180 5,807 5,081(8) 10,888 ---------- ----------- ----------- ----------- ---------- Total operating expenses...................... 9,636 2,842 12,478 5,081 17,559 ---------- ----------- ----------- ----------- ---------- (Loss) income from operations..................... (4,590) 4,542 (48) (5,081) (5,129) Gain on sale of HomeScout......................... 1,626 1,626 1,626 Common stock repurchase premium................... (5,202) (5,202) (5,202) Interest expense.................................. (93) (1) (94) (2,013)(9) (2,107) Other income, net................................. 142 66 208 208 ---------- ----------- ----------- ----------- ---------- Net (loss) income................................. $ (8,117) $ 4,607 $ (3,510) $ (7,094) $ (10,604) ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Net (loss) income available to common shareholders.................................... $ (8,680) $ 4,607 $ (4,073) $ (7,334) 10) (11,407) ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Basic and diluted net loss per share.............. $ (2.95) $ (3.88)(11) ---------- ---------- ---------- ---------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share.............................. 2,938,460 2,938,460 ---------- ---------- ---------- ----------
18 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
Pro Forma Cobalt PartsVoice Combined Adjustments Total ---------- ----------- ----------- ----------- ---------- (in thousands, except share and per share amounts) Net revenues................................... $ 2,453 $ 2,556 $ 5,009 $ 5,009 Cost of revenues............................... 540 583 1,123 1,123 ---------- ----------- ----------- ---------- Gross profit............................... 1,913 1,973 3,886 3,886 ---------- ----------- ----------- ---------- Operating expenses Sales and marketing.......................... 1,650 520 2,170 2,170 Product development.......................... 401 401 401 General and administrative................... 1,870 296 2,166 1,270(8) 3,436 ---------- ----------- ----------- ----------- ---------- Total operating expenses................... 3,921 816 4,737 1,270 6,007 ---------- ----------- ----------- ----------- ---------- (Loss) income from operations.................. (2,008) 1,157 (851) (1,270) (2,121) Interest expense............................... (49) (49) (503)(9) (552) Other income, net.............................. 57 4 61 61 ---------- ----------- ----------- ----------- ---------- Net (loss) income.............................. $ (2,000) $ 1,161 $ (839) $ (1,773) $ (2,612) ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Net (loss) income available to common shareholders................................. $ (2,591) $ 1,161 $ (1,430) $ (1,833) 10) $ (3,263) ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Basic and diluted net loss per share........... $ (1.74) $ (2.19)(11) ---------- ---------- ---------- ---------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share................... 1,488,681 1,488,681 ---------- ---------- ---------- ----------
19 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION Pro forma adjustments for the unaudited pro forma combined balance sheet as of March 31, 1999 and statements of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 are as follows: (1) Represents the distribution of assets and liabilities of PartsVoice to its owners immediately prior to the acquisition. Substantially all of the tangible assets and liabilities were distributed. (2) Represents the payment of $3.0 million in cash at closing of the acquisition. (3) Represents the issuance of 500,000 shares of Series C Convertible Preferred Stock at a per share value of $8.00. (4) Represents the issuance of the short-term notes at closing. For purposes of this pro forma presentation, we have not assumed repayment of the indebtedness due to the lack of existing capital in these historical periods to fund repayment. (5) Represents the fair value of the warrants issued at closing. (6) Represents estimated acquisition costs incurred in connection with the acquisition. (7) Reflects the allocation of the purchase price to goodwill and other intangible assets. The intangible assets acquired are believed to include client base, marketing agreements, assembled workforce, technology, covenants not to compete and goodwill. For purposes of these pro forma financial statements, we have estimated the overall amortization period to be six years. We are in the process of obtaining a third party valuation to determine the allocation of intangible assets. Once we have made a final allocation, changes may be appropriate. The impact of the changes could be material. (8) Reflects the amortization of the intangible assets referred to in Note 7. (9) Reflects the interest expense of the acquisition indebtedness at the rate of 8.75% outstanding for the period presented. (10) Reflects the pro forma adjustments described in Notes 8 and 9, as well as cumulative, unpaid dividends relating to the Series C Convertible Preferred Stock at $0.48 per share per annum. (11) Pro forma basic and diluted net loss per share reflects the impact of the adjustments above. The convertible preferred stock and warrants issued in connection with the acquisition are excluded from the computation, as their effect is antidilutive. (12) Reflects elimination of PartsVoice owners' equity. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH INVOLVES RISKS AND UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES," "BELIEVES," "PLANS," "EXPECTS," "FUTURE," "INTENDS" AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS PROSPECTUS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE RISKS DESCRIBED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. Overview We are a leading provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. We enable our clients to develop and implement effective e-business strategies and to position themselves to capitalize on the increasing use of the Internet by consumers to research, evaluate and initiate purchases of new and pre-owned vehicles, parts and accessories and automotive-related services such as financing and insurance. We derive our revenues principally from fees charged to our clients for Web site design, development and maintenance services, data extraction, aggregation and management services and Internet marketing training and support. We recognize revenues for ongoing services over the related service period and recognize revenues for initial setup fees and custom projects upon activation of the related service. The majority of our services are sold to clients on a monthly fee basis under short-term service contracts. Revenues are recognized net of promotional discounts. Our cost of revenues consists of the costs associated with production, maintenance and delivery of our services. These costs include the costs of production, processing and design personnel, communication expenses related to data transfer, fees payable to third parties for distribution of vehicle inventory data to other Web sites and for banner advertising, site content licensing fees and costs of Web servers used to host client data. In April 1999, we acquired PartsVoice, LLC, an Oregon limited liability company, whose principal business is vehicle parts data acquisition and management services. The purchase price, including transaction expenses, was $30.6 million, of which $3.0 million was paid in cash and $4.4 million was paid by issuance of preferred stock and warrants at closing. The balance of the purchase price was paid by issuance of short-term notes. The notes are secured by a pledge of the PartsVoice equity interests and a security agreement. See "--Liquidity and Capital Resources," "Recent Acquisition" and Note 14 of Notes to Cobalt Financial Statements. The PartsVoice acquisition is being accounted for as a purchase transaction, and we plan to allocate substantially all of the purchase price to intangible assets. We may in the future pursue additional acquisitions of businesses, products or technologies that could complement or expand our business. Integrating newly acquired businesses or technologies may be expensive and time-consuming. The negotiation of potential acquisitions or strategic relationships as well as the integration of future acquired businesses, products or technologies could divert our management's time and resources and could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors-- We face challenges in integrating the PartsVoice acquisition and will encounter similar challenges if we make future acquisitions." Since inception, but increasingly during the past year, we have made substantial investments in infrastructure and in staffing and management to accommodate current and anticipated future growth. Since May 1, 1998, we have hired more than 100 employees and invested more than $2.9 million in capital assets. 21 A large portion of these assets is intended to improve our service to clients, including backup computer systems and more stable and scalable database systems. Our planned growth will require additional staff and facilities. Our continued growth and the PartsVoice acquisition have placed and will continue to place a significant strain on our managerial, operational and financial resources. To manage our anticipated growth, we must continue to implement and improve our operational and financial systems and must expand, train and manage our employee base. We may not be able to manage the expansion of our operations effectively, and our systems, procedures or controls may not be adequate to support our operations. Any inability to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors--The failure to manage our growth effectively will adversely affect our business and results of operations." In October 1998, in conjunction with a preferred stock investment by Warburg, Pincus Equity Partners, L.P., we repurchased shares of common stock from certain of our investors, founders and employees. We recorded an expense of $5.2 million representing the premium paid to redeem sufficient shares to provide Warburg with a 62% equity ownership position, on a fully diluted basis, as of the investment date. See Note 10 of Notes to Cobalt Financial Statements. We have incurred net losses each year since we began operations. After giving pro forma effect to Cobalt's acquisition of PartsVoice, we had a net loss of $10.6 million for the year ended December 31, 1998, which includes $5.1 million of pro forma amortization of intangibles and $2.0 million in interest expense. We intend to increase our spending on technology infrastructure development, marketing and promotion, services development and strategic relationships. As a result, we expect to continue to incur net losses and negative cash flows from operations at least through 2000. Our limited operating history makes it difficult to forecast further operating results. Although our net revenues have grown in recent quarters, we cannot be certain that net revenues will continue to increase or that they will increase at a rate sufficient to achieve and maintain profitability. Even if we were to achieve profitability in any period, we might fail to sustain or increase that profitability on a quarterly or annual basis. See "Risk Factors--We may never achieve or maintain profitability." 22 Results of Operations--Cobalt The following table sets forth for the periods indicated certain statements of operations data expressed as a percentage of net revenues. The quarterly financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the results of operations for each quarter.
Year Ended December Three Months Ended 31, March 31, ---------------------- ------------------- 1996 1997 1998 1998 1999 ------ ------ ------ ----------- ----- (unaudited) Net revenues.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues...................................................... 16.3 16.7 19.2 14.0 22.0 ------ ------ ------ ----- ----- Gross profit...................................................... 83.7 83.3 80.8 86.0 78.0 ------ ------ ------ ----- ----- Operating expenses: Sales and marketing................................................. 91.7 101.7 64.8 52.3 67.3 Product development................................................. 40.1 21.1 15.4 14.6 16.3 General and administrative.......................................... 216.6 102.4 74.1 58.2 76.3 ------ ------ ------ ----- ----- Total operating expenses.......................................... 348.4 225.2 154.3 125.1 159.9 ------ ------ ------ ----- ----- Loss from operations.................................................. (264.7) (141.9) (73.5) (39.1) (81.9) Gain on sale of HomeScout division.................................... 26.0 150.7 Common stock repurchase premium....................................... (83.3) Interest expense.................................................... (0.7) (1.0) (1.5) (0.7) (1.9) Other income........................................................ 2.7 2.3 0.6 2.3 ------ ------ ------ ----- ----- Net (loss) income..................................................... (265.4)% (140.2)% (130.0)% 111.5% (81.5)% ------ ------ ------ ----- ----- ------ ------ ------ ----- -----
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 NET REVENUES. Net revenues increased from $1.1 million for the three months ended March 31, 1998 to $2.5 million for the same period in 1999, an increase of $1.4 million, or 127%. This increase in net revenues was primarily due to a significant increase in the number of paying clients and, to a lesser extent, to increases in the levels of Internet marketing services provided to manufacturer clients. COST OF REVENUES. Cost of revenues increased from $151,000 for the three months ended March 31, 1998 to $540,000 for the same period in 1999, an increase of $389,000, or 258%. This increase was primarily attributable to an increase in costs related to increased staffing and facilities required to accommodate our increased client base and, to a lesser extent, an increase in costs associated with new service offerings for distribution of vehicle inventory data to third party Web sites. Cost of revenues, as a percentage of net revenues, increased from 14.0% for the three months ended March 31, 1998 to 22.0% for the same period in 1999 due primarily to the increase in production and design staffing and computer equipment required to accommodate the increased size of our client base. There was also a shift in our mix of services to higher cost Internet advertising services from 6% to 10% of net revenues for the three months ended March 31, 1998 and 1999. We anticipate the investments that we have made in production and design staff and operating equipment will support further growth in our client base, which will decrease our cost of revenues as a percentage of net revenues as we add new customers. Such decrease may be offset if our services mix continues to shift to lower margin Internet advertising services. SALES AND MARKETING. Sales and marketing expenses consist primarily of salary compensation, sales commissions and travel expenses for sales and marketing personnel and expenses for promotional advertising and marketing. Sales and marketing expenses increased from $564,000 for the three months ended March 31, 23 1998 to $1.7 million for the same period in 1999, an increase of $1.1 million, or 193%. This cost increase was primarily due to the increase in the number of our sales and marketing personnel and, to a lesser extent, increased expenses for corporate brand advertising and travel. PRODUCT DEVELOPMENT. Our product development expenses consist primarily of compensation for product development personnel and costs of related computer equipment. We expense product development costs as they are incurred. We increased our product development costs from $157,000 for the three months ended March 31, 1998 to $401,000 for the same period in 1999, an increase of $244,000, or 155%. This increase was due to the increase in the number of our product development personnel. GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist primarily of compensation for administrative personnel, facilities and communications expenses and fees for outside professional advisors. General and administrative expenses increased from $629,000 for the three months ended March 31, 1998 to $1.9 million for the same period in 1999, an increase of $1.2 million, or 197%. This increase was primarily due to the increase in the number of administrative personnel and the related increase in facilities costs and, to a lesser extent, increased professional, consulting, legal and accounting fees. NET LOSS. During the quarter ended March 31, 1998 we sold the assets of our HomeScout division and realized a gain of $1.6 million. HomeScout was a real estate search service that we developed to give users access to homes for sale on the Internet. See Note 2 of Notes to Cobalt Financial Statements. Excluding the gain on sale of HomeScout, our net loss for the three months ended March 31, 1998 was $423,000 compared to a net loss of $2.0 million for the same period in 1999, an increase of $1.6 million. Increased operating expenses described above offset the increase in net revenues. YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998 NET REVENUES. Our net revenues increased from $312,000 in 1996 to $1.7 million in 1997 and to $6.2 million in 1998. These increases in net revenues were attributable to substantial growth in our client base and to a lesser extent to increased sales to existing clients. Also, in December 1997 we acquired the assets of the DealerNet division of The Reynolds and Reynolds Company for a purchase price of $800,000. This acquisition also contributed to the growth in our client base as we transitioned automobile dealership clients of DealerNet to Cobalt services. See Note 3 of Notes to Cobalt Financial Statements. COST OF REVENUES. Cost of revenues increased from $51,000 in 1996 to $285,000 in 1997 and to $1.2 million in 1998. These increases were directly related to the substantial increase in our client base. These increases primarily consisted of increases in the costs of production and design personnel and, to a lesser extent, to equipment depreciation and costs associated with new service offerings for distribution of vehicle data to third party Web sites. Cost of revenues, as a percentage of net revenues, increased from 16.3% in 1996 to 16.7% in 1997 and to 19.2% in 1998 due primarily to the increase in production and design staffing and computer equipment required to accommodate our increased client base. There was also a shift in our services mix to higher cost Internet advertising services from 1% of net revenue in 1997 to 11% in 1998. We did not provide Internet advertising services in 1996. SALES AND MARKETING. Sales and marketing expenses increased from $286,000 in 1996 to $1.7 million in 1997 and to $4.0 million in 1998. Our marketing department, initially established in 1997 with two designated employees, had increased to 40 employees by December 31, 1998. We also expanded our sales force to address the substantial increase in our client base and to position us to reach new clients more effectively. These increases also resulted from expenditures for a program of nationwide corporate branding and advertising. We expect sales and marketing expenses to continue to increase as we seek to continue to expand our sales and marketing organization and our presence in the marketplace. Sales and marketing expense as a percentage of net revenues decreased from 101.7% in 1997 to 64.8% in 1998 due primarily to the significant increase in net revenues during the same period. 24 PRODUCT DEVELOPMENT. Product development expenses increased from $125,000 in 1996 to $361,000 in 1997 and to $961,000 in 1998. These increases resulted from additional product development personnel and related equipment. We expect that product development expenses will continue to increase in the future as we hire additional personnel in this area. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from $676,000 in 1996 to $1.8 million in 1997 and to $4.6 million in 1998. The increases were due primarily to additional personnel and related facilities expenses and, to a lesser extent, to increased professional consulting, legal and accounting fees, increased depreciation of capital assets and amortization of intangible assets related to the DealerNet acquisition. NET LOSS. Our net loss increased from $828,000 in 1996 to $2.4 million in 1997 and to $8.1 million in 1998. Excluding the common stock repurchase premium of $5.2 million and the gain on the sale of our HomeScout division of $1.6 million, our net loss in 1998 would have been $4.5 million. See Notes 2 and 10 of Notes to Cobalt Financial Statements. Quarterly Results The following table sets forth unaudited statements of operations data expressed in dollars (in thousands) and as a percentage of net revenues for each quarter of 1998 and the first quarter of 1999. These financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the results of operations for each quarter. The results for any quarter are not necessarily indicative of the results we expect in any future period.
Three Months Ended ----------------------------------------------- Mar. June Dec. Mar. 31, 30, Sept. 31, 31, 1998 1998 30, 1998 1998 1999 ------- ------- -------- ------- ------- Net revenues.......................................................... $1,079 $1,258 $ 1,647 $ 2,261 $ 2,453 Cost of revenues...................................................... 151 262 333 453 540 ------- ------- -------- ------- ------- Gross profit...................................................... 928 996 1,314 1,808 1,913 ------- ------- -------- ------- ------- Operating expenses: Sales and marketing................................................. 564 784 1,218 1,482 1,650 Product development................................................. 157 191 261 352 401 General and administrative.......................................... 629 959 1,349 1,690 1,870 ------- ------- -------- ------- ------- Total operating expenses.......................................... 1,350 1,934 2,828 3,524 3,921 ------- ------- -------- ------- ------- Loss from operations.................................................. (422) (938) (1,514) (1,716) (2,008) Gain on sale of HomeScout division.................................... 1,626 Common stock repurchase premium....................................... (5,202) Interest expense...................................................... (7) (8) (43) (35) (49) Other income, net..................................................... 6 29 13 94 57 ------- ------- -------- ------- ------- Net income (loss)..................................................... $1,203 $ (917) $ (1,544) $(6,859) $(2,000) ------- ------- -------- ------- ------- ------- ------- -------- ------- -------
25
Three Months Ended ------------------------------------------------ Mar. June Dec. Mar. 31, 30, Sept. 31, 31, 1998 1998 30, 1998 1998 1999 ------- ------- -------- ------- ------- Net revenues.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues...................................................... 14.0 20.8 20.2 20.0 22.0 ------- ------- -------- ------- ------- Gross profit...................................................... 86.0 79.2 79.8 80.0 78.0 ------- ------- -------- ------- ------- Operating expenses: Sales and marketing................................................. 52.3 62.3 74.0 65.5 67.3 Product development................................................. 14.6 15.2 15.8 15.6 16.3 General and administrative.......................................... 58.2 76.3 81.9 74.8 76.3 ------- ------- -------- ------- ------- Total operating expenses.......................................... 125.1 153.8 171.7 155.9 159.9 ------- ------- -------- ------- ------- Loss from operations.................................................. (39.1) (74.6) (91.9) (75.9) (81.9) Gain on sale of HomeScout division.................................... 150.7 Common stock repurchase premium....................................... (230.1) Interest expense...................................................... (0.7) (0.6) (2.6) (1.6) (1.9) Other income, net..................................................... 0.6 2.3 0.8 4.2 2.3 ------- ------- -------- ------- ------- Net income (loss)..................................................... 111.5% (72.9)% (93.7)% (303.4)% (81.5)% ------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Net revenues increased in 1998 due to increases in the size of our client base. The rate of growth slowed in the first quarter of 1999, due to a decline in the rate of new client acquisition we experienced in the fourth quarter of 1998 and the first quarter of 1999. This decline was due principally to our conversion to a new database system which resulted in a reallocation of sales and marketing resources to maintaining client relationships. Our cost of revenues has increased each quarter, although generally at the same rate as the growth in net revenues. We expect our quarterly operating results to fluctuate due to a variety of factors, many of which are beyond our control. These factors include: - the level of demand in the automotive industry for Internet marketing and data aggregation services; - the rate and volume of additions to our client base; - the amount and timing of expenditures by clients for Internet-based services; - the introduction of new products or services by us or our competitors; - our ability to attract and retain personnel with the necessary technical, sales, marketing and creative skills required to develop our services and to service our clients effectively; - technical difficulties with respect to the Internet or infrastructure; and - economic conditions generally and specific to the automotive industry. As a strategic initiative or as a response to the competitive environment, we may from time to time make pricing, service, technology or marketing decisions or business or technology acquisitions that could have a material adverse effect on our short-term operating results. We also may experience seasonality in our business in the future resulting in diminished revenues as a result of diminished demand for our services during seasonal periods that correspond to seasonal fluctuations in the automotive industry or to fluctuations in industry spending for Internet marketing services. Due to all or any of the foregoing factors, in some future quarter our operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock would likely be materially and adversely affected. 26 Results of Operations--PartsVoice The following table sets forth for the periods indicated certain historical statements of operations data of PartsVoice expressed in dollars (in thousands) and as a percentage of net revenues.
Year Ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net revenues......................................................................... $ 6,679 $ 7,715 $ 9,528 Cost of revenues..................................................................... 1,714 1,965 2,144 --------- --------- --------- Gross profit......................................................................... 4,965 5,750 7,384 Sales and marketing expense........................................................ 1,339 1,419 1,662 General and administrative expense................................................. 1,012 1,054 1,180 --------- --------- --------- Income from operations............................................................... 2,614 3,277 4,542 Other income (expense)............................................................... (1) 28 65 --------- --------- --------- Net income........................................................................... $ 2,613 $ 3,305 $ 4,607 --------- --------- --------- --------- --------- --------- Year Ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net revenues......................................................................... 100.0% 100.0% 100.0% Cost of revenues..................................................................... 25.7 25.5 22.5 --------- --------- --------- Gross profit......................................................................... 74.3 74.5 77.5 Sales and marketing expense........................................................ 20.0 18.4 17.4 General and administrative expense................................................. 15.2 13.6 12.4 --------- --------- --------- Income from operations............................................................... 39.1 42.5 47.7 Other income (expense)............................................................... -- 0.3 0.7 --------- --------- --------- Net income........................................................................... 39.1% 42.8% 48.4% --------- --------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998 NET REVENUES. Net revenues increased from $6.7 million in 1996 to $7.7 million in 1997 and to $9.5 million in 1998. The increase from 1996 to 1997 was primarily due to increased services provided to existing manufacturer clients and, to a lesser extent, services provided to three new manufacturer clients. Revenues from individual dealership clients did not change significantly. The increase in net revenues from 1997 to 1998 was primarily due to increased services provided to existing manufacturer clients and, to a lesser extent, an increase in the number of individual dealership clients. Net revenues also improved due to the impact of a full year of service provided to the manufacturer clients that were new clients in 1997. COST OF REVENUES. Cost of revenues increased from $1.7 million in 1996 to $2.0 million in 1997 and to $2.1 million in 1998. This increase was due to increased personnel and phone charges required to support increased levels of net revenues. However, cost of revenues as a percentage of net revenues decreased from 25.7% of net revenues in 1996 to 22.5% of net revenues in 1998 as PartsVoice was able to leverage existing personnel and facilities to generate additional revenues during those periods. SALES AND MARKETING. Sales and marketing expenses increased from $1.3 million in 1996 to $1.4 million in 1997 and to $1.7 million in 1998. This increase was primarily due to increased personnel costs for sales and sales support personnel required to service the increased client base and, to a lesser extent, to increased advertising expenditures. Other marketing activities, such as trade shows and other manufacturer meetings, did not change significantly over the three year period. Sales and marketing expenses, as a percentage of net revenues, decreased from 20.0% in 1996 to 17.4% in 1998. 27 GENERAL AND ADMINISTRATIVE. General and administrative expenses were approximately $1.0 million for each year in the three year period. Accordingly, general and administrative costs, as a percentage of net revenues, declined from 15.2% in 1996 to 12.4% in 1998. NET INCOME. Net income increased from $2.6 million in 1996 to $3.3 million in 1997 and to $4.6 million in 1998 due to the increase in net revenues at a rate in excess of the growth in expenses. Net income increased from 39.1% of net revenues in 1996 to 48.4% in 1998. Liquidity and Capital Resources Since inception, we have financed our operations primarily from sales of preferred stock, cash flow from operations and, to a lesser extent, borrowings under short-term debt facilities. Net cash used in operating activities was $374,000 in 1996, $1.8 million in 1997 and $3.8 million in 1998. In each case net cash used was primarily attributable to our net loss before non-operating and noncash items. Net cash used in operations was $99,000 for the three months ended March 31, 1998 and $1.6 million for the same period in 1999. In 1996, our net loss was partially offset by an increase in deferred revenues and accrued liabilities. In 1997, cash used in operating activities primarily consisted of the net loss after noncash items, the increase in accounts receivable and the decrease in accrued liabilities, offset by the increase in deferred revenues. In 1998, cash used in operating activities primarily consisted of the net loss after noncash items and increases in accounts receivable and other assets, offset by increases in accrued liabilities and deferred revenues. For the three months ended March 31, 1998, our net loss after non-operating items approximated our net cash used in operations. For the same period in 1999, net cash used was primarily attributable to our net loss and, to a lesser extent, the increase in other assets, partially offset by current liabilities. Net cash used in investing activities was $101,000 in 1996 and $348,000 in 1997, substantially all of which was used to acquire capital assets consisting primarily of computer equipment and software. In 1998, we used cash of $472,000 to acquire capital assets. Our other significant investing activities in 1998 were the sale of the assets of our former HomeScout division for $1.6 million and a use of $983,000 to purchase short-term investments. Beginning in 1997 and in addition to cash purchases of capital assets, we have leased capital assets under financing leases. The value of the assets acquired under terms of these leases were $21,000 in 1997 and $959,000 in 1998. In March 1998, we sold the assets of our HomeScout division, which generated cash proceeds of $1.0 million for the three months ended March 31, 1998. During the three months ended March 31, 1999 we used cash of $172,000 for investment in capital assets. Net cash provided by financing activities was $477,000 in 1996, $2.4 million in 1997 and $9.2 million in 1998. In 1996, net cash provided by financing activities consisted primarily of proceeds from the issuance of common stock, proceeds from lease financing transactions and officer advances. In 1997 and 1998, net cash provided by financing activities was primarily the result of proceeds from the issuance of preferred stock (net of repurchases), net of repayment of various short-term credit facilities and the $500,000 portion of the DealerNet purchase price that was payable in cash. Net cash used for financing activities was not significant for the three month periods ended March 31, 1998 and 1999. At April 30, 1999, we had cash and cash equivalents of $1.0 million. In May 1999, we secured a line of credit from an institutional lender under which we may borrow up to $5.0 million, for a fee of 2.0%. Borrowings under this line of credit will bear interest at prime plus 2.0%, or 9.75%, and will be due on the earlier of completion of this offering or December 31, 1999. The line of credit is secured by Cobalt's assets. We also have short-term indebtedness in the principal amount of $23.0 million owed to the former owners of PartsVoice, which we incurred on April 30, 1999. We are required to repay the PartsVoice acquisition indebtedness and any borrowings outstanding under the line of credit with net proceeds from this offering. In addition, we will use approximately $2.0 million of the net proceeds to pay accrued and unpaid dividends on our outstanding preferred stock. See "Use of Proceeds." 28 We had no material commitments for capital expenditures at April 30, 1999. As of that date, we had total minimum lease obligations of $735,000 under certain noncancellable operating leases. We also are contractually obligated to make aggregate payments of $558,000 through December 31, 1999 for purchases of third-party advertising services that we are re-selling to clients. We believe that the net proceeds from this offering, together with cash flow from operations and funds available under our line of credit, will be sufficient to meet our cash requirements for the next twelve months. Depending on our rate of growth and cash requirements, we may require additional equity or debt financing to meet future working capital needs. We cannot assure you that such additional financing will be available or, if available, that such financing can be obtained on satisfactory terms. Impact of Year 2000 Many existing computer programs and hardware use only two digits to identify a year. These computer programs and hardware were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer programs and hardware could fail or create erroneous results by, at or beyond the year 2000. We have evaluated our internal and third party hardware and software systems and, based on this evaluation and statements published by our hardware and software suppliers, which we have not verified, we have determined that substantially all of our systems are Year 2000 compliant. All of our non-compliant purchased software is used for internal processes only and we intend to upgrade or replace and to test such software prior to December 31, 1999. We intend to replace all of our non-compliant hardware prior to December 31, 1999. We are in the process of assessing our internally developed software for Year 2000 compliance and intend to have all such software fully compliant by September 30, 1999. We also intend to execute a series of test scenarios during the remainder of 1999 to simulate the date change for all critical systems. The products and services used by our clients in connection with our services may not be Year 2000 compliant and as a result may lead to claims against us, the impact of which cannot be currently estimated. The aggregate cost of defending and resolving these claims, if any, could be significant. Year 2000 issues also could affect the purchasing patterns of our clients and potential clients as many automobile dealers, dealer groups and manufacturers are expending significant resources to replace or remedy their current hardware and software systems in order to resolve Year 2000 issues. In addition, our clients may experience interruptions to their businesses as a result of their failure to timely correct their Year 2000 issues. As a result, our clients may postpone or cancel purchases of our services, potentially causing interruptions to our revenue that could have a material adverse effect on our business, operating results and financial condition. In addition, we utilize other services developed and provided by third party vendors that may fail due to Year 2000 issues. We are currently assessing the Year 2000 readiness of our third party supplied services. Based upon the results of this assessment we will develop and implement, if necessary, a remediation plan with respect to third party services that may fail to be Year 2000 compliant. To date, we have expended internal resources associated with assessment and remediation of Year 2000 issues. Total expenses associated with our entire review and assessment are not presently determinable but are expected to be less than $25,000. The failure of our software and computing systems and of our third party vendors to be Year 2000 compliant could have a material adverse effect on our business, results of operations and financial condition. We currently have no contingency plans to address the risks associated with unremediated Year 2000 problems. Quantitative and Qualitative Disclosures about Market Risk Substantially all of our cash equivalents and marketable securities are at fixed interest rates, and, as such, the fair value of these instruments is affected by changes in market interest rates. However, all of our cash 29 equivalents and marketable securities mature within one year. As a result, we believe that the market risk arising from our holding of these financial instruments is minimal. In addition, all of our current clients pay in U.S. dollars and, consequently, our foreign currency exchange rate risk is immaterial. We do not have any derivative instruments and do not engage in hedging transactions. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement became effective on January 1, 1999 and establishes accounting standards for costs incurred in the acquisition or development and implementation of computer software. These new standards will require capitalization of certain software implementation costs relating to software acquired or developed and implemented for our use. This statement does not have a significant effect on our financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement became effective on January 1, 1999 and requires costs of start-up activities and organization costs to be expensed as incurred. This statement does not have a significant effect on our financial position or results of operations. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. We adopted SFAS 130 on January 1, 1998. To date, we have not had any significant transactions that are required to be reported as other comprehensive income other than our net (loss) income. The FASB recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management approach." The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. We adopted SFAS 131 on January 1, 1998. We have determined that we do not have any separately reportable business or geographic segments. 30 BUSINESS Overview We are a leading provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. We enable our clients to develop and implement effective e-business strategies and to position themselves to capitalize on the increasing use of the Internet by consumers to research, evaluate and initiate purchases of new and pre-owned vehicles, parts and accessories, and automotive-related services such as financing and insurance. We currently offer our clients: - comprehensive Web site design, development and maintenance services; - data extraction, aggregation and management services; - Internet advertising and promotional services; and - Internet marketing, training and support. We are developing additional services to help our clients realize the potential of the Internet to attract and retain customers, increase the efficiency of their operations, and improve the productivity of their sales and service departments. We currently manage and maintain more than 3,300 Web sites for clients holding more than 4,700 new vehicle franchises. Our clients include more than 50 of the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE NEWS, and we are the manufacturer-endorsed provider of Web site solutions for the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. Our vehicle parts data services are used by clients holding more than 9,000 new vehicle franchises. We also provide vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi, Subaru and Toyota. In total, we provide our services to clients holding more than 12,000 new vehicle franchises. Industry Background THE U.S. AUTOMOBILE RETAIL INDUSTRY The automotive retailing industry is one of the largest retail trade sectors in the United States. New vehicle franchised dealerships generated more than $500 billion in new and pre-owned vehicle sales in 1998. In addition, franchised dealerships generate substantial additional revenues in vehicle service and parts sales and financing. While the automotive retailing industry is large, it remains highly fragmented and is characterized by relatively small, independent dealerships. In 1998, there were more than 22,000 automobile dealerships in the United States representing more than 49,000 franchises. According to AUTOMOTIVE NEWS, the top ten U.S. dealer groups sold only 4.1% of the total new and pre-owned vehicles in 1998. The automotive retailing industry is highly competitive and characterized by relatively low margins. In many markets, there are numerous dealerships offering consumers identical, or very similar, products and services. Furthermore, the relatively high cost of a new car makes consumers price-sensitive and encourages comparison shopping among dealerships. These market dynamics result in low dealership pre-tax margins and require dealerships to maintain multiple sources of profitability. According to the National Automobile Dealers Association, or NADA, sales of new automobiles in 1998 represented 59% of the industry's revenues, although profits generated by new car sales comprised only 29% of total dealership profitability. In contrast, parts and service revenues and profits were approximately 12% and 47%, respectively. In 1998, dealerships spent more than $5.0 billion and manufacturers spent more than $7.0 billion in marketing and advertising to differentiate themselves in this highly competitive industry. According to NADA, U.S. automobile dealerships spent on average more than $225,000 in advertising in 1997, representing more than $440 per new vehicle sale. 31 GROWTH OF THE INTERNET The Internet has emerged as a significant global medium for communication, content delivery and commerce. International Data Corporation, or IDC, estimates that there were over 38 million Internet users in the United States at the end of 1997. IDC projects these numbers to increase to over 135 million Internet users in the United States by the end of 2002. Increasing Internet usage has facilitated the rapid growth of e-business. As the Internet has gained acceptance as a commercial medium, the dollar volume of online commerce transactions has risen dramatically. IDC estimates that the volume of goods and services purchased over the Internet will increase from $32 billion in 1998 to $425 billion in 2002. In addition to facilitating business transactions, the Internet enables businesses to target and manage a broad customer base and establish and maintain ongoing, direct customer relationships. As the number of businesses and information providers marketing on the Internet has grown, the Internet has become a primary source from which consumers can access a large amount of information regarding products and services, such as pricing, quality and specifications. Jupiter Communications, Inc. estimates that the amount spent on online advertising will increase from $1.9 billion in 1998 to $7.7 billion in 2002. GROWING IMPORTANCE OF THE INTERNET TO THE AUTOMOTIVE RETAILING INDUSTRY The emergence of the Internet as a commercial medium has created an opportunity for automobile manufacturers and dealerships to market cost-effectively to and communicate with a large and growing pool of online consumers. J.D. Power and Associates estimates that 25% of new vehicle purchasers used the Internet to search for information on automobiles or otherwise assist them with their purchases in 1998 and that this figure will increase to approximately 37% by the end of 2000. J.D. Power and Associates estimates that 76% of these prospective customers who use the Internet during the shopping process visit manufacturers' sites to conduct research on vehicles. AutoNation, Inc., the largest multi-franchise dealer group in the United States, has emphasized the Internet in its brand marketing campaign in the Denver, Colorado market. AutoNation estimates that 51% of its customers would not have visited a Denver area AutoNation dealership if it did not have an Internet presence and 35% of its Denver area customers would not have made purchases from AutoNation if it did not have a Web site. Forrester Research projects that dealerships will increase spending on Internet marketing to $600 million annually by 2002. We believe that the increasing demand for Internet marketing solutions in the automotive retailing industry provides a significant market opportunity for a business that: - understands the unique marketing requirements of automobile manufacturers and dealers; - creates compelling Internet content that targets the online automotive consumer; and - delivers a broad suite of services that can improve the productivity and efficiency of traditional automobile dealerships. The Cobalt Group Solution We provide Internet marketing and data aggregation services that enable our clients to use the Internet effectively to attract and retain customers, increase the efficiency of their operations, and improve the productivity and effectiveness of their sales and service departments. We believe that our solution provides the following benefits: RAPID DEPLOYMENT OF A COMPREHENSIVE INTERNET PRESENCE We can rapidly deploy sophisticated Web sites for individual dealerships as well as complex networks of dealership Web sites for a manufacturer's entire dealer network. Clients are able to modify the design of their 32 Web sites by selecting from a broad range of features that include dealer-specific content pages, a searchable vehicle database, and interactive communications tools. We offer our clients a professional, scalable solution with features appropriate to each client's marketing budget and strategy. We enable our clients to remain focused on their own competencies and implement an e-business strategy and professional Internet presence by outsourcing a large portion of their Internet marketing needs to us. CREATION OF AN ONLINE IDENTITY AND LEVERAGE OF BRAND ASSETS We enable our clients to build a distinct presence on the Internet that contributes to the development of their independent online brand image and reinforces their existing brand identity. Our manufacturer and dealer group clients can achieve a consistent Internet presence across their dealership networks by employing network-wide style and graphics templates that support a cohesive brand-building strategy. In addition, our individual dealership clients can use their Internet presence to build their own local or regional brand identities while leveraging the brand assets of the manufacturers they represent. INCREASED RETURN ON INVESTMENT IN TRADITIONAL ADVERTISING MEDIA Our services enable dealerships to maximize their investments in traditional advertising media. Prospective dealership customers who learn about a dealership's Web site through traditional advertising can access the Web site for information about the dealership, its vehicle inventories and services, and special "Internet-only" promotional offers in an easy to use and interactive manner. We believe that dealerships that pursue an Internet marketing strategy and prominently feature their Web site address in their traditional advertising can expect a greater return on their investment in traditional media. IMPROVED CUSTOMER ACQUISITION AND RETENTION Our services allow dealerships to communicate efficiently and effectively with their prospective and current customers. Our clients can obtain information about consumers and their preferences that enables dealers to present desired information in a targeted manner, thereby enhancing the relevancy of the response to the customer's inquiry. We design our services to help our clients to pursue, enrich and maintain customer relationships, which we believe increase the likelihood that the dealership will complete an initial sale and follow-on sales of vehicles and automotive-related products and services. ENHANCED INTERNAL EFFICIENCIES Our services empower our clients to sell their products and services more efficiently. Our data aggregation and management capabilities enable our clients to present consolidated, system-wide vehicle and parts inventory information, collected from disparate sources and systems, and make this aggregated inventory searchable on a centralized Web site as well as on individual dealership Web sites. By providing an inexpensive mechanism to market vehicle and parts inventories to a broad audience, our clients are able to increase the frequency of inventory turns, thus reducing obsolescence and financing costs. Our dealership clients also can manage their inventory to meet customer needs more effectively and increase the likelihood of closing a sale. In addition, we believe that effective use of the Internet as a communication medium can increase the efficiency and productivity of, and reduce turnover among, a dealership's sales staff. 33 Growth Strategy Our objective is to be the premier provider of Internet marketing and e-business solutions to the automotive retailing industry. We intend to implement the following strategies to achieve this objective: EXPAND OUR CLIENT BASE We intend to increase our market penetration by educating prospective clients about the benefits of deploying our comprehensive Internet marketing and data aggregation solution. We believe that we are perceived by the automotive retailing industry as understanding the needs and attributes of the "online shopper," and can leverage our reputation to continue building key relationships with manufacturers, dealer groups and individual dealerships. To take advantage of our position within the industry, we have adopted a consultative approach in our sales and marketing efforts and seek to be viewed by both current and prospective clients as their e-business partner of choice. SELL ADDITIONAL SERVICES TO OUR EXISTING CLIENTS We seek to enhance our clients' understanding and appreciation of Internet and e-business strategies and encourage them to upgrade their Web sites with additional services and new features. We believe that our best informed clients are the most likely to purchase additional services from us. Consequently, our account management activities include recommending service upgrades that are consistent with a client's e-business strategy, Internet management capabilities, and marketing budget. In addition, we estimate that less than 10% of our client base purchases both Internet marketing and data aggregation services from us. We believe that we have an opportunity to cross-sell our entire service offerings to clients that currently purchase only one service from us. INCREASE OUR SERVICE OFFERINGS We are committed to expanding our suite of Internet services to address the evolving needs of our clients. We have identified a number of opportunities that we believe leverage our large network of dealership clients, our core competencies in data acquisition and integration, and our technical and online marketing expertise. For example, in late 1999 we expect to introduce a service to assist our dealership clients to integrate data captured from their Web sites with data extracted from their existing dealer management systems to track leads and manage existing customers. PURSUE GROWTH BY ACQUISITIONS We are continually assessing strategic investments and acquisitions that are aligned with our goals of increasing our client base and expanding our service offerings. For example, our recent acquisition of PartsVoice provided us with access to clients representing an additional 8,000 franchises as well as a new suite of services. As a result, we are now positioned to cross-sell our comprehensive Internet marketing and data aggregation services to our combined client base. CAPITALIZE ON INTERNATIONAL MARKET OPPORTUNITIES We expect to offer our Internet solution in foreign markets to address the global e-business needs of our manufacturer clients and to leverage our technical expertise and existing service offerings for dealerships in countries with rapidly increasing Internet usage. 34 Service Offerings We currently offer comprehensive Web site design, development and maintenance services; data extraction, aggregation and management services; and Internet advertising and promotional services. We offer other services such as Internet training and support services.
Web Site Design, Development Data Extraction, Aggregation Internet Advertising and and Maintenance Services and Management Services Promotional Services - ------------------------------------ ------------------------------------ ------------------------------------ - - Basic content pages - Vehicle inventory data extraction - Internet classified advertising - - E-mail forms and database management - Banner advertising - - Dealer-managed pages - Parts inventory data extraction - Interactive promotion development - - Web traffic reporter and database management and management - - Multimedia enhancement - Service record data extraction and - DEALERNET Web site - - Creative and development services decoding - Creative and development services - - Client training and support - Additional data extraction - PARTSVOICE parts marketing service services
WEB SITE DESIGN, DEVELOPMENT AND MAINTENANCE SERVICES The foundation of our service offerings is a powerful, cost-effective Web site. We offer a wide range of features and options that enable our clients to have a robust e-business platform. Our core Web site solution has more than 40 features, each of which is available for incremental monthly fees. These features include: BASIC CONTENT PAGES. We believe that effective dealer Web sites provide substantial information about the dealership. Consequently, we offer our clients a range of content templates and format styles that enable them to customize the dealer-specific content of their online presence and highlight the specific benefits and attributes associated with their dealerships. Our available content templates include, among others: - a welcome letter; - a map and directions to the dealership location; - dealership history; - customer testimonials; - financing information; - management and staff profiles; - dealership news and events; and - vehicle maintenance schedules. E-MAIL FORMS. We offer a variety of tailored e-mail forms on the Web site to address specific customer needs and interests, including requests for financing pre-qualification, service appointments, and price quotes on specific vehicles. These forms include dynamically generated content, such as information about a vehicle listing and a photograph of the vehicle about which the customer has inquired. The forms also solicit context-specific information from the customer to enhance the shopping experience and ensure that the dealership receives the information necessary to respond fully and promptly to the inquiry. DEALER-MANAGED PAGES AND CONTENT LIBRARY. Our WEBEDGE Power Marketing Tools include features that allow our clients to build special promotional pages on their sites quickly and easily using a simple step-by-step program and a wide array of stylistic templates, vehicle images and logos. Using our ADWIZARD tool, dealers can create and post custom, new vehicle display advertisements on their Web site. Dealers can use our DEALER'S CHOICE tools to create advertisements for pre-owned vehicles. Similarly, our INSTANT INCENTIVES feature allows our clients to create coupons for services and highlight special offerings. These tools allow users to schedule the start and stop dates for the special offerings, which is particularly important in advertising manufacturer incentive programs. 35 WEB TRAFFIC REPORTER. Our Web site user traffic reporting feature allows dealerships to review activity on their Web sites. Available data include total page views, addresses of referral sites, and parameters of vehicle searches conducted by site visitors. This information enables dealerships to make informed decisions about management of their Internet marketing programs and to allocate their marketing resources more effectively. MULTIMEDIA ENHANCEMENT OPTIONS. We also offer other features, such as streamed audio and video, animated graphics and scrolling "ticker tape" messages, that dealerships may add to enrich their sites. DATA EXTRACTION, AGGREGATION AND MANAGEMENT SERVICES An important component of our services to our clients is our ability to extract data from their dealership management information systems, process this data into standard record structures, and integrate it with data from other sources into our databases. VEHICLE INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. Our vehicle inventory data extraction and management service allows dealerships to include a searchable database of their new and pre-owned vehicle inventory on their Web sites. In most cases, we can extract basic inventory data from a dealership's information system, populate the database with this information, and then permit the dealership to make real time enhancements to their listings by adding photos, descriptive text or other information. PARTS INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. We currently extract parts inventory data on behalf of our clients from dealerships representing more than 9,000 dealer franchises, and our database contains information on more than 38 million parts. Manufacturer clients and dealership parts managers can access this database over the Internet or through an interactive voice response telephone system to check parts inventories and to locate parts needed in their service departments. For the year ended December 31, 1998, our parts inventory database received more than nine million queries. SERVICE RECORD EXTRACTION AND DECODING. We recently introduced a service record extraction and decoding service. This service extracts individual vehicle service records from dealership information systems and converts disparate dealership labor operations codes into a standard set of codes, making it possible to review service record information across a network of dealer databases. This process enables automobile manufacturers to aggregate vehicle service records across their entire dealership network. We currently provide this service to DaimlerChrysler. ADDITIONAL DATA EXTRACTION SERVICES. We also perform customized data extraction and aggregation tasks for our manufacturer clients, such as dealership sales and financial performance and parts sales history reporting. CREATIVE AND DEVELOPMENT SERVICES Many of our clients request custom solutions or service upgrades to enhance our standard dealership Web site system. For example, dealer group Web sites generally require significant custom design and development work to enable prospective customers to access information about multiple franchises and dealerships as well as search the aggregated inventory of all dealerships in the group on one central site. We provide these custom development services on a per-project basis and typically charge fees based on the anticipated staff time required to complete the project. INTERNET ADVERTISING AND PROMOTIONAL SERVICES We provide a range of Internet advertising and promotion services for clients that seek to allocate a portion of their marketing budgets to driving increased traffic to their Web sites and generating additional customer leads. 36 INTERNET ADVERTISING PROGRAMS. We provide our dealer group and individual dealership clients with a complete range of advertising services, including creating necessary graphics such as advertising banners, developing interactive media plans, and purchasing interactive media. In addition, we sell participation in and upload our clients' pre-owned vehicle listings to, a variety of national and regional Internet classified advertising services, including TraderOnline.com, Classifieds2000, Yahoo! Classifieds, and others. We provide a complete service to both our clients and the Internet advertising partners by selling the service, collecting, modifying, and enhancing the required data, transmitting the data to the advertising partner, addressing client service issues, and remitting advertising fees to the advertising partner. On behalf of our clients, we have purchased advertising from Internet media companies such as Yahoo!, Big Yellow, MapQuest, and 24/7 Media. We also have purchased blocks of advertising space on high traffic Web sites and are reselling that inventory to our clients for banner and tile advertisements. INTERACTIVE PROMOTION DEVELOPMENT AND MANAGEMENT. We assist our clients in creating and managing Internet promotional events, such as car and other product giveaways, to generate traffic to their Web sites and to promote specific products. Online promotions generate leads for our clients from promotion registrants who request additional information about the dealership, its products and future promotions. DEALERNET WEB SITE. Our DEALERNET Web site is an automotive research destination site that generates visibility for our dealership clients' inventories of new and pre-owned vehicles and increases traffic to our dealership clients' Web sites. Unlike other automotive sites, the names of participating dealership clients and links to their Web sites are prevalent throughout the site. The DEALERNET Web site users may browse model specifications and prices for new cars from every major automobile manufacturer. In addition, users may specify vehicle features and submit new vehicle purchase requests, and search for more than 330,000 new and pre-owned vehicles linked to more than 1,800 Web sites. TRAINING AND SUPPORT We offer both fee-based and complimentary training programs for our clients to educate dealership and dealer group owners, managers, and sales staff, manufacturer marketing personnel, and other client personnel about implementing an effective Internet marketing program. In addition, our direct sales consultants meet with clients to provide one-on-one training and our customer service staff provides unlimited telephone support to our clients to address technical questions about our services that may arise from time to time. See "--Sales and Marketing." YACHTWORLD MARKETING SERVICE When we commenced operations in 1995 we offered Internet solutions to the automotive retailing, residential real estate and yachting industries. In 1997, we began focusing our efforts on the automotive retailing industry. We sold our HomeScout real estate business in 1998 and continue to operate our YACHTWORLD Web site as a distinct line of business. The YACHTWORLD Web site provides prospective yacht buyers with access to thousands of yacht listings from hundreds of yacht brokers. As of May 24, 1999, our YACHTWORLD Web site listed more than 16,000 yachts for sale or charter by more than 500 brokers located in 16 countries. The site also contains a directory of nearly 18,000 marine-related businesses, editorial content from several leading boating publications, and other marine-related content. On average, more than 5,000 users search the YachtWorld database every day. Yacht brokers pay a monthly subscription fee to list their boats on our YACHTWORLD Web site. Clients INDIVIDUAL DEALERSHIPS We have designed, developed and currently maintain more than 3,300 Web sites for clients holding more than 4,700 new vehicle franchises. Our vehicle parts data services are used by clients holding more than 37 9,000 new vehicle franchises. Fewer than 10% of our clients purchase both services, and we believe that we have the opportunity to strengthen our relationships with our dealership clients by cross-selling our other services to clients that currently purchase only one category of service from us. The chart below illustrates the approximate number of franchises for which, as of April 30, 1999, we provided Internet marketing services and for which we provided data aggregation and parts locator services:
Internet Data Aggregation and Franchise Marketing Services Parts Locator Services - -------------------------------------------- ----------------------------- ----------------------- Acura....................................... 185 -- Audi........................................ 32 -- BMW......................................... 52 25 Chrysler.................................... 485 3,742 Ford........................................ 355 1,327 General Motors.............................. 733 1,314 Honda....................................... 232 68 Hyundai..................................... 101 44 Infiniti.................................... 79 -- Isuzu....................................... 62 225 Jaguar...................................... 21 -- Kia......................................... 47 -- Lexus....................................... 196 -- Mazda....................................... 66 551 Mercedes-Benz............................... 350 14 Mitsubishi.................................. 153 191 Nissan...................................... 383 84 Porsche..................................... 34 -- Saab........................................ 92 17 Saturn...................................... 43 * Subaru...................................... 54 271 Suzuki...................................... 22 -- Toyota...................................... 776 23 Volkswagen.................................. 60 70 Volvo....................................... 40 39
- --------- * Included in the 1,314 General Motors franchises listed above. MULTI-FRANCHISE DEALER GROUPS Dealer groups are networks of franchised dealerships under common ownership and management. In general, marketing strategies for dealer groups are designed and implemented on a centralized basis. Our Internet solutions are particularly applicable to the needs of both large dealership consolidation companies and smaller, regional dealership groups that recognize the need to aggressively establish their companies' online brand identities and implement Internet marketing programs across their dealership networks. We provide services to more than 50 of the 100 largest multi-franchise dealer groups in the United States including five of the ten largest multi-franchise dealer groups as ranked by AUTOMOTIVE NEWS: AutoNation, Inc., Group 1 Automotive Inc., Hendrick Automotive Group, Sonic Automotive Inc., and United Auto Group Inc. MANUFACTURERS We are the manufacturer-endorsed provider of Web site solutions for the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. In 38 addition, we are a provider of vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi, Subaru and Toyota. We intend to cross-sell our services offerings to our current manufacturer clients, and continue to pursue relationships with other manufacturers to expand our client base. OTHER CLIENTS We have leveraged our experience in the automotive retailing industry, our technical expertise, and our sales and marketing capabilities to create a Web site program for Case Corporation heavy equipment dealerships and Case/IH farm equipment dealers. In April 1999, we launched default Web sites for approximately 1,500 Case and Case/IH dealerships in North America and recently have begun marketing enhanced services to this dealer group. We believe that there are a number of other dealer-based industries with attributes similar to the automotive retailing industry that would benefit from our Internet solution. We also provide Internet marketing services to multi-franchise regional dealership associations. Regional dealership marketing associations such as the Western Washington Toyota Dealers Association, Infiniti West Region, and the Bay Area Nissan Retailers have established online presences to promote their members' individual sales and marketing programs. Client Case Study The following case study describes what we believe to be an effective implementation of our Internet solution by a dealership. HUEY'S HONDA In 1997 we were retained by Huey's Honda of Frontenac, Missouri to design and build its dealer Web site. The initial Web site consisted of basic content pages, customer e-mail forms, and Web site traffic reports, as well as premium services that allowed Huey's Honda to customize its Web site with advertisements and dealer specials. Since the Huey's Honda site was launched, the dealership has added features such as the ability to search new vehicle inventory, a customer support page, and additional design and graphics elements. In addition, we have assisted Huey's Honda in increasing traffic to its site through inventory listings with Classifieds2000 and TraderOnline, and in coordinating banner advertising purchases from Yahoo! and the St. Louis Post-Dispatch. A prospective customer can view new and pre-owned vehicle inventory, vehicle service and maintenance schedules, dealership hours and directions, new model specials and Internet-only coupons and specials. As the commitment of Huey's Honda to maintaining an online presence has grown, our average monthly billings to Huey's Honda have increased from an average of approximately $900 per month in 1997 to more than $2,000 per month as of May 1999. Traffic to the Huey's Honda Web site in March 1999 reached 1,764 visits and 14,403 page views, and the dealership attributes approximately 25% of its new customer business to its Internet presence. Sales and Marketing SALES AND MARKETING ORGANIZATION. Our sales and marketing staff is responsible for sales to and support of our individual dealership, dealer group and manufacturer clients. Our marketing staff consists of 29 professionals who are principally responsible for initiating and managing our relationships with automobile manufacturers and large dealer groups, as well as for product management and creative services, marketing communications, and online media activities. Our 29 field sales consultants are organized into 21 geographic territories within six regions, and are principally responsible for initiating and maintaining direct contact with our individual dealership and smaller dealer group clients. In addition to our field sales force, our headquarters-based sales team is dedicated to supporting our field sales consultants and providing customer service to our dealership clients. 39 ACCOUNT ACQUISITION AND MANAGEMENT. Our sales and marketing efforts are focused on account acquisition and management. Account acquisition consists of identifying prospective clients, arranging initial meetings to explain the general capabilities and benefits of our solution, identifying the specific needs and interests of prospective clients, and helping prospective clients create an integrated Internet marketing strategy. Once we have launched a client's initial Internet marketing solution, we work to ensure that the client receives the maximum benefit from our services. Finally, we provide a range of support and training to help increase our clients' Internet marketing and e-business expertise and improve their internal processes. In addition, as a client's Internet marketing expertise increases, we suggest additional services that are appropriate for that client's strategy, Internet management capabilities, and budget. We believe that well-informed clients are the most likely to purchase additional services from us. MANUFACTURERS We provide manufacturers with an Internet solution that gives each dealer in the manufacturer's dealer network a unique Web site and allows the dealers to extensively customize their sites while maintaining the manufacturer's graphic look and feel across the dealership network. Our Internet marketing solution allows manufacturers to leverage their considerable investments in brand image and the graphic assets supporting that brand, while enabling each dealership to distinguish itself from others holding the same franchise. Our manufacturer relationships typically begin with meetings between our senior executives and members of the manufacturer's marketing or dealer relations staff. During these initial meetings, we present our capabilities and explain the benefits of our services to both the manufacturer and its dealership network. Once we have been retained, we will work with the manufacturer's advertising agency or other vendors to develop a design template for the dealer Web sites. We then create standard Web sites containing name and contact information for every dealership in the network and follow-up by contacting each dealership to obtain additional information, sell additional enhancements to the manufacturer-provided solution and provide training. Following the launch of Web sites for the dealership network, our ongoing relationship with a manufacturer is assigned to a specific account executive who is responsible for that relationship. The account executive consults with the manufacturer's marketing managers in developing an Internet marketing plan, and helps the client understand the value of our Internet marketing and data aggregation and management capabilities. MULTI-FRANCHISE DEALER GROUPS Our dealer group relationships often result from introductions to the parent organization following our development of a manufacturer-endorsed Web site for a dealership member of the group. Our approach to acquiring and supporting dealer groups is similar to the strategy that we employ with manufacturer prospects and clients. We seek to build a relationship with the dealer group at the corporate level and dedicate a specific account executive to serve the client's needs. The account executive is responsible for selling services such as a central Web site for the group, individual dealership Web sites that present a consistent brand image across the group, searchable inventory listings of vehicles for all dealerships in the group and our online advertising services. In recognition of the importance of this client category to our business strategy, we recently established a sales and marketing team dedicated to identifying and developing relationships with multi-franchise dealer groups. INDIVIDUAL DEALERSHIPS Our field sales consultants generally begin their dialogue with individual dealerships either through a manufacturer or dealer group relationship or through traditional sales calls upon the dealer principal, general manager or other dealership management staff. We also obtain sales leads through our participation at trade shows and similar industry events, direct mail solicitations and telemarketing efforts. When the dialogue is in 40 the context of a manufacturer- or dealer group-endorsed Internet marketing program, our sales consultants and headquarters-based sales associates will introduce the details and benefits of the program, conduct training, collect information about the dealership, and coordinate the launch of the dealer's Web site. Once the Web site is active, the designated sales consultant will make periodic calls upon the dealership to introduce new services, conduct further training, and assess the client's needs for additional services. In addition, our headquarters-based sales team assists dealership clients with changes to their Web sites, inventory data acquisition and management issues, and provides ongoing support services. Technology Infrastructure Our technology infrastructure consists of our proprietary Web site production and publishing system, our data extraction, aggregation and management tools, our software development capabilities and our Web server and database management infrastructure. WEB SITE PRODUCTION AND PUBLISHING We have developed a hardware and software system and a body of software tools that enable us to generate large numbers of Web sites with a consistent look and feel while simultaneously preserving the flexibility to enhance each site with custom content and features. Our Web site production and publishing system has enabled us to launch and maintain thousands of individual dealership Web sites in connection with automobile manufacturer Internet marketing initiatives. DATA EXTRACTION, AGGREGATION AND MANAGEMENT We also have developed tools to collect, aggregate and manipulate efficiently large quantities of data from disparate sources. We currently extract data from a variety of dealership information systems, and we also collect data from our manufacturer and dealer group clients. In addition, we provide our dealer clients with tools to modify and enhance their inventory data when it resides in our database. We then integrate data from these disparate sources to provide access to and searchability of our dealer clients' vehicle and parts inventory, both on an aggregated basis across our entire dealer network, for defined groups of our dealer clients, or individual dealers. SOFTWARE DEVELOPMENT We believe that strong software development capabilities are essential to implementing our strategy of expanding our customer base successfully, selling more of our services to our existing customers and expanding our service offerings. We spend a substantial amount of time and resources on the development of new services. In an effort to increase our ability to develop and bring new services to market rapidly, we recently augmented our development organization with an Austin, Texas office dedicated to new services development. In addition, we work to enhance our existing suite of services. We believe that our future success will depend in significant part on our ability to improve the performance, functionality and reliability of our Internet marketing and data aggregation and management services. WEB SERVER AND DATABASE MANAGEMENT The demands on our Web site publishing system have increased rapidly with the increase in the number of Web sites maintained on our system, the traffic loads on our Web servers, and the volume of queries to our database servers. Our Web site production and publishing system resides on a range of Web and database servers. We currently have database servers running the Oracle database on Sun hardware. We also operate Digital Equipment VAX servers. This hardware and software support the system that maintains all the Web sites we create, as well as manage the vehicle inventory, parts inventory and other data employed in our data aggregation services. We have invested significantly in hardware and software to support the rapid growth in demands on our hardware and software infrastructure and we continually strive to improve the capacity, 41 efficiency, and performance of our systems. We believe that we have established a scalable technology platform, and we anticipate that continued growth in demands on our system will require substantial additional investments. Internet connectivity from our Seattle headquarters is established through a dual peer-to-peer (direct link) to our bandwidth provider, which has multiple redundant links to the Internet backbone. Our system hardware is housed in locked, climate controlled, dedicated server rooms at our facilities in Seattle, Washington and Portland, Oregon. Security is provided through features inherent in our operating systems. We are in the process of co-locating our Web servers offsite to improve system redundancy. Competition Our Internet marketing services compete directly with services offered by local and regional Web site development firms and indirectly with advertising agencies. We believe, however, that we currently do not have a direct competitor in our Internet marketing services business that has market penetration, geographic coverage, service offerings, technical expertise or infrastructure comparable to ours. We may be perceived by some dealerships to compete with automobile sales lead generation services such as autobytel.com, AutoVantage, CarPoint and Autoweb.com, if these dealerships maintain a distinct Internet marketing budget. Our data aggregation and management services compete with data aggregation service providers such as The Reynolds and Reynolds Company and ADP. It is possible that, in the future, some or all automobile manufacturers could attempt to provide services comparable to those that we provide to our dealership clients. In such an event, our ability to retain our dealership clients could be impaired. In 1997, DaimlerChrysler announced an internal initiative to bring elements of our parts locator service in-house. If implemented, this initiative could significantly reduce our contract revenues for parts locator services to DaimlerChrysler. While we believe that we will be able to leverage our expertise and dealership network to provide better quality services at lower cost than dealerships likely would receive from their franchisor, we cannot be certain that we will be successful in doing so, or that our manufacturer clients may not attempt to bring such services in-house for other reasons beyond our control. While the market for Internet-related services is competitive, we believe the following factors will contribute to our future success in providing such services to the automotive industry: - our ability to offer an integrated, comprehensive Internet solution; - our cooperative relationships with a significant number of dealerships, dealer groups, and manufacturers; - the depth and breadth of our industry expertise; - our proprietary technology and technical expertise; and - our commitment to customer service and reputation for responsiveness. The market for providing Internet marketing services is relatively new and rapidly evolving. We anticipate competition in the market for automotive retailing industry Internet services will increase over time. Barriers to entry on the Internet are relatively low, and we may face competitive pressures from numerous companies, particularly those with existing data aggregation capabilities that may be easily integrated with Internet services. Furthermore, our existing and potential competitors may develop offerings that are perceived as better than our services or otherwise achieve greater market acceptance. Intellectual Property We regard substantial elements of our service offerings as proprietary and believe that they are protected by intellectual property rights including trademark, service mark, copyright, and trade secret laws, and contractual restrictions on their use by licensees and others. Although from time to time we may apply for registration of our trademarks, service marks, and copyrights with the appropriate U.S. agencies, we do not 42 rely on such registrations for the protection of these intellectual property rights. We often enter into confidentiality agreements with our employees and consultants and with third parties in connection with our business operations and services offerings. These confidentiality agreements generally seek to control access to, and distribution of, our technology, documentation, and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use or disclose to others our confidential information without authorization or to develop similar technology independently. Legal standards relating to the validity, enforceability, and scope of protection of certain proprietary rights in Internet-related businesses are uncertain and still evolving, and we cannot be certain about the future viability or value of any of our proprietary rights. We also cannot assure you that the steps that we have taken will prevent misappropriation or infringement of our intellectual property rights and confidential information, which could have a material adverse effect on our business, results of operations and financial condition. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or trademarks or to determine the validity and scope of the intellectual property rights of others. This litigation could result in substantial costs and diversion of resources and management attention. Furthermore, our business activities may infringe upon the proprietary rights of others and other parties may assert infringement claims against us, including claims that arise from directly or indirectly providing hyper-text links to Web sites operated by third parties. Moreover, from time to time, we may be subject to claims of alleged infringement by us or our clients of the trademarks, service marks and other intellectual property rights of third parties. These claims and any resultant litigation, should it occur, might subject us to significant liability for damages, might result in invalidation of our intellectual property rights and, even if not meritorious, could result in substantial costs and diversion of resources and management attention and have a material adverse effect on our business, results of operations and financial condition. We have filed for federal trademark protection for our trademark "Cobalt," which we use in both word and logo form. Other organizations within the computer and software industries have also filed trademark registration applications for "Cobalt." We have filed an opposition proceeding before the Trademark Trial and Appeal Board of the United States Patent and Trademark Office with respect to two of these competing registration applications. That opposition is pending and we are in discussions with the third-party applicant regarding a potential trademark use consent agreement. We may be unsuccessful in these proceedings or negotiations and may be required to limit the use of the tradenames or marks around which we have attempted to build brand identities. We currently license from third parties technologies and information incorporated into our products and services. As we continue to introduce new services that incorporate new technologies and information, we may be required to license additional technology and information from others. We cannot assure you that these third party technology and information licenses will continue to be available to us on commercially reasonable terms, if at all. Additionally, we cannot assure you that the third parties from which we currently license our technology and information will be able to defend their proprietary rights successfully against claims of infringement or invalidity. If any of these technology and information licenses are not available to us in the future, we may be delayed in introducing, or fail to introduce, new features, functions or services. It could also adversely affect the performance of our existing services until equivalent technology or information can be identified, obtained and integrated. Employees As of April 30, 1999, we had 264 employees. We engage independent contractors for database management and programming activities. We consider our relations with our employees to be good. We have never had a work stoppage, and no employees are represented under collective bargaining agreements. 43 Facilities Our headquarters are located in a single office building in Seattle, Washington. We occupy approximately 23,500 square feet on two floors, which are leased through October 2000. We have an option to renew the lease for an additional five year term. Our PartsVoice subsidiary operates from approximately 8,800 square feet of office space in Portland, Oregon, that is leased through November 1999. We currently are negotiating an extension of this lease. We also lease approximately 1,200 square feet of office space in Austin, Texas, for our new services development team. We believe that this space is adequate to meet our needs for the present, and that additional space will be required in the near future to accommodate our planned growth and that additional or substitute space will be available as needed to accommodate any expansion of our operations. Legal Proceedings There are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on our business, results of operations and financial condition. 44 MANAGEMENT Directors and Executive Officers The following table sets forth information as of April 30, 1999 regarding our executive officers and directors.
Name Age Position - ----------------------------------------------------- --- ----------------------------------------------------- Geoffrey T. Barker................................... 37 Co-Chief Executive Officer and Director John W. P. Holt...................................... 42 Co-Chief Executive Officer and Director Brian G. Allen....................................... 52 Vice President, Parts Services Jackie L. Davidson................................... 38 Vice President, Finance David M. Douglass.................................... 43 Chief Financial Officer/Vice President, Operations and Secretary Rajan Krishnamurty................................... 42 Vice President, Development Jeffrey B. Lissack................................... 38 Vice President, Business Integration Kenneth D. Pfau...................................... 38 Vice President, Sales David L. Potts....................................... 38 Vice President, Business Development Diane R. Wetherington................................ 39 Vice President, Marketing Mark T. Koulogeorge(1)............................... 35 Director Joseph P. Landy(2)................................... 37 Director Ernest H. Pomerantz(1)............................... 57 Director J. D. Power, III..................................... 67 Director Howard A. Tullman(1)(2).............................. 53 Chairman of the Board of Directors
- --------- (1) Member of audit committee (2) Member of compensation committee MR. BARKER co-founded Cobalt in March 1995 and has served as its Co-Chief Executive Officer and as a Director since inception. From March 1994 to February 1995, Mr. Barker was Vice President of New Business at IVI Publishing, Inc., a publicly-held multimedia developer and publisher. From 1989 to 1994, Mr. Barker was a Vice President at Piper Jaffray, Inc., specializing in corporate finance for new media technology companies. Prior to 1989, Mr. Barker held positions in investment banking at Salomon Brothers Inc and securities trading at Kidder, Peabody & Co., Inc. Mr. Barker is a director of GreatFood.com, Inc. Mr. Barker holds an M.B.A. degree from Columbia University and a B.A. degree in Economics from Tufts University. MR. HOLT co-founded Cobalt in March 1995 and has served as its Co-Chief Executive Officer and as a Director since inception. From March 1994 to February 1995, Mr. Holt was Director of Affiliate Label Publishing for IVI Publishing, Inc. where he developed and directed IVI's affiliate label publishing program. From 1989 to 1993, Mr. Holt served as Vice President of Growth and Development at Oceantrawl Inc., a seafood processing company. Mr. Holt holds an M.P.P.M. degree from The Yale School of Organization and Management and a B.A. degree in English from Bowdoin College. MR. ALLEN has served as a Vice President of Cobalt since April 1999, and upon completion of this offering will become the President of PartsVoice, LLC. From 1981 to 1999, Mr. Allen was President of Compu-Time, Inc., a computer services bureau that was one of three owners of PartsVoice LLC, a vehicle parts data acquisition and management company. Mr. Allen holds an M.B.A. degree from the University of Oregon and a B.S. degree in Accounting from the University of Oregon. 45 MS. DAVIDSON has served as Cobalt's Vice President of Finance since December 1996. From 1990 to 1996, Ms. Davidson was Chief Financial Officer of Oceantrawl Inc., a seafood processing company where Ms. Davidson was responsible for operational accounting, financial reporting and management of debt facilities. Ms. Davidson holds a B.A. degree in Business Administration from Washington State University. MR. DOUGLASS has served as Cobalt's Chief Financial Officer and Vice President of Operations since July 1998 and as Secretary since May 1999. From 1977 to 1998, Mr. Douglass was employed by PACCAR Inc, a heavy-duty truck manufacturer encompassing the Kenworth, Peterbilt, Foden and DAF nameplates. His positions included Managing Director of Foden Trucks, Director of Internal Audit--PACCAR, and National Dealer Development Manager--Peterbilt Motors. Mr. Douglass holds an M.B.A. degree from the University of Washington and a B.A. degree in Economics and Finance from the University of Puget Sound. MR. KRISHNAMURTY has served as Cobalt's Vice President of Development since December 1998. From 1997 to 1998, Mr. Krishnamurty was a Manager of Test Execution for Perot Systems, a software services and consulting company. Before joining Perot Systems Corporation, from December 1976 to July 1997, Mr. Krishnamurty held various management positions at International Business Machines Corporation, including General Manager of Professional Services, India, and Program Director of Power Personal Systems in Austin, Texas, where he was responsible for key software solutions to differentiate Power PC-based systems. Mr. Krishnamurty holds an M.S. degree in Electrical Engineering from the University of Texas and a B.S. degree in Electrical Engineering from the University of Houston. MR. LISSACK has served as Cobalt's Vice President of Business Integration since May 1999. From July 1998 to May 1999, Mr. Lissack was Cobalt's Vice President of Business Development. From January 1998 to June 1998, Mr. Lissack was Cobalt's Director of Product Management. From June 1997 to December 1997, Mr. Lissack served as an independent consultant to Cobalt. From July 1990 to May 1997, Mr. Lissack was Director of Market Development for the Massachusetts Department of Environmental Protection's recycling division. Mr. Lissack holds an M.P.P.M. degree from The Yale School of Organization and Management and a B.A. degree in Political Science from Williams College. MR. PFAU has served as Cobalt's Vice President of Sales since October 1997. Since joining the Company in 1995, Mr. Pfau held a variety of sales positions including Sales Manager and Director of Sales. From 1994 to 1995, Mr. Pfau served as Assistant Sales Manager for New Wilson Ford in Seattle, Washington. Prior to joining New Wilson Ford, from 1986 to 1994, Mr. Pfau was with Harris Ford in Seattle, Washington, where he was responsible for Commercial Truck and Fleet Sales and acted as Finance and Insurance Manager. Mr. Pfau holds a B.A. degree in Asian Studies from the University of Puget Sound. MR. POTTS has served as Cobalt's Vice President of Business Development since April 1999. From 1996 to 1999, Mr. Potts was a Managing Director for 2Bridge Software where he was responsible for sales, product management and professional services development. From 1995 to 1996, Mr. Potts was Vice President of Multimedia Business Development for Dataware Technologies, Inc. In 1992, Mr. Potts co-founded Ledge Multimedia, a CD-Rom production company where he served as Executive Vice President until 1995. Mr. Potts holds an M.A. degree in Law & Diplomacy from The Fletcher School at Tufts University and a B.A. degree in History from the University of Virginia. MS. WETHERINGTON has served as Cobalt's Vice President of Marketing since June 1998. Prior to joining Cobalt, Ms. Wetherington was a self-employed consultant from December 1996 to June 1998. From June 1994 to May 1996, Ms. Wetherington was a Senior Vice President with MasterCard International Incorporated. From May 1983 to May 1994, Ms. Wetherington was with AT&T Corp. where she held management positions including President of SmartCard Business. Ms. Wetherington holds an M.A. degree in Economics and a B.A. degree in Economics and German from the University of Pennsylvania. MR. KOULOGEORGE joined the board of directors in March 1997. Since 1994, Mr. Koulogeorge has served as a Managing Director of First Analysis Corporation, a venture capital investment firm where he leads the firm's Internet and e-commerce investment practice. Prior to joining First Analysis in 1994, Mr. Koulogeorge 46 was an executive officer and Vice President of Eagle Industries, Inc., a diversified manufacturer from 1991 through 1994. Mr. Koulogeorge is a director of GreatFood.com, Inc. Mr. Koulogeorge holds an M.B.A. degree from Stanford University and a B.A. degree in Economics from Dartmouth College. MR. LANDY joined the board of directors in October 1998. Since 1985, Mr. Landy has served with E.M. Warburg, Pincus & Co., LLC, a private equity investment firm, and has been a Managing Director since 1994. Throughout his career at E.M. Warburg, Pincus & Co., LLC, Mr. Landy has focused primarily on investments in information technology and specialty semiconductors. Mr. Landy also serves as a director of Covad Communications Group, Inc., Indus International, Inc. and Level One Communications, Inc. and of several privately held companies. Mr. Landy holds an M.B.A. degree from The Stern School of Business at New York University and a B.S. degree in Economics from The Wharton School of Business. MR. POMERANTZ joined the board of directors in October 1998. Since 1978, Mr. Pomerantz has served with E.M. Warburg, Pincus & Co., LLC, a private equity investment firm, and has been a Managing Director since 1982. Mr. Pomerantz also serves as a director of Axxess Technologies, Inc., a manufacturer of key duplication equipment and identification systems, Select Automotive, Inc., an owner of automobile dealerships, and Imark Communications, Inc., a global event management business. Mr. Pomerantz holds an M.B.A. degree from The Stern School of Business at New York University, an M.A. degree from the University of Southern California and London School of Economics and a B.S. degree from Rensselaer Polytechnic Institute. MR. POWER joined the board of directors in April 1999. Mr. Power founded J.D. Power and Associates, a marketing information company. Mr. Power has served as Chief Executive Officer since J.D. Power's inception in 1968, and as Chairman of the Board since 1996. Mr. Power holds an M.B.A. degree from The Wharton School of Business and a B.A. degree from the College of the Holy Cross. MR. TULLMAN joined the board of directors in November 1997. Since June 1997, Mr. Tullman has served as Chief Executive Officer of Tunes.com Inc., which operates an Internet music site specializing in webcasting live music events. From October 1996 to May 1997, Mr. Tullman was one of the co-managers of Digital Entertainment Networks LLC. From October 1993 to September 1996, Mr. Tullman served as President and Chief Executive Officer of Imagination Pilots, Inc., a multimedia software developer which he also founded. Immediately prior to founding Imagination Pilots, Inc., Mr. Tullman served as Chief Executive Officer of Eager Enterprises, Inc., an information industry venture capital firm which he founded in 1990. Mr. Tullman is a director of uBid, Inc. an online auction company. Mr. Tullman holds a B.A. degree from Northwestern University and a J.D. degree from the Northwestern University School of Law. Board Committees The board of directors has a compensation committee and an audit committee. AUDIT COMMITTEE. The audit committee consists of Messrs. Koulogeorge, Pomerantz and Tullman. The audit committee makes recommendations to the board of directors regarding the selection of independent public accountants, reviews the results and scope of the audit and other services provided by Cobalt's independent public accountants and reviews and evaluates Cobalt's financial control functions. COMPENSATION COMMITTEE. The compensation committee consists of Messrs. Tullman and Landy. The compensation committee administers the issuance of stock options under Cobalt's 1995 Stock Option Plan, makes recommendations regarding Cobalt's various incentive compensation and benefit plans and determines salaries for the executive officers and incentive compensation for employees and consultants. Director Compensation Directors do not receive any cash compensation for their services as members of the board of directors although they are reimbursed for certain expenses incurred in connection with attendance at board and committee meetings. Cobalt's bylaws authorize the board of directors to fix director compensation, and Cobalt may compensate non-employee directors in the future for their attendance at board and committee meetings. 47 Non-employee directors receive an initial grant of non-qualified options to acquire 12,000 shares of common stock vesting at a rate of 1,000 shares per month. Thereafter, non-employee directors will receive additional grants of 2,000 options on the anniversary date of commencement of board service. Compensation Committee Interlocks and Insider Participation None of the members of the compensation committee of the board of directors has at any time been an officer or employee of Cobalt. No executive officer of Cobalt serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on Cobalt's board or compensation committee. Mr. Tullman, Chairman of the Board of Directors and a member of the compensation committee, purchased shares of Cobalt's Series C Preferred Stock in April 1999. See "Certain Transactions." Executive Compensation The following table sets forth the compensation we paid to our Co-Chief Executive Officers and all other executive officers of Cobalt receiving compensation in excess of $100,000 for the fiscal year ended December 31, 1998 (the "Named Executive Officers"): Summary Compensation Table
Long-term Compensation ------------- Annual Compensation Securities Name and ---------------------- Underlying All Other Principal Positions Salary Bonus Options Compensation - --------------------------------------------------- ---------- ---------- ------------- ------------- Geoffrey T. Barker................................. 1998 $ 127,083 $ -- -- $ -- Co-Chief Executive Officer John W. P. Holt.................................... 1998 $ 127,083 -- -- -- Co-Chief Executive Officer Kenneth D. Pfau.................................... 1998 $ 43,333 $ 2,000 40,000 $ 62,374 Vice President, Sales
- --------- The other compensation represents sales commissions for Mr. Pfau. 48 Option Grants in Last Fiscal Year The following table provides information relating to stock options awarded to each of the Named Executive Officers during the fiscal year ended December 31, 1998.
Individual Grants Potential Realizable ------------------------------------------------------ Value at Assumed Percentage Annual Rates of Number of of Total Stock Price Securities Options Appreciation for Underlying Granted Exercise Option Term ($) Options in Fiscal Price Expiration -------------------- Name Granted 1998 ($/Sh) Date 5% ($) 10% ($) - ------------------------------------------------------ ----------- --------------- ----------- ----------- --------- --------- Geoffrey T. Barker.................................... -- -- -- -- -- -- John W. P. Holt....................................... -- -- -- -- -- -- Kenneth D. Pfau....................................... 40,000 6.1% $ 0.75 8/01/08 $ 18,867 $ 47,812
- --------- - - The options become exercisable at a rate of 25% beginning in the 13th month after the option grant date with monthly vesting of the remaining 75% in 36 equal increments, and expire ten years from the date of the grant or earlier upon termination of employment. - - Based on an aggregate of 655,100 shares subject to options granted to employees and directors of and consultants to Cobalt in the fiscal year ended December 31, 1998. - - Options were granted at an exercise price equal to the fair market value of the common stock as determined by the board of directors on the date of the grant. - - The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Securities and Exchange Commission. There can be no assurance that the actual stock price appreciation over the option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the common stock appreciates over the ten year option term, no value will be realized from the option grants made to the executive officers. The potential realizable value is calculated by multiplying the per share fair market value of the common stock on the date of grant by the stated annual appreciation rate compounded annually for the option term, subtracting the exercise price per share from the product, and multiplying the remainder by the number of shares underlying the option granted. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values The following table sets forth information regarding the aggregate number of options exercised during fiscal 1998 by each of the Named Executive Officers and the number of shares subject to both exercisable and unexercisable stock options as of December 31, 1998.
Number of Securities Value of Unexercised Shares Underlying In-the- Acquired Unexercised Options at Money Options at on Value December 31, 1998 (#) December 31, 1998 ($) Exercise Realized -------------------------- -------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------- ----------- ----------- ----------- ------------- ----------- ------------- Geoffrey T. Barker.......................... -- -- 477,360 -- 823,380 -- John W. P. Holt............................. 403,060 -- 703,855 -- Kenneth D. Pfau............................. 10,000 39,000 22,104 71,896 34,303 93,447
- --------- Value of unexercised in-the-money options is based on the difference between the fair market value of the shares of common stock underlying the options at December 31, 1998 as determined by the board of directors and the exercise price of such options. 49 Executive Agreements In February 1997, Cobalt entered into confidentiality and noncompetition agreements with Mr. Barker and Mr. Holt. These provide that during and after the term of their employment, Mr. Barker and Mr. Holt will keep confidential all proprietary information of Cobalt and that any inventions, designs or otherwise copyrightable work produced by Mr. Barker or Mr. Holt during their employment shall be the exclusive property of Cobalt. In addition, Mr. Barker and Mr. Holt agree that for a period of three years following the termination of their employment, they will not participate in any business that sells competing services or products to clients which have purchased similar services or products from Cobalt within the preceding three years and will not solicit employees, customers or other business relations of Cobalt. In April 1999, Cobalt, in connection with its acquisition of PartsVoice, entered into an employment agreement with Brian Allen to serve as Vice President of Cobalt for a three year term. Mr. Allen receives an annual salary of $125,000 and options to acquire 100,000 shares of Cobalt common stock at an exercise price of $1.85 per share. Mr. Allen will also receive a bonus of $25,000 on June 30, 1999. Mr. Allen's options vest over a four-year period. If Mr. Allen is terminated without cause or Mr. Allen terminates his employment for good reason he will be entitled to receive his $125,000 salary for the full term of the agreement and his options will immediately vest. Employee Benefit Plans STOCK OPTION PLAN. Our 1995 Stock Option Plan (the "Option Plan") was adopted by the board of directors and approved by the shareholders in May 1995. We currently have an aggregate of 2,862,033 shares of common stock reserved for issuance under the Option Plan. The Option Plan provides for the grant of incentive stock options, as defined under the Internal Revenue Code of 1986, as amended (the "Code"), to our employees (including officers and employee-directors) or employees of our subsidiaries. The Option Plan also provides for the grant of non-statutory stock options to officers, employees, consultants and non-employee directors. The board administers the Option Plan and determines both the recipients of options and the type of options to be granted, including the exercise price, number of shares subject to the option and the exercisability thereof. The terms of options granted under the Option Plan generally may not exceed 10 years. While the board determines the exercise price of options, the exercise price for an incentive stock option may not be less than 100% of the fair market value of the common stock on the date of the option grant. Options vest at the rate specified in the option agreement. No incentive stock option may be granted to any person who, at the time of the grant, owns stock possessing more than 10% of the total combined voting power of Cobalt unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by a person holding an option during any calendar year (under the Option Plan or any other incentive stock option plan of Cobalt) may not exceed $100,000. If Cobalt effects a sale of all or substantially all of its assets, or any merger or consolidation, the board of directors may select one of three alternatives for treating outstanding options under the Option Plan: (1) the outstanding options may remain in effect in accordance with their terms; (2) outstanding options may be converted into options to purchase stock in the surviving or acquiring corporation in the transaction with the amount, type of securities and exercise price of converted options to be determined by the board of directors; or (3) the board of directors may provide a 30-day period prior to the consummation of the transaction during which outstanding options may be exercised to the extent vested, and the board of directors may accelerate the exercisability of any options so they are exercisable in full during the 30-day period. After the 30-day period, all unexercised options shall immediately terminate. 50 Generally, a person holding an option may not transfer the option other than by will or the laws of descent or distribution. A person whose service to Cobalt and its affiliates ceases for any reason (other than for cause, resignation in lieu of termination, retirement, disability or death) may exercise an option, as to vested shares, in the three-month period following such cessation (unless the option expires sooner or later by its terms). A person, or his heirs, may exercise an option, as to vested shares, for up to one year after the person's service to Cobalt ceases due to death or disability (unless such option expires sooner or later by its terms). Shares subject to options that have expired or otherwise terminated without having been exercised in full again become available for the grant of options under the Option Plan. As of April 30, 1999, options to purchase 2,021,654 shares of common stock were outstanding and 840,379 shares remained available for future grant. The Option Plan may be suspended, amended or terminated at any time by the Board provided that shareholder approval is granted within 12 months of the adoption of any amendment to increase the number of shares of common stock reserved for issuance under the Option Plan or any other amendment that requires shareholder approval under applicable law. 401(K) PLAN. Cobalt participates in a tax-qualified employee savings and retirement plan (the "401(k) Plan") which covers all of Cobalt's full-time employees who are at least 18 years of age and have completed at least three months of employment. Pursuant to the 401(k) Plan, eligible employees may defer up to 15% 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 Cobalt on behalf of all participants in the 401(k) Plan in an amount up to 10% of the employees' compensation. To date, Cobalt has made no such matching contributions. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by Cobalt 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 Cobalt, if any, will be deductible by Cobalt 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. Indemnification and Limitation of Director and Officer Liability Our articles of incorporation limit the liability of our directors to the maximum extent permitted by Washington law. Washington law provides that the articles of incorporation may contain provisions that eliminate or limit the personal liability of a director to the corporation or its shareholders provided that such provisions do not eliminate or limit the liability of a director for (1) acts or omissions involving intentional misconduct or a knowing violation of law, (2) unlawful payments or distributions, or (3) any transaction from which the director will personally receive an improper benefit in money, property, or services. Our articles of incorporation contain such provisions. Our bylaws also provide that we shall indemnify our directors and officers and may indemnify our employees and other agents to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We intend to obtain directors' and officers' insurance providing indemnification for certain of our directors, officers, affiliates and employees for certain liabilities. We also intend to enter into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our articles of incorporation and bylaws. These agreements, among other things, will indemnify our directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Cobalt, arising out of such person's services as a director or executive officer of Cobalt, any subsidiary of Cobalt or 51 any other company or enterprise to which the person provides services at the request of Cobalt. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of ours where indemnification is expected to be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 52 RECENT ACQUISITION On April 30, 1999, Cobalt acquired all of the equity of PartsVoice, LLC, an Oregon limited liability company, from three owners, Compu-Time, Inc., an Oregon corporation, Locators, Inc., an Oregon corporation, and Parts Finder Locating Systems, Inc., an Oregon corporation. At closing, Cobalt paid aggregate purchase consideration for the PartsVoice equity of (1) $3.0 million in cash; (2) promissory notes in the principal amount of (a) $8.0 million, due on the earlier of completion of this offering or July 30, 1999 and (b) $15.0 million, due on the earlier of completion of this offering or January 25, 2000; (3) 500,000 shares of Series C Convertible Preferred Stock convertible at $8.00 per share; and (4) warrants to purchase 160,000 shares of Cobalt common stock at $6.00 per share. The promissory notes bear interest at the rate of 8.75% per annum. Cobalt's obligations under the promissory notes are secured by a pledge of the PartsVoice equity and a security agreement. In connection with the acquisition, Brian Allen, former Vice President of PartsVoice, entered into a three-year employment agreement with Cobalt. See "Management--Executive Agreements." CERTAIN TRANSACTIONS On April 30, 1999, Howard Tullman, Chairman of the Board of Directors of Cobalt, purchased 12,500 shares of Cobalt Series C Preferred Stock at a purchase price of $8.00 per share. The terms of Mr. Tullman's purchase were no more favorable than those offered to the PartsVoice purchasers. In October 1998, Warburg, Pincus Equity Partners, L.P. purchased 1,858,100 shares of Series B Preferred Stock and 5,118,091 shares of Series B-1 Preferred Stock at a purchase price of $4.20 per share, for an aggregate purchase price of $29.3 million. Cobalt used $19.2 million of the net proceeds from this Series B Preferred Stock financing to redeem, at a price of $4.20 per share, shares of common stock and shares of Series A Preferred Stock from certain shareholders of Cobalt. As part of this redemption, Cobalt redeemed, at $4.20 per share, 738,768 shares from Mr. Barker, 688,285 shares from Mr. Holt, 5,000 shares from Mr. Lissack, 22,255 shares from Ms. Davidson, 10,000 shares from Mr. Pfau, 6,500 shares from Mr. Tullman and 112,773 shares from Mr. Koulogeorge. See Note 10 of Notes to Cobalt Financial Statements. First Analysis Corporation and Cobalt entered into a Management Services Agreement in February 1997. The Management Services Agreement entitles First Analysis to receive a fee of $150,000 for financial and consulting services. This fee is payable upon the completion of this offering. Mr. Koulogeorge is Managing Director of First Analysis Corporation. On February 28, 1997, Mr. Barker and Mr. Holt entered into an agreement to settle amounts due for deferred compensation. The terms of the agreement required a 50% cash payment of $81,287 to Mr. Barker and $64,584 to Mr. Holt which was paid on February 28, 1997. The remainder was forgiven by Mr. Barker and Mr. Holt. In August 1996, Cobalt issued 120,000 shares of common stock to each of Mr. Barker and Mr. Holt at a purchase price of $0.60 per share. In satisfaction of the purchase price, Messrs. Barker and Holt each executed promissory notes to Cobalt due in August 2006 in the principal amount of $72,000. The promissory notes bear interest at a rate of 8% per annum. In March 1997, following the sale of Cobalt's Series A Preferred Stock at a per share price of $0.55, Cobalt issued additional shares of common stock to all shareholders who had purchased at a per share price greater than that paid by the Series A Preferred Stock investors. As a result, Mr. Barker and Mr. Holt each received 9,915 additional shares of common stock to implement this dilution protection. Each promissory note is secured by a pledge of the 129,915 total shares of common stock issued in the purchase transaction. Cobalt has entered into an employment agreement with Mr. Allen dated as of April 30, 1999, and Noncompete Agreements with each of Mr. Barker and Mr. Holt dated as of February 28, 1997. See "Management--Executive Agreements." 53 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our common stock as of April 30, 1999, and as adjusted to reflect the sale of the shares of common stock offered in this Prospectus by each of Cobalt's Named Executive Officers, its directors, each beneficial holder of more than 5% of Cobalt's common stock and all current directors and executive officers as a group.
Shares Percentage of Beneficially Shares Beneficially Owned (1) Owned (1) ------------ ------------------------ Prior to Prior to After Beneficial Owners Offering Offering Offering - -------------------------------------------------------------------------------- ------------ ----------- ----------- Warburg, Pincus Equity Partners, L.P.(2)........................................ 7,764,195 65.9% 466 Lexington Avenue New York, NY 10017 Entities affiliated with First Analysis Corporation(3).......................... 1,205,504 10.2% The Sears Tower, Suite 9500 233 South Wacker Drive Chicago, IL 60606 Mark T. Koulogeorge(3)(4)....................................................... 1,328,278 11.3% Geoffrey T. Barker(5)........................................................... 738,767 6.2% John W.P. Holt(6)............................................................... 701,616 5.9% Howard A. Tullman(7)............................................................ 40,000 * Ernest H. Pomerantz(2)(8)....................................................... 7,774,195 65.9% Joseph P. Landy(2)(9)........................................................... 7,774,195 65.9% J.D. Power, III(10)............................................................. 5,000 * Kenneth D. Pfau(11)............................................................. 45,750 * All directors and executive officers as a group(12) (15 people)................. 10,761,342 88.8%
- --------- * Represents beneficial ownership of less than 1% of the outstanding shares of Cobalt's Common Stock. (1) 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. Shares of common stock subject to options currently exercisable or exercisable within sixty days of the date of this prospectus are deemed to be outstanding and to be beneficially owned by the person holding these options for the purpose of computing the number of shares beneficially owned and the percentage of this person or entity holding these securities but are not outstanding for the purpose of computing the percentage of any other person or entity. Percentage of beneficial ownership is based on 11,789,267 shares of common stock outstanding as of April 30, 1999 and shares of common stock outstanding after completion of this offering. (2) The sole general partner of Warburg, Pincus Equity Partners, L.P., or Warburg, is Warburg, Pincus & Co., a New York general partnership. E.M. Warburg, Pincus & Co., L.L.C., or EMWP, manages Warburg. Mr. Landy and Mr. Pomerantz are both Managing Directors of EMWP and may be deemed to control Warburg, and thus may be deemed to have an indirect pecuniary interest in an indeterminate portion of the shares beneficially owned by Warburg. Mr. Landy and Mr. Pomerantz disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The terms of the shares owned by Warburg preclude Warburg from exercising voting control over a majority of the outstanding voting shares. (3) Includes 507,580 shares held by The Productivity Fund III, L.P. and 697,924 shares held by Environmental Private Equity Fund II, L.P. Mr. Koulogeorge is a member of the limited liability company which is the general partner of The Productivity Fund III, L.P. and an executive officer of First Analysis Corporation, a general partner of the limited partnership that controls Environmental Private 54 Equity Fund II, L.P. Accordingly, Mr. Koulogeorge may be deemed to have an indirect pecuniary interest in an indeterminate portion of the shares beneficially owned by The Productivity Fund III, L.P. and Environmental Private Equity Fund II, L.P. Mr. Koulogeorge disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (4) Includes 5,000 shares Mr. Koulogeorge has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (5) Includes 102,360 shares Mr. Barker has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (6) Includes 32,932 shares held in trust for Mr. Holt's heirs and 75,000 shares Mr. Holt has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (7) Includes 13,000 shares Mr. Tullman has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (8) Includes 10,000 shares Mr. Pomerantz has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (9) Includes 10,000 shares Mr. Landy the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (10) Includes 5,000 shares Mr. Power has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (11) Includes 22,188 shares Mr. Pfau has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (12) Includes an aggregate of 242,548 shares that the directors and officers as a group have a right to acquire pursuant to options exercisable within 60 days of August 1, 1999. 55 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock will consist of 200,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share. Common Stock As of April 30, 1999 there were 11,789,267 shares of common stock outstanding held by 56 shareholders of record, including shares of preferred stock that will be converted into common stock upon completion of this offering. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. There are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of the common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefor. In the event of a liquidation, dissolution, or winding up of Cobalt, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities. Holders of common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon the completion of this offering will be, fully paid and non-assessable. Preferred Stock Upon the closing of this offering, each outstanding share of preferred stock will be converted into shares of common stock. See Note 1 of Notes to Cobalt Financial Statements. Following the offering, the board of directors will have the authority, without further action by the shareholders, to issue up to 100,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. The board of directors, without shareholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued with terms calculated to delay or prevent a change in control of Cobalt or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock, and may adversely affect the voting and other rights of the holders of common stock. We have no current plans to issue any of the preferred stock. Warrants As of April 30, 1999, Cobalt had outstanding warrants to purchase an aggregate of 221,500 shares of common stock at exercise prices ranging from $0.30 to $6.00 per share. The warrants expire at various dates from October 31, 2003 to April 30, 2004. Generally, each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications and consolidations. All warrants are currently exercisable. Registration Rights Pursuant to agreements between Cobalt and the holders of approximately 9,850,402 shares of common stock (assuming the conversion of all outstanding preferred stock upon the completion of this offering) and warrants to purchase 184,000 shares of common stock, the holders of the shares and warrants are entitled to have shares of Cobalt's stock held by them registered under the Securities Act. If Cobalt proposes to register 56 its common stock under the Securities Act, subject to certain exceptions, the holders of these shares are entitled to notice of the registration and are entitled, at Cobalt's expense, to include their shares in the registration, provided that the managing underwriters have the right to limit the number of such shares included in the registration. In addition, holders of at least 70% of these shares may require Cobalt, at its expense and on certain terms, to file a registration statement under the Securities Act with respect to their shares of common stock. Further, the holders of these shares may require Cobalt, at Cobalt's expense, to register the shares on Form S-3 when Cobalt can use this form, subject to certain conditions and limitations. Antitakeover Effects of Certain Provisions of Our Articles of Incorporation and Bylaws and Under Washington Law As noted above, our board of directors, without shareholder approval, has the authority under our articles of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock could be issued quickly and easily, could adversely affect the rights of holders of common stock and could be issued with terms calculated to delay or prevent a change in control of Cobalt or make removal of management more difficult. Our articles of incorporation provide for the division of our board of directors into three classes, as nearly equal in number as possible, with the directors in each class serving for a three-year term, and one class being elected each year by our shareholders. Directors may be removed only for cause. Because this system of electing and removing directors generally makes it more difficult for shareholders to replace a majority of the board of directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to gain control of Cobalt. Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a corporation, with certain exceptions, from engaging in certain significant business transactions with an "acquiring person," which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the corporation's board of directors prior to the time of acquisition. These prohibited transactions include, among other things, - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; - termination of 5% or more of the employees of the corporation as a result of the acquiring person's acquisition of 10% or more of the shares; - allowing the acquiring person to receive any disproportionate benefit as a shareholder. After the five-year period, a significant business transaction may occur, as long as it complies with certain fair price provisions of the statute. A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of Cobalt. Transfer Agent and Registrar The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services. 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock (including shares issued upon exercise of outstanding options) in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of equity securities. As described below, no shares currently outstanding will be available for sale immediately after this offering due to certain contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, Cobalt will have outstanding shares of common stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, the shares sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by "affiliates" of Cobalt as that term is defined in Rule 144 under the Securities Act. Of the remaining shares, shares will be eligible for sale in the public market beginning 91 days after the date of this offering and shares are subject (1) to lock-up agreements providing that, with certain limited exceptions, the shareholder will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of common stock of Cobalt or any securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days following the date of the final prospectus for this offering or (2) to holding period requirements under Rule 144 under the Securities Act. Beginning 181 days after the date of the final prospectus, of these shares will be eligible for sale in the public market, although shares will be subject to certain volume limitations. The majority of the remaining shares will become eligible for sale, subject to certain volume limitations, on October , 1999. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned shares that were purchased from us (or any affiliate) at least one year previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (1) 1% of the number of shares of common stock then outstanding (which will equal approximately shares immediately after this offering) or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the proposed sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about Cobalt. Under Rule 144(k), a person who is not deemed to have been an affiliate of Cobalt at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell its shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any employee, officer or director of or consultant to Cobalt who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares. However, all shares issued pursuant to Rule 701 are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of BancBoston Robertson Stephens. Immediately after this offering, Cobalt intends to file a registration statement under the Securities Act covering shares of common stock subject to options outstanding and reserved for issuance under the Option 58 Plan. Based on the number of shares subject to outstanding options at , 1999 and currently reserved for issuance under the Plan, the registration statement would cover approximately - shares. The registration statement will automatically become effective upon filing. Accordingly, shares registered under the registration statement will, subject to Rule 144 volume limitations applicable to affiliates of Cobalt, be available for sale in the open market immediately after the 180-day lock-up agreement expires. Also beginning 180 days after the date of this offering, certain holders of shares of common stock will be entitled to certain rights with respect to registration of their shares of common stock for offer and sale to the public. See "Description of Capital Stock--Registration Rights." 59 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., SG Cowen and Wit Capital Corporation, have severally agreed with us, subject to the terms and conditions set forth in the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their respective names below. The underwriters are committed to purchase and pay for all such shares if any are purchased.
Number of Underwriter Shares - ------------------------------------------------------------------------------------------------------ ----------- BancBoston Robertson Stephens Inc. ................................................................... ----------- Bear, Stearns & Co. Inc. ............................................................................. ----------- SG Cowen Securities Corporation....................................................................... ----------- Wit Capital Corporation............................................................................... ----------- TOTAL............................................................................................. ----------- -----------
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at this price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. However, no reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. A prospectus in electronic format is being made available on an Internet Web site maintained by Wit Capital. In addition, pursuant to an e-Dealer Agreement, all dealers purchasing shares from Wit Capital in the offering similarly have agreed to make a prospectus in electronic format available on Web sites maintained by each of the e-Dealers. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. OVER-ALLOTMENT OPTION. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to additional shares of common stock at the same price per share as we will receive for the shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the shares offered hereby. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares are being sold. We will be obligated, pursuant to the option, to sell shares to the extent the option is exercised. The underwriters may exercise these option only to cover over-allotments made in connection with the sale of the shares of common stock offered hereby. If the option is exercised in full, the total public offering price of the shares we sell to the underwriters, underwriting discounts and commissions on such shares will be $ and total proceeds to us from the sale of these shares will be $ . INDEMNITY. The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representation and warranties contained in the underwriting agreement. 60 LOCK-UP AGREEMENTS. Under the terms of lock-up agreements, each of our officers and directors and certain of our shareholders have agreed with the representatives, for a period of 180 days after the date of this prospectus, subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to, any shares of common stock, or any securities convertible into or exchangeable for shares of common stock, now owned or hereafter acquired directly by these holders or with respect to which they have the power of disposition, without the prior written consent of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements. There are no agreements between the representatives and any of our shareholders providing consent by the representatives to the sale of shares prior to the expiration of the period 180 days after this prospectus. FUTURE SALES. In addition, we have agreed that during the 180 days after the date of this prospectus, we will not, subject to certain exceptions, without the prior written consent of BancBoston Robertson Stephens: - Consent to the disposition of any shares held by shareholders prior to the expiration of the period of 180 days after the date of this prospectus; or - Issue, sell, contract to sell or otherwise dispose of any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than the sale of shares in this offering, the issuance of common stock upon the exercise of outstanding options or warrants or our issuance of options or shares under our stock option plan. LISTING. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "CBLT." NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public market for our common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations between Cobalt and the representatives of the underwriters. Among the factors to be considered in these negotiations are prevailing market conditions, financial information of Cobalt, market valuations of other companies that Cobalt and the representatives believe to be comparable to Cobalt, estimates of the business potential of Cobalt, the present state of Cobalt's development and other factors deemed relevant. STABILIZATION. The representatives of the underwriters have advised us that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that these types of transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. NEW UNDERWRITERS. Wit Capital, a member of the National Association of Securities Dealers, Inc., will participate in this offering as one of the underwriters. The National Association of Securities Dealers, Inc. approved the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital has acted as an underwriter, co-manager or selected dealer in approximately 70 public offerings. COSTS OF OFFERING. We estimate that total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $750,000. 61 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Cobalt by Stoel Rives LLP, Seattle, Washington. Certain legal matters related to the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The financial statements of The Cobalt Group, Inc. and PartsVoice as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 included in this Prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, or the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Cobalt and the common stock, reference is made to the registration statement and to the related exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of the applicable contract or other document filed as an exhibit to the registration statement, each of these statements being qualified in all respects by this reference. A copy of the registration statement may be inspected by anyone without charge at the commission's principal office in Washington, D.C., and copies of all or any part of the registration statement may be obtained from the Public Reference Section of the Commission, 450 Fifth street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as Cobalt, that file electronically with the Commission. The address of the Web site is http://www.sec.gov. 62 INDEX TO FINANCIAL STATEMENTS
Page --------- The Cobalt Group, Inc. Report of Independent Accountants.......................................................................... F-2 Balance Sheets............................................................................................. F-3 Statements of Operations................................................................................... F-4 Statements of Changes in Shareholders' Deficit............................................................. F-5 Statements of Cash Flows................................................................................... F-6 Notes to Financial Statements.............................................................................. F-7 PartsVoice, The Combined Financial Statements of PartsVoice, a General Partnership, and Compu-Time, Inc. Report of Independent Accountants.......................................................................... F-22 Combined Balance Sheets.................................................................................... F-23 Combined Statements of Operations.......................................................................... F-24 Combined Statements of Changes in Owners' Equity........................................................... F-25 Combined Statements of Comprehensive Income................................................................ F-26 Combined Statements of Cash Flows.......................................................................... F-27 Notes to Combined Financial Statements..................................................................... F-28
F-1 Report of Independent Accountants To the Board of Directors and Shareholders of The Cobalt Group, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of The Cobalt Group, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Seattle, Washington March 29, 1999 except as to Note 14, which is as of May 27, 1999 F-2 The Cobalt Group, Inc. Balance Sheets (in thousands, except share and per share amounts)
Pro forma shareholders' December 31, equity at -------------------- March 31, March 31, 1997 1998 1999 1999 --------- --------- ----------- ------------- (unaudited) (unaudited) Assets Current assets Cash and cash equivalents......................................... $ 241 $ 5,756 $ 3,876 Short-term investments............................................ 983 983 Accounts receivable, net of allowance for doubtful accounts of $40, $85 and $68 (unaudited).................................... 459 1,250 1,401 Other current assets.............................................. 21 130 1,172 --------- --------- ----------- 721 8,119 7,432 Capital assets, net................................................. 351 1,453 2,806 Intangible assets, net of accumulated amortization of $22, $321, and $384 (unaudited), respectively.................................... 868 479 416 Other assets........................................................ 11 11 11 --------- --------- ----------- Total assets.................................................... $ 1,951 $ 10,062 $ 10,665 --------- --------- ----------- --------- --------- ----------- Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders' Deficit Current liabilities Accounts payable.................................................. $ 197 $ 191 $ 665 Accrued liabilities............................................... 158 776 1,316 Deferred revenue.................................................. 897 1,290 1,505 DealerNet acquisition liability, current portion.................. 500 Note payable to bank.............................................. 200 Software financing contract, current portion...................... 257 Capital lease obligations, current portion........................ 33 328 560 --------- --------- ----------- 1,985 2,585 4,303 --------- --------- ----------- Non-current liabilities Capital lease obligations, non-current portion.................... 34 557 971 Software financing contract, non-current portion.................. 405 DealerNet acquisition liability, non-current portion.............. 390 --------- --------- ----------- 424 557 1,376 --------- --------- ----------- Commitments and contingencies (Notes 6, 12 and 14) Mandatorily redeemable convertible preferred stock Series A; $0.01 par value per share; redemption and liquidation value of $2,481, $1,158 and $1,158 (unaudited), respectively.... 2,439 1,116 1,118 Series B; $0.01 par value per share; redemption and liquidation value of $29,600 plus unpaid dividends.......................... 30,046 30,635 --------- --------- ----------- 2,439 31,162 31,753 $ -- --------- --------- ----------- ------------- Shareholders' deficit Preferred stock, $0.01 par value per share; 20,000,000 shares authorized in 1997, 100,000,000 shares authorized thereafter; 4,510,934, 9,153,902 and 9,153,902 (unaudited) issued and outstanding as mandatorily redeemable convertible preferred stock; no shares issued and outstanding, pro forma (unaudited)..................................................... Common stock, $0.01 par value per share; 30,000,000 shares authorized in 1997, 200,000,000 shares authorized thereafter; 3,406,597, 1,343,898 and 1,821,979 (unaudited) issued and outstanding, respectively; 10,975,881 (unaudited) shares issued and outstanding pro forma....................................... 34 13 18 110 Additional paid-in capital........................................ 854 31,661 Notes receivable from shareholders................................ (144) (144) (144) (144) Accumulated deficit............................................... (3,641) (24,111) (26,641) (26,641) --------- --------- ----------- ------------- (2,897) (24,242) (26,767) $ 4,986 --------- --------- ----------- ------------- ------------- Total liabilities, mandatorily redeemable convertible preferred stock and shareholders' deficit................................... $ 1,951 $ 10,062 $ 10,665 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of these financial statements. F-3 The Cobalt Group, Inc. Statements of Operations (in thousands, except share and per share amounts)
Three months ended Year ended December 31, March 31, ---------------------------------- ------------------------ 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ------------ (unaudited) Net revenues.................................... $ 312 $ 1,711 $ 6,245 $ 1,079 $ 2,453 Cost of revenues................................ 51 285 1,199 151 540 ---------- ---------- ---------- ---------- ------------ Gross profit................................ 261 1,426 5,046 928 1,913 ---------- ---------- ---------- ---------- ------------ Operating expenses Sales and marketing........................... 286 1,740 4,048 564 1,650 Product development........................... 125 361 961 157 401 General and administrative.................... 676 1,753 4,627 629 1,870 ---------- ---------- ---------- ---------- ------------ Total operating expenses.................... 1,087 3,854 9,636 1,350 3,921 ---------- ---------- ---------- ---------- ------------ Loss from operations............................ (826) (2,428) (4,590) (422) (2,008) Gain on sale of HomeScout....................... 1,626 1,626 Common stock repurchase premium................. (5,202) Interest expense................................ (2) (17) (93) (7) (49) Other income, net............................... 47 142 6 57 ---------- ---------- ---------- ---------- ------------ Net (loss) income............................... $ (828) $ (2,398) $ (8,117) $ 1,203 $ (2,000) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Net (loss) income available to common shareholders.................................. $ (828) $ (2,406) $ (8,680) $ 1,201 $ (2,591) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Basic net (loss) income per share............... $ (0.24) $ (0.69) $ (2.95) $ 0.35 $ (1.74) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Diluted net (loss) income per share............. $ (0.24) $ (0.69) $ (2.95) $ 0.13 $ (1.74) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Weighted-average shares outstanding............. 3,491,536 3,485,563 2,938,460 3,406,597 1,488,681 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Weighted-averge shares outstanding, assuming dilution...................................... 3,491,536 3,485,563 2,938,460 9,093,629 1,488,681 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Pro forma net loss available to common shareholders (unaudited)...................... $ 8,117 $ (2,000) ---------- ------------ ---------- ------------ Pro forma basic and diluted net loss per share (unaudited)................................... $ (0.95) $ (0.19) ---------- ------------ ---------- ------------ Pro forma weighted-average shares outstanding (unaudited)................................... 8,530,634 10,642,583 ---------- ------------ ---------- ------------
The accompanying notes are an integral part of these financial statements. F-4 The Cobalt Group, Inc. Statements of Changes in Shareholders' Deficit (in thousands, except share amounts)
Common stock Additional Notes -------------------------- paid-in receivable from Accumulated Shares Par value capital shareholders deficit Total ----------- ------------- ------------- --------------- ------------ --------- Balances at January 1, 1996................. 3,017,777 $ 30 $ 166 $ -- $ (415) $ (219) Net loss.................................... (828) (828) Issuance of stock options and warrants to non-employees............................. 36 36 Proceeds from issuance of stock............. 627,197 6 354 360 Proceeds from exercise of stock options..... 3,250 -- Issuance of stock in exchange for notes receivable................................ 240,000 3 141 (144) -- ----------- --- ----- ----- ------------ --------- Balances at December 31, 1996............... 3,888,224 39 697 (144) (1,243) (651) Net loss.................................... (2,398) (2,398) Issuance of stock options and warrants to employees and non-employees............... 188 188 Proceeds from issuance of stock............. 6,750 7 7 Contribution of shareholder services........ 146 146 Issuance of parity shares................... 119,867 1 9 10 Proceeds from exercise of stock options..... 4,771 1 1 Accretion of mandatorily redeemable convertible preferred stock............... (8) (8) Repurchase of common stock.................. (613,015) (6) (186) (192) ----------- --- ----- ----- ------------ --------- Balances at December 31, 1997............... 3,406,597 34 854 (144) (3,641) (2,897) Net loss.................................... (8,117) (8,117) Proceeds from exercise of stock options..... 110,507 1 26 27 Accretion of mandatorily redeemable convertible preferred stock............... (14) (14) Repurchase of mandatorily redeemable convertible preferred stock............... (8,767) (8,767) Repurchase of common stock.................. (2,173,206) (22) (367) (3,536) (3,925) Dividends on mandatorily redeemable convertible preferred stock............... (499) (50) (549) ----------- --- ----- ----- ------------ --------- Balances at December 31, 1998............... 1,343,898 13 -- (144) (24,111) (24,242) Net loss (unaudited)........................ (2,000) (2,000) Proceeds from exercise of stock options (unaudited)............................... 478,081 5 61 66 Accretion of mandatorily redeemable convertible preferred stock (unaudited)... (7) (7) Dividends on mandatorily redeemable convertible preferred stock (unaudited)... (54) (530) (584) ----------- --- ----- ----- ------------ --------- Balances at March 31, 1999 (unaudited)...... 1,821,979 $ 18 $ -- $ (144) $ (26,641) $ (26,767) ----------- --- ----- ----- ------------ --------- ----------- --- ----- ----- ------------ ---------
The accompanying notes are an integral part of these financial statements. F-5 The Cobalt Group, Inc. Statements of Cash Flows (in thousands)
Three months ended Year ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (unaudited) Cash flows from operations Net (loss) income............................................. $ (828) $ (2,398) $ (8,117) $ 1,203 $ (2,000) Adjustments to reconcile net (loss) income to net cash used in operating activities: Common stock repurchase premium............................. 5,202 Issuance of stock options and warrants...................... 36 188 Issuance of parity shares................................... 10 Depreciation and amortization............................... 12 120 614 117 250 Net (gain) loss on sale of assets........................... (1,617) (1,623) 4 Changes in: Accounts receivable....................................... (43) (411) (791) 53 (151) Other assets.............................................. (12) (16) (109) (35) (977) Accounts payable.......................................... 65 121 (6) (14) 474 Deferred revenue.......................................... 197 699 393 169 215 Accrued liabilities....................................... 199 (125) 618 31 540 --------- --------- --------- --------- --------- Total adjustments............................................. 454 586 4,304 (1,302) 355 --------- --------- --------- --------- --------- Net cash used in operating activities..................... (374) (1,812) (3,813) (99) (1,645) --------- --------- --------- --------- --------- Cash flows from investing activities Acquisition of capital assets................................. (101) (349) (472) (66) (172) Purchase of short-term investments............................ (983) Proceeds from sale of HomeScout, net of costs................. 1,626 1,016 Proceeds from disposal of capital assets...................... 1 5 --------- --------- --------- --------- --------- Net cash (used in) provided by investing activities....... (101) (348) 176 950 (172) --------- --------- --------- --------- --------- Cash flows from financing activities Proceeds from issuance of common stock, net of costs.......... 360 7 Proceeds from issuance of mandatorily redeemable convertible preferred stock, net of costs............................... 2,431 29,193 Repurchase of common stock.................................... (192) (9,127) Repurchase of mandatorily redeemable convertible preferred stock....................................................... (10,100) Proceeds from issuance of notes payable....................... 200 1,000 Payments of notes payable..................................... (1,200) Payment of DealerNet acquisition liability.................... (500) (84) Proceeds from exercise of stock options....................... 1 27 66 Proceeds from officer advances................................ 45 Repayment of officer advances................................. (45) Proceeds from lease financing transactions.................... 76 25 Payment of capital lease obligations.......................... (4) (30) (141) (8) (129) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities....... 477 2,397 9,152 (92) (63) --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............ 2 237 5,515 759 (1,880) Cash and cash equivalents, beginning of period.................. 2 4 241 241 5,756 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period........................ $ 4 $ 241 $ 5,756 $ 1,000 $ 3,876 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-6 The Cobalt Group, Inc. Notes to Financial Statements 1. Nature of the Business and Summary of Significant Accounting Policies Nature of the business The Cobalt Group, Inc. (the Company) is a provider of Internet marketing and data aggregation services to individual franchised dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. The Company enables its clients to develop and implement electronic business strategies and to position themselves to capitalize on the increasing use of the Internet by consumers to research, evaluate and buy new and pre-owned vehicles, parts and accessories and automotive-related services such as financing and insurance. The Company currently offers to its clients services including comprehensive Web site design, development and maintenance; data extraction, aggregation and maintenance; Internet advertising and promotion; and Internet marketing, training and support. The Company also maintains YachtWorld, a marine Web site, which contains photo listings of yachts for sale on the Web, as well as other marine-related information. HomeScout, a real estate search service which gives users access to homes for sale on the Internet, was sold in 1998. Cash and cash equivalents The Company considers all short-term highly liquid instruments purchased within three months of their maturity date to be cash equivalents. The Company maintains its cash accounts with two financial institutions that are insured by the Federal Deposit Insurance Corporation up to $100,000. Short-term investments Short-term investments consist of highly rated commercial paper with original maturities of between three and six months. These investments are classified as available-for-sale and are carried at fair value. The fair value of these securities approximates cost, and there were no material unrealized gains or losses at December 31, 1998 or March 31, 1999 (unaudited). Fair value of financial instruments The Company's financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities, deferred revenue, capital lease obligations and mandatorily redeemable convertible preferred stock. Except for capital lease obligations and mandatorily redeemable convertible preferred stock, the carrying amounts of financial instruments approximate fair value due to their short maturities. The fair value of capital lease obligations at December 31, 1997 and 1998 is not materially different from the carrying amount, based on interest rates available to the Company for similar types of arrangements. The Company considers the fair value of the mandatorily redeemable convertible preferred stock to be liquidation value, plus unpaid dividends. Capital assets Capital assets consist of computer equipment, furniture and other equipment, purchased software and leasehold improvements, all of which are stated at historical cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter. The useful lives of capital assets range from three to five years. Maintenance and repairs, which neither materially add to the value of the asset nor prolong its life, are charged to expense as incurred. Gains or losses on dispositions of capital assets are included in income. F-7 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) Intangible assets Intangible assets consist of purchased customer contracts and a consumer Internet site. These assets are amortized over their estimated useful lives of 36 months. Impairment of long-lived assets The Company periodically evaluates the carrying value of long-lived assets to be held and used, including but not limited to, capital assets and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. No losses from impairment have been recognized in the financial statements. Pro forma shareholders' equity (unaudited) Effective upon the closing of this offering, the outstanding shares of Series A and Series B mandatorily redeemable convertible preferred stock will automatically convert into 2,106,282 and 7,047,620 shares, respectively, of common stock. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma shareholders' equity at March 31, 1999. Revenue recognition The Company derives its revenues principally from monthly fees charged to its automobile dealership, dealer group and manufacturer clients for its services. The Company recognizes revenue for ongoing services ratably over the related service period and recognizes revenues for initial setup fees and custom projects upon activation of the related service. The majority of the Company's services are sold to clients under short-term service agreements with an initial term of six months and month-to-month thereafter. Revenues are recognized net of promotional discounts. Prepayments received for sites not yet activated and services not yet provided are reported as deferred revenue. Cost of revenues The Company's cost of revenues consists of the costs associated with production, maintenance and delivery of the Company's services. These costs include the costs of production and design personnel, fees payable to third parties for distribution of vehicle inventory data to other Web sites and for banner advertising, site content licensing fees and costs of Web servers used to host client data. Concentration of credit risk Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable, cash equivalents and short-term investments. The Company does not require collateral from its customers. Individual customer balances are small and customers are required to pay for Web site service in advance. Due to the nature of the business, no individual customer accounted for more than 10% of accounts receivable or net revenues as of and for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited). The Company maintains an F-8 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) allowance for doubtful accounts receivable based upon its historical experience and the expected collectibility of all accounts receivable. Credit losses to date have been within the Company's estimates. The Company has a cash investment policy which restricts investments to ensure preservation of principal and maintenance of liquidity. Advertising costs The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 1997 and 1998 were $156,000 and $276,000, respectively. Advertising costs for the three months ended March 31, 1998 and 1999 were $4,000 and $220,000 (unaudited), respectively. There were no advertising costs in 1996. Income taxes The Company provides for income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Net (loss) income per share and pro forma net loss per share Basic net (loss) income per share represents net (loss) income available to common shareholders divided by the weighted-average number of shares outstanding during the period. Diluted net (loss) income per share represents net (loss) income available to common shareholders divided by the weighted-average number of shares outstanding including the potentially dilutive impact of common stock options and warrants and Series A and B mandatorily redeemable convertible preferred stock. Common stock options and warrants are converted using the treasury stock method. Mandatorily redeemable convertible preferred stock is converted using the if-converted method. Basic and diluted net (loss) income per share are equal for the periods presented, except for the three months ended March 31, 1998, because the impact of common stock equivalents is anti-dilutive. Potentially dilutive securities totaling 433,884, 6,220,188 and 11,259,342 shares for the years ended December 31, 1996, 1997 and 1998, respectively, and 11,055,696 (unaudited) for the three months ended March 31, 1999, were excluded from diluted net loss per share due to their anti-dilutive effect. Pro forma net loss per share is computed using the weighted-average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's mandatorily redeemable convertible preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on the date the shares were originally issued. F-9 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) The following table sets forth the computation of the numerators and denominators in the basic, diluted and pro forma net (loss) income per share calculations for the periods indicated:
Three months ended Years ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (in thousands, except share and per share amounts) (unaudited) Numerator: Net (loss) income.................... $ (828) $ (2,398) $ (8,117) $ 1,203 $ (2,000) Dividends on mandatorily redeemable Convertible preferred stock.......... (549) (584) Accretion of mandatorily redeemable Convertible preferred stock........ (8) (14) (2) (7) --------- --------- --------- --------- --------- Net (loss) income available to common shareholders....................... $ (828) $ (2,406) $ (8,680) $ 1,201 $ (2,591) --------- --------- --------- --------- --------- --------- Effect of pro forma conversion of securities: Dividends on mandatorily redeemable convertible preferred stock........ 549 584 Accretion of mandatorily redeemable convertible preferred stock........ 14 7 --------- --------- Pro forma net loss available to common shareholders (unaudited).... $ (8,117) $ (2,000) --------- --------- --------- --------- Denominator: Weighted-average shares outstanding........................ 3,491,536 3,485,563 2,938,460 3,406,597 1,488,681 Dilutive effect of potential additional common shares: Stock options and warrants......... 1,176,098 Series A mandatorily redeemable convertible preferred stock....... 4,510,934 --------- --------- --------- --------- --------- Weighted-average shares outstanding, assuming dilution.................. 3,491,536 3,485,563 2,938,460 9,093,629 1,488,681 --------- --------- --------- --------- --------- --------- Weighted-average effect of pro forma securities: Series A mandatorily redeemable convertible preferred stock....... 3,950,947 2,106,282 Series B mandatorily redeemable convertible preferred stock....... 1,641,227 7,047,620 --------- --------- Pro forma weighted average shares outstanding (unaudited)............ 8,530,634 10,642,583 --------- --------- --------- ---------
Stock options The Company's stock option plan is subject to the provisions of the Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Under the provisions of this statement, employee stock-based compensation expense is measured using either the intrinsic value F-10 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (ABP 25), or the fair value method. The Company has elected to account for its employee stock-based compensation under the provisions of APB 25 and to disclose the pro forma impact of the fair value method on net (loss) income and net (loss) income per share. The Company accounts for stock-based awards issued to non-employees in accordance with the fair value method of SFAS 123. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New accounting pronouncements In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is effective beginning January 1, 1999 and establishes accounting standards for costs incurred in the acquisition or development and implementation of computer software. These new standards will require capitalization of certain software implementation costs relating to software acquired or developed and implemented for the Company's use. This statement is not expected to have a significant effect on the Company's financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement is effective beginning January 1, 1999 and requires costs of start-up activities and organization costs to be expensed as incurred. This statement is not expected to have a significant effect on the Company's financial position or results of operations. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The Company adopted SFAS 130 on January 1, 1998. To date, the Company has not had any significant transactions that are required to be reported as other comprehensive income other than its net (loss) income. The FASB recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management approach." The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The Company adopted SFAS 131 on January 1, 1998. The Company has determined that it does not have any separately reportable business or geographic segments. Unaudited interim financial statements The interim financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited; however, in the opinion of management, the interim data includes all adjustments, F-11 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) consisting only of normal recurring adjustments necessary to present fairly the Company's financial position as of March 31, 1999 and the results of its operations and cash flows for the three months ended March 31, 1998 and 1999. Reclassifications Certain items in the 1996 and 1997 financial statements have been reclassified to conform to the 1998 presentation. 2. Sale of HomeScout On March 4, 1998 the Company sold substantially all of the assets related to its HomeScout operations to Homeshark, Inc. for $1,982,000. Cash proceeds of $500,000 were received by the Company upon closing of the sale. The remaining sale price was received in cash during 1998. The Company recorded a gain of $1,626,000. Revenues for HomeScout were $22,000, $61,000 and $19,000 for the years ended December 31, 1996, 1997 and 1998, respectively. 3. Acquisition of DealerNet Assets On December 1, 1997, the Company purchased certain assets of DealerNet, which provides Internet marketing services to auto dealers. DealerNet was previously operated as a division of The Reynolds and Reynolds Company ("Reynolds"). The purchase price was $800,000, of which $500,000 was paid in cash over the twelve months following acquisition and $300,000 was paid by issuance of Series B mandatorily redeemable convertible preferred stock. There was additional consideration due depending on the level of revenues attributable to DealerNet clients for the twelve month period following the acquisition. At December 31, 1997, based on revenue projections, the Company expected to pay $90,000 in additional consideration. Based on actual revenues realized, no additional consideration was due to Reynolds. The purchase price and resulting intangible asset was reduced by $90,000 in 1998, and the adjusted basis will be amortized over the remaining life of the related assets. The results of operations of DealerNet are included in the financial statements from the date of acquisition. Unaudited pro forma results as if DealerNet had been included in the financial results during 1996 and 1997 are as follows:
Years ended December 31, -------------------- 1996 1997 --------- --------- (in thousands, except per share amounts) (unaudited) Net revenues............................................................... $ 2,041 $ 3,360 Net loss................................................................... (1,272) (2,437) Basic and diluted net loss per share....................................... $ (0.36) $ (0.70)
The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. F-12 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 4. Capital Assets A summary of capital assets follows:
December 31, -------------------- March 31, 1997 1998 1999 --------- --------- ----------- (in thousands) (unaudited) Computer equipment.................................................................. $ 361 $ 1,190 $ 1,887 Furniture and other equipment....................................................... 59 378 403 Software............................................................................ 37 161 925 Leasehold improvements.............................................................. -- 134 173 --------- --------- ----------- 457 1,863 3,388 Less: Accumulated depreciation and amortization..................................... (106) (410) (582) --------- --------- ----------- $ 351 $ 1,453 $ 2,806 --------- --------- ----------- --------- --------- -----------
Equipment held under capital leases is included in capital assets. The cost of the leased equipment is $101,000 $1,060,000 and $1,770,000 (unaudited) at December 31, 1997 and 1998 and March 31, 1999, respectively. The accumulated amortization for these items is $36,000 $173,000 and $279,000 (unaudited) at December 31, 1997 and 1998 and March 31, 1999, respectively. 5. Accrued Liabilities A summary of accrued liabilities follows:
December 31, -------------------- March 31, 1997 1998 1999 --------- --------- ----------- (in thousands) (unaudited) Accrued payroll and related benefits................................................. $ 113 $ 324 $ 442 Accrued professional fees............................................................ -- 166 170 Accrued advertising costs............................................................ -- -- 420 Other................................................................................ 45 286 284 --------- --------- ----------- $ 158 $ 776 $ 1,316 --------- --------- ----------- --------- --------- -----------
6. Capital Leases The Company leases various equipment under master lease agreements with one of its shareholders. The leases expire at various dates between October 1999 and December 2001. F-13 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 6. Capital Leases (Continued) Future minimum lease payments for these capital leases are as follows:
Years ending December 31, (in thousands) - ------------------------------------------------------------------------------------------------- 1999........................................................................................... $ 402 2000........................................................................................... 387 2001........................................................................................... 259 ------ Total minimum lease payments..................................................................... 1,048 Less: Portion representing interest.............................................................. (163) ------ Present value of capital lease obligations....................................................... 885 Less: Current portion............................................................................ (328) ------ Capital lease obligations, non-current portion................................................... $ 557 ------ ------
7. Note Payable to Bank Note payable to bank at December 31, 1997 represents the balance due on a line of credit, which bears interest at prime plus 2% (10.5% at December 31, 1997), payable monthly. The line of credit expired November 15, 1998 and was not renewed. 8. Income Taxes From inception through February 28, 1997 the Company was organized as a S corporation for income tax reporting purposes and, as such, the tax effects were passed directly to the shareholders. Effective February 28, 1997, the Company became a C corporation. A current provision for income taxes has not been recorded for the year ended December 31, 1998 or for the period from March 1, 1997 to December 31, 1997, due to taxable losses incurred during the periods. A valuation allowance has been recorded for deferred tax assets because realization is primarily dependent on generating sufficient taxable income prior to expiration of net operating loss carry-forwards. Temporary differences that give rise to the Company's deferred tax assets and liabilities comprise the following:
December 31, -------------------- 1997 1998 --------- --------- (in thousands) Net operating loss carry-forwards................................................................ $ 724 $ 1,672 Depreciation and amortization.................................................................... (5) 77 Compensation expense related to stock options.................................................... 68 64 Allowance for doubtful accounts.................................................................. 14 29 Accrued liabilities.............................................................................. 11 37 Valuation allowance.............................................................................. (812) (1,879) --------- --------- $ -- $ -- --------- --------- --------- ---------
F-14 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 8. Income Taxes (Continued) For the periods in which the Company was a C corporation, a reconciliation of taxes on income at the federal statutory rate to actual tax expense is as follows:
Years ended December 31, -------------------- 1997 1998 --------- --------- (in thousands) Tax at statutory rate.......................................................................... $ (815) $ (2,760) Nondeductible items............................................................................ 6 1,780 Loss attributed to S corporation............................................................... 66 -- Change in valuation allowance.................................................................. 812 1,067 Other.......................................................................................... (69) (87) --------- --------- $ -- $ -- --------- --------- --------- ---------
At December 31, 1998, the Company had net operating loss carry-forwards of approximately $4.9 million, which will expire beginning in the year 2012, if not previously utilized. Should certain changes in the Company's ownership occur, there could be a limitation on the utilization of its net operating losses. The Company has determined that such a change occurred in October 1998 and the utilization of loss carryforwards generated through that period will be limited. 9. Mandatorily Redeemable Convertible Preferred Stock The Company's Series A and Series B mandatorily redeemable convertible preferred stock each include a provision whereby, at any time after September 30, 2003, a shareholder majority has the right to require the Company to repurchase the shares at the stated redemption price plus any declared and unpaid dividends. The redemption price is $0.55 per share and $4.20 per share plus unpaid dividends for the Series A preferred stock and the Series B preferred stock, respectively. The redemption value of the mandatorily redeemable convertible preferred stock is being accreted over the period from issuance to the earliest redemption date using the effective interest method. The Series A and Series B preferred shares have preferential liquidation and conversion rights, as well as voting and registration rights. The Series A preferred shareholders are entitled to one of the six authorized representatives on the Company's Board of Directors and the Series B preferred shareholders are entitled to two of the six. The purchase agreements also contain restrictive covenants, among which are limitations as to dividends, asset sales, indebtedness, capital asset acquisitions and lease agreements. The Series A and Series B mandatorily redeemable preferred stock are both convertible, on a one-for-one basis, into common stock at any time at the option of the holders. These shares automatically convert upon an initial public offering, and the entitlement to Board representatives and restrictive covenant provisions terminate. The Series B preferred shareholders are entitled to receive cumulative dividends in the amount of $0.336 per share per annum. No dividends were declared by the Company during the year ended December 31, 1998. Accumulated unpaid dividends of $549,000 and $1,133,000 (unaudited) at December 31, 1998 and March 31, 1999, respectively, do not bear interest. These unpaid dividends have been recorded as an increase to Series B mandatorily redeemable convertible preferred stock. F-15 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit Stock repurchase On October 7, 1998, the Company used a portion of the proceeds from the issuance of the Series B preferred stock to repurchase and retire 2,173,206 shares of common stock and 2,404,652 shares of Series A preferred stock at $4.20 per share. The repurchase price of the Series A preferred stock was equal to the estimated fair market value. The repurchase price of the common stock was in excess of the $1.85 per share fair value as determined by the Company's Board of Directors. In accordance with FASB Technical Bulletin 85-6, the Company recognized expense of $4,928,000 which represents the excess of the repurchase price over the fair value of all common shares repurchased, with the exception of repurchased shares which resulted from employee stock option exercises immediately preceding the repurchase. For these shares, $274,000 in expense was recognized for the excess of the repurchase price over the employees' cost basis in the shares. Other common stock transactions On February 28, 1997, two of the Company's officers, who are also shareholders, entered into an agreement to settle the Company's liability for deferred compensation. The terms of the agreement required a cash payment of half the amount due and the remainder was forgiven by the officers. Such amount is included in shareholders' equity as a contribution of services. As of February 28, 1997, certain of the Company's shareholders had purchased shares of common stock at prices in excess of the share price paid by the Series A Preferred shareholders. To retain their basis in parity with the Series A Preferred share price, these shareholders received a total of 119,867 additional shares of common stock, which the Company accounted for as a stock dividend to non-employee shareholders and as compensation expense to employee shareholders. On February 28, 1997, the company repurchased 613,015 shares of common stock from a former officer and a former employee at the fair market value as determined by the Company's Board of Directors. On August 20, 1996, the Company issued 120,000 shares of common stock each to two shareholders that are also officers of the Company. Two non-recourse notes were accepted in exchange, each in the amount of $72,000 with interest at the rate of 8% per annum, due on August 20, 2006. The notes are collateralized by stock pledge agreements for 129,915 shares each, which include the 120,000 shares and 9,915 additional shares issued to each shareholder on February 28, 1997. The notes are included in shareholders' deficit on the balance sheet. Stock warrants During October 1996, the Company issued warrants to purchase 24,000 shares of common stock with an exercise price of $0.30 per share. These warrants were issued to a third party in consideration for professional services performed. The warrants became vested ratably over 24 months and expire in October 2003. These warrants were recorded at their fair value of $2,000, which was recognized as general and administrative expense. During February 1997, the Company issued warrants to purchase 37,500 shares of common stock with an exercise price of $0.55 per share. These warrants were issued to a third party in consideration for professional services performed. These warrants were fully vested upon issuance and expire in February 2004. These warrants were recorded at their fair value of $15,000, which was recognized as general and administrative expense. F-16 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit (Continued) Stock option plan The Company has a stock option plan (the Plan) for employees, directors, consultants or independent contractors under which is reserved 2,750,000 shares of common stock. In April 1999, the number of shares reserved under the plan was increased to 3,641,000. Pursuant to the Plan, the Board of Directors has granted nonqualified stock options and incentive stock options. The vesting period, exercise price and expiration period of options are established at the discretion of the Board of Directors. While some options were vested when granted, options generally vest over a four-year period and expire ten years from the date of grant. In 1996 and 1997, compensation expense of $34,000 and $12,000 was recognized under the Plan for certain options granted to third parties. The fair value of each option grant was estimated on the date of grant using the Black Scholes option-pricing model. There was no compensation expense relating to options granted to third parties in 1998. In 1997, compensation expense of $161,000 was recognized under the Plan for certain options that were granted to executives with exercise prices below the fair value determined by the Board of Directors. The compensation expense represents the differential between the exercise price and the fair value. There was no compensation expense relating to option grants with exercise prices below fair value in 1996 or 1998. On March 24, 1997, the Board of Directors approved an option repricing to reflect the then current fair value of the shares of $0.30 per share. All options issued and outstanding at that date with exercise prices in excess of $0.30 were repriced at $0.30. Had the Company determined compensation expense based on the fair value of the option at the grant date for its stock options issued to employees, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
Years ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- (in thousands, except per share amounts) Net loss As reported....................................................................... $ (828) $ (2,398) $ (8,117) Pro forma......................................................................... $ (855) $ (2,452) $ (8,216) Basic and diluted net loss per share As reported....................................................................... $ (0.24) $ (0.69) $ (2.95) Pro forma......................................................................... $ (0.24) $ (0.71) $ (2.99)
The fair value of each option grant is estimated on the date of grant using the minimum value option-pricing model. The following weighted average assumptions were used for employee stock option grants in 1996, 1997 and 1998: risk free interest rate at grant date of 6.22%, 6.26% and 5.11%, respectively, no dividends or volatility and expected lives of five years in all three years. The March 24, 1997 option-repricing event is considered a modification of an existing option. For determination of the pro forma amounts, this modification is treated as if a new option had been issued and any additional incremental value recorded in the year of repricing is immediately recognized for vested options and amortized over the remaining vesting period for nonvested options. F-17 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit (Continued) Pro forma net loss amounts reported above reflect only options granted in 1995 through 1998. The full impact of calculating compensation expense for stock options based on fair value at the grant date is not reflected in the pro forma net loss amounts because compensation expense is reflected over the options' vesting period of four years. In addition, because the determination of the fair value of all options granted after such time as the Company becomes a public entity will include an expected volatility factor in addition to the factors described in the preceding paragraph, the above results may not be representative of future periods. The following summarizes the activity under the Plan:
Weighted- Number of Weighted- average shares under average fair value option exercise of options agreements price granted ------------ ----------- ----------- Balance at January 1, 1996................................................... 102,000 $ 0.20 Options granted.............................................................. 504,384 0.39 $ 0.14 Options exercised............................................................ (3,250) 0.10 Options canceled............................................................. (193,250) 0.39 ------------ Balance at December 31, 1996................................................. 409,884 0.34 Options granted: Exercise price equal to fair value......................................... 538,250 0.33 0.13 Exercise price less than fair value........................................ 812,920 0.10 0.20 Options exercised............................................................ (4,771) 0.28 Options canceled............................................................. (108,529) 0.48 ------------ Balance at December 31, 1997................................................. 1,647,754 0.20 Options granted.............................................................. 655,100 0.80 0.26 Options exercised............................................................ (110,507) 0.27 Options canceled............................................................. (148,407) 0.37 ------------ Balance at December 31, 1998................................................. 2,043,940 0.39 ------------ ------------ Options exercisable at: December 31, 1996.......................................................... 133,729 $ 0.34 December 31, 1997.......................................................... 1,015,597 $ 0.14 December 31, 1998.......................................................... 1,115,651 $ 0.16
At December 31, 1998, 564,060 shares remained reserved and available for grant under the Plan. F-18 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit (Continued) The following table summarizes information about stock options outstanding under the Plan at December 31, 1998:
Weighted- average Weighted- Weighted- remaining average average Exercise Number contractual exercise Number exercise price outstanding life price exercisable price - ----------- ----------- --------------- ----------- ---------- ----------- $ 0.10 812,920 8.2 $ 0.10 812,920 $ 0.10 $ 0.30 522,920 8.0 $ 0.30 275,970 $ 0.30 $ 0.60 10,000 7.7 $ 0.60 10,000 $ 0.60 $ 0.75 670,100 9.4 $ 0.75 16,761 $ 0.75 $ 1.85 28,000 9.8 $ 1.85 ----------- ---------- 2,043,940 1,115,651 ----------- ----------
11. Retirement Savings Plan On August 1, 1997, the Company established a retirement savings plan that qualifies under Internal Revenue Code Section 401(k). The plan covers all qualified employees. Contributions to this plan by the Company are made at the discretion of the Board of Directors. The Company did not contribute to the plan in 1997 and 1998 or during the three months ended March 31, 1998 and 1999 (unaudited). 12. Operating Lease Commitments The Company leases office space in Seattle, Washington, under a lease that expires in October 2000. The lease includes one option to extend the lease term for five years. The Company also leases certain office equipment under various operating leases. Future minimum lease payments for the leases are as follows:
Years ending December 31, (in thousands) - --------------------------------------------------------------------------------------------------- 1999........................................................................................ $ 442 2000........................................................................................ 342 2001........................................................................................ 7 2002........................................................................................ 4 2003........................................................................................ 1 ----- $ 796 ----- -----
Operating lease expense was $31,000 $140,000 and $349,000 for the years ended December 31, 1996, 1997 and 1998, respectively, and $55,000 and $112,000 (unaudited) for the three months ended March 31, 1998 and 1999, respectively. In 1997, the building in which the Company leases its office space was purchased by one of its shareholders. F-19 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 13. Supplemental Disclosures of Cash Flow Information Cash paid for interest during 1996, 1997 and 1998 was $2,000, $17,000 and $90,000, respectively. Cash paid for interest during the three months ended March 31, 1998 and 1999 was $7,000 and $49,000 (unaudited), respectively. In 1997 and 1998 the Company purchased capital assets under capital leases of $21,000 and $959,000, respectively. The Company did not purchase capital assets under capital leases during 1996. During the three months ended March 31, 1999, the Company purchased capital and other assets under the capital leases and a software financing contract of $1,437,000 (unaudited). The Company did not purchase capital assets under capital leases during the three months ended March 31, 1998. 14. Subsequent Events Advertising commitment In February 1999, the Company entered into an agreement to purchase online advertising, which the Company intends to resell to clients. Under this agreement, the Company is contractually obligated to make aggregate payments of $697,000 through December 31, 1999. Financing commitment and line of credit In April 1999, the Company received a commitment from one of its current investors to provide any financing necessary for the Company to meet its current operating and growth objectives through December 31, 1999 if alternative sources of financing are not obtained. In May 1999, the Company secured a $5.0 million line of credit from an institutional lender. This line of credit bears interest at prime plus 2% and is due on the earlier of completion of this offering or December 31, 1999. The line of credit is secured by the Company's assets. Acquisition On April 1, 1999, the Company acquired all of the equity interests in PartsVoice, LLC (PartsVoice), whose principal business is vehicle parts data acquisition and management services. Immediately prior to the closing, PartsVoice distributed to its owners certain assets and liabilities. At closing, the Company paid aggregate purchase consideration for the PartsVoice equity of (i) $3.0 million in cash; (ii) promissory notes in the principal amount of (a) $8.0 million due on the earlier of completion of an initial public offering or July 30, 1999 and (b) $15.0 million due on the earlier of the completion of an initial public offering or January 25, 2000; (iii) 500,000 shares of Series C convertible preferred stock at $8.00 per share; and (iv) warrants to purchase 160,000 shares of the Company's common stock at $6.00 per share. The Company's obligations under the promissory notes are secured by a pledge of the PartsVoice equity interests and an agreement with respect to the management of the PartsVoice equity interests, pending payment in full of the promissory notes. The Company will account for the PartsVoice acquisition using the purchase method of accounting. The aggregate purchase price will be allocated to the net assets acquired, based upon their respective fair market values. The excess of the purchase price, including estimated acquisition costs, over the fair market value of the assets acquired will be allocated to intangible assets. F-20 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 14. Subsequent Events (Continued) The following summarizes the unaudited pro forma results of operations, on a combined basis, as if the Company's acquisition of PartsVoice occurred as of the beginning of each of the periods presented, after including the impact of certain adjustments such as amortization of cost in excess of net assets acquired:
Three months Year ended Ended December 31, March 31, 1998 1999 ------------ ------------- (in thousands, except per share amounts) Net revenues......................................................................... $ 15,773 $ 5,009 Net loss............................................................................. (10,604) (2,612) Basic and diluted net loss per share................................................. $ (3.88) $ (2.19)
The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. Initial public offering On April 30, 1999, the Company's Board of Directors authorized the Company to initiate a potential initial public offering of its common stock. F-21 Report of Independent Accountants To the Board of Directors and Shareholders of The Cobalt Group, Inc. In our opinion, the accompanying combined balance sheets and the related combined statements of operations, changes in owners' equity, of comprehensive income and of cash flows present fairly, in all material respects, the financial position of PartsVoice (the Company), consisting of the operations of PartsVoice, a general partnership, and Compu-Time, Inc., at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Seattle, Washington May 12, 1999 F-22 PartsVoice Combined Balance Sheets (in thousands)
December 31, -------------------- 1997 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents.................................................................... $ 216 $ 497 Accounts receivable, net of allowance for doubtful accounts of $46 and $41 in 1997 and 1998, respectively................................................................................ 833 1,032 Other current assets......................................................................... 26 3 --------- --------- 1,075 1,532 Marketable securities.......................................................................... 144 405 Capital assets, net............................................................................ 164 123 Other noncurrent assets........................................................................ 136 200 --------- --------- Total assets............................................................................... $ 1,519 $ 2,260 --------- --------- --------- --------- LIABILITIES AND OWNERS' EQUITY Current liabilities: Accounts payable and accrued liabilities..................................................... $ 81 $ 203 Distribution payable to owners............................................................... 865 1,087 --------- --------- 946 1,290 --------- --------- Noncurrent portion of notes payable............................................................ 12 8 --------- --------- Commitments and contingencies (Note 7) Owners' equity: Common stock and partners' capital........................................................... 702 1,070 Accumulated other comprehensive loss......................................................... (141) (108) --------- --------- 561 962 --------- --------- Total liabilities and owners' equity....................................................... $ 1,519 $ 2,260 --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-23 PartsVoice Combined Statements of Operations (in thousands)
Year ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net revenues......................................................................... $ 6,679 $ 7,715 $ 9,528 Cost of revenues..................................................................... 1,714 1,965 2,144 --------- --------- --------- Gross profit..................................................................... 4,965 5,750 7,384 Sales and marketing expense.......................................................... 1,339 1,419 1,662 General and administrative expenses.................................................. 1,012 1,054 1,180 --------- --------- --------- Income from operations........................................................... 2,614 3,277 4,542 Other (expense) income............................................................... (1) 28 65 --------- --------- --------- Net income....................................................................... $ 2,613 $ 3,305 $ 4,607 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-24 PartsVoice Combined Statements of Changes in Owners' Equity (in thousands)
Accumulated Common Stock and Other Total Partners' Comprehensive Owners' Capital Loss Equity ---------------- --------------- --------- Balance, December 31, 1995............................................ $ 288 $ (39) $ 249 Net income............................................................ 2,613 -- 2,613 Distributions......................................................... (2,438) -- (2,438) ------- ----- --------- Balances, December 31, 1996........................................... 463 (39) 424 Net income............................................................ 3,305 -- 3,305 Distributions......................................................... (3,066) -- (3,066) Unrealized loss on securities......................................... -- (102) (102) ------- ----- --------- Balances, December 31, 1997........................................... 702 (141) 561 Net income............................................................ 4,607 -- 4,607 Distributions......................................................... (4,239) -- (4,239) Unrealized gain on securities......................................... -- 33 33 ------- ----- --------- Balances, December 31, 1998........................................... $ 1,070 $ (108) $ 962 ------- ----- --------- ------- ----- ---------
The accompanying notes are an integral part of the combined financial statements. F-25 PartsVoice Combined Statements of Comprehensive Income (in thousands)
Year ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net income........................................................................... $ 2,613 $ 3,305 $ 4,607 Unrealized (loss) gain on securities................................................. -- (102) 33 --------- --------- --------- Comprehensive income................................................................. $ 2,613 $ 3,203 $ 4,640 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-26 PartsVoice Combined Statements of Cash Flows (in thousands)
Year ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Cash flows from operating activities: Net income...................................................................... $ 2,613 $ 3,305 $ 4,607 Depreciation.................................................................... 50 50 80 Net changes in: Accounts receivable........................................................... (228) (105) (199) Other current assets.......................................................... (13) 19 23 Other noncurrent assets....................................................... (17) (52) (64) Accounts payable and accrued liabilities...................................... 52 (36) 122 --------- --------- --------- Net cash provided by operating activities..................................... 2,457 3,181 4,569 --------- --------- --------- Cash flows used by investing activities: Purchases of equipment and furniture............................................ (58) (108) (39) Purchase of marketable securities............................................... (22) (146) (228) --------- --------- --------- Net cash used by investing activities......................................... (80) (254) (267) --------- --------- --------- Cash flows used by financing activities: Net change in notes payable..................................................... (61) 12 (4) Distributions to owners......................................................... (2,456) (2,947) (4,017) --------- --------- --------- Net cash used by financing activities......................................... (2,517) (2,935) (4,021) --------- --------- --------- Net (decrease) increase in cash............................................... (140) (8) 281 Cash and cash equivalents at beginning of year................................ 364 224 216 --------- --------- --------- Cash and cash equivalents at end of year...................................... $ 224 $ 216 $ 497 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-27 PartsVoice Notes to Combined Financial Statements 1. Nature of the Business and Summary of Significant Accounting Policies: Nature of the Business and Basis of Presentation The combined business of PartsVoice, a general partnership, and Compu-Time, Inc. (CTI) (the Company) provides parts data acquisition and management services to auto manufacturers and dealers. The Partnership was founded in 1988. CTI was founded in 1978. Principles of Combination The accompanying combined financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Marketable Securities Marketable securities consist of certificates of deposit and equity securities. All marketable securities are classified as available-for-sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Investments in Certain Debt and Equity Securities" and are recorded at fair market value determined by the most recently traded price of securities held at each balance sheet date. Unrealized gains or losses on available-for-sale securities are recorded as a component of accumulated other comprehensive income in owners' equity. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the combined statement of operations. Capital Assets Capital assets consist of computer equipment, furniture and other equipment, purchased software and leasehold improvements, all of which are stated at cost. Depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over either their estimated service lives or the life of the related lease on a straight-line basis. The useful lives of the property, equipment and software range from three to five years. Maintenance and repairs, which neither materially add to the value of the property nor prolong its life, are charged to expense as incurred. Gains or losses on dispositions of capital assets are included in income. Capital Structure Given the Company's historical capital structure, historical shares outstanding and earnings per share amounts for Compu-Time, Inc. are not presented as they are not considered meaningful. Revenue Recognition The Company's revenues consist principally of subscription fees charged to auto manufacturers and dealers periodically throughout each year. Revenue is recognized when services are rendered. F-28 PartsVoice Notes to Combined Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies: (Continued) Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily accounts receivable, cash equivalents and certificates of deposit. The Company does not require collateral from its customers. One automobile manufacturer and its related entities accounted for 31%, 35% and 41% of the Company's revenues during the years ended December 31, 1996, 1997 and 1998, respectively. At December 31, 1997 and 1998, these entities comprised 58% and 70%, respectively of the accounts receivable balance. The Company has a cash investment policy which restricts investments to ensure preservation of principal and maintenance of liquidity. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 1996, 1997 and 1998 were $42,000, $68,000 and $123,000, respectively. Income Taxes CTI was a C corporation under the Internal Revenue Code (IRC) until May 31, 1997, at which time it elected to be taxed as a S corporation under the IRC. Income taxes on earnings through May 31, 1997 were immaterial and have not been separately presented. Subsequent to May 31, 1997 for CTI, and for all periods presented with respect to the Partnership, the combined operations have not been subject to federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying combined financial statements because the income or loss of CTI and the Partnership for those periods is included in the tax returns of the individual owners. The tax returns of CTI and the Partnership are subject to examination by federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liabilities of the owners could be adjusted accordingly. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income", which became effective in 1998. This statement establishes rules for the reporting of comprehensive income. Other comprehensive income or loss is shown in the combined statements of comprehensive income and is solely comprised of unrealized losses on available-for-sale securities. 2. Marketable Securities: Marketable securities consist of certificates of deposit maturing on March 17, 2003 and June 3, 2003 and available-for-sale equity securities. F-29 PartsVoice Notes to Combined Financial Statements (Continued) 2. Marketable Securities: (Continued) Marketable securities are summarized as follows:
December 31, -------------------------------------------------- 1997 1998 ------------------------ ------------------------ Cost Fair Value Cost Fair Value --------- ------------- --------- ------------- (in thousands) Equity Securities............................................... $ 285 $ 144 $ 494 $ 386 Certificates of Deposit......................................... -- -- 19 19 --------- ----- --------- ----- Total marketable securities................................... $ 285 $ 144 $ 513 $ 405 --------- ----- --------- ----- --------- ----- --------- -----
3. Capital Assets: Capital assets were as follows at:
December 31, -------------------- 1997 1998 --------- --------- (in thousands) Furniture and fixtures................................................................. $ 33 $ 33 Equipment.............................................................................. 285 318 Trucks and automobiles................................................................. 118 118 Office equipment....................................................................... 12 18 --------- --------- 448 487 Less accumulated depreciation and amortization......................................... (284) (364) --------- --------- $ 164 $ 123 --------- --------- --------- ---------
4. Note Payable: The note payable bears interest at a rate of 6.4%, requires payments of $4,000 per year and is due December 15, 2001. The note payable is secured by one vehicle owned by the Company. Payments are due as follows at December 31, 1998:
(in thousands) 1999........................................................................... $ 4 2000........................................................................... 4 2001........................................................................... 4 --- $ 12 --- --- Noncurrent portion............................................................. $ 8 --- ---
5. Related Parties: The Company has a profit sharing arrangement with its owners. As of December 31, 1997 and 1998, the net payables to partners as a result of this arrangement were $865,000 and $1,087,000, respectively. Distributions to the partners in connection with the arrangement were $2,438,000, $3,066,000 and $4,239,000 in 1996, 1997 and 1998, respectively. F-30 PartsVoice Notes to Combined Financial Statements (Continued) 6. Employee Benefit Plans: The Company maintains retirement savings plans that qualify under Internal Revenue Code Section 401(k). The plans cover all qualified employees. Contributions to these plans may be made at the discretion of the Company. No contributions were made for the years ended December 31, 1996, 1997 and 1998. CTI also maintains an Aged Weighted Profit Sharing Plan for which all qualified CTI employees are eligible. Contributions to the Profit Sharing Plan are made at the discretion of the Company. Contributions related to this plan were $37,000 and $85,000 for the years ended December 31, 1997 and 1998. No contributions were made for the year ended December 31, 1996. 7. Operating Lease Commitments: The Company leases office space in Portland, Oregon under a lease that expires in November 1999. The Company also leases certain office equipment and vehicles under various operating leases. Future minimum lease payments for the leases are as follows:
Years ending December 31, (in thousands) - ------------------------------------------------------------------------------- 1999........................................................................... $ 137 2000........................................................................... 17 2001........................................................................... 9 ----- $ 163 ----- -----
Operating lease expense was $156,000, $158,000 and $168,000 for the years ended December 31, 1996, 1997 and 1998, respectively. 8. Subsequent Event: On April 30, 1999 all assets and liabilities of the Partnership and CTI were contributed to a new Oregon limited liability company, PartsVoice, LLC. On April 30, 1999, all of the equity interests of PartsVoice, LLC were purchased by The Cobalt Group, Inc. ("Cobalt"). Immediately prior to the purchase, there was a distribution of certain assets and all liabilities to the former owners. Cobalt paid an aggregate purchase consideration of: (i) $3.0 million in cash; (ii) promissory notes in the principal amount of (a) $8.0 million due on the earlier of completion of an initial public offering or July 30, 1999 and (b) $15.0 million due on the earlier of the completion of an initial public offering or January 25, 2000; (iii) 500,000 shares of Series C convertible preferred stock at $8.00 per share; and (iv) warrants to purchase 160,000 shares of the Company's common stock at $6.00 per share. The promissory notes bear interest at the rate of 8.75% per annum and are secured by a pledge of the PartsVoice, LLC equity interests. F-31 The Cobalt Group, Inc. Logo PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, to be paid in connection with the sale of the common stock being registered, all of which will be paid by the Registrant. All amounts are estimates except the SEC registration, NASD and Nasdaq filing fees. SEC Registration fee...................................................... 23,978 NASD filing fee........................................................... 9,125 Nasdaq National Market listing fee........................................ 95,000 Blue Sky fees and expenses................................................ 5,000 Accounting fees and expenses.............................................. 200,000 Legal fees and expenses................................................... 300,000 Transfer agent and registrar fees......................................... 10,000 Printing and engraving expenses........................................... 100,000 Miscellaneous expenses.................................................... 6,897 Total..................................................................... 750,000
ITEM 14. Indemnification of Directors and Officers Cobalt's articles of incorporation limit the liability of directors to the maximum extent permitted by Washington law. Washington law provides that the articles of incorporation may contain provisions that eliminate or limit the personal liability of a directors to the corporation or its shareholders provided that such provisions do not eliminate or limit the liability of a director for (1) acts or omissions involving intentional misconduct or a knowing violation of law, (2) unlawful payments of distributions, or (3) any transaction from which the director will personally receive an improper benefit in money, property, or services. Cobalt's bylaws provide that Cobalt shall indemnify its directors and officers and may indemnify its employees and other agents to the fullest extent permitted by law. Cobalt's bylaws also permit it to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. Cobalt will maintain officers' and directors' liability insurance which will insure against liabilities that officers and directors of Cobalt may incur in such capacities. Cobalt also intends to enter into indemnification agreements with its directors and officers. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of Cobalt and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. Recent Sales of Unregistered Securities (a) Within the past three years, Cobalt has made the following sales of securities that were not registered under the Securities Act: 1. In August 1996, Cobalt issued 120,000 shares of common stock to each of Mr. Barker and Mr. Holt at a purchase price of $0.60 per share. In satisfaction of the purchase price, Messrs. Barker and Holt each executed promissory notes to Cobalt due in August 2006 in the principal amount of $72,000. II-1 The promissory notes bear interest at a rate of 8% per annum. Each promissory note is secured by a pledge of the common stock issued in the purchase transaction. The shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 2. On October 23, 1996, Cobalt issued to The Madrona Investment Group, LLC a warrant to purchase 24,000 shares of common stock at an exercise price of $1.25 per share. The Madrona warrant was later repriced at $0.30 per share. The Madrona warrant expires on October 31, 2003. The warrant was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 3. On February 27, 1997, Cobalt issued to GH Investments a warrant to purchase 37,500 shares of common stock at an exercise price of $0.55 per share. The GH Investments warrant expires on February 28, 2004. The warrant was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 4. During the period from May 27, 1996 through May 27, 1999, Cobalt granted options to purchase an aggregate of 4,057,612 shares of common stock pursuant to its Option Plan. 897,495 shares of common stock have been issued on exercise of such options in reliance on Rule 701 under the Securities Act. 5. On February 28, 1997, Cobalt issued and sold 4,510,934 shares of Series A Preferred Stock to investment funds affiliated with First Analysis Corporation for an aggregate consideration of $2.5 million in cash. The sale of the Series A Preferred Stock was made in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act. Following this sale of Series A Preferred Stock, Cobalt also issued 119,867 shares of common stock to nine existing shareholders who had purchased common stock at a per share price greater than that paid by First Analysis Corporation. These dilution protection shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 6. On October 7, 1998 and November 6, 1998, Cobalt issued and sold 7,047,620 shares of Series B and Series B-1 Preferred Stock to Warburg, Pincus Equity Partners, L.P. and The Reynolds and Reynolds Company for an aggregate consideration of $29.3 million in cash and as partial consideration for an asset purchase. Sales of the Series B and Series B-1 Preferred Stock were made in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act. 7. On April 30, 1999, Cobalt issued and sold 12,500 shares of Series C Preferred Stock to Howard Tullman, a Director of Cobalt. Also on April 30, 1999, Cobalt issued and sold 500,000 shares of Series C Preferred Stock to two entities that previously held equity in PartsVoice, LLC and warrants to purchase an additional 160,000 shares of Series C Preferred Stock at an exercise price of $6.00 per share to those same two entities and a third entity that previously held equity in PartsVoice LLC for an aggregate consideration of $4.1 million. Sales of the Series C Preferred Stock were made in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). ITEM 16. Exhibits and Financial Statement Schedules (a) Exhibits
Number Description - ----------- -------------------------------------------------------------------------------------------------------- 1.1* Underwriting Agreement. 3.1* Amended and Restated Articles of Incorporation of The Cobalt Group, Inc. 3.2* Bylaws of The Cobalt Group, Inc. 4.1* Form of specimen certificate for Common Stock.
II-2
Number Description - ----------- -------------------------------------------------------------------------------------------------------- 5.1* Opinion of Stoel Rives LLP 10.1 The Cobalt Group, Inc. 1995 Stock Option Plan, as amended. 10.2 Promissory Note, dated August 20, 1996, between The Cobalt Group, Inc. and John W.P. Holt (and schedule of similar Note between The Cobalt Group, Inc. and Geoffrey T. Barker). 10.3 Lease Agreement, dated September 14, 1996, between The Cobalt Group, Inc. and David and Nancy Jo Edelstein. 10.3.1 Amendment No. 1 to Lease Agreement, dated April 21, 1998, between First and Lenora, LLC and The Cobalt Group, Inc. 10.3.2 Amendment No. 2 to Lease Agreement, dated December 16, 1998, between First and Lenora, LLC and The Cobalt Group, Inc. 10.4 Purchase Warrant, dated October 23, 1996, from The Cobalt Group, Inc. to Madrona Investment Group, LLC. 10.5 Confidentiality and Noncompetition Agreement, dated February 28, 1997, between The Cobalt Group, Inc. and John W.P. Holt (and schedule of similar Agreement with Geoffrey T. Barker). 10.6 Purchase Warrant, dated February 27, 1997 from The Cobalt Group, Inc. to GH Investments. 10.7 Registration Agreement, dated February 28, 1997, between The Cobalt Group, Inc., The Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P. and Mark T. Koulogeorge. 10.7.1 First Amendment to Registration Agreement, dated October 7, 1998, between The Cobalt Group, Inc., the Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P. and Mark T. Koulogeorge. 10.7.2 Second Amendment to Registration Agreement, dated July 7, 1998, between The Cobalt Group, Inc., the Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P. and Mark T. Koulogeorge. 10.8 Management Services Agreement, dated February 28, 1997, between The Cobalt Group, Inc. and First Analysis Securities Corporation. 10.8.1 First Amendment to Management Services Agreement, dated October 7, 1998, between The Cobalt Group, Inc. and First Analysis Securities Corporation. 10.9 Lease Agreement, dated October 20, 1997, between Compu-Time, Inc. and CTL Management, Inc. 10.10* Acquisition and Investment Agreement, dated November 25, 1997, between The Cobalt Group, Inc. and The Reynolds and Reynolds Company. 10.11 Asset Purchase Agreement, dated March 3, 1998, between The Cobalt Group, Inc. and Home Shark, Inc. 10.12 Lease Agreement, dated December 1, 1997, between Parts Voice and CTL Management, Inc. 10.13 Series B Stock Purchase Agreement, dated October 7, 1998, between The Cobalt Group, Inc. and E.M. Warburg, Pincus, L.P. 10.14 Information Rights Agreement, dated October 7, 1998, between The Cobalt Group, Inc. and the holders of Series A Preferred Stock. 10.15 Purchase Agreement, dated April 19, 1999, between The Cobalt Group, Inc., Locators, Inc., Parts Finder Locating Systems, Inc., Compu-Time, Inc., Brian Allen and Shirley Atherton. 10.16 Agreement for Management of Security, dated April 30, 1999, between The Cobalt Group, Inc., Compu-Time, Inc, Parts Finder Locating Systems, Inc. and Locators, Inc. 10.17 Pledge and Security Agreement, dated April 30, 1999, between The Cobalt Group, Inc., Compu-Time, Inc., Parts Finder Locating Systems, Inc. and Locators, Inc. 10.18 Warrant Shares and Series C Preferred Shares Registration Agreement, dated April 30, 1999, between The Cobalt Group, Inc., Compu-Time, Inc., Parts Finder Locating Systems, Inc. and Locators, Inc.
II-3
Number Description - ----------- -------------------------------------------------------------------------------------------------------- 10.19 90-Day Promissory Note, dated April 30, 1999, between The Cobalt Group, Inc. and Compu-Time, Inc. (and schedule of similar Notes). 10.20 270-Day Promissory Note, dated April 30, 1999, between The Cobalt Group, Inc. and Compu-Time, Inc. (and schedule of similar Notes). 10.21 Purchase Warrant, dated April 30, 1999, from The Cobalt Group, Inc. to Parts Finder Locating Systems, Inc. (and schedule of similar Warrants). 10.22* Loan and Security Agreement, dated May 27, 1999, between The Cobalt Group, Inc. and Greyrock Capital. 11.1 Statement Regarding Computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Stoel Rives LLP (reference is made to Exhibit 5.1). 23.2 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants. 23.3 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants. 24.1 Power of Attorney (reference is made to the signature page). 27.1 Financial Data Schedule.
- --------- * To be filed by Amendment (b) Financial Statement Schedules 16.1 Report of Independent Accountants on Financial Statement Schedule. 16.2 Schedule II: Valuation and Qualifying Accounts.
ITEM 17. Undertakings (a) The undersigned Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus as filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective, II-4 (2) for the purpose of determining any liability under the 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 an initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has caused this Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Seattle, State of Washington, on the 27th day of May 1999. THE COBALT GROUP, INC. By: /s/ GEOFFREY T. BARKER ----------------------------------------- Name: Geoffrey T. Barker Title: CO-CHIEF EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Geoffrey T. Barker and John W.P. Holt as his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for each person and in such person's name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Name Title Date - ------------------------------ -------------------------- ------------------- /s/ GEOFFREY T. BARKER Co-Chief Executive Officer - ------------------------------ and Director (principal May 27, 1999 Geoffrey T. Barker executive officer) /s/ JOHN W.P. HOLT Co-Chief Executive Officer - ------------------------------ and Director (principal May 27, 1999 John W.P. Holt executive officer) /s/ DAVID M. DOUGLASS Chief Financial Officer, - ------------------------------ Vice President, May 27, 1999 David M. Douglass Operations and Secretary /s/ HOWARD A. TULLMAN - ------------------------------ Chairman of the Board of May 27, 1999 Howard A. Tullman Directors /s/ MARK T. KOULOGEORGE - ------------------------------ Director May 27, 1999 Mark T. Koulogeorge /s/ JOSEPH P. LANDY - ------------------------------ Director May 27, 1999 Joseph P. Landy /s/ ERNEST H. POMERANTZ - ------------------------------ Director May 27, 1999 Ernest H. Pomerantz /s/ J. D. POWER, III - ------------------------------ Director May 27, 1999 J. D. Power, III
II-6 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 THE COBALT GROUP, INC. 1995 STOCK OPTION PLAN 1. PURPOSE. The purpose of the 1995 Stock Option Plan (the "Plan") is to provide a means by which The Cobalt Group, Inc. (the "Company") may attract, reward and retain the services or advice of former, current or future employees, officers, directors, agents and consultants, including members of technical advisory boards and independent contractors of the Company and to provide added incentives to them by encouraging stock ownership in the Company. 2. ADMINISTRATION. This Plan shall be administered by the Board of Directors of the Company (the "Board"). The Board of Directors may suspend, amend or terminate this Plan as provided in Section 8. The administrator of this Plan is referred to as the "Plan Administrator." 2.1 PROCEDURES. The Board of Directors shall designate one of the members of the Plan Administrator as chairman. The Plan Administrator may hold meetings at such times and places as it shall determine. The acts of a majority of the members of the Plan Administrator present at meetings at which a quorum exists, or acts approved in writing by all Plan Administrator members, shall constitute valid acts of the Plan Administrator. 2.2 POWERS. Subject to the specific provisions of this Plan, the Plan Administrator shall have the authority, in its discretion: (a) to grant the stock options described in Section 5, including Incentive Stock Options and Non-Qualified Stock Options, and to designate each option granted as an Incentive Stock Option or a Non-Qualified Stock Option; (b) to determine, in accordance with Section 5.1(f) of this Plan, the fair market value of the shares of Common Stock subject to options; (c) to determine the exercise price per share of options; (d) to determine the Optionees to whom, and the time or times at which, options shall be granted and the number of shares of Common Stock to be represented by each option; (e) to interpret this Plan; (f) to prescribe, amend and rescind rules and regulations relating to this Plan; (g) to determine the terms and provisions of each option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each option; (h) to reduce the exercise price per share of outstanding and unexercised options; (i) to defer, with the consent of the Optionee, or to accelerate the exercise date of any option; (j) to waive or modify any term or provision contained in any option applicable to the underlying shares of Common Stock; (k) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an option previously granted by the Plan Administrator; and (l) to make all other determinations deemed necessary or advisable for the administration of this Plan. The interpretation and construction by the Plan Administrator of any terms or provisions of this Plan, any option issued hereunder or of any rule or regulation promulgated in connection herewith and all actions taken by the Plan Administrator shall be conclusive and binding on all interested parties. The Plan Administrator may delegate administrative functions to individuals who are officers or employees of the Company. 2.3 LIMITED LIABILITY. No member of the Board of Directors or the Plan Administrator, or officer of the Company shall be liable for any action or inaction of the entity or body, or another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the explicit provisions hereof, the Board of Directors and Plan Administrator may act in their absolute discretion in all matters related to this Plan. 2.4 SECURITIES EXCHANGE ACT OF 1934. At any time that the Company has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Plan shall be administered by the Plan Administrator in accordance with Rule 16b-3 adopted under the Exchange Act, as such rule may be amended from time to time. 3. STOCK SUBJECT TO THIS PLAN. Subject to adjustment as provided below and in Section 6 hereof, the stock subject to this Plan shall be the Company's common stock (the "Common Stock"), and the total number of shares of Common Stock to be delivered upon the exercise of all options granted under this Plan shall not exceed 3,641,000 shares, as such Common Stock was constituted on the effective date of this Plan. If any option granted under this Plan shall expire, be surrendered, exchanged for another option, cancelled or terminated for any reason without having been exercised in full, the unpurchased shares subject thereto shall thereupon again be available for purposes of this Plan, including for replacement options which may be granted in exchange for such surrendered, cancelled or terminated options. Shares issued upon exercise of options granted under this Plan may be subject to such restrictions on transfer, repurchase rights or other restrictions as may be determined by the Plan Administrator. 4. ELIGIBILITY. The Plan Administrator may award options to any former, current or future employee, officer, director, agent or consultant, including any member of technical advisory boards and any independent contractor, of the Company. Any party to whom an option is granted under this Plan is referred to as an "Optionee." 5. AWARDS. The Plan Administrator, from time to time, may take the following actions, separately or in combination, under this Plan: (a) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to any employee of the Company or its subsidiaries, as provided in Section 5.1 of this Plan; (b) grant options other than Incentive Stock Options ("Non-Qualified Stock Options"), as provided in Section 5.2 of this Plan; (c) grant options to officers, employees and others in foreign jurisdictions, as provided in Section 5.7 of this Plan; and (d) grant options in certain acquisition transactions, as provided in Section 5.8 of this Plan. 5.1 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be subject to the following terms and conditions: (a) Incentive Stock Options may be granted under this Plan only to employees of the Company or its subsidiaries, including employees who are directors. (b) No employee may be granted Incentive Stock Options under this Plan to the extent that the aggregate fair market value, on the date of grant, of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by that employee during any calendar year, under this Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any subsidiary, exceeds $100,000. To the extent that any option designated as an Incentive Stock Option exceeds the $100,000 limit, such option shall be treated as a Non-Qualified Stock Option. In making this determination, options shall be taken into account in the order in which they were granted, and the fair market value of the shares of Common Stock shall be determined as of the time that the option with respect to such shares was granted. (c) An Incentive Stock Option may be granted under this Plan to an employee possessing more than 10% of the total combined voting power of all classes of stock of the Company (as determined pursuant to the attribution rules contained in Section 424(d) of the Code) only if the exercise price is at least 110% of the fair market value of the Common Stock subject to the option on the date the option is granted, as described in Section 5.1(f) of this Plan, and only if the option by its terms is not exercisable after the expiration of five years from the date it is granted. (d) Except as provided in Section 5.5 of this Plan, no Incentive Stock Option granted under this Plan may be exercised unless at the time of such exercise the Optionee is employed by the Company or any subsidiary of the Company and the Optionee has been so employed continuously since the date such option was granted. (e) Subject to Sections 5.1(c) and 5.1(d) of this Plan, Incentive Stock Options granted under this Plan shall continue in effect for the period fixed by the Plan Administrator, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted. (f) The exercise price shall not be less than 100% of the fair market value of the shares of Common Stock covered by the Incentive Stock Option at the date the option is granted. The fair market value of shares shall be the closing price per share of the Common Stock on the date of grant as reported on a securities quotation system or stock exchange. If such shares are not so reported or listed, the Plan Administrator shall determine the fair market value of the shares of Common Stock in its discretion. (g) The provisions of clauses (b) and (c) of this Section shall not apply if either the applicable sections of the Code or the regulations thereunder are amended so as to change or eliminate such limitations or to permit appropriate modifications of those requirements by the Plan Administrator. 5.2 NON-QUALIFIED STOCK OPTIONS. Non-Qualified Stock Options shall be subject to the following terms and conditions: (a) The exercise price may be more or less than or equal to the fair market value of the shares of Common Stock covered by the Non-Qualified Stock Option on the date the option is granted, and the exercise price may fluctuate based on criteria determined by the Plan Administrator. The fair market value of shares of Common Stock covered by a Non-Qualified Stock Option shall be determined by the Plan Administrator, as described in Section 5.1(f). (b) Unless otherwise established by the Plan Administrator, any Non-Qualified Stock Option shall terminate 10 years after the date it is granted. 5.3 VESTING. To ensure that the Company will achieve the purposes of and receive the benefits contemplated in this Plan, any option granted to any Optionee hereunder shall be exercisable according to the following vesting schedule, except that the Plan Administrator may waive this vesting schedule, establish a different vesting schedule or provide for no vesting schedule for such options as it determines:
Period From the Date Portion of Total the Option is Granted Which is Exercisable ------------------------------------------------------------------ Less than 12 months None 12th month 25% 13th month through 48th month Monthly vesting of remaining 75% in 36 equal increments
5.4 NONTRANSFERABILITY. Each option granted under this Plan and the rights and privileges conferred hereby may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution, shall not be subject to execution, attachment or similar process and shall be exercisable during the Optionee's lifetime only by the Optionee. Any purported transfer or assignment in violation of this provision shall be void. 5.5 TERMINATION OF OPTIONS. 5.5.1 GENERALLY. Unless otherwise determined by the Plan Administrator or specified in the Optionee's Option Agreement, if the Optionee's employment or service with the Company terminates for any reason other than for cause, resignation, retirement, disability or death, and unless by its terms the option sooner terminates or expires, then the Optionee may exercise, for a three-month period, that portion of the Optionee's option which was exercisable at the time of such termination of employment or service (provided the conditions of Section 5.6.4 and any other conditions specified in the Option Agreement shall have been met by the date of exercise of such option). 5.5.2 FOR CAUSE; RESIGNATION. (a) If an Optionee is terminated for cause or resigns in lieu of dismissal, any option granted hereunder shall be deemed to have terminated as of the time of the first act which led or would have led to the termination for cause or resignation in lieu of dismissal, and such Optionee shall thereupon have no right to purchase any shares of Common Stock pursuant to the exercise of such option, and any such exercise shall be null and void. Termination for "cause" shall include (i) the violation by the Optionee of any reasonable rule or policy of the Board of Directors or the Optionee's superiors or the chief executive officer or the President of the Company that results in damage to the Company or which, after notice to do so, the Optionee fails to correct within a reasonable time; (ii) any willful misconduct or gross negligence by the Optionee in the responsibilities assigned to him or her; (iii) any willful failure to perform his or her job as required to meet the objectives of the Company; (iv) any wrongful conduct of an Optionee which has an adverse impact on the Company or which constitutes a misappropriation of the assets of the Company; (v) unauthorized disclosure of confidential information; or (vi) the Optionee's performing services for any other company or person which competes with the Company while he or she is employed by or provides services to the Company, without the prior written approval of the chief executive officer of the Company. "Resignation in lieu of dismissal" shall mean a resignation by an Optionee of employment with or service to the Company if (i) the Company has given prior notice to such Optionee of its intent to dismiss the Optionee for circumstances that constitute cause, or (ii) within two months of the Optionee's resignation, the chief operating officer or the chief executive officer of the Company or the Board of Directors determines, which determination shall be final and binding, that such resignation was related to an act which would have led to a termination for cause. (b) If an Optionee resigns from the Company, the right of the Optionee to exercise his or her option shall be suspended for a period of two months from the date of resignation, unless the President or chief executive officer of the Company or the Board of Directors determines otherwise in writing. Thereafter, unless there is a determination that the Optionee resigned in lieu of dismissal, the option may be exercised at any time prior to the earlier of (i) the expiration date of the option (which shall have been similarly suspended) or (ii) the expiration of three months after the date of resignation, for that portion of the Optionee's option which was exercisable at the time of such resignation (provided the conditions of Section 5.6.4 and any other conditions specified in the Option Agreement shall have been met at the date of exercise of such option). 5.5.3 RETIREMENT. Unless otherwise determined by the Plan Administrator, if an Optionee's employment or service with the Company is terminated with the Company's approval for reasons of age, the Option may be exercised at any time prior to the earlier of (a) the expiration date of the option or (b) the expiration of three months after the date of such termination of employment or service, for that portion of the Optionee's option which was exercisable at the time of such termination of employment or service (provided the conditions of Section 5.6.4 and any other conditions specified in the Option Agreement shall have been met at the date of exercise of such option). 5.5.4 DISABILITY. Unless otherwise determined by the Plan Administrator, if an Optionee's employment or relationship with the Company terminates because of a permanent and total disability (as defined in Section 22(e)(3) of the Code), the option may be exercised at any time prior to the earlier of (a) expiration date of the option or (b) the expiration of 12 months after the date of such termination, for up to the full number of shares of Common Stock covered thereby, including any portion not yet vested (provided the conditions of Section 5.6.4 and any other conditions specified in the Option Agreement shall have been met by the date of exercise of such option). 5.5.5 DEATH. Unless otherwise determined by the Plan Administrator, in the event of the death of an Optionee while employed by or providing service to the Company, the option may be exercised at any time prior to the earlier of (a) the expiration date of the option or (b) the expiration of 12 months after the date of death by the person or persons to whom such Optionee's rights under the option shall pass by the Optionee's will or by the applicable laws of descent and distribution, for up to the full number of shares of Common Stock covered thereby, including any portion not yet vested (provided the conditions of Section 5.6.4. and any other conditions specified in the Option Agreement shall have been met by the date of exercise of such option). 5.5.6 EXTENSION OF EXERCISE PERIOD APPLICABLE TO TERMINATION. The Plan Administrator, at the time of grant or at any time thereafter, may extend the three-month and 12-month exercise periods to any length of time not longer than the original expiration date of the option, and may increase the portion of an option that is exercisable, subject to such terms and conditions as the Plan Administrator may determine; provided, that any extension of the exercise period or other modification of an Incentive Stock Option shall be subject to the written agreement and acknowledgement by the Optionee that the extension or modification disqualifies the option as an Incentive Stock Option. 5.5.7 FAILURE TO EXERCISE OPTION. To the extent that the option of any deceased Optionee or of any Optionee whose employment or service terminates is not exercised within the applicable period, all rights to purchase shares of Common Stock pursuant to such options shall cease and terminate. 5.5.8 LEAVES. For purposes of this Section 5.5, with respect to Incentive Stock Options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Plan Administrator) in accordance with the policies of the Company. 5.6 EXERCISE. 5.6.1 PROCEDURE. Subject to the provisions of Section 5.3 above, each option may be exercised in whole or in part; provided, however, that no fewer than 100 shares (or the remaining shares then purchasable under the option, if less than 100 shares) may be purchased upon any exercise of any option granted hereunder and that only whole shares will be issued pursuant to the exercise of any option (the number of 100 shares shall not be changed by any transaction or action described in Section 6 unless the Plan Administrator determines that such a change is appropriate). Options shall be exercised by delivery to the Secretary of the Company or his or her designated agent of notice of the number of shares with respect to which the option is exercised, together with payment in full of the exercise price. 5.6.2 PAYMENT. Payment of the option exercise price shall be made in full at the time the notice of exercise of the option is delivered to the Secretary of the Company or his or her designated agent and shall be in cash or bank certified or cashier's check for the shares of Common Stock being purchased. The Plan Administrator may determine at the time the option is granted for Incentive Stock Options, or at any time before exercise for Non-Qualified Stock Options, that additional forms of payment will be permitted, including without limitation payment through irrevocable instructions to a stock broker to deliver the amount of sales proceeds necessary to pay the appropriate exercise price and withholding tax obligations, all in accordance with applicable governmental regulations. 5.6.3 WITHHOLDING. Prior to the issuance of shares of Common Stock upon the exercise of an option, the Optionee shall pay to the Company the amount of any applicable federal, state or local tax withholding obligations. The Company may withhold any distribution in whole or in part until the Company is so paid. The Company shall have the right to withhold such amount from any other amounts due or to become due from the Company, as the case may be, to the Optionee, including salary (subject to applicable law) or to retain and withhold a number of shares having a market value not less than the amount of such taxes required to be withheld by the Company to reimburse it for any such taxes and cancel (in whole or in part) any such shares so withheld. 5.6.4 CONDITIONS PRECEDENT TO EXERCISE. The Plan Administrator may establish conditions precedent to the exercise of any option, which shall be described in the relevant Option Agreement. 5.7 FOREIGN QUALIFIED GRANTS. Options under this Plan may be granted to officers and employees of the Company and other persons described in Section 4 who reside in foreign jurisdictions as the Plan Administrator may determine from time to time. The Board of Directors may adopt such supplements to the Plan as are necessary to comply with the applicable laws of such foreign jurisdictions and to afford Optionees favorable treatment under such laws; provided, however, that no award shall be granted under any such supplement on terms which are more beneficial to such Optionees than the terms permitted by this Plan. 5.8 CORPORATE MERGERS, ACQUISITIONS, ETC. The Plan Administrator may also grant options under this Plan having terms, conditions and provisions that vary from those specified in this Plan provided that such options are granted in substitution for, or in connection with the assumption of, existing options granted, awarded or issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, reorganization or liquidation to which the Company is a party. 5.9 HOLDING PERIOD. Unless otherwise determined by the Plan Administrator, if a person subject to Section 16 of the Exchange Act exercises an option within six months of the date of grant of the option, the shares of Common Stock acquired upon exercise of the option may not be sold until six months after the date of grant of the option. 5.10 OPTION AGREEMENTS. Options granted under this Plan shall be evidenced by written stock option agreements (the "Option Agreements") which shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and which are consistent with this Plan. All Option Agreements shall include or incorporate by reference the applicable terms and conditions contained in this Plan. 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. 6.1 STOCK SPLITS, CAPITAL STOCK ADJUSTMENTS. The aggregate number and class of shares for which options may be granted under this Plan, the number and class of shares covered by each outstanding option and the exercise price per share thereof (but not the total price), and each such option, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a stock split, stock dividend or consolidation of shares or any like capital stock adjustment. 6.2 EFFECT OF MERGER, SALE OF ASSETS, LIQUIDATION OR DISSOLUTION. 6.2.1 MERGERS, SALE OF ASSETS, OTHER TRANSACTIONS. In the event of a merger, consolidation or plan of exchange to which the Company is a party or a sale of all or substantially all of the Company's assets (each, a "Transaction"), the Board of Directors, in its sole discretion and to the extent possible under the structure of the Transaction, shall select one of the following alternatives for treating outstanding options under this Plan: (a) Outstanding options shall remain in effect in accordance with their terms; (b) Outstanding options shall be converted into options to purchase stock in the corporation that is the surviving or acquiring corporation in the Transaction. The amount, type of securities subject thereto and exercise price of the converted options shall be determined by the Board of Directors of the Company, taking into account the relative values of the companies involved in the Transaction and the exchange rate, if any, used in determining shares of the surviving corporation to be issued to holders of shares of the Company. Unless otherwise determined by the Board of Directors, the converted options shall be vested only to the extent that the vesting requirements relating to options granted hereunder have been satisfied; or (c) The Board of Directors provides a 30-day period prior to the consummation of the Transaction during which outstanding options shall be exercisable to the extent vested and, upon the expiration of such 30-day period, all unexercised options shall immediately terminate. The Board of Directors, in its sole discretion, may accelerate the exercisability of options so that they are exercisable in full during such 30-day period. 6.2.2 LIQUIDATION; DISSOLUTION. In the event of the liquidation or dissolution of the Company, options shall be treated in accordance with Section 6.2.1(c). 6.3 FRACTIONAL SHARES. In the event of any adjustment in the number of shares covered by any option, any fractional shares resulting from such adjustment shall be disregarded and each such option shall cover only the number of full shares resulting from such adjustment. 6.4 DETERMINATION OF BOARD TO BE FINAL. All adjustments under this Section 6 shall be made by the Board of Directors, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. Unless an Optionee agrees otherwise, any change or adjustment to an Incentive Stock Option shall be made, if possible, in such a manner so as not to constitute a "modification," as defined in Section 424(h) of the Code, and so as not to cause the Optionee's Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. 7. SECURITIES REGULATIONS. Shares of Common Stock shall not be issued with respect to an option granted under this Plan unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable laws of foreign countries and other jurisdictions and the requirements of any quotation service or stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of any shares hereunder. The inability of the Company to obtain, from any regulatory body having jurisdiction, the authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from registration for the issuance and sale of any shares hereunder shall relieve the Company of any liability with respect of the nonissuance or sale of such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an option, the Company may require the Optionee to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any relevant provision of the aforementioned laws. The Company may place a stop-transfer order against any shares of Common Stock on the official stock books and records of the Company, and a legend may be stamped on stock certificates to the effect that the shares of Common Stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation. The Plan Administrator may also require such other action or agreement by the Optionees as may from time to time be necessary to comply with the federal and state securities laws. THIS PROVISION SHALL NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK THEREUNDER. Should any of the Company's capital stock of the same class as the Common Stock subject to options granted hereunder be listed on a national securities exchange, all shares of Common Stock issued hereunder if not previously listed on such exchange shall be authorized by that exchange for listing thereon prior to the issuance thereof. 8. AMENDMENT AND TERMINATION. 8.1 PLAN. The Board of Directors may at any time suspend, amend or terminate this Plan, provided that, except as set forth in Section 6, the approval of the Company's shareholders is necessary within 12 months before or after the adoption by the Board of Directors of any amendment which will: (a) increase the number of shares of Common Stock which are to be reserved for the issuance of options under this Plan; (b) permit the granting of stock options to a class of persons other than those presently permitted to receive stock options under this Plan; or (c) require shareholder approval under applicable law, including Section 16(b) of the Exchange Act. 8.2 OPTIONS. Subject to the requirements of Section 422 of the Code with respect to Incentive Stock Options and to the terms and conditions and within the limitations of this Plan, the Plan Administrator may modify or amend outstanding options granted under this Plan. The modification or amendment of an outstanding option shall not, without the consent of the Optionee, impair or diminish any of his or her rights or any of the obligations of the Company under such option. Except as otherwise provided in this Plan, no outstanding option shall be terminated without the consent of the Optionee. Unless the Optionee agrees otherwise, any changes or adjustments made to outstanding Incentive Stock Options granted under this Plan shall be made in such a manner so as not to constitute a "modification," as defined in Section 425(h) of the Code, and so as not to cause any Incentive Stock Option issued hereunder to fail to continue to qualify as an Incentive Stock Option as defined in Section 422(b) of the Code. 8.3 AUTOMATIC TERMINATION. Unless sooner terminated by the Board of Directors, this Plan shall terminate ten years from the date on which this Plan is adopted by the Board. No option may be granted after such termination or during any suspension of this Plan. The amendment or termination of this Plan shall not, without the consent of the Optionee, alter or impair any rights or obligations under any option theretofore granted under this Plan. 9. MISCELLANEOUS. 9.1 TIME OF GRANTING OPTIONS. The date of grant of an option shall, for all purposes, be the date on which the Company completes the required corporate action relating to the grant of an option; the execution of an Option Agreement and the conditions to the exercise of an option shall not defer the date of grant. 9.2 NO STATUS AS SHAREHOLDER. Neither the Optionee nor any party to which the Optionee's rights and privileges under the option may pass shall be, or have any of the rights or privileges of, a shareholder of the Company with respect to any of the shares of Common Stock issuable upon the exercise of any option granted under this Plan unless and until such option has been exercised and the issuance (as evidenced by the appropriate entry on the books of the Company or duly authorized transfer agent of the Company) of the stock certificate evidencing such shares. 9.3 STATUS AS AN EMPLOYEE. Nothing in this Plan or in any option granted pursuant to this Plan shall confer upon any Optionee any right to continue in the employ of the Company, or to interfere in any way with the right of the Company to terminate his or her employment or other relationship with the Company at any time. 9.4 RESERVATION OF SHARES. The Company, during the term of this Plan, at all times will reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of this Plan. 10. EFFECTIVENESS OF THIS PLAN. This Plan shall become effective upon adoption by the Board so long as it is approved by the Company's shareholders any time within 12 months after the adoption of this Plan. No option granted under this Plan to any officer or director of the Company shall become exercisable, however, until the Plan is approved by the shareholders, and any options granted prior to such approval shall be conditioned upon and are subject to such approval. Adopted by the Board of Directors on May 18, 1995 and approved by the Shareholders on May 18, 1995. Amended by the Board of Directors and approved by the Shareholders in March 1997, September 1998 and April 1999. EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 PROMISSORY NOTE $72,000.00 August 20, 1996 For value received, John W.P. Holt (hereinafter referred to as "DEBTOR"), promises to pay to The Cobalt Group, Inc., a Washington Corporation ("COBALT"), the sum of SEVENTY-TWO THOUSAND AND NO/100 U.S. DOLLARS ($72,000), together with interest at the rate of eight percent (8%) per annum compounded annually on the outstanding principal balance from the date hereof, until this note is fully paid as follows: All accrued but unpaid interest, the outstanding principal balance and all other sums payable hereunder shall be immediately due and payable on August 20, 2006. All payments shall be made in lawful money of the United States of America and shall be made at such place as Cobalt may designate in writing from time to time. Payments shall be applied first to accrued but unpaid interest, then to reduction of the outstanding principal balance. This note may be prepaid in whole or in part at any time or times without penalty and without prior notice. This note shall be in default if the payment required hereunder is not paid when due and within 10 days after written notice of such default is given by Cobalt. Upon or at any time after a default in this note or after a default in compliance with any term, covenant or condition of the Stock Pledge Agreement securing payment of this note, at the option of Cobalt, without further notice, the entire debt evidenced hereby shall become due and payable and shall thereafter bear interest at twelve percent (12%) per annum until paid. Cobalt's failure to exercise this option in the event of a default shall not constitute a waiver of Cobalt's right to exercise this option as the result of any other default or of any subsequent default of the same or similar kind. NOTHING HEREIN CONTAINED SHALL BE DEEMED TO CAUSE DEBTOR TO BE PERSONALLY LIABLE TO PAY THIS NOTE OR ANY OBLIGATION EVIDENCED HEREBY AND COBALT SHALL NOT SEEK ANY PERSONAL OR DEFICIENCY JUDGMENT ON THIS NOTE OR ANY OBLIGATION EVIDENCED HEREBY AND THE SOLE REMEDY OF COBALT SHALL BE AGAINST THE PROPERTY SECURING THIS NOTE AND THE INCOME FROM SUCH PROPERTY GIVEN IN CONNECTION WITH THIS NOTE. This note may not be assigned by Cobalt. Debtor and any assignees thereof who are at any time liable for payment of this note or other sum required hereby waive presentment for payment, notice of dishonor and protest and consent that the terms of payment of any part or the whole of the debt evidenced by this note may be modified or extended at any time by agreement between Cobalt and Debtors and any assignees thereof now or hereafter liable on this note and that any security now or hereafter given to secure payment of this note may be released or modified in whole or in part by agreement between Cobalt and the owner of any such security. Debtor and any assignees thereof who are at any time liable for payment of this note or any installment or other sum required hereby waive all defenses which might otherwise be asserted (a) that security is adequate or that resort must first be had against any other person or against any security now or hereafter given to secure payment of this note and (b) because any of the following may occur in the future: delay in the enforcement of payment of this note; and delay or omission in exercising any right or power granted to Cobalt by the note. Any notice or demand by Cobalt shall be sufficient if in writing and delivered or mailed, certified or registered United States mail, postage prepaid, to the address stated below for notice purposes or to such other address as shall be designated in writing from time to time by the persons who are then liable upon this note and received by Cobalt. Notice given and received in complete and legible form by electronic facsimile devices and delivery by courier or messenger service shall be deemed to have been personally delivered. This note is made with reference to and shall be construed and enforced in accordance with the laws of the State of Washington without regard to its choice of law provisions. This note is secured by a Stock Pledge Agreement affecting the ownership interests of Debtor in Cobalt. Debtor agrees that the venue of any action on this note may be laid in King County, Washington. UNDER WASHINGTON LAW, ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE. DEBTOR: Address for Notice: John W.P. Holt 3001 10th Ave. West _____________________________ Seattle, WA 98119 Schedule to Exhibit 10.2 Other similar Note of the Company dated August 20, 1996.
Holder Principal Amount Geoffrey Barker $72,000
EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 LEASE THIS LEASE (this "Lease") is entered into as of this 14th day of September, 1996 between DAVID A. EDELSTEIN and NANCY JO EDELSTEIN, husband and wife ("Landlord") and The Cobalt Group, Inc. ("Tenant") (collectively, the "Parties"). AGREEMENT 1. EXHIBITS AND DEFINITIONS 1.1 DEFINITIONS. The following terms used in this Lease shall have the definitions as set forth below; other terms are defined throughout the Lease. "BUILDING": The building and all other improvements located on the Property, as they currently exist or as they may be renovated by Tenant pursuant to this Lease. "COMMENCEMENT DATE": The Commencement Date shall be November 1, 1996, however, Tenant may occupy the Premises as of September 15, 1996. "COMMON AREAS": Landlord shall make available (or cause to be made available) throughout the Lease Term such common areas (including, but not limited to, parking areas, exits, entrances, driveways, truckways, delivery passages, truck-loading areas, access and egress roads, parcel pickup stations, retaining walls, sidewalks, walkways, footbridges, landscaped and planted areas and public restrooms) for the common use and benefit of the tenants of the Property, their employees, agents, customers and other invitees. Landlord shall (or shall cause the same to be done) operate, manage, equip, light, repair, replace and maintain the common areas for their intended purposes in such manner as is consistent with the operation and maintenance of a first-class or well maintained office building similar in nature to and within the same metropolitan area as the Property. [Insert 6.1.1.] "HAZARDOUS SUBSTANCES": Any hazardous, toxic, or dangerous substance, waste, or other product, substance, or material that is now or hereafter considered to be potentially injurious to the public health, or to the -1- environment or which is or becomes regulated under any federal, state, or local statute, rule, regulation or ordinance now or hereafter in effect pertaining to environmental protection, environmental contamination or cleanup, or to the protection of human or animal health or safety. "INTEREST": Interest means interest at the rate equal to twelve percent (12%) per annum. "LEASE YEAR": The first Lease Year means the period beginning on the Commencement Date and terminated on the last day of the twelfth (12th) full calendar month after the Commencement Date. Each subsequent Lease Year means each (12) month period during the Term following the first Lease Year. If the first Lease Year has more than 365 days as a result of the application of this Section, any prorations for the first Lease Year shall be based on the actual number of days in that first Lease Year. "PREMISES": Shall mean the space commonly known as 11,536 rentable square feet on the third floor of the building as indicated by Exhibit B attachment, for the sole purpose of identification, together with all appurtenant rights and easements, and the non-exclusive right and easement to use all the Common Areas of the Property for their intended purposes including, without limitation, access, ingress, and egress. "PROPERTY": The real property commonly known as 2030 First Avenue, Seattle, Washington, and legally described on Exhibit A hereto, together with all easements, licenses, and other rights appurtenant thereto. Unless otherwise specifically stated, all references to the Property shall include the Premises and the building. "TAXES": All taxes or impositions of any kind levied with respect to the Property or the use and occupation thereof, including without limitation: service payments levied or assessed wholly or partly in lieu of taxes; annual or periodic license, permit, inspection, or use fees; excises, transit charges, housing fund assessments, assessments, levies, fees, or charges; and all extraordinary, unforeseen as well as foreseen, of any kind, that are levied, assessed, charges, confirmed, or imposed by any public, quasi-public, or private authority upon the property, its operation, the rent payable under this Lease, the land upon which the property is situated, or the personal property contained thereupon (but excluding state and federal, personal or corporate income taxes measured by the net income of Landlord from all sources, and franchise, inheritance, and estate taxes of Landlord). -2- "TERMINATION DATE": The Termination Date of the initial Lease Term means October 31, 2000. "UTILITIES": Water, sewer, garbage, heat, air conditioning, and electricity furnished to Tenant and/or other occupants of the Building, in the manner and subject to the qualifications set forth in Section 12. "UTILITIES EXPENSES": All expenses related to the provision of Utilities to the various occupants of the Building. 1.2. EXHIBITS. The following exhibits are attached hereto and are made a part of this Lease. Exhibit A - Legal Description of Property Exhibit B - Site Plan of the Premises Exhibit C - Amendment to Lease Exhibit D - Second Floor Site Plan 2. DEMISE AND TERM 2.1. PREMISES AND DEMISE. Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord, subject to the terms and conditions of this Lease. 2.2. TERM. This Lease shall be for four (4) years commencing on the Commencement Date and terminating at 11:59 p.m. on the Termination Date (the "Term"). If Tenant shall hold over with Landlord's written consent following the expiration of the term, such holding over shall be on a month-to-month tenancy under the terms of this Lease, terminable by either party upon thirty (30) days written notice to the other. 2.3. SURRENDER OF PREMISES Upon termination of this Lease, Tenant shall surrender possession of the Premises to Landlord free of debris, broom clean, and in good condition, as modified by any repairs, alterations or improvements (excluding trade fixtures) made by Tenant in accordance with this Lease, and subject to gradual and ordinary wear and tear. Ordinary wear and tear shall not include any damage or deterioration caused by Tenant's failure to perform or observe any covenant or other provision of this Lease. 2.4. SURRENDER OF LEASE. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the -3- option of Landlord, terminate all or any existing subleases or subtenancies, or may at the option of Landlord, operate as an assignment to it of any such subtenancies. 2.5 OPTION TO RENEW. Providing Tenant has not materially defaulted on this Lease during the initial four (4) year Lease Term, Tenant shall have one (1) five (5) year option(s) to renew the Lease at the then existing fair market rents. The option shall be exercised by Tenant, if at all, in writing at least two hundred forty (240) days prior to the end of the initial Lease Term. [Insert 2.6, 2.7, 2.8] 3. RENT 3.1. MINIMUM RENT. Tenant agrees to pay Landlord Minimum Rent in the amounts set out in the schedule below. No deduction or offset of any kind is allowed except for prepaid rent as set out in the schedule below. Landlord acknowledges receipt of $7,000.00 in prepaid rent from Tenant, to be applied to the first month of the Lease Term. BASE RENT DUE PER RENTABLE SQUARE FOOT PER YEAR Years 1 - 4 $14.00 3.2. PAYMENT. All rent due under this Lease shall be payable in advance at the Landlord's address for notice purposes set forth below, on the first business day of each month throughout the Term of this Lease. Tenant shall pay the first installment of Minimum Rent and last month's rent upon signing of the Lease. If any monthly installment of Minimum Rent is not received on or before the tenth (10th) day of the month for which such payment is due, Tenant agrees to pay Landlord a late charge in the sum of two percent (2%) of the amount of such installment. In addition, all sums past due from Tenant shall bear interest at one (1%) per month or any fraction thereof. If any check given to Landlord by Tenant shall be dishonored by the bank upon which it is drawn, Landlord, at its option, may require all future payments of Rent to be made only by cashier's check. 3.3. PRORATION. All Minimum Rent and Additional Rent shall be prorated for any partial calendar month at the beginning or end of the Term. 4. UTILITIES, TAXES, AND INSURANCE -4- Landlord shall pay before delinquent all Utilities Expenses, Taxes, and the cost of any insurance to be carried hereunder and which are Landlord's responsibility per paragraph 12. 5. TITLE, AUTHORITY, AND QUIET ENJOYMENT 5.1. TITLE AND AUTHORITY. Landlord warrants to Tenant that Landlord has the right to lease the Premises to Tenant. Tenant warrants to Landlord that Tenant has all requisite right, power, and authority to enter into this Lease and to perform its obligations hereunder. Each party shall provide the other party with reasonably satisfactory evidence of its authority to enter into this Lease upon request. 5.2. QUIET ENJOYMENT. Landlord covenants to Tenant that, so long as Tenant is not in default under this Lease beyond any applicable cure period, Tenant shall have quiet enjoyment of the Premises and all of the rights granted hereunder without interference by Landlord, anyone acting by, through or under Landlord, or anyone having title or any lien or interest paramount to Landlord. Landlord may enter the Premises or the Building, and the same shall not be a breach of this covenant of quiet enjoyment if done upon forty-eight (48) hours prior written notice to Tenant (except in the event of emergency, in which case no notice is required) for the purpose of: 5.2.1. curing a default by Tenant; or 5.2.2. showing the Premises to any prospective purchaser, lessee, or mortgagee; or 5.2.3. posting reasonable signs indicating the Landlord is not responsible for the cost of work done thereupon, or that the Premises is for sale or lease; or 5.2.4. to inspect the Premises; or 5.2.5 in the event of an emergency, to enter the Premises without notice to perform any duty of Tenant, whether or not Tenant's failure to have performed by the time of Landlord's entry then constitutes a default, if done to prevent injury to persons or loss of property or life; or 5.2.6. to perform any act necessary to remediate any contamination of the Property by Hazardous Substances; or -5- 5.2.7. to exercise any other right of Landlord under this Lease. 5.3. RIGHTS IN OTHERS. Landlord reserves the right to grant public utility easements and other rights on, over, and under the Property without any abatement in rent, provided that such rights do not materially interfere with Tenant's business on the Premises. Tenant agrees to sign any documents reasonably requested by Landlord in regard to the grant of any such easement rights, dedication, map, or restrictions. No grant of any such interest shall be a violation of Landlord's covenant of quiet enjoyments. [Insert 5.4] 6. ACCEPTANCE OF PREMISES 6.1. PHYSICAL DEFECTS; USE RESTRICTIONS. Tenant warrants that it has fully investigated the physical characteristics of the Premises and any legal, physical, or other limitations relating to the Premises, and except as noted in Section 8, is fully satisfied that there are no physical defects in the Premises, and that there are no restrictions (including, without limitation, zoning, building, fire, or health code regulations) that could unfavorably limit Tenant's use of the Premises. Tenant waives any right to terminate this Lease or to enforce nay other remedy against Landlord with respect to use the Premises for any given purpose, whether due to current or future legal restrictions on the use of the premises, or any other reason whatsoever, whether known or unknown, and whether existing now or in the future. [Insert 6.2] 7. HAZARDOUS SUBSTANCES 7.1. LANDLORD'S ACCESS. At its option, Landlord shall have access to the Premises as set forth in Section 5.2.6., as may be required to carry out any remediation, testing, or inspection of the Premises in any way connected with or required with respect to the detection, analysis, remediation, or other activity related to the presence or possible presence of Hazardous Substances on the Premises or the Property. Landlord shall use all reasonable measures to minimize the disturbance to Tenant in connection with such entry. If any of the foregoing actions is required because of a default of Tenant with respect to any of its obligations set forth in this Lease, whether actual, threatened, or imminent, Tenant shall pay Landlord's actual reasonable expenses required to plan, supervise, and carry out any required cure or remedy of such contamination, including reasonable attorney fees. -6- 7.2. INDEMNIFICATION OF TENANT. Landlord shall protect, indemnify, defend, and hold Tenant harmless from and against any claims, demands, penalties, fees, liens, damages, losses, expenses or liabilities (including the costs of clean-up and reasonable professional fees, including fees of Tenant's counsel), incurred by Tenant as a result of any contamination of the Premises by Hazardous Substances to the extent caused by Landlord, its agents, employees or contractors, whether negligent or otherwise and whether occurring before or after the Commencement Date. Except as provided in the preceding sentence, Landlord shall not be responsible for any cost or expense of Tenant arising from any contamination of the Premises by Hazardous Substances arising from or in any way connected to any act or omission of Tenant or any party other than Landlord, whether negligent or otherwise. The indemnity and other duties provided for in this Section shall survive the expiration or sooner termination of this Lease. 7.3. INDEMNIFICATION OF LANDLORD. Tenant will hold harmless, protect, indemnify and defend Landlord from and against any claims, demands, penalties, fees, liens, damages, losses, expenses or liabilities (including the costs of clean-up and reasonable professional fees, including fees of Landlord's counsel) incurred by Landlord as a result of the presence of any Hazardous Substance on the Property to the extent caused by Tenant, whether negligent or otherwise, and whether occurring before or after the Commencement Date. Except as provided in the preceding sentence, Tenant shall not be responsible for any cost or expense of Landlord arising from any contamination of the Premises by Hazardous Substances arising from or in any way connect to any act or omission of Landlord or any party other than Tenant, whether negligent or otherwise. The indemnity and other duties provided for in this Section shall survive the expiration or sooner termination of this Lease, and shall apply notwithstanding any approval, knowledge, acquiescence, or notice of Landlord of any activity of the Tenant on the Property. 7.4. TENANT'S RESPONSIBILITIES. 7.4.1. CONFORM WITH LAWS. Tenant shall not create, use or keep in, on or around the Property any Hazardous Substance except such as is used or sold by Tenant in the ordinary course of its business and then only in accordance with all applicable laws, rules, regulations and ordinances covering the transportation, storage, sale, use and disposal of any such products. Without limiting the generality of the foregoing, Tenant shall use and keep all solvents, petroleum, and petroleum-based products used by it on the Property in conformity with all applicable laws, rules, regulations and ordinances relating to -7- the transportation, storage, sale, use and disposal of any such products, and in conformity with any Hazardous Substance management program and/or then-current industry practices related thereto. 7.4.2. DUTY TO INFORM LANDLORD. If Tenant knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from the same, has come to be located in, on, under, or about the Premises other than as previously consented to by Landlord, Tenant shall immediately give written notice of such fact to Landlord. Tenant shall also immediately give Landlord a copy of any statement, report, notice, registration application, permit, business plan, license, claim action, or proceeding given to, or received from, any governmental authority or private part, or persons entering or occupying the Premises concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance, or contamination in, or on, or about the Property. 7.5. SURRENDER PROPERTY FREE OF CONTAMINATION. Tenant shall, at its sole cost, cause any Hazardous Waste contamination of the Premises to the extent caused solely by any act or omission of Tenant to be fully remedied to the satisfaction of all governmental entities having jurisdiction over the Property by the Termination Date. 8. TENANT IMPROVEMENTS Landlord shall have no duty to make any improvements to the Premises the exception being the following: 1.) Landlord shall pressure wash the exterior of the Building. 2.) Landlord shall repair all exterior window and roof water leaks and any damage as a result of. All improvements shall be completed by Landlord prior to the Commencement Date of the Lease. 9. TRADE FIXTURES AND PERSONAL PROPERTY Any trade fixtures, equipment and other personal property installed in or attached to the Premises by and at the expense of Tenant shall remain the property of Tenant, except in any case where Tenant is the lessee of any trade fixtures, equipment or other property, in which case the lessor of such property shall retain title. Landlord agrees that Tenant shall have the right to remove any -8- and all of its trade fixtures, equipment and other personal property which it may have stored, attached to, or installed in the Premises; provided, however, that Tenant will repair all damage to the Premises occasioned by such removal to Landlord's reasonable satisfaction prior to the expiration or sooner termination of this Lease. 10. USE Tenant shall use the Premises only for administrative office purposes for Tenant's business, and for storage incidental thereto, and for no other purpose. Tenant shall not use the Premises in any way that constitutes a nuisance or violates any law, ordinance, or regulation of any governmental entity having jurisdiction over the property or causes any damage to any property. 11. PERSONAL PROPERTY TAXES; LICENSE FEES Tenant shall pay prior to delinquency all personal property taxes assessed during the term of this Lease upon Tenant's fixtures, furnishings, equipment and stock in trade or upon any other personal property of Tenant situated in or upon the Premises. Tenant shall also pay all fees or charges related to any permit, approval, or license required to operate Tenant's business upon the Premises. Tenant shall indemnify and hold Landlord harmless from any lien against Landlord's interest in the Property arising from such taxes and shall immediately cause the same to be satisfied and removed of record. 12. UTILITIES 12.1. SERVICES INCLUDED. Landlord shall furnish Tenant the following Utilities of the quality and quantity customarily supplied in similar office buildings and retail locations located in Seattle, Washington, all at Landlord's expense. 12.1.1. Water for drinking and office cleaning purposes. 12.1.2. Garbage collection and sewer services for ordinary office and retail waste. 12.1.3. HVAC services. 12.1.4. Janitorial services -9- 12.2. Landlord shall be obligated to provide the foregoing services only on normal business days, excluding Sundays and U.S. national holidays. 12.3. Landlord does not warrant that the Utilities will be free from interruption, but Landlord shall take all reasonable steps to restore any interrupted utilities and services. Interruption of utilities or services shall not be deemed an eviction or excuse performance of any of Tenant's obligations under this Lease or render Landlord liable for damages, unless caused by Landlord's active negligence or willful misconduct. [Insert 12.3.] 12.4. DEFINITIONS. In Addition to the Minimum Rent provided in Section 3.1 of this Lease, Tenant shall pay to Landlord Tenant's Pro Rata Share of increases in operating costs and taxes under this Section 12.4.1 as Additional Rent. The Tenant's Pro Rata Share shall be determined using a numerator equal to the rentable square footage then currently leased by Tenant and a denominator equal to the total rentable square footage for the Building, which is equal to 33,037 square feet. The following definitions shall apply to the calculation of Additional Rent. 12.4.1. "Operating Costs" shall mean: 12.4.1.1. All "Real Property Taxes" which shall mean that portion of all real and personal property taxes, assessments and charges levied upon or with respect to the Property. Real Property Taxes shall include, without limitation, taxes on Tenant improvements which are paid for by Landlord and not reimbursed by Tenants but not taxes on personal property of Tenants; all general real property taxes, charges, and general and special assessments, for transit, housing, police, fire and other governmental services or purported benefits to the Property, and service payments in lieu of taxes; and shall also include any other tax, fee or excise, however described, that may be levied or assessed as a substitute for, or as an addition to, in whole or in part, any other Real Property Taxes. Real Property Taxes shall not include local, state or federal income, franchise, or transfer taxes of Landlord unless, due to a change in the method of taxation, any such tax is levied or assessed against Landlord as a substitute for, in whole or part, any other tax that would otherwise constitute a Real Property Tax. Real Property Taxes shall not include interest or penalties assessed due to the late payment of taxes or assessments by Landlord. All assessments shall be paid in the maximum permissible number of installments. If at any time during the Lease Term, any governmental authority levies or assesses against Landlord any tax, fee or excise on (i) rents payable under any lease of space or accruing from the use of space in the Property, (ii) the -10- business of renting space in the Property, (iii) the act of entering into this Lease or any other lease of space in the Property, (iv) the use or occupancy by Tenants of any space in the Property, such tax, fee or excise shall constitute a Real Property Tax. Real Property Taxes shall also include reasonable legal fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Property Taxes. 12.4.1.2. All other expenses paid or incurred by Landlord for obtaining services and products for maintaining, operating and repairing the Property and the personal property used in conjunction therewith, including without limitation, the costs of refuse collection, water, sewer and other utilities services, electricity, gas and other similar energy sources, supplies, janitorial and cleaning services, window washing, landscape maintenance, services of independent contractors, compensation (including employment taxes and fringe benefits) off all persons who perform duties in connection with the operation, maintenance and repair of the Property, and its insurance premiums, licenses, permits, and inspection fees, market rate management fees, legal and accounting expenses and any other expenses or charges whether or not herein above described, which in accordance with generally accepted accounting and management practices would be considered an expense of maintaining, operating, or repairing the Property. For any costs applicable to properties other than the Property, only the portion allocable to the Property shall be an Operating Cost. The following shall not be considered Operating Costs: a. Costs incurred in connection with the initial construction or design of the Property or to repair, change, improve, replace or correct defects in the original construction or design of the Property, ordinary wear and tear excepted. b. Costs that are actually reimbursed to Landlord (other than through pro-rated absorption of such costs by substantially all of the Tenants in the Property), including reimbursements through insurance or warrants. c. Landlord's administrative and overhead expenses not incurred directly in maintaining the common areas of the Property. d. Costs incurred as a result of Landlord's negligence or breach of any legal obligation (including any obligation of Landlord under any lease of space in the Property). -11- e. Costs, including (without limitation) any professional fees, commissions, remodeling costs or court costs, incurred in connection with the enforcement of leases with other Tenants of the Property, or obtaining or retaining Tenants for the Property. f. Amounts paid to persons or entities related to Landlord in excess of the fair market value of services or materials provided in exchange therefor. g. Costs of achieving compliance with any environmental or other law or regulation applicable to the Property. h. Amounts payable under or in connection with Landlord's mortgage, deed of trust, ground lease or other financing or refinancing arrangements. i. Depreciation of or reserves for replacement of any of Landlord's assets. j. Costs incurred in advertising or promoting the Property for any purpose, including (without limitation) sale of the Property. k. Costs, fines or penalties incurred due to violation by Landlord of any applicable law. l. Wages, salaries or other compensation or costs incurred to (a) any executive employees or agents of Landlord for the purpose of managing Landlord's interest in the Property or (b) any persons employed in commercial concessions operated by Landlord. m. Costs of traveling to and attending any off-site management meetings of professional property management for promotional associations or groups. n. Capital costs, except for capital costs incurred for capital repairs and replacements in the Property amortized over their useful life. Capital costs incurred for renovation or expansion of the Property shall not be Operating Costs. 12.4.2 "Lease Year" shall mean the twelve-month period commencing January 1 and ending December 31. 12.4.3 "Actual Operating Costs" means the actual expenses paid or incurred by Landlord for Operating Costs for any Lease Year of the term hereof. -12- 12.4.4 "Actual Operating Costs Allocable to the Premises" means the Tenant's Pro Rata Share of the Actual Operating Costs determined by multiplying Tenant's Pro Rata Share by the Actual Operating Costs. 12.4.5 "Estimated Operating Costs Allocable to the Premises" means Landlord's estimate of Actual Operating Costs Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 12.5.1 below. 12.4.6 "Base Service Year" shall mean the calendar year 1997. 12.5 ADDITIONAL CHARGES FOR ESTIMATED INCREASES IN OPERATING COSTS. 12.5.1 At the beginning of each Lease Year after the Base Service Year, during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Operating Costs Allocable to the Premises for such Lease Year, and a calculation of the Additional Charges payable hereunder as follows: One-twelfth (1/12) of the amount, if any, by which such amount exceeds the Actual Operating Costs Allocable to the Premises for the Base Service Year shall be Additional Charges payable by Tenant for each month during such Lease Year. 12.5.2 Within ninety (90) days after the close of each Lease Year during the term hereof for which an estimated statement was delivered to Tenant pursuant to Section 12.5.1 above, or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth in reasonable detail the Actual Operating Costs for the preceding Lease Year or such prorated portion thereof if this Lease commences or terminates on a day other than the first or last day of a Lease Year (based on a 365-day Lease Year). If Tenant's Pro Rata Share of such costs for any Lease Year exceed Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to Section 12.5.1, Tenant shall pay the amount of such excess to Landlord as Additional Charges within thirty (30) days after receipt of such statement by Tenant. If such statement shows such costs to be less than the amount paid by Tenant to Landlord pursuant to Section 12.5.1, then the amount of such overpayment by Tenant shall be credited by Landlord to the next Minimum Rent payable by Tenant or, if the Lease has terminated, paid to Tenant within thirty (30) days after such termination. 12.5.3 RIGHT TO REVIEW BOOKS. Landlord or its agent shall keep records in reasonable detail, sufficient to conduct an audit, showing all expenditures made for the items enumerated above, which records shall be available for inspection by Tenant at any reasonable time upon twenty-four (24) hours prior notice for a period of up to six (6) months after expiration of the Lease Year remains. Tenant shall be entitled to -13- audit and copy these records within such six-month period in the office of Landlord. In the event that the audit discloses that Tenant has been overcharged for such expenses, Landlord shall immediately pay Tenant the amount of such overpayment. Similarly, Tenant shall immediately pay any underpayment to Landlord. If the overpayment of any such charge exceeds 3% of Tenant's Pro Rata Share of such charge for the subject fiscal or calendar year, Landlord shall be liable for the cost of such audit. 12.5.4 BASE RENT. Notwithstanding anything to the contrary in this Section 12.5.4, Additional Charges may decrease throughout the term of this Lease, but the Minimum Rent payable by Tenant shall in no event be less than the Minimum Rent specified in Section 3.1. of this Lease. 12.5.5 PERSONAL PROPERTY TAXES. Tenant shall pay, prior to delinquency, all Personal Property Taxes payable with respect to all personal property of Tenant located on the Premises or the Property and promptly, upon request of Landlord, shall provide written proof of such payment. 13. MAINTENANCE AND REPAIR 13.1. TENANT'S DUTIES. Tenant shall repair and maintain the Premises and any mechanical or electrical equipment located therein and solely or primarily serving the Premises in good condition and repair. Tenant shall also do anything required to put or maintain the Premises, and any mechanical or electrical equipment located thereon and solely or primarily serving the Premises, in compliance with any laws, ordinances, rules, directives, or requirements of any governmental entity having jurisdiction over the Property, whether existing now or in the future. 13.2. LANDLORD'S DUTIES. Landlord shall keep in good order, condition and repair the foundations, exterior walls (excluding the interior of all walls and any exterior or interior of any windows, doors, plate glass and display windows), and the Common Areas of the Premises and the Building, except for the following, for which Tenant shall bear the sole cost and responsibility for repairing (i) any damage to the foregoing caused by an act, negligence or omission of Tenant or Tenant's employees, agents, contractors or customers; and (ii) any structural or other alterations or improvements required by any governmental agency by reason of Tenant's use and occupancy of the Premises. 14. ALTERATIONS -14- 14.1. RIGHT TO MAKE APPROVED ALTERATIONS. Tenant, at its sole cost and expense, may make such repairs, alterations, improvements, constructions, fabrication, or installations to the interior of the Premises (the "Tenant Alterations") as Tenant deems desirable; provided, that if the costs of any Tenant Alterations made during the Term exceeds the cumulative total of Five Thousand Dollars ($5,000.00), Tenant must first provide Landlord with final plans and specifications for the Tenant Alterations, and must thereafter obtain Landlord's written approval of the Tenant Alterations prior to undertaking any demolition, construction, or other activity relating to the same, such consent not to be unreasonably withheld or delayed. Landlord may, in its sole discretion, withhold approval for any Tenant Alterations unless Tenant agrees to remove such Tenant Alterations at the expiration or sooner termination of the Lease, and to restore the Premises to a similar or better condition as of the date of approval for the proposed Tenant Alterations is requested. 14.2. COMPLIANCE WITH LAWS; WORKMANLIKE MANNER. Tenant shall comply with any applicable laws, ordinances, rules, or regulations of any governmental entity having jurisdiction over the Premises relating to the design and accomplishment of the Tenant Alterations. Tenant shall perform all Tenant Alterations in a good workmanlike manner. Tenant shall obtain all permits and approvals required for any aspect of any Tenant Alteration, and shall provide Landlord with copies of all such permits and approvals prior to commencing any activity on the Premises related to the Tenant Alterations. 14.3 LIENS. Tenant shall not permit any liens to be filed against the Property for materials delivered to the Premises or for labor or other services performed on or with respect to the Premises at the request of Tenant, or in any way arising from or related thereto. Even if not previously required, and without waiving any violation of this Section, Landlord may require that Tenant post a bond against any lien filed against the Property in favor of Landlord, the amount, form, and issuer of which shall be acceptable to Landlord in it reasonable, discretion exercised in good faith. 15. DISABILITY LAWS 15.1. ACCESSIBILITY LAW. "Accessibility Law" means any local, State, or federal law, regulation, ordinance, resolution, order, or directive relating to access, use, or enjoyment of the Premises by, or employment thereupon, handicapped persons, or to the removal of any tangible or intangible barrier or impediment to access, use, or enjoyment of the Premises by handicapped persons, including, but not limited to the Americans with Disabilities Act. -15- 15.2. NEGATIVE COVENANTS. Notwithstanding anything in this Lease to the contrary, Tenant shall make no Tenant Alteration that violates any provision of any Accessibility Law. Tenant shall not adopt or otherwise allow to exist any policy or practice related to its use or occupancy of the Premises or the conduct of its activities thereon that violates any Accessibility Law. 15.3. COLLATERAL CHANGES. Tenant shall reimburse Landlord upon demand for any cost or expense required to alter any portion of the Property to comply with any Disability law as a result of any Tenant Alteration. 15.4. LANDLORD'S APPROVAL OF TENANT ALTERATIONS. Notwithstanding any contrary provision of Section 14, Landlord shall have no obligation to approve any Tenant Alteration if Landlord, in its sole discretion exercised in good faith, determines that such Tenant Alteration would obligate Landlord to make alterations of or additions at its cost in the manner provided for other Tenant Alterations. 15.5. INDEMNITY. If any claim is asserted against Landlord under any Accessibility Law relating directly to any violation by Tenant of any of the provisions of this Section 15, Tenant shall defend, indemnify and hold Landlord harmless from and against any claims, charges, liabilities, obligations, penalties, damages, judgments, costs and expenses (including attorney's fees) arising directly from such violation. 15.6. NO COVENANTS, REPRESENTATIONS, OR WARRANTIES. Landlord has made no covenant, representation, or warranty regarding the compliance or extend of noncompliance of any portion of the Property with any Accessibility Law and hereby disclaims nay implied warranties with respect thereto, including any implied warranty of habitability or fitness for a particular purpose. No approval by Landlord of any plans or specifications for any Tenant Alterations, or failure to disapprove any such plans, specifications, or Tenant Alterations shall constitute a representation or warranty by Landlord, whether express or implied, that such plans will comply with any Accessibility Law. By initialing below, Tenant hereby agrees that the provisions of subsection 15.5. were explicitly negotiated. Tenant ______________________ 16. TENANT'S SIGNS -16- Tenant may, at its own expense, maintain a door plaque or other sign identifying the Premises; provided, that Tenant first obtains Landlord's approval of the design and proposed manner of installation thereof which approval shall not be unreasonably withheld or delayed. At the termination of this Lease, all signs, symbols and advertising matter attached to the Premises, whether the exterior or interior thereof, shall be removed by Tenant at its own expense, and any damage or injury to the Premises caused thereby shall be repaired by Tenant at its sole cost. Tenant shall maintain no other signs on the Premises in any manner that would be visible from outside the Premises unless it has the express written consent of Landlord. Tenant shall also have the right to signage on the Building's south wall, similar in size to the existing signage currently in place. The design of this sign must be approved by Landlord, which approval shall not be unreasonably withheld or delayed. At Tenant's option throughout the Term, Tenant shall have the right to place exterior signage on the south wall of the Building, comparable to what exists at the date of Lease execution. 17. HOLD HARMLESS; DEFENSE FROM CLAIMS Tenant agrees to hold harmless, protect, indemnify and defend Landlord from all demands, claims, causes of action or judgments, and all reasonable expenses incurred in investigating and defending the same (including reasonable attorneys' fees and costs) for injury to person or damage to property occurring on the Premises during the Term or arising out of Tenant's use of the Premises or the Property, except if caused by the gross negligence or willful misconduct of Landlord, in which case Landlord shall hold harmless, protect, indemnify and defend Tenant therefrom including reasonable attorney's fee and costs. Landlord need not have first paid any such claim in order to be so indemnified. Should Landlord, without fault on Landlord's part, be made a party to any litigation instituted by Tenant or by any third party against Tenant, or by or against any person holding under Tenant. Tenant shall defend and indemnify Landlord from any liability, damages, or costs (including reasonable attorneys' fees) arising from such action. 18. INSURANCE 18.1. ALL RISK INSURANCE. Commencing upon the date hereof, and continuously during the entire term of this Lease, Landlord shall keep in full force and effect a policy or policies of insurance covering the Property, with the broadest available "all-risk" coverage (including flood, boiler, and machinery insurance). The casualty insurance shall be in an amount equal to the full replacement cost of the Property. The policy shall not contain any intra-insured exclusions as -17- between insured persons or organizations. The policy shall also insure against costs related to the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Property required to be demolished or removed by reasons of the enforcement of any building, zoning, safety, or land use laws as a result of a covered cause of loss. 18.2. RENTAL VALUE INSURANCE. Commencing on the date hereof and continuing throughout the Term, Landlord may, at its option, keep in force a policy or policies with loss payable to Landlord and its lenders, insuring the loss of the full rental and other charges payable by Tenant to Landlord under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises if necessary to provide one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs, and other expenses, if any, otherwise payable by Tenant for the following twelve (12) month period. 18.3. LIABILITY INSURANCE. Commencing on the date hereof and continuously during the entire term of the Lease, or such other time as Tenant occupies the Premises, Tenant shall keep in full force and effect a policy or policies of liability insurance for property damage and personal injury, with minimum limits of $1,000,000.00 for any occurrence within or about the Premises resulting in bodily injury or death of one person and consequential damages arising therefrom, and in an amount of not less than $1,000,000.00 for any occurrence within or about the Premises resulting in injury to or death of more than one person and consequential damages arising therefrom. Such policy shall also include coverage for liability assumed under this Lease as an "Insured Contract" for the performance of Tenant's indemnity obligations under this Lease. 18.4. INSURANCE PROCEEDS. Unless this Lease is terminated pursuant to Section 21, all insurance proceeds relating to the damage or destruction of the Property shall be used by Landlord to pay all costs of repair and restoration of any portion of the Property damaged by an insured casualty. Notwithstanding the foregoing, Landlord shall have no duty to restore the Property or to pay over any insurance proceeds to the extend Landlord is required by the terms of any mortgage or deed of trust superior to this Lease to apply such proceeds to the debt secured thereby. Landlord shall by under no obligation to restore or replace any -18- personal property or trade fixtures of Tenant located upon the Premises, unless gross damage to such items was caused by Landlord's or its agent's grossly negligent acts or omissions. 18.5. GENERAL INSURANCE MATTERS. At Landlord's request made not more frequently than once every two years during the Term, the amount of casualty and liability insurance shall be updated to provide adequate coverage in accordance with then-current industry standards. Each policy shall name Landlord and Landlord's lenders as additional named insureds, as their interests appear, and shall contain a clause that the insurer shall not cancel or materially change said policies without giving Landlord and Landlord's lenders at least thirty (30) days prior written notice. Each policy shall contain a waiver of any co-insurance clause. Tenant shall deliver certificates of insurance evidencing the insurance required to be carried by Tenant hereunder to Landlord within ten (10) days of the Commencement Date, and thereafter, upon Landlord's reasonable request. Tenant shall provide Landlord with evidence of renewals or "insurance binders" evidencing renewal of all insurance to be maintained by Tenant at least thirty (30) days prior to the expiration of such policies. If Tenant fails to do so, Landlord may obtain such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant to Landlord upon demand and shall constitute Additional Rent. Any insurance policies required hereunder shall be written by insurance companies admitted and authorized to do business in the state I which the property is located, and rated A-IX by Best's Insurance Guide. If any policy of insurance to be maintained by either party shall contain a deductible clause, the deductible amount shall not exceed $1,000.00 per occurrence and the insured shall be liable for such deductible amount in the event of an insured loss. Tenant shall settle no claims under any policy of insurance required to be carried by either party under this Lease without the prior written approval of Landlord. If Lease is terminated pursuant to Section 21, all insurance proceeds relating to the damage or destruction of the Property shall be paid to Landlord. 19. WAIVER OF SUBROGATION Landlord and Tenant hereby release each other from liability and waive all right of recovery against each other for any loss in or about the Premises or the Property from perils insured against by the insurance required hereunder, whether due to negligence or any other cause; provided that this Section shall be inapplicable if it would have the effect, of invalidating or reducing any insurance coverage required hereunder. Landlord and Tenant shall, at the request of the other, execute and deliver to the other -19- a waiver of subrogation in form and content as required by the respective insurance carriers of each. 20. WAIVER OF LIABILITY Landlord shall not be liable for injury or damage to the person or goods, wares, merchandise, or other property of Tenant, Tenant's employees, contractors, invitees, customers, or any other persons in or about the Property, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction, or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Property, or from other sources or places, and regardless of whether the cause of such damage or injury or the means or repairing the same is accessible to Tenant or not, except to the extent caused by the gross negligence, willful or wanton act of Landlord, its agents, employees, invitees, guests or contractors. Landlord shall not be liable for any damages arising from any act or negligence of any other Tenant of Landlord. Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall under no circumstances be liable for injury to Tenant's business or for any loss of income or profit therefrom. By initialing below, Tenant agrees that the terms of this Section 20 have been explicitly negotiated between the parties and discussed with Tenant's legal counsel. Tenant _________________ 21. DAMAGE BY CASUALTY 21.1. REPAIR AND RESTORATION. Subject to the provisions of Section 18.4., all insurance payments for damage to the Premises shall be held for the sole purpose of repairing, rebuilding and/or restoring the Premises with the exception that any payments from rent loss insurance carried by Landlord shall be retained by Landlord. If the Premises is damaged or destroyed by fire or other insured casualty such that the repair of such damage is reasonably estimated by Landlord not to exceed fifty percent (50%) of the then-fair market value of the Premises, Landlord shall promptly rebuild and restore the damaged area to its pre-existing condition. If Landlord reasonably estimates the cost of repairing such damage to the Premises to exceed fifty percent (50%) of the then-fair market value of the Premises, or if the Property is damaged by an uninsured casualty or Landlord is required to apply an insurance proceeds to amounts secured by a mortgage or deed of trust on the Property senior to this -20- Lease, either party may elect to terminate this Lease upon thirty (30) days written notice to the other, given within thirty (30) days after such damage. If the Lease is not so terminated, the Property shall be repaired in the manner and subject to the conditions provided for above. Notwithstanding the foregoing, if the Building is damaged or destroyed by fire or other insured casualty such that the repair of such damage is reasonably estimated by Landlord to exceed ten percent (10%) of the then-fair market value of the Building, Landlord may terminate this Lease upon thirty (30) days written notice to Tenant. 21.2. DAMAGE NEAR END OF TERM. Notwithstanding any contrary provision of Section 21.1, if at any time during the last six (6) months of the Term the Premises is damaged to an extent that Landlord reasonably estimates will cost more than one (1) month's installment of Minimum Rent to repair, whether or not an insured loss, Landlord may, at Landlord's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within thirty (30) days after the date of the occurrence of such damage. 21.3. RENTAL ABATEMENT. In the event of damage or destruction to the Premises or the Property which substantially affects Tenant's ability to operate its business, Minimum Rent shall be abated in the same proportion that Tenant's use of the Premises is adversely affected thereby, until the Premises or the Property (as the case may be) is repaired or restored. 22. CONDEMNATION 22.1. TOTAL TAKING. If all of the Property is taken by public or private condemnation or eminent domain or transferred under the threat thereof (hereinafter, a "Taking"), this Lease shall automatically terminate as of the date of any final condemnation judgment or as of the date possession is taken by the condemning party, whichever is earlier. 22.2. SUBSTANTIAL TAKING. If a portion of the Building or access or parking related thereto is Taken such that, in Landlord's reasonable discretion, it is economically infeasible to continue to operate the Building, Landlord may terminate this Lease within twenty (20) days after such Taking by written notice to Tenant, effective thirty (30) days after the date of such notice. 22.3. -21- 22.3.1. RESTORATION. If this Lease is not terminated upon a Taking as provided for above, Landlord shall, as far as economically feasible, promptly restore the Premises to a unit architecturally and functionally comparable to the unit existing just prior to such Taking (other than as to size), and this Lease shall continue, except that rent shall be adjusted to accommodate the change in size. 22.4. ABATEMENT OF RENT. Commencing with the date on which Tenant is deprived of actual use of any portion of the Premises or Property b a Taking, the Minimum Rent shall be reduced by the percentage by which the fair market rental value of the Premises prior to such taking or damage. 22.5. PROCEEDINGS. Landlord reserves all rights to an award for damages to the Premises or the Property resulting from any condemnation of the Property and Tenant hereby assigns to Landlord any right Tenant may have to such an award, provided that Tenant shall retain the right to receive compensation for the value of: (i) trade fixtures and personal property on the Premises, and (ii) any award for Tenant's interruption of business and moving expenses. Neither Landlord nor Tenant shall have the right to claim any portion of the condemnation of the condemnation award separately allocated to the other party, except as stated above. 23. ASSIGNMENT AND SUBLETTING 23.1. NO ASSIGNMENT OR SUBLETTING WITHOUT CONSENT. Tenant may not assign this Lease or otherwise convey, transfer, or sublet any interest herein without Landlord's prior written consent. Landlord shall not unreasonably withhold such consent, but Tenant agrees that the business experience, reputation and net worth of any proposed transferee may be appropriately considered by Landlord. Tenant agrees that Landlord may condition its approval of an assignment or sublease by requiring amendments to this Lease as Landlord may reasonably deem necessary or appropriate to protect its interests with respect to such proposed assignee or subtenant. [Insert 23.1] 23.2. RECAPTURE. Tenant shall pay Landlord any consideration of any kind received by Tenant with respect to any sublease or assignment of the Premises by Tenant to the extent that such consideration exceeds the Minimum Rent. 23.3. NO RELEASE. The consent of Landlord to an assignment, sublease, or other transfer to, or occupation of the Premises by, any person or entity other than -22- Tenant shall not discharge any liability of Tenant under this Lease, nor shall such consent be deemed a consent to any subsequent transfer to any other party. Any transfer without Landlord's prior consent shall, at Landlord's option, be void. 23.4. LANDLORD'S EXPENSES. Tenant shall pay Landlord's reasonable legal costs and other expenses incurred with respect to any transfer, consent to transfer, or consideration of transfer described above. 24 NO MERGER Unless specifically stated otherwise in writing by Landlord, the voluntary or other surrender of this Lease by Tenant, the mutual termination or cancellation hereof, or termination hereof by Landlord for breach by Tenant, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Landlord shall, in the event of any such surrender, termination, or cancellation, have the option to continue any one or all of such existing lesser interests. Landlord's failure within ten (10) days following any such event to give written notice to the contrary to the holder of any such lesser interests shall constitute Landlord's election to terminate such interest. 25. DEFAULT 25.1. TENANT'S DEFAULT. The occurrence of any one or more of the following shall be an Event of Default by Tenant under this Lease: 25.1.1. PAYMENT. The failure by Tenant to make any payment of Minimum Rent, Additional Rent, or any other payment required to be made by Tenant hereunder, as and when due. 25.1.2. INSURANCE AND BONDS. The failure of Tenant to provide Landlord with any evidence of insurance or bonds as and when required under this Lease. 25.1.3. GENERAL FAILURE. The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease or of the Lease Termination Agreement between Landlord and Tenant of even date herewith (the "Lease Termination Agreement"), or of the Settlement Documents (as that term is defined in the Lease Termination Agreement) to be observed or performed by Tenant. -23- 25.1.4. INSOLVENCY. The insolvency of Tenant, its failure to pay its debts in the ordinary course of business, or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt (unless in the case of a petition filed against Tenant, the same is dismissed within 60 days) or a petition for reorganization or arrangement under any law relating to bankruptcy or the reorganization of the debts of individuals or corporations, or the appointment of a trustee or a receiver to take possession of substantially all Tenant's assets located on the Premises or of Tenant's interest in this Lease. 25.1.5. NO NOTICE FOR MONETARY DEFAULTS. Tenant shall not be in default until 10 days after notice of a monetary default has been given by Landlord to Tenant. 25.1.6 NOTICE FOR NONMONETARY DEFAULTS. Landlord shall give Tenant fifteen (15) days notice and opportunity cure any default of more than fifteen (15) calendar days, then Tenant shall have such longer period to cure such default as is reasonably necessary, provided Tenant commences such cure within said fifteen (15) calendar day period and thereafter diligently prosecutes such cure to completion within thirty (30) days after receipt of Landlord's notice. If a cure is not completed within (30) days after notice from Landlord, Landlord may immediately pursue any remedy available to it under the Lease upon the expiration of such period. 25.2. NOTICES CONCURRENT. Any notice and opportunity to cure to be given by Landlord under the terms of this Lease shall run concurrently with any such notice or cure rights provided for under any applicable statute authorizing the forfeiture of leases for unlawful detainer, and the failure of Tenant to cure any default within the greater of the two such periods shall constitute both an unlawful detainer and a breach of this Lease. 25.3 LANDLORD'S DEFAULTS. The occurrence of any one or more of the following shall be an Event of Default by Landlord under this Lease: 25.3.1. GENERAL FAILURE. Failure to perform any of the obligations of Landlord under this Lease if not cured within (10) calendar days after written notice by Tenant to Landlord; provided, that if the nature of Landlord's breach or obligation is such that more than ten (10) calendar days are required for cure of performance, then -24- Landlord shall not be in default if it commences to cure within said ten (10) calendar day period and thereafter diligently prosecutes the same to completion within thirty (30) days after Tenant's notice. 25.3.2. NOTICE TO LENDER. Tenant shall give any lender of Landlord holding a security interest in the Property whose name and address have been furnished to Tenant in writing for such purpose thirty (30) days notice and opportunity to cure any default of Landlord before invoking any remedies Tenant may have by reason thereof. 26. REMEDIES 26.1. LANDLORD'S REMEDIES. Following any Event of Default defined above that remains uncured beyond any applicable grace period, Landlord may thereafter exercise any of the following remedies, all of which remedies shall, to the greatest extent possible, be cumulative, such that exercise of one shall not exclude any other. 26 1.1. TERMINATE LEASE. Terminate the Lease and Tenant's right to possession of the premises by any lawful means and upon such notice as may be required hereunder and by law, in which case this Lease shall terminate and Tenant shall surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all past due Minimum Rent, Additional Rent and other payments due hereunder plus the amount of the brokerage commission paid by Landlord with respect to this Lease attributable to the then-unexpired Term, plus the value at the time of award of the amount by which the unpaid Minimum Rent, Additional Rent and other payments due hereunder for the balance of the Lease term after the time of such award (discounted to present value at the discount rate of the Federal Reserve Bank of San Francisco plus one (1) percent) exceed the amount of such loss for the same period that Tenant proves Landlord could have avoided through reasonable attempts at mitigation. Unpaid installments of Minimum Rent, and unpaid Additional Rent, and any other sums due Landlord shall bear Interest from the date such sums are payable to Landlord, in addition to any late charge other fee levied with respect to such amounts. -25- 26.1.2. CONTINUE LEASE. Continue the Lease in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Minimum Rent, Additional Rent, and any other payments due hereunder as they become due and/or relet the Premises in Tenant's or Landlord's name, enter the Premises and incur expenses to remove all persons and property from the Premises, and to restore the same at Tenant's risk and expense, to put the Premises in Tenantable condition and to alter or improve the same as required or any new Tenant, or remedy any other default of Tenant, and to obtain a new Tenant (including all brokerage fees related to such new lease), which costs and expenses shall be considered Additional Rent, and shall become due and payable by Tenant, with Interest from the date such expenses are incurred; provided, that Landlord shall use reasonable diligence to relet the Premises in order to mitigate Landlord's damages. Notwithstanding that Landlord may elect to keep this Lease in force, Landlord may thereafter terminate the Lease for any previous default that remains uncured or for any subsequent default. 26.1.3. LANDLORD'S RIGHT TO CURE. If Tenant defaults in the performance of any of its obligations hereunder, Landlord may, at its option (but without obligation to do so), pay such amounts or perform such obligations as required to cure any defaults of Tenant, all on behalf of and at the expense of Tenant and under protest if requested by Tenant, and may do all necessary work and make all necessary payments in connection therewith, including but not limited to, the payment of any reasonable attorney's fees, costs, or charges in connection with any legal action which may have been brought. Tenant shall pay Landlord the amount so paid by Landlord upon demand, with Interest from the date of payment, all of which shall be Additional Rent. 26.1.4. OTHER REMEDIES; FURTHER DAMAGES. Pursue any other remedy available to Landlord at law or equity, including the right to recover any other amount necessary to compensate Landlord for all reasonably foreseeable damages proximately caused by the Tenant's failure to perform its obligations under this Lease. -26- 26.2 TENANT'S REMEDIES. Upon a default by Landlord that remains uncured for any applicable grace period, Tenant shall have the right, but not the obligation, to incur any cost or make any expenditure reasonably necessary to cure Landlord's default, in which case Landlord shall reimburse Tenant for any expenditure made or cost incurred with Interest from the date of such expense. Tenant shall also have the right to sue Landlord for damages and declaratory or injunctive relief. Tenant shall have no right to cancel this Lease due to a default of Landlord under this Lease or any other reason, other than for a breach of Landlord's covenant of quiet enjoyment set forth herein. 27. SURVIVAL Any obligations or liability of Tenant or Landlord accruing prior to the expiration or sooner termination of this Lease shall survive such termination or expiration. 28. MEMORANDUM OF LEASE This Lease shall not be recorded, but at the request of either party a Memorandum of Lease setting forth the Term hereof and such other provisions as may be reasonably acceptable to both parties shall be executed and acknowledged by the parties and recorded in the county where the Property is located. The party requesting such memorandum shall pay all costs of recording such memorandum and the other party's reasonable attorneys' fees required to review such memorandum. 29. SUBORDINATION AND NONDISTURBANCE 29.1. CONDITIONS. If any current or future holder of a mortgage, deed of trust, or other consensual lien (a "Security Device") on the Property requires that this Lease be subordinate thereto, Tenant shall, upon the request of Landlord in writing, subordinate this Lease to the Security Device and agrees to attorn to the holder thereof if requested to do so by such holder, provided said holder executes an agreement with Tenant, substantially providing that (i) in the event of foreclosure of the lien of said Security Device, Tenant's possession of the Premises including any options to extend the Term hereof, shall remain undisturbed so long as Tenant is not in default beyond any applicable grace period hereunder, and that (ii) Tenant may remove Tenant's trade fixtures from the Premises in accordance with the provisions of this Lease. If any security device held by such lender, the lender shall give written notice thereof to Tenant, and this lease shall thereupon be deemed prior to such security device, notwithstanding the relative dates of documentation or recording thereof or any prior subordination of this Lease to such lien. -27- 29.2 AGREEMENT. Subject to the conditions set forth above, Tenant agrees to execute and deliver to Landlord within fourteen (14) business days after receipt thereof, any instruments necessary or proper to effect a subordination complying with this article. [Insert 29.3] 35. VENUE AND JURISDICTION The parties agree that any suit, arbitration, action or other legal proceeding arising out of or relating to this Lease may, at the option of Landlord, be brought in a federal or state court located in the county in which the Property is located. The parties consent to the jurisdiction of each such court in any such suit, action or proceeding, and waive any objection either may have as to the venue of any such suit, action or proceeding in any such court. Alternatively, Landlord may institute suit against Tenant in any other jurisdiction in which Tenant is subject to suit. 36. MISCELLANEOUS PROVISIONS 36.1. SEVERABILITY. If any term or provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid and unenforceable, the remainder of this Lease or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each remaining term and provision of this Lease shall be valid and be enforced to the extent permitted by law. 36.2. TIME OF ESSENCE. Time is of the essence of this Lease. The failure of a party to insist upon a strict performance of any of the terms, conditions and covenants herein or to exercise any remedy available to it shall not be deemed a waiver of any rights or remedies that said party may have and shall not be deemed a waiver of any subsequent breach or default in the terms, conditions, and covenants herein contained. 36.3 COUNTERPARTS. This agreement may be signed in counterparts, but when so signed shall constitute but one and the same agreement. This Lease may be delivered by facsimile transmission. The party so delivering a document will deliver the original of such document by overnight courier within two (2) business days thereafter. 36.4. CONSENTS. No consent or approval of either Landlord or Tenant required or contemplated under this Lease shaft be unreasonably withheld or delayed. -28- 36.5. RULES AND REGULATIONS. Landlord shall have the right to make reasonable, nondiscriminatory rules and regulations relating to the use of the Common Areas of the Property and the parking located thereon, and to amend the same from time to time on reasonable notice to Tenant. Tenant shall observe such rules and regulations. [Insert 36.5] 36.6 AMENDMENTS. No change in the provisions of this Lease shall be effective unless made in writing and signed by the parties to this Lease and approved by the holder of any mortgage or deed of trust against the Property if such consent is required by any agreement of Landlord and such Lender. 36.7. ENTIRE AGREEMENT. There are no verbal or other agreements, representations, or warranties of the parties (unless attached hereto or specifically referred to herein) that modify, supplement, or affect this Lease. This lease supersedes any and all prior agreements executed by or on behalf of the parties hereto regarding Tenant's occupancy of the Premises. The covenants and conditions contained in this Lease run with the Property and are binding on and inure to the benefit of the parties and their respective heirs, successors and assigns. 36.8. FORCE MAJEURE. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant shall not be deemed to be in default in respect of the performance of any of the terms covenants and conditions of this lease if any such failure or delay is due to any strike, lockout, civil commotion, warlike operation, invasion, rebellion, hostilities, military or usurped power, sabotage, Act of God, or other cause beyond the reasonable control of Landlord or Tenant, provided, however, that this provision shall not excuse any obligation of Landlord or Tenant to make any payment due to the other or to any third party, including, but not limited to, Maximum Rent or Additional Rent. 36.9. BROKERAGE COMMISSION. Each party represents and warrants to the other party that Teutsch Partners was the sole agent involved in this transaction. Landlord shall pay said agent a leasing commission equal to five percent (5%) of the total lease value, half upon lease signing and half upon Tenant's occupancy. This fee shall be paid in two components, the first portion being paid over the gross rental for the first 16 months of the Lease Term. The balance shall be paid within 15 days of Tenant indicating its intention to continue its occupancy in the building by not exercising it's option to terminate the Lease after October 1, 1997. In the event Landlord does not pay the balance by said date, then Tenant shall have the right to make its monthly rental payments directly to Teutsch Partners until the balance is paid. -29- 36.10. PREVAILING LAW. This Lease shall be governed by the laws of the state in which the Property is located, as they exist from time to time, and by any applicable federal law. 36.11 NO THIRD PARTY BENEFICIARIES. Unless otherwise expressly specified herein, this Lease shall not be construed to be for the benefit of any third party. 36.12. CONSTRUCTION. Landlord and Tenant have participated equally in the negotiation of this Lease. This Lease shall be construed without regard to which party drafted any particular clause under consideration. 36.13. HEADINGS. The paragraph headings are not part of this Lease and shall not be considered in construing the provisions hereof. 38. SECURITY AND/OR DAMAGE DEPOSIT Concurrently with Tenant's execution of this Lease, Tenant has deposited with Landlord $9375.33. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this sum in default, or for deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within ten (10) days after written demand thereof, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a default under this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within ten (10) days following expiration of the Lease Term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest. Tenant will at all times maintain with the Landlord on deposit a sum equal to one month's rent for the purposes of this paragraph. Landlord hereby acknowledges receipt of ____________________________ DOLLARS ($___________) for the security deposit. -30- Executed as of the date first above written. LANDLORD TENANT DAVID & NANCY EDELSTEIN By:_________________________________ By_______________________ David A. Edelstein Title:______________________ For: The Cobalt Group, Inc. By:_________________________________ Nancy Edelstein -31- LANDLORD STATE OF WASHINGTON ) )SS COUNTY OF KING ) On this _____ day of ________________, 199_, before me the undersigned, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared DAVID A. EDELSTEIN, to me known to be the person who signed the within and foregoing instrument, and acknowledged said instrument to be his/her free and voluntary act and deed for the uses and purposes therein mentioned. _________________________________ NOTARY PUBLIC in and for the State of Washington, residing at_____________ My Appointment Expires____________ STATE OF WASHINGTON ) ) SS COUNTY OF KING ) On this _____ day of _________________, 199_, before me the undersigned, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared NANCY JO EDELSTEIN, to me known to be the person who signed the within and foregoing instrument, and acknowledged said instrument to be his/her free and voluntary act and deed for the uses and purposes therein mentioned. _________________________________ NOTARY PUBLIC in and for the State of Washington, residing at______________ My Appointment Expires_____________ -32- TENANT STATE OF WASHINGTON ) ) SS COUNTY OF KING ) On this _____ day of _________________, 199_, before me, the undersigned, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared _______________________________ to me known to be the person who signed the within and foregoing instrument, and acknowledged said instrument to be his/her free and voluntary act and deed for the uses and purposes therein mentioned. IN WITNESS WHEREOF I have hereunto set my hand and official seal the day and year first above written. _________________________________ NOTARY PUBLIC in and for the State of Washington, residing at______________ My Appointment Expires:____________ -33- EXHIBIT A Lots 1 and 4, Block 43, Addition to the Town of Seattle as laid out by A.A. Denny (commonly known as A.A. Denny's 6th Addition to the City of Seattle), according to the Plat recorded in Volume I of Plats, page 99, in King County, Washington; except the westerly 9 feet thereof condemned for First Avenue in King County Superior Court Cause No. 7092, as provided by Ordinance No. 1129 of the City of Seattle. Exhibit B Third Floor Plan Exhibit C Amendment to Lease Dated September ____, 1996 For The Cobalt Group At the First and Lenora building SPACE POCKET. (Insert 2.6) Tenant shall have the right to reduce the amount of office space and corresponding rent by as much as approximately 5,536 Rentable Square Feet (RSF) by designating space pockets throughout the premises. Tenant shall have the right to absorb 5,536 RSF of pocket spaces on an incremental or office-by-office basis. Tenant will commence paying rent on a portion of the pocketed space by absorbing 2,036 RSF at the end of the sixth (6th) month of the Lease Term and the remaining 3,500 RSF at the end of the sixteenth (16th) month of the Lease Term or upon active use of the space, whichever occurs first. RIGHT TO CANCEL. (Insert 2.7) Tenant shall have the right to cancel this Lease after the end of the sixteenth (16th) month of the Initial Lease Term by providing Landlord written notice of its intent by no later than October 1, 1997. In the event Tenant chooses to terminate, then a cancellation fee equal to $9,375.33 shall accompany the written notice. RIGHT OF FIRST REFUSAL. (Insert 2.8) Tenant shall have a right of first refusal for the approximately 4,000 Rentable Square Feet in the southeast corner of the second floor described herein as Exhibit D. Upon receipt of a legitimate offer from an outside party for the space, Landlord shall provide Tenant five (5) business days with which to declare its intention to lease said space. If Tenant elects to lease this space, all terms and conditions of the Initial Lease shall apply on a prorated basis, as necessary. TITLE, AUTHORITY, AND QUIET ENJOYMENT. (Insert 5.4) Notwithstanding anything contained herein to the contrary, Landlord, its agents, employees or contractors' entry onto the Premises, or any repair or work performed thereon as provided under this Section shall not in any way materially or unreasonably affect or interrupt with Tenant's use, business or operations on the Premises or obstruct the visibility or ingress and egress of the Premises. In the event of such substantial and material interference, Landlord shall first obtain the written consent of Tenant which consent shall not be unreasonably withheld, with the exception in case of emergency. Landlord shall be liable for any damage or injury to persons or property caused by any grossly negligent, willful, or wanton act of Landlord, its agents, employees, invitees, guests or contractors resulting from its and/or their entry onto or the repair or any other work performed. Landlord shall give Tenant no less than forty-eight (48) hour's notice before any entry hereunder, unless an emergency requires shorter notice. USE OF COMMON AREAS. (Insert 6.1.1.) Tenant and its officers, employees, agents, contractors, customers and invitees shall have and Landlord hereby grants a irrevocable license (in common with the other tenants of the Property and their employees, agents, customers and other invitees) to use the common areas of the Property for the intended purposes (e.g. parking, access, ingress and egress). ACCEPTANCE OF PREMISES. (Insert 6.2) Notwithstanding anything contained herein to the contrary, Landlord represents, to the best of the Landlord's knowledge, all structural parts, including but not limited to foundation, roof, exterior walls, plumbing and electrical systems of the Premises and Building, and any work constructed or caused to be constructed by Landlord (except any additions, alterations or improvements made or caused to be made by Tenant that constitute structural parts of the Premises or the Building), meet and comply with federal, state, and local laws, ordinances and regulations and are in good sanitary order, condition and repair at delivery of the Premises to Tenant. Landlord shall promptly correct any latent defects as they become known. Landlord shall disclose any known conditions that would adversely affect use as contemplated by this Lease. UTILITIES. (Insert 12.3) Tenant shall have the right to sufficient utilities and ventilation necessary to support its intended use of the Premises. Nothing contained herein precludes Tenant from seeking recovery of any and all damages suffered and losses incurred (including but not limited to loss of business) due to an interruption of utilities for a period greater than forty-eight (48) hours if such interruption was caused by the intentional or grossly negligent act of Landlord or its agents, employees, contractors or invitees. If any such interruption continues for a period of excess of one hundred twenty (120) days, in addition to any other rights Tenant may have, Tenant shall have the right to terminate this Lease. UTILITIES (Insert 12.5) Landlord shall pay before delinquent all Utilities Expenses, Taxes, and the cost of any insurance to be carried hereunder by Landlord and which are Landlord's responsibility per paragraph 12. DAMAGE BY CASUALTY. (Insert 21.4) Notwithstanding anything to the contrary contained in this Lease, in the event of damage or destruction to the Premises or the Building, Tenant shall have the night to terminate under the following conditions: (a) the damage is such that the Premises cannot be (or are not) restored within one hundred eighty (180) days from the date of damage; (b) damage or destruction is caused by a peril not required to be insured against hereunder; or (c) the damage or destruction occurs during the last six (6) months of the Term (or any Extension Term) and Tenant has not previously exercised any option rights it may for succeeding extension or renewal terms. ASSIGNMENT AND SUBLETTING. (Insert 23.1) Notwithstanding the foregoing, Tenant may, without Landlord's prior written consent, sublet all or any portions of the Premises or assign the Lease to (i) a parent, subsidiary, affiliate, division, or corporation controlling, controlled by or under common control with Tenant; (ii) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy reorganization or government action; or (iii) a purchaser of substantially all of the Tenant's assets located in the Premises, provided that, as of the date of such transfer, the purchaser has the reasonable financial ability to perform its obligations with respect to this Lease and/or the Premises. For the purpose of the Lease, any sale or transfer of Tenant's capital stock through any exchange, or redemption or issuance of additional stock of any class shall not be deemed an assignment, subletting or any other transfer of the Lease or the Premises. SUBORDINATION AND NON-DISTURBANCE. (Insert 29.3) Notwithstanding anything contained herein to the contrary, Tenant's subordination and attornment under this Article shall be conditioned upon such transferee, purchaser, landlord, mortgagee, or beneficiary executing and providing Tenant with a non-disturbance agreement preserving Tenant's rights and leasehold interest under the Lease. Execution of any instruments required under this Article shall not diminish or affect in any way Tenant's rights or remedies under the Lease against Landlord or any other third party claiming under, by or through Landlord. MISCELLANEOUS PROVISIONS. (Insert 36.5) All rules and regulations shall be equally applicable to all tenants. The Lease provisions shall control and supersede any contradictory or inconsistent provisions contained in the rules and regulations. Landlord shall provide reasonable advance notice of any modifications or additions to the rules and regulations, and such modifications or additions shall not materially, or unreasonably interfere with Tenant's conduct of its business or Tenant's use or enjoyment of the Premises, and shall not require payment of additional rent or the incurring of any other costs and expenses. Exhibit D Floor Plan STATE OF ________________ ) )ss COUNTY OF ______________ ) On this _________ day of ____________, 1998, before me personally appeared ______________________, to me known to be the _______________________ of THE COBALT GROUP, INC., a Washington corporation, which executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said partnership, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument on behalf of said partnership. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. ___________________________________ Notary Public Commission Expires: ________________ EX-10.3(1) 5 EXHIBIT 10.3.1 Exhibit 10.3.1 AMENDMENT NO. 1 TO LEASE AGREEMENT This Amendment No. 1 dated as of April 21, 1998, is made by and between FIRST & LENORA, LLC a Washington Limited Liability Company ("Landlord") and THE COBALT GROUP, INC., a Washington Corporation ("Tenant"). RECITALS A. David A. Edelstein and Nancy Jo Edelstein (then Landlord) and Tenant executed a certain Lease, dated 14th day of September, 1996, for the lease of certain office space in the building commonly known as the First & Lenora Building. B. The Office Lease Agreement is referred to herein as "Lease". C. Landlord is the successor in interest to David A. Edelstein and Nancy Jo Edelstein. D. The space added to the current rentable area of the Premises as a result of this amendment shall be referred to as the "Expansion Space". AGREEMENT It is therefore agreed as follows: 1. SECTION 1.1 PREMISES is amended to increase the current net rentable area of 11,536 leased by Tenant to include the 6,731 rsf northwestern bay and the 3,325 rsf southwestern bay of the ground floor, increasing the Premises by 10,056 rsf. Within the 6,731 rsf northwestern bay 1,261 square feet is mezzanine and within the 3,325 rsf southwestern bay 553 square feet is mezzanine. The adjusted rentable square footage for the entire Premises as of this amendment shall be 21,592 rentable square feet. 2. SECTION 2.2 TERM: The lease term for the expanded premises shall begin May 1, 1998 and expire coterminous with the initial lease expiration date of October 31, 2000. 3. SECTION 2.1 --MINIMUM RENT FOR THE PREMISES
SPACE SQUARE FOOTAGE PER RSF COST PER ANNUM MONTHLY RENTAL AMOUNT Floor 1 10,056 rsf $19.50 $16,341.00 Floor 3 11,536 rsf $14.00 $13,458.67
The total adjusted Minimum Rent for the entire Premises is $29,799.67 per month plus any past or future adjustments due to an increase in operating costs passed through to Tenant as part of the Lease. The Minimum Rent for the entire Premises is calculated as a fully serviced lease pursuant to the terms of the Lease. Tenant shall be responsible for payment of its own separately metered electrical service for the ground floor spaces. 4. TENANT IMPROVEMENTS Tenant shall occupy the Premises on an "as is" basis with the exception of the demolition of the existing partition walls currently within the northwestern bay of the first floor expansion space. Demolition work shall be paid for by the Landlord. Any additional improvements to the Premises shall be at the cost of Tenant. 5. RELOCATION OF EXPANDED PREMISES In the event Landlord can make available to Tenant an office space on the second floor of the building comparable in size to that leased by Tenant on the ground floor, then Landlord shall have the right to relocate Tenant provided the following conditions are met: 1.) Landlord provides Tenant with $7.00 per rsf in tenant improvement dollars to refurbish the new premises. 2.) Landlord provides Tenant with a one-month rental abatement. 3.) Landlord provides Tenant with three months notice prior to such relocation. In the event such relocation should occur, the rental rate and the lease term remaining shall be the same as that on the first floor. 6. EXTERIOR BUILDING CONSTRUCTION Tenant acknowledges that during the course of this lease Landlord may begin significant construction on the exterior of the building. While Landlord shall use its best efforts to minimize any disruption to Tenant's premises, it is expected that such work shall be of inconvenience to Tenant during that period. Tenant agrees and understands that this may be the case and understands that short of Landlord's negligence, Tenant shall have no right to rental offset or abatement during the term of this lease. However in no event shall Landlord's construction work materially effect Tenant's ability to conduct normal business operations within the Premises. Except as set forth in this Amendment No. 1 all provisions of the Lease and the remainder of each Section referenced above, shall remain unchanged and in full force and effect. DATED this ___ day of ______________, 1998. TENANT: LANDLORD: THE COBALT GROUP, INC. FIRST & LENORA, LLC. A Washington Corporation a Washington limited liability company By: By: ------------------------------- ------------------------------- Its: Its: ------------------------------ ------------------------------ STATE OF ________________ ) )ss COUNTY OF ______________ ) On this _________ day of ____________, 1998, before me personally appeared ______________________, to me known to be the _______________________ of FIRST & LENORA, LLC., a Washington limited liability company, which executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said partnership, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument on behalf of said partnership. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. ------------------------------------ Notary Public Commission Expires: ---------------- EX-10.3(2) 6 EXHIBIT 10.3.2 Exhibit 10.3.2 AMENDMENT NO. 2 TO LEASE AGREEMENT This Amendment No. 2 dated as of DECEMBER 16TH, 1998, is made by and between FIRST AND LENORA, LLC a Washington Limited Liability Company ("Landlord") and THE COBALT GROUP, INC., a Washington Corporation ("Tenant"). RECITALS A. David A. Edelstein and Nancy Jo Edelstein (then Landlord) and Tenant executed a certain Lease, dated 14th day of September, 1996, for the lease of certain office space in the building commonly known as the First & Lenora Building, and an Amendment to Lease No. 1, dated April 21, 1998, for the purpose of expanding the original leased space. B. The Office Lease Agreement is referred to herein as "Lease." C. Landlord is the successor in interest to David A. Edelstein and Nancy Jo Edelstein. D. The space added to the current rentable area of the Premises as a result of this amendment shall be referred to as the "Second Expansion Space." AGREEMENT It is therefore agreed as follows: 1. SECTION 1.1 PREMISES is amended to increase the current net rentable area of 21,592 rentable square feet (RSF) leased by Tenant to include the 1,857 RSF formerly occupied by Coupe Rokei on the ground floor. The adjusted rentable square footage for the entire Premises as of this amendment shall be 23,449 RSF. 2. SECTION 2.2 TERM The lease term for the Second Expansion Space shall begin January 1, 1999, and expire coterminous with the initial lease expiration date of October 31, 2000. 3. SECTION 2.1 MINIMUM RENT (for the entire Premises, including the Second Expansion Space)
Month(s) square footage monthly rental amount -------- -------------- --------------------- Month 1 23,449 RSF $26,608.80 Months 2-22 23,449 RSF $32,817.30
The total adjusted Minimum Rent for the entire Premises is $32,817.30 per month plus any past or future adjustments due to an increase in operating costs passed through to Tenant as part of the Lease. The Minimum Rent for the third floor of the Premises is calculated as a fully serviced lease pursuant to the terms of the Lease. The Minimum Rent for the ground floor is calculated as a partially serviced lease with Tenant responsible for payment of its own separately metered electrical services. 4. TENANT IMPROVEMENTS Tenant shall occupy the Premises on an "as is" basis. Any improvements to the Premises shall be at the cost of Tenant. 5. EXTERIOR BUILDING CONSTRUCTION Tenant acknowledges that during the course of this lease Landlord may begin significant construction on the exterior of the building. While Landlord shall use its best efforts to minimize any disruption to Tenant's premises, it is expected that such work shall be of inconvenience to Tenant during that period. Tenant agrees and understands that this may be the case and understands that short of Landlord's negligence, Tenant shall have no right to rental offset or abatement during the term of this lease. However in no event shall Landlord's construction work materially effect Tenant's ability to conduct normal business operations within the Premises. Except as set forth in this Amendment No. 2 all provisions of the Lease and the remainder of each Section referenced above shall remain unchanged and in full force and effect. DATED this 16TH day of DECEMBER, 1998. TENANT: LANDLORD: THE COBALT GROUP, INC. FIRST AND LENORA, LLC. A Washington Corporation a Washington limited liability company By: /s/ D Douglass By: /s/ John Teutsch ------------------------------ ------------------------------ John Teutsch Its:VP-Ops & CFO Its:Managing Member ----------------------------- ----------------------------- STATE OF WASHINGTON ) ) ss COUNTY OF KING ) On this 16TH day of DECEMBER, 1998, before me personally appeared JOHN TEUTSCH, to me known to be the MANAGING MEMBER of FIRST AND LENORA, LLC., a Washington limited liability company, which executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said partnership, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument on behalf of said partnership. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. [NOTARY SEAL OF ANDREA L. SIEGEL] /s/ Andrea L. Siegel ---------------------------------------- Notary Public Commission Expires: 5-24-02 --------------------- STATE OF WASHINGTON ) ) ss COUNTY OF KING ) On this 16TH day of DECEMBER, 1998, before me personally appeared DAVID DOUGLASS, to me known to be the V.P. OF OPERATIONS AND CFO of THE COBALT GROUP, INC., a Washington corporation, which executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said partnership, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument on behalf of said partnership. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. [NOTARY SEAL OF ANDREA L. SIEGEL] /s/ Andrea L. Siegel ---------------------------------------- Notary Public Commission Expires: 5-24-02 --------------------- EX-10.4 7 EXHIBIT 10.4 Exhibit 10.4 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. THE COBALT GROUP, INC. COMMON STOCK PURCHASE WARRANT This certifies that, in consideration for $100.00 and other value received, MADRONA INVESTMENT GROUP, L.L.C., or registered assigns, is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time on or after the date hereof (subject to the vesting provisions of Section 1) and at or prior to 11:59 pm., Pacific time, on October 31, 2003 (the "Expiration Time"), but not thereafter, to acquire from THE COBALT GROUP, INC., a Washington corporation (the "Company"), in whole or from time to time in part, up to 24,000 fully paid and nonassessable shares of Common Stock of the Company ("Warrant Stock") at a purchase price per share (the "Exercise Price") equal to the lesser of (I) $1.25 or (ii) the lowest price per share at which shares of common stock or conversion price per share for other securities are issued during the 12 months following the date of the engagement letter (other than options for employees or consultants who are not controlling shareholders). Such number of shares, type of security and Exercise Price are subject to adjustment as provided herein, and all references to "Warrant Stock" and "Exercise Price" herein shall be deemed to include any such adjustment. 1. EXERCISE OF WARRANT The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part (subject to the vesting schedule set forth below in this Section 1), at any time and from time to time at or prior to the Expiration Time by the surrender of this Warrant and the Notice of Exercise form attached hereto duly executed to the office of the Company at 2030 First Avenue, 3rd Floor, Seattle, WA 98121 (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the Exercise Price for the shares thereby purchased (by cash or by check or bank draft payable to the order of the Company or by cancellation of indebtedness of the Company to the holder hereof, if any, at the time of exercise in an amount equal to the purchase price of the shares thereby purchased); whereupon the holder of this Warrant shall -1- be entitled to receive from the Company a stock certificate in proper form representing the number of shares of Warrant Stock so purchased. This Warrant shall be exercisable for 1,000 shares on November 1, 1996 and for an additional 1,000 shares on the first day of each month thereafter until a total of 24,000 shares are exercisable, based upon the continued performance of services pursuant to the letter from Madrona Investment Group, L.L.C. to The Cobalt Group dated October 15, 1996 (the "Engagement Letter"), unless in each case the Company has given written notice prior to the applicable date that its chief executive officer has determined that the services covered by the Engagement Letter are no longer being provided to the Company, other than by the fault of the Company. The foregoing vesting schedule shall be subject to acceleration as provided in Section 10. 2. CONVERSION OF WARRANT The registered holder hereof shall have the right to convert this Warrant, in whole or in part, at any time and from time to time at or prior to the Expiration Time, by the surrender of this Warrant and the Notice of Conversion form attached hereto duly executed to the office of the Company at the address set forth in Section I hereof (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), into shares of Warrant Stock as provided in this Section 2. Upon exercise of this conversion right, the holder hereof shall be entitled to receive that number of shares of Warrant Stock of the Company equal to the quotient obtained by dividing [(A - B)(X)] by (A), where: A = the Fair Market Value (as defined below) of one share of Warrant Stock on the date of conversion of this Warrant. B = the Exercise Price for one share of Warrant Stock under this Warrant. X = the number of shares of Warrant Stock as to which this Warrant is being converted. If the above calculation results in a negative number, then no shares of Warrant Stock shall be issued or issuable upon conversion of this Warrant. "Fair Market Value" of a share of Warrant Stock shall mean: (a) if the conversion right is being exercised in connection with a transaction specified in Section 10 hereof, the value of the consideration (determined, in the case of noncash consideration, in good faith by the Board of Directors of the Company) to be received pursuant to such transaction by the holder of one share of Warrant Stock; -2- (b) if the conversion right is being exercised after the occurrence of an initial public offering of common stock of the Company, the average of the high and low trading prices of a share of Common Stock as reported by the NASDAQ National Market (or equivalent recognized source of quotations) for the previous 20 trading days; or (c) in all other cases, the fair value as determined in good faith by the Company's Board of Directors. Upon conversion of this Warrant in accordance with this Section 2, the registered holder hereof shall be entitled to receive a certificate for the number of shares of Warrant Stock determined in accordance with the foregoing. 3. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP Certificates for shares purchased hereunder or issuable upon conversion hereof shall be delivered to the holder hereof within a reasonable time after the date on which this Warrant shall have been exercised or converted in accordance with the terms hereof. The Company hereby represents and warrants that all shares of Warrant Stock which may be issued upon the exercise or conversion of this Warrant will, upon such exercise or conversion, be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issuance thereof (other than liens or charges created by or imposed upon the holder of the Warrant Stock). The Company agrees that the shares so issued shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised or converted in accordance with the terms hereof. No fractional shares or scrip representing fractional shares shall be issued upon the exercise or conversion of this Warrant. With respect to any fraction of a share called for upon the exercise or conversion of this Warrant, an amount equal to such fraction multiplied by the then current price at which each share may be purchased hereunder shall be paid in cash or check to the holder of this Warrant. 4. CHARGES, TAXES AND EXPENSES Issuance of certificates for shares of Warrant Stock upon the exercise or conversion of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; PROVIDED, HOWEVER, that in the event certificates for shares of Warrant Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise or conversion shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof. 5. NO RIGHTS AS SHAREHOLDERS -3- This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise or conversion hereof. -4- 6. REGISTRATION RIGHTS The shares of Common Stock issuable upon exercise or conversion of this Warrant shall be entitled to piggyback registration rights on terms no less favorable than those granted at any time to any other holder of Company securities. 7. EXCHANGE AND REGISTRY OF WARRANT This Warrant is exchangeable, upon the surrender hereof by the registered holder at the above-mentioned office or agency of the Company, for a new Warrant of like tenor and dated as of such exchange. The Company shall maintain at the above-mentioned office or agency a registry showing the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer, exercise or conversion, in accordance with its terms, at such office or agency of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 8. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 9. SATURDAYS, SUNDAYS AND HOLIDAYS If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 10. MERGER, SALE OF ASSETS, ETC. If at any time the Company proposes to merge or consolidate with or into any other corporation, effect any reorganization, or sell or convey all or substantially all of its assets to any other entity, in a transaction in which the shareholders of the Company immediately before the transaction will own immediately after the transaction less than a majority of the outstanding voting securities of the entity (or its parent) succeeding to the business of the Company, then the Company shall give the holder of this Warrant 20 days' prior written notice of the proposed effective date of such transaction, and if this Warrant has not been exercised or converted by or on the effective date of such transaction, it shall terminate. -5- The vesting schedule set forth in Section I shall be accelerated so that this Warrant is 100% vested and exercisable upon receipt of such notice. In addition, effective upon filing of a registration statement with the Securities and Exchange Commission any public offering of more than $10 million of securities of the Company, this Warrant shall likewise accelerate so that the Warrant is 100% vested and exercisable. 11. RECLASSIFICATION, CONVERSION, ETC. If the Company at any time shall, by reclassification of securities or otherwise, change the Warrant Stock into the same or a different number of securities of any class or classes, including, without limitation, conversion of the Warrant Stock into Common Stock in accordance with the Certificate upon an initial public offering or otherwise, this Warrant shall thereafter entitle the holder to acquire such number and kind of securities as would have been issuable in respect of the Warrant Stock (or other securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change) as the result of such change if this Warrant had been exercised in full for cash immediately prior to such change. The Exercise Price hereunder shall be adjusted if and to the extent necessary to reflect such change. If the Warrant Stock or other securities issuable upon exercise or conversion hereof are subdivided or combined into a greater or smaller number of shares of such security, the number of shares issuable hereunder shall be proportionately increased or decreased, as the case may be, and the Exercise Price shall be proportionately reduced or increased, as the case may be, in both cases according to the ratio which the total number of shares of such security to be outstanding immediately after such event bears to the total number of shares of such security outstanding immediately prior to such event. The Company shall give the holder prompt written notice of any change in the type of securities issuable hereunder, any adjustment of the Exercise Price for the securities issuable hereunder, and any increase or decrease in the number of shares issuable hereunder. 12. CERTAIN ADJUSTMENTS In the event that the conversion price of any shares of convertible securities at any time outstanding are adjusted to a conversion price which is lower than the initially stated conversion price for such securities and lower than the Exercise Price, then the Exercise Price shall forthwith be adjusted to equal such decreased conversion price. 13. TRANSFERABILITY Prior to the Expiration Time and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable by the holder hereof, in whole or in part, at the office or agency of the Company referred to in Section I hereof, to any affiliate or constituent partner of the holder. Any such transfer shall be made in person or by the holder's duly authorized attorney, upon surrender of this Warrant to-ether with the Assignment Form attached hereto properly endorsed. 14. REPRESENTATIONS AND WARRANTIES -6- The Company hereby represents and warrants to the holder hereof that: -7- (a) during the period this Warrant is outstanding, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise or conversion of this Warrant; (b) during the period this Warrant or the Warrant Stock issuable hereunder is outstanding, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon conversion of the Warrant Stock issuable upon exercise or conversion of this Warrant; (c) the issuance of this Warrant shall constitute full authority to the Company's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the shares of Warrant Stock issuable upon exercise or conversion of this Warrant; (d) the Company has all requisite legal and corporate power to execute and deliver this Warrant, to sell and issue the Warrant Stock hereunder, to issue the Common Stock issuable upon conversion of the Warrant Stock and to carry out and perform its obligations under the terms of this Warrant; and (e) all corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Warrant by the Company, the authorization, sale, issuance and delivery of the Warrant Stock and the Common Stock issuable upon conversion of the Warrant Stock, the grant of registration rights as provided herein and the performance of the Company's obligations hereunder has been taken; (f) the Warrant Stock and the Common Stock issuable upon conversion of the Warrant Stock, when issued in compliance with the provisions of this Warrant and the Articles, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances, and will be issued in compliance with all applicable federal and state securities laws; and (g) the issuance of the Warrant Stock and the Common Stock issuable upon conversion of the Warrant Stock will not be subject to any preemptive rights, rights of first refusal or similar rights. 15. COOPERATION The Company will not, by amendment of its Articles or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of the Warrant against impairment. 16. GOVERNING LAW -8- This Warrant shall be governed by and construed in accordance with the laws of the State of Washington. -9- IN WITNESS WHEREOF, the company has caused this Warrant to be executed by its duly authorized officers. Dated: October 23, 1996 THE COBALT GROUP, INC. By _______________________ Title ______________________ ACCEPTED: October 23, 1996 MADRONA INVESTMENT GROUP, L.L.C. By _________________________ Tom A. Alberg, Principal -10- NOTICE OF EXERCISE To: The Cobalt Group, Inc. (1) The undersigned hereby elects to purchase shares of Common Stock of The Cobalt Group, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: __________________________ (Name) __________________________ (Address) (3) The undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. ______________________ ______________________ (Date) (Signature) -11- NOTICE OF CONVERSION To: The Cobalt Group, Inc. (1) The undersigned hereby elects to convert the attached Warrant into such number of shares of Common Stock of The Cobalt Group, Inc. as is determined pursuant to Section 3 of such Warrant, which conversion shall be effected pursuant to the terms of the attached Warrant. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: __________________________ (Name) __________________________ __________________________ (Address) (3) The undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. ______________________ __________________________ (Date) (Signature) -12- ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to ______________________________________________________________________ (Please Print) whose address is_________________________________________________________ (Please Print) Dated:___________________________________ Holder's Signature:_________________________ Holder's Address:__________________________ Guaranteed Signature:_____________________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. -13- EX-10.5 8 EXHIBIT 10.5 Exhibit 10.5 CONFIDENTIALITY AND NONCOMPETITION AGREEMENT AGREEMENT made as of February 28, 1997 between The Cobalt Group, Inc., a Washington corporation (the "Company"), and John Holt ("Executive"). The Company and Executive desire to enter into an agreement (i) defining the relative rights of the Company and Executive with respect to Intellectual Property (as defined below) owned by the Company or its customers or clients to which Executive may have access or may contribute as a result of Executive's employment with the Company and (ii) setting forth the obligation of Executive to refrain from competing with the Company during his employment with the Company and for a period of time thereafter as provided herein. The execution and delivery of this Agreement by the Company and Executive is a condition to the purchase of shares of the Company's Series A Preferred Stock by certain investors pursuant to a Purchase Agreement dated as of this date (the "Purchase Agreement"). NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive hereby agree as follows: 1. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION. (a) Executive will not disclose or use at any time, either during his employment with the Company or thereafter, any Confidential Information (as defined below) of which Executive is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly related to and required by Executive's performance of duties assigned to Executive by the Company. Executive will take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. (b) As used in this Agreement the term "Confidential Information" means information that is not generally known in the industry or to the public and that is used, developed or obtained by the Company in connection with its business, including but not limited to (i) products or services, (ii) fees, costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports, (vi) computer software, including operating systems, applications and program listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix) accounting and business methods, (x) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xi) customers and clients and customer or client lists, (xii) other copyrightable works, (xiii) all technology and trade secrets, and (xiv) all similar and related information in whatever form. -1- 2. THE COMPANY'S OWNERSHIP OF INTELLECTUAL PROPERTY. In the event that Executive as part of his activities on behalf of the Company generates, authors or contributes to any invention, design, new development, device, product, method or process (whether or not patentable or reduced to practice or comprising Confidential Information), any copyrightable work (whether or not comprising Confidential Information) or any other form of Confidential Information relating to the Company's business as now or hereinafter conducted during the period Executive is employed by the Company (collectively, "Intellectual Property"), Executive acknowledges that such Intellectual Property is the exclusive property of the Company and hereby assigns all right, title and interest in and to such Intellectual Property to the Company. Any copyrightable work prepared in whole or in part by Executive as part of his activities on behalf of the Company will be deemed "a work made for hire" under Section 201(b) of the 1976 Copyright Act, as amended, and the Company will own all of the rights comprised in the copyright therein. Executive will promptly and fully disclose all Intellectual Property to the Company and will cooperate with the Company to protect the Company's interests in and rights to such Intellectual Property. 3. DELIVERY OF MATERIALS UPON TERMINATION OF EMPLOYMENT. As requested by the Company from time to time and upon the termination of Executive's employment with the Company for any reason, Executive will promptly deliver to the Company all copies and embodiments, in whatever form, of all Confidential Information or Intellectual Property in Executive's possession or within his control (including, but not limited to, written records, notes, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information or Intellectual Property) irrespective of the location or form of such material and, if requested by the Company, will provide the Company with written confirmation that all such materials have been delivered to the Company. 4. NONCOMPETITION. Executive acknowledges and agrees with the Company that Executive's services to the Company are unique in nature and that the Company would be irreparably damaged if Executive were to provide similar services to any person or entity competing with the Company or engaged in a similar business. Executive accordingly covenants and agrees with the Company that during the period commencing with the date of this Agreement and ending on the third anniversary of the date of the termination of Executive's employment with the Company for any reason (the "Noncompetition Period"), Executive will not, directly or indirectly, either for himself or for any other individual, corporation, limited liability company, partnership, joint venture or other entity, Participate in any business (including, without limitation, any division, group or franchise of a larger organization) anywhere in the world which sells, proposes to sell, or represents or serves as an agent to a third party proposing to sell any product or service competing with any product or service of the Company's to any Person or its affiliates to whom the Company has sold such of its products or services within the three years prior to Executive's Participation in any such business. In addition, the Executive agrees that, while employed by the Company, he will (a) pursue any and all future opportunities involving products, technologies or markets of the Company exclusively for the Company and (b) devote his full and complete efforts to the Company's business. For purposes of this Agreement, the terms "Participation" and "Participate in" will include, without limitation, having any direct or indirect interest in any corporation, limited liability company, partnership, joint -2- venture or other entity, whether as a sole proprietor, owner, member, stockholder, partner, joint venturer, creditor or otherwise, or rendering any direct or indirect service or assistance to any individual, corporation, limited liability company, partnership, joint venture and other business entity (whether as a director, officer, member, manager, supervisor, employee, agent, consultant or otherwise). 5. NONSOLICITATION. During the Noncompetition Period, Executive shall not (i) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof, (ii) hire directly or through another entity any person who was an employee of the Company at any time during the Noncompetition Period, or (iii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company to cease doing business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company. 6. NOTICES. Any notice provided for in this Agreement must be in writing and must be either personally delivered, mailed by first class mail (postage prepaid and return receipt requested or sent by reputable overnight courier service (charges prepaid) to the recipient at the address below indicated: To the Company: The Cobalt Group, Inc. 2030 First Avenue, Suite 300 Seattle, Washington 98121 Attention: Chief Executive Officer With a copy to: First Analysis Corporation Sears Tower, Suite 9500 233 South Wacker Drive Chicago, Illinois 60606 Attention: Mark Koulogeorge -3- To Executive: John Holt 3001 10th Avenue West Seattle, WA 98119 or such other address or to the attention of such other person as the recipient party will have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or, if mailed, five days after deposit in the U.S. mail. 7. GENERAL PROVISIONS. (a) COMPANY SUBSIDIARIES. For purposes of this Agreement, the term "Company" shall include all subsidiaries of the Company, if any. (b) NOT AN EMPLOYMENT AGREEMENT. Executive and the Company acknowledge and agree that this Agreement is not intended and should not be construed to grant Executive any right to continued employment with the Company or to otherwise define the terms of Executive's employment with the Company. (c) ABSENCE OF CONFLICTING AGREEMENT. Executive hereby warrants and covenants that his employment by the Company and his execution, delivery and performance of this Agreement do not and will not result in a breach of the terms, conditions or provisions of any agreement, order, judgment or decree to which Executive is subject. (d) SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. The parties agree that a court of competent jurisdiction making a determination of the invalidity or unenforceability of any term or provision of Section 4 of this Agreement will have the power to reduce the scope, duration or area of any such term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision in Section 4 with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement will be enforceable as so modified. (e) COMPLETE AGREEMENT. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. -4- (f) COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. (g) SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement will bind and inure to the benefit of and be enforceable by the Company and Executive and their respective successors and assigns; provided that the rights and obligations of Executive under this Agreement will not be assignable without the prior written consent of Executive and the Company. (h) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Illinois without giving effect to any choice or conflict of law provision or rule (either of the State of Illinois or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Illinois. (i) REMEDIES. Each of the parties to this Agreement will be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including reasonable attorneys fees) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that Executive's breach of any term or provision of this Agreement will materially and irreparably harm the Company, that money damages will accordingly not be an adequate remedy for any breach of the provisions of this Agreement by Executive and that the Company in its sole discretion and in addition to any other remedies it may have at law or in equity may apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. (j) AMENDMENT AND WAIVER. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and Executive. * * * -5- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. THE COBALT GROUP, INC. By ----------------------------------- Its ---------------------------------- ------------------------------------- John Holt -6- Schedule to Exhibit 10.5 The Company has entered into a similar Confidentiality and Noncompetition Agreement on the same terms set forth above with Geoffrey Barker, dated February 28, 1997. -7- EX-10.6 9 EXHIBIT 10.6 Exhibit 10.6 WARRANT TO PURCHASE 37,500 SHARES OF COMMON STOCK OF THE COBALT GROUP, INC. THIS CERTIFIES THAT, for payment of $100 and other due and valid consideration, GH Investments or its assigns is entitled to subscribe for and purchase from The Cobalt Group, Inc. a Washington corporation (the "Company"), THIRTY-SEVEN THOUSAND FIVE HUNDRED (37,500) fully paid and nonassessable shares of the Common Stock of the Company at the price of $0.55 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant, as set forth below. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means GH Investments, any party who acquires all or a part of this Warrant as a registered transferee of GH Investments, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized common stock, par value $.01 per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. EXERCISE; TRANSFERABILITY. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company prior to the expiration of this Warrant and accompanied or preceded by the Surrender of this Warrant along with a check in payment of the Warrant Exercise Price for such shares. (b) This Warrant may be exercised in whole or in part at any time from the date hereof to and including February 28, 2004. (c) Until the Company has conducted a public offering of its Common Stock registered under the Securities Act of 1933, as amended (an "Initial Public Offering), this Warrant may not be sold, assigned, hypothecated, or otherwise transferred except -1- to partners of GH Investments and subject to the opinion of counsel as provided in Section 7 hereof that such transaction is not in violation of federal or state securities laws. After an Initial Public Offering, this Warrant may be sold, assigned, hypothecated, or otherwise transferred without restriction, subject to the opinion of counsel as provided in Section 7 hereof that such transaction is not in violation of federal or state securities laws. 2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in the case of loss, theft, or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses, taxes (other than stock transfer taxes), and other charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 2. 3. ISSUANCE OF THE WARRANT SHARES. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such Warrant Shares as aforesaid. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder -2- seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for issuance of the Warrant Shares. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof; and without limiting the generality of the foregoing, the Company covenants and agrees that it will from time to time take all such action as may be requisite to assure that the par value per share of its Common Stock is at all times equal to, or less than, the then effective Warrant Exercise Price. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 5. ANTIDILUTION ADJUSTMENTS. The provisions of this Warrant are subject to adjustment as provided in this Section 5. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: (i) pay a dividend or make a distribution on its Common Stock in shares of Common Stock, (ii) subdivide its Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Warrant Exercise Price in effect immediately prior to such action shall be adjusted so that the Holder of any Warrant thereafter surrendered for exercise shall be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately following such action had such Warrant been exercised immediately prior thereto. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive) shall determine the allocation of the -3- adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) In case of any consolidation or merger to which the Company is the party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above, but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which he would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. (c) Upon any adjustment of the Warrant Exercise Price, then and in each such case, the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. -4- 7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel and to counsel to the original purchaser of this Warrant. If in the opinion of each such counsel the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If, in the opinion of either of the counsel referred to in this Section 7, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 6 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the opinion of both such counsel, are permitted by law. 8. CONVERSION RIGHTS. (a) In addition to and without limiting the rights of the holder of this Warrant under the terms of this Warrant, the holder of this Warrant shall have the right (the "Conversion Rights") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this paragraph 8 at any time or from time to time prior to its expiration. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder of this Warrant, without payment by the holder of any exercise pace or any cash or other consideration, that number of shares of Common Stock equal to the quotient obtained by dividing the Net Value (as -5- hereinafter defined) of the Converted Warrant Stock, determined in each case as of the close of business on the Conversion Date (as hereinafter defined). The "Net Value" of the Converted Warrant Shares shall be determined by subtracting the aggregate warrant purchase price of the Converted Warrant Shares from the aggregate fair market value of the Converted Warrant Shares. No fractional shares shall be issuable upon exercise of the Conversion Rights and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder of this Warrant an amount in cash equal to the fair market value of the resulting fractional share. (b) The Conversion Right may be exercised by the holder of this Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in paragraph (a) above as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of the Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant shall be issued as of the Conversion Date and shall be delivered to the holder of this Warrant within 15 days following the Conversion Date. (c) For purposes of this paragraph 8, the "fair market value" of a share of Common Stock as of a particular date shall mean, if the Common Stock is traded on a securities exchange or on the NASDAQ National Market System, the average of the closing prices of the Common Stock on such exchange or the NASDAQ National Market System on the 5 trading days ending on the trading day prior to the date of determination, or if the Common Stock is otherwise traded in the over-the-counter market, the average of the closing bid prices on the 5 trading days ending on the trading day prior to the date of determination. If at any time the Common Stock is not traded on an exchange or the NASDAQ National Market System, or otherwise traded in the over-the-counter market, the Fair Market Value shall be deemed to be the higher of (i) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made, or (ii) the fair value thereof determined in good faith by the Board of Directors of the Company as of a date which is within 15 days of the date as of which the determination is to be made. -6- IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated February 27, 1997. THE COBALT GROUP, INC. By: ------------------------------- Its: ------------------------------ -7- WARRANT EXERCISE (To be Executed by the Registered Holder in Order to Exercise Warrant) The undersigned hereby irrevocably elects to exercise the attached Warrant and to purchase for cash ____________ (*) of the shares issuable upon the exercise of said Warrant and requests that certificates for such Shares shall be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF REGISTERED HOLDER - -------------------------- - -------------------------- GH INVESTMENTS - ------------------------------------------------------------------- Address Dated: , 19 ------------------------------------------ ------- Signature: --------------------------------------------------------- * Insert here the number of Warrants evidenced on the face of the Warrant (or, in the case of a partial exercise, the portion thereof being exercised), in either case without making any adjustment for additional Common Stock or any other securities or property or cash which, pursuant to the adjustment provisions referred to in the Warrant, may be deliverable upon exercise. -8- WARRANT ASSIGNMENT (To be Executed by the Registered Holder in Order to Transfer Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _________________ the purchase right represented by the foregoing Warrant to purchase _________ shares of Common Stock of _____________ to which such Warrant relates and appoints ____________ attorney to transfer such purchase right on the books of __________________ with full power of substitution in the premises. - ---------------------------------------------------- (Name) - ----------------------------------------------------------------- (Address) Dated: , 19 ------------------------- ------ Signature: ------------------------------------------ -9- EX-10.7 10 EXHIBIT 10.7 Exhibit 10.7 REGISTRATION AGREEMENT THIS AGREEMENT is made as of February 28, 1997, between The Cobalt Group, Inc., a Washington corporation (the "Company") and the Persons listed on the Schedule of Purchasers attached hereto (collectively referred to herein as the "Purchasers" and individually as a "Purchaser"). The parties to this Agreement are parties to a Purchase Agreement of even date herewith (the "Purchase Agreement"). In order to induce the Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the Closing under the Purchase Agreement. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in the Purchase Agreement. The parties hereto agree as follows: 1. DEMAND REGISTRATIONS. (a) REQUESTS FOR REGISTRATION. At any time after the second anniversary of the date hereof, the holders of at least a majority of the Registrable Securities (as defined below) may request registration under the Securities Act of all or part of their Registrable Securities on Form S-1 or any similar long-form registration ("Long-Form Registration"), or on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations") if available. Such request for a Demand Registration shall specify (i) the number of Registrable Securities requested to be registered, (ii) the anticipated per share price range for such offering, and (iii) if such holders wish to sell Registrable Securities in a market other than that of the market transactions, the intended method of distribution. Within ten days after receipt of any such request, the Company will give written notice of such requested registration to all other holders of Registrable Securities and, subject to the limitation set forth in Section 1(d) hereof, will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. All registrations requested pursuant to this paragraph l(a) are referred to herein as "Demand Registrations". (b) LONG-FORM REGISTRATIONS. The holders of Registrable Securities will be entitled to request one Long-Form Registration in which the Company will pay all Registration Expenses. A registration will not count as the permitted Long-Form Registration until it has become effective and unless the holders of Registrable Securities are able to register and sell at least 90% of the Registrable Securities requested to be included in such registration; provided that -1- in any event the Company will pay all Registration Expenses in connection with any registration initiated as a Long-Form Registration whether or not it has become effective. (c) SHORT-FORM REGISTRATIONS. In addition to the Long-Form Registration provided pursuant to paragraph 1(b), the holders of Registrable Securities will be entitled to request three Short-Form Registrations in which the Company will pay all Registration Expenses. Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form. After the Company has become subject to the reporting requirements of the Securities Exchange Act, the Company will use its best efforts to make Short-Form Registrations on Form S-3 available for the sale of Registrable Securities. (d) PRIORITY ON DEMAND REGISTRATIONS. The Company will not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of at least a majority of the Registrable Securities initially requesting such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold therein without adversely affecting the marketability of the offering, the Company will include in such registration prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold without adversely affecting the marketability of the offering, pro rata among the respective holders thereof on the basis of the amount of Registrable Securities owned by each such holder. (e) RESTRICTIONS ON DEMAND REGISTRATIONS. The Company will not be obligated to effect a Demand Registration within six months after the effective date of a registration in which the holders of Registrable Securities were given piggyback rights pursuant to paragraph 2 and in which there was no reduction in the number of Registrable Securities requested to be included. The Company may postpone for up to six months the filing or the effectiveness of a registration statement for a Demand Registration if the Company determines in its reasonable discretion that such Demand Registration could reasonably be expected to have an adverse effect on any proposal or plan by the Company to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction; provided that in such event, the holders of Registrable Securities initially requesting such Demand Registration will be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration will not count as the permitted Long-Form Registration hereunder and the Company will pay all Registration Expenses in connection with such registration. (f) OTHER REGISTRATION RIGHTS. Except for the securities held by Tom Alberg and Madrona Investment Group LLC as of the date hereof and as provided in this Agreement, the Company will not grant to any Persons the right to request the Company to register any equity securities of the Company, or any securities convertible or exchangeable into or exercisable for -2- such securities, without the prior written consent of the holders of at least a majority of the Registrable Securities, which consent shall not be unreasonably withheld. (g) REGISTRABLE SECURITIES. "Registrable Securities" means (i) any Series A Preferred Stock issued pursuant to the Purchase Agreement, (ii) any Common Stock issued upon the conversion of any Series A Preferred Stock issued pursuant to the Purchase Agreement, and (ii) any Common Stock issued or issuable with respect to the securities referred to in clauses (i) and (ii) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force). For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. Unless otherwise stated, other capitalized terms contained herein have the meanings set forth in the Purchase Agreement. 2. PIGGYBACK REGISTRATIONS. (a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration or a registration related solely to employee benefit plans) and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company will give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration, which notice shall specify whether such offer will be underwritten and shall include all jurisdictions in which the Company intends to attempt to qualify such securities under applicable blue sky or state securities laws, and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. (b) PIGGYBACK EXPENSES. The Registration Expenses of the holders of Registrable Securities will be paid by the Company in all Piggyback Registrations. (c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, including the proposed price for the securities, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number -3- of shares owned by each such holder, and (iii) third, other securities requested to be included in such registration. (d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, including the proposed price for the securities, the Company will include in such registration (i) first, the securities requested to be included therein by the holders requesting such registration, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of shares owned by each such holder, and (iii) third, other securities requested to be included in such registration. (e) OTHER REGISTRATIONS. If the Company has previously filed a registration statement with respect to Registrable Securities pursuant to paragraph 1 or pursuant to this paragraph 2, and if such previous registration has not been withdrawn or abandoned, the Company will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least six months has elapsed from the effective date of such previous registration. 3. HOLDBACK AGREEMENTS. (a) Each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 90-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration in which Registrable Securities are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the 90-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering otherwise agree, and (ii) to cause each holder of its Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such 90-day period -4- (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. Notwithstanding the foregoing, the Company may (i) issue securities upon exercise or conversion of rights or other securities outstanding on the date of execution of the underwriting agreement in connection with such underwritten Demand Registration or underwritten Piggyback Registration and (ii) issue equity securities in the ordinary course of business pursuant to The Cobalt Group, Inc. 1995 Stock Option Plan. 4. REGISTRATION PROCEDURES. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed); (b) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 90 days and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions (a) in the case of a Demand Registration, as any seller reasonably requests, (b) in the case of a Piggyback Registration, in such jurisdictions as are specified in the notice sent pursuant to paragraph 2(a) and (3) do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided, in each case, that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this -5- subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on The Nasdaq Stock Market and, if listed on The Nasdaq Stock Market, use its best efforts to secure designation of all such Registrable Securities covered by such registration statement as a "national market system security" of The Nasdaq Stock Market within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing that, to secure Nasdaq authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements satisfactory to Company in its reasonable discretion (including underwriting agreements in customary form); (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter upon reasonable notice and at reasonable times, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply upon reasonable notice and at reasonable times, all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (j) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; -6- (k) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Company will use its reasonable best efforts promptly to obtain the withdrawal of such order; (l) use its best efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Securities; and (m) obtain a comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the holders of a majority of the Registrable Securities being sold reasonably request (provided that such Registrable Securities constitute at least 10% of the securities covered by such registration statement). 5. REGISTRATION EXPENSES. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding fees, discounts and commissions attributable to Registrable Securities) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), will be borne as provided in this Agreement, except that the Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on The Nasdaq Stock Market. (b) In connection with each Demand Registration and each Piggyback Registration, the Company will reimburse the holders of Registrable Securities covered by such registration for the reasonable and documented fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Securities initially requesting such registration, not to exceed $15,000. (c) To the extent Registration Expenses are not required to be paid by the Company, each holder of securities included in any registration hereunder will pay those Registration Expenses, including without limitation underwriting fees, discounts and commissions, allocable to the registration of such holder's securities so included, and any Registration Expenses -7- not so allocable will be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. 6. INDEMNIFICATION. (a) The Company agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder; provided that the obligation to indemnify will be individual to each holder and will be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement, provided the Company shall not be obligated to indemnify an underwriter for any liability relating to the failure of such underwriter to deliver a preliminary or final prospectus. (c) Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not -8- to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party. 7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 8. MISCELLANEOUS. (a) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not take any action, or permit any change to occur, with respect to its securities which would materially and adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would materially and adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares). (b) REMEDIES. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. (c) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of at least as a majority of the Registrable Securities. (d) SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the -9- benefit of purchasers or holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities. (e) INCORPORATION OF PURCHASE AGREEMENT PROVISIONS. The paragraphs entitled "Severability," "Counterparts," "Descriptive Headings" and "Governing Law" of the Purchase Agreement are hereby incorporated in this Agreement by reference and made a part hereof, except that the provisions of such paragraphs shall refer to this Agreement rather than the Purchase Agreement and shall continue to apply hereto regardless of whether the Purchase Agreement is no longer in effect. (f) NOTICES. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable express courier service (charges prepaid) or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications will be sent to each Purchaser at the address indicated on the Schedule of Purchasers and to the Company at the address indicated below: The Cobalt Group, Inc. 2030 First Avenue Suite 300 Seattle, Washington 98121 Attention: John W.P. Holt Geoffrey T. Barker with a copy to: Stoel Rives LLP One Union Square 600 University Street Suite 3600 Seattle, WA 98101-3197 Attention: Ronald J. Lone or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. * * * * -10- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE COBALT GROUP, INC. By ---------------------------------------- Name: Title: THE PRODUCTIVITY FUND III, L.P., a Delaware limited partnership By: First Analysis Management Company III, L.L.C., Its General Partner By: ------------------------------- Its: ENVIRONMENTAL PRIVATE EQUITY FUND II, L.P., a Delaware limited partnership By: Environmental Private Equity Management II, L.P. Its: General Partner By: First Analysis EPEF Management Company II, a General Partner By: First Analysis Corporation, a General Partner By: ------------------------------- ------------------------------------------ Mark Koulogeorge -11- SCHEDULE OF PURCHASERS
Total Purchase Number of Shares Price of Shares of Name and Address of Preferred Stock Preferred Stock - ---------------- ------------------ --------------- The Productivity Fund III, 1,804,373 $1,000,000 L.P. The Sears Tower Suite 9500 233 South Wacker Drive Chicago, IL 60606 Environmental Private 2,481,014 $1,375,000 Equity Fund II, L.P. The Sears Tower Suite 9500 233 South Wacker Drive Chicago, IL 60606 Mark Koulogeorge 225,547 $ 125,000 The Sears Tower Suite 9500 233 South Wacker Drive Chicago, IL 60606
-12- EX-10.7(1) 11 EXHIBIT 10.7.1 Exhibit 10.7.1 FIRST AMENDMENT TO REGISTRATION AGREEMENT This First Amendment to the Registration Agreement (this "Amendment") is entered into as of October 7, 1998, by and between The Productivity Fund III, L.P., a Delaware limited partnership (the "Productivity Fund"), Environmental Private Equity Fund II, L.P., a Delaware limited partnership (the "Environmental Private Equity Fund"), Mark Koulogeorge, Warburg, Pincus Equity Partners, L.P. ("WPEP") (all such persons listed on the Schedule of Purchasers attached hereto, and collectively referred to herein as the "Purchasers" and individually as a "Purchaser") and The Cobalt Group, Inc., a Washington corporation (the "Company"). RECITALS A. The Company, The Productivity Fund, the Environmental Private Equity Fund and Mark Koulogeorge are parties to a Registration Agreement, dated as of February 28, 1997 (the "Agreement"). B. The Company and WPEP have entered into a Purchase Agreement, of even date herewith (the "Series B Purchase Agreement"). All capitalized terms used herein and not defined shall have the meaning set forth in the Agreement. C. The Company and the Purchasers desire to amend the Agreement to induce WPEP to enter into the Series B Purchase Agreement. AGREEMENT 1. AMENDMENT TO PARAGRAPH 1(a). The first sentence of Paragraph 1(a) is hereby amended to insert October 1, 2000," in the place of "the second anniversary of the date hereof." 2. AMENDMENT TO PARAGRAPH 1(g). The first sentence of Paragraph 1(g) is hereby amended to read as follows: "'Registrable Securities' means (i) any Series A Preferred Stock issued pursuant to the Purchase Agreement, (ii) any Series B Preferred Stock issued pursuant to the Series B Purchase Agreement, (ii) any Common Stock issued upon the conversion of any Series A Preferred Stock issued pursuant to the Purchase Agreement, (iv) any Common Stock issued upon the conversion of any Series B Preferred Stock issued pursuant to the Series B Purchase Agreement, and (v) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii), (iii) and (iv) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization." The last sentence of Paragraph 1(g) is hereby amended to read as follows: "Unless otherwise stated, other capitalized terms contained herein shall have the meanings set forth in the Series B Purchase Agreement." 3. AMENDMENT TO PARAGRAPH 8(e). Paragraph 8(e) is hereby amended to insert "the Series B Purchase Agreement" in the place of "the Purchase Agreement." 4. NO OTHER AMENDMENTS. Except as expressly amended as set forth above, the Registration Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment on the date first written above. THE COBALT GROUP, INC. By: -------------------------------------- Name: ----------------------------- Title: ---------------------------- WARBURG, PINCUS EQUITY PARTNERS, L.P. By: Warburg, Pincus & Co., Inc. Its: General Partner By: ------------------------------ Joseph P. Landy, Partner THE PRODUCTIVITY FUND III, L.P., a Delaware limited partnership By: First Analysis Management Company III, L.L.C., Its: General Partner By: ------------------------------ Its: ------------------------------ ENVIRONMENTAL PRIVATE EQUITY FUND II, L.P., a Delaware limited partnership By: Environmental Private Equity Management II, L.P. Its: General Partner By: First Analysis EPEF Management Company II, a General Partner By: First Analysis Corporation, a General Partner By: --------------------------- Mark Koulogeorge --------------------------- Mark Koulogeorge SCHEDULE OF PURCHASERS
NUMBER OF SHARES OF PREFERRED STOCK NAME AND ADDRESS Warburg, Pincus Equity Partners, L.P. Series A: 788,004 466 Lexington Avenue Series B: 1,858,100 New York, NY 10017 Series B-1: 5,118,091 The Productivity Fund III, L.P. Series A: 507,580 The Sears Tower Series B: 0 Suite 9500 Series B-1: 0 233 South Wacker Drive Chicago, IL 60606 Environmental Private Equity Fund II, L.P. Series A: 697,924 The Sears Tower Series B: 0 Suite 9500 Series B-1: 0 233 South Wacker Drive Chicago, IL 60606 Mark Koulogeorge Series A: 112,774 The Sears Tower Series B: 0 Suite 9500 Series B-1: 0 233 South Wacker Drive Chicago, IL 60606
EX-10.7(2) 12 EXHIBIT 10.7.2 Exhibit 10.7.2 SECOND AMENDMENT TO REGISTRATION AGREEMENT This Second Amendment to the Registration Agreement (this "Amendment") is entered into as of January 7, 1998, by and between The Reynolds and Reynolds Company, an Ohio corporation ("Reynolds"), Warburg, Pincus Equity Partners, L.P. ("WPEP") and The Cobalt Group, Inc., a Washington corporation (the "Company"). RECITALS A. The Company, The Productivity Fund III, L.P., a Delaware limited partnership, Environmental Private Equity Fund II, L.P., a Delaware limited partnership, Mark Koulogeorge, and Warburg, Pincus Equity Partners, L.P.(collectively, the "Purchasers") are parties to a First Amendment to Registration Agreement, dated as of October 7, 1998. B. The Company plans to issue shares of its Series B Preferred Stock to Reynolds pursuant to the Acquisition and Investment Agreement between the Company and Reynolds dated as of November 25, 1997. C. The Company wishes to add, and the Purchasers have consented to the addition of, Reynolds to the Schedule of Purchasers. AGREEMENT 1. SCHEDULE OF PURCHASERS. The Schedule of Purchasers is hereby amended to insert: "The Reynolds and Reynolds Company, 800 Germantown Street, Dayton, OH 45407. Series B - 71429." 2. AMENDMENT TO PARAGRAPH 1(g)(ii). Paragraph 1(g)(ii) is hereby amended to read as follows: "(ii) any Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and any Series B Preferred Stock issued to the Reynolds and Reynolds Company," 3. AMENDMENT TO PARAGRAPH 1(g)(iv). Paragraph 1(g)(iv) is hereby amended to read as follows: "(iv) any Common Stock issued upon the conversion of any Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and any Common Stock issued upon the conversion of any Series B Preferred Stock issued to the Reynolds and Reynolds Company, and" 4. NO OTHER AMENDMENTS. Except as expressly amended as set forth above, the Registration Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment on the date first written above. THE COBALT GROUP, INC. By: --------------------------------------- Title: ------------------------------------- WARBURG, PINCUS EQUITY PARTNERS, L.P. By: Warburg, Pincus & Co., Inc. Its: General Partner By: ---------------------------------- Joseph P. Landy, Partner THE REYNOLDS AND REYNOLDS COMPANY By: ---------------------------------------- Title: ------------------------------------- EX-10.8 13 EXHIBIT 10.8 Exhibit 10.8 MANAGEMENT SERVICES AGREEMENT THIS AGREEMENT is made as of February 28, 1997 by and between The Cobalt Group, Inc., a Washington corporation (the "COMPANY"), and First Analysis Securities Corporation, an Illinois corporation ("FIRST ANALYSIS"). WHEREAS, the Company desires to retain First Analysis and First Analysis desires to perform for the Company certain services; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows: 1. TERM. This Agreement shall be in effect from the date hereof and shall terminate upon the Sale of the Company (used herein as defined in the Stockholders Agreement as of the date hereof by and among the Company and certain of the stockholders of the Company). 2. SERVICES. First Analysis shall perform or cause to be performed such services for the Company and its subsidiaries as directed by the Company's board of directors, which may include, without limitation, the following: (a) general executive and management services; (b) identification, support, negotiation and analysis of acquisitions and dispositions by the Company; (c) support, negotiation and analysis of financing alternatives, including, without limitation, in connection with acquisitions, capital expenditures and refinancing of indebtedness; (d) finance functions, including assistance in the preparation of financial projections, and monitoring of compliance with financing agreements; and (e) other services for the Company and its subsidiaries upon which the Company's board of directors and First Analysis agree. 3. TRANSACTION FEES. During the term of this Agreement, First Analysis shall be entitled to receive from the Company a transaction fee in connection with the consummation of an initial public offering of the Company's securities under the Securities Act of 1933 (an "IPO") in an amount equal to 0.75% of the aggregate value of such transaction (each such 1 payment, a "TRANSACTION FEE"). In addition, during the term of this Agreement, First Analysis shall be entitled to receive from the Company a Transaction Fee in connection with the consummation of (a) each acquisition by the Company of an additional business or disposition by the Company of any or all business assets (other than sales of inventory in the ordinary course of business and other than the sale of assets relating to HomeScout) and (b) each financing of either debt or equity by the Company (other than for an IPO), in each case, in an amount equal the greater of 1.5% of the aggregate value of such transaction or the percentage fee that constitutes the industry standard for the performance of such services; provided, however, First Analysis shall defer the receipt of any Transaction Fee from the Company until the earlier of the Sale of the Company or such time as the Company's enterprise value (defined herein as the sum of the Company's debt plus its stockholders' equity) is at least $10,000,000. 4. PERSONNEL. First Analysis shall provide and devote to the performance of this Agreement the services of Mark Koulogeorge (the "COORDINATOR") and such other partners, employees and agents of First Analysis as the Coordinator shall deem appropriate to the furnishing of the services required. 5. LIABILITY. Neither First Analysis nor any of its affiliates, partners, employees or agents shall be liable to the Company or its subsidiaries or affiliates for any loss, liability, damage or reasonable expense arising out of or in connection with the performance of services contemplated by this Agreement, unless such loss, liability, damage or expense shall be proven to result directly from gross negligence, willful misconduct or bad faith on the part of First Analysis, its affiliates, partners, employees or agents acting within the scope of their employment or authority. 6. INDEMNITY. The Company and its subsidiaries shall defend, indemnify and hold harmless First Analysis, its affiliates, partners, employees and agents from and against any and all loss, liability, damage, or expenses arising from any claim (a "CLAIM") by any person with respect to, or in any way related to, the performance of services contemplated by this Agreement (including attorneys' fees) (collectively, "CLAIMS") resulting from any act or omission of First Analysis, its affiliates, partners, employees or agents, other than for Claims which shall be proven to be the direct result of gross negligence, bad faith or willful misconduct by First Analysis, its affiliates, partners, employees or agents. The Company and its subsidiaries shall defend at its own cost and expense any and all suits or actions (just or unjust) which may be brought against the Company, its subsidiaries and First Analysis, its officers, directors, affiliates, partners, employees or agents or in which First Analysis, its affiliates, partners, employees or agents may be impleaded with others upon any Claim or Claims or upon any matter, directly or indirectly, related to or arising out of this Agreement or the performance hereof by First Analysis, its affiliates, partners, employees or agents, except that if such damage shall be proven to be the direct result of gross negligence, bad faith or willful misconduct by First Analysis, its affiliates, partners, employees or agents, then First Analysis shall reimburse the Company and its subsidiaries for the costs of defense and other costs incurred by the Company and its subsidiaries. 2 7. NOTICES. All notices hereunder shall be in writing and shall be delivered by reputable express courier, personally or mailed by United States mail, postage prepaid, addressed to the parties as follows: To the Company: The Cobalt Group, Inc. 2030 First Avenue, Suite 300 Seattle, Washington 98121 Attention: President with a copy to: Stoel Rives LLP One Union Square 600 University Street, Suite 3600 Seattle, Washington 98101-3197 Attention: Ronald J. Lone To First Analysis: First Analysis Securities Corporation 233 South Wacker Drive, Suite 9500 Chicago, Illinois 60606 Attention: Mark Koulogeorge with a copy to: McDermott, Will & Emery 227 W. Monroe Street Chicago, Illinois 60606-5096 Attention: Timothy R.M. Bryant 8. ASSIGNMENT. Neither party may assign any rights or obligations hereunder to any other party without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, that First Analysis (a) may assign its rights and obligations under this Agreement to any of its affiliates without the consent of the Company and (b) shall assign its rights and obligations to the Coordinator if he shall no longer be affiliated with First Analysis. The assignor shall remain liable for the performance of any assignee. 9. SUCCESSORS. This Agreement and all the obligations and benefits hereunder shall inure to the successors and assigns of the parties. 3 10. COUNTERPARTS. This Agreement may be executed and delivered by each party hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and both of which taken together shall constitute but one and the same agreement. 11. ENTIRE AGREEMENT; MODIFICATION; GOVERNING LAW. The terms and conditions hereof constitute the entire agreement between the parties hereto with respect to the subject matter of this Agreement and supersede all previous communications, either oral or written, representations or warranties of any kind whatsoever, except as expressly set forth herein. No modifications of this Agreement nor waiver of the terms or conditions thereof shall be binding upon either party unless approved in writing by an authorized representative of such party. All issues concerning this agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the State of Illinois. * * * * 4 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE COBALT GROUP, INC. By: ------------------------------------- Its: ------------------------------------ FIRST ANALYSIS SECURITIES CORPORATION By: ------------------------------------- Its: ------------------------------------ 5 EX-10.8(1) 14 EXHIBIT 10.8.1 Exhibit 10.8.1 FIRST AMENDMENT TO MANAGEMENT SERVICES AGREEMENT This First Amendment to the Management Services Agreement (this "Amendment") is entered into as of October 7, 1998, by and between First Analysis Securities Corporation, an Illinois corporation ("First Analysis"), and The Cobalt Group, Inc., a Washington corporation (the "Company"). RECITALS A. The Company and First Analysis are parties to a Management Services Agreement, dated as of February 28, 1997 (the "Agreement"). B. The Company has entered into a purchase agreement, of even date herewith (the "Series B Purchase Agreement") with Warburg, Pincus Equity Partners, L.P. ("WPEP"). C. The Company and First Analysis desire to amend the Agreement to induce WPEP to enter into the Series B Purchase Agreement. AGREEMENT 1. AMENDMENT TO SECTION 3. Section 3 is hereby amended in its entirety to read as follows: "First Analysis shall be entitled to receive from the Company a fee of $150,000 for its services under this Agreement. This fee shall be payable upon the earlier of (a) the completion by the Company of a Qualified Public Offering (as defined in the Company's Amended and Restated Shareholders Agreement) or (b) a liquidation of the Company (as defined in the Company's Amended and Restated Articles of Incorporation) so long as in such liquidation the Purchaser (as defined in the Series B and B-1 Preferred Stock Purchase Agreement of the Company dated October 7, 1998) receives the full liquidation preference to which it is entitled in such liquidation pursuant to the Company's Amended and Restated Articles of Incorporation." 2. NO OTHER AMENDMENTS. Except as expressly amended as set forth above, the Management Services Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment on the date first written above. THE COBALT GROUP, INC. By: ------------------------------------- Its: ------------------------------------ FIRST ANALYSIS SECURITIES CORPORATION By: ------------------------------------- Its: ------------------------------------ EX-10.9 15 EXHIBIT 10.9 Exhibit 10.9 OFFICE LEASE This lease, made and entered into at Portland, Oregon, this 20th day of October, 1997 by and between LANDLORD: CTL Management, Inc. and TENANT: Compu-Time Inc. Landlord hereby leases to Tenant the following: 5,008 SQ.FT KNOWN AS SUITES 110, 206, 208, 209 AND 210 (the premises) in LEWIS AND CLARK BUILDING (the building) at 8305 SE MONTEREY, Oregon, for a term commencing DECEMBER 1, 1997. and continuing through NOVEMBER 30, 1999 at a Monthly Base Rental as follows: YEAR 1 YEAR 2 $13.50/SQ.FT. = $5,634/MONTH $14.00/SQ.FT. = 5,842/MONTH Rent is payable in advance on the 1ST DAY of each month commencing December 1, 1997. Landlord and Tenant covenant and agree as follows: 1.1 DELIVERY OF POSSESSION. Should Landlord be unable to deliver possession of the premises on the date fixed for the commencement of the term, commencement will be deferred and Tenant shall owe no rent until notice from the Landlord tendering possession to Tenant. If possession is not so tendered within 90 days following commencement of the term, then Tenant may elect to cancel this lease by notice to Landlord within 10 days following expiration of the 90 day period. Landlord shall have no Page 1 Landlord Tenant -------- ----- liability to Tenant for delay in delivering possession, nor shall such delay extend the term of this lease in any manner. 2.1 RENT PAYMENT. Tenant shall pay the Base Rent for the premises and any additional rent provided herein without deduction or offset. Rent for any partial month during the lease term shall be prorated to reflect the number of days during the month that Tenant occupies the premises. Additional rent means amounts determined under section 19 of this lease and any other sums payable by Tenant to Landlord under this lease. Rent not paid when due shall bear interest at the rate of one-and-one-half per month until paid. Landlord may at its option impose a late charge of $.05 for each $1 of rent for rent payments made more than 10 days late in lieu of interest for the first month of delinquency, without waiving any other remedies available for default. Failure to impose a late charge shall not be a waiver of Landlord's rights hereunder. 3.1 LEASE CONSIDERATION. Upon execution of the lease Tenant has paid the Base Rent for the first full month to the lease term for which rent is payable and in addition has paid the sum of $ -0- as lease consideration. Landlord may apply the lease consideration to pay the cost of performing any obligation which Tenant fails to perform within the time required by this lease, but such application by Landlord shall not be the exclusive remedy for Tenant's default. If the lease consideration is applied by Landlord, Tenant shall on demand, pay the sum necessary to replenish the lease consideration to its original amount. To the extent not applied by Landlord to cure defaults by Tenant, the lease consideration shall be applied against the rent payable for the last month of the term. The lease consideration shall not be refundable. 4.1 USE. Tenant shall use the Premises for business for and for no other purpose without Landlord's written consent. In connection with its use, Tenant shall at its expense promptly comply with all applicable laws, ordinances, rules and regulations of any public authority and shall not annoy, obstruct, or interfere with the rights of other Tenants of the building. Tenant shall create no nuisance nor allow any objectionable fumes, noise, or vibrations to be emitted from the Premises. Tenant shall not conduct any activities that will increase Landlords insurance rates for any portion of the building or that will in any manner degrade or damage the reputation of the Building. 4.2 EQUIPMENT. Tenant shall install in the Premises only such office equipment as is customary for general office use and shall not overload the floors or electrical circuits of the Premises or Building or alter the plumbing or wiring of the Premises or Building. Landlord must approve in advance the location of and manner of installing any wiring or electrical, heat generating or communications equipment or exceptionally heavy articles. All telecommunications equipment, conduit, cables and wiring Please Initial Page 2 ------ ------- Landlord Tenant and any additional air conditioning required because of heat generating equipment or special lighting installed by Tenant shall be installed and operated at Tenant's expense. 4.3 SIGNS. No signs, awnings, antennas, or other apparatus shall be painted on or attached to the Building or anything placed on any glass or woodwork of the Premises or positioned so as to be visible from outside the Premises without Landlords written approval as to design, size, location, and color. All signs installed by Tenant shall comply with Landlord's standards for signs and all applicable codes and all signs and sign hardware shall be removed upon termination of this lease with the sign location restored to its former state unless Landlord elects to retain all or any portion thereof. 5.1 UTILITIES AND SERVICES. Landlord will furnish water, electricity and elevator service and, during the normal Building hours of 8:00 AM to 6:00 PM Monday through Friday except holidays, will furnish heat and air conditioning (if the Building is air conditioned). Janitorial services will be provided in accordance with the regular schedule of the Building, which schedule and service may change from time to time. Tenant shall comply with all government laws or regulations regarding the use or reduction of utilities on the Premises. Interruption of services or utilities shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, render Landlord liable to Tenant for damages, or relieve Tenant from performance of Tenant's obligations under this lease. Landlord shall take all reasonable steps to correct any interruptions of service. Electrical service will be 110 volts unless different service already exist in the Premises. Tenant shall provide its own surge protection for power furnished to computers. 5.2 EXTRA USAGE. If Tenant uses excess amounts of utilities or services of any kind because of operation outside of normal Building hours, high demands from office machinery and equipment, nonstandard lighting, r any other cause, Landlord may impose a reasonable charge for supplying such extra utilities of services, which charge shall be payable monthly by Tenant in conjunction with rent payments. In case of dispute over any extra charge under this paragraph, Landlord shall designate a qualified independent engineer whose decision shall be conclusive on both parties. Landlord and Tenant shall each pay one-half of the cost of such determination. 6.1 MAINTENANCE AND REPAIR. Landlord shall have no liability for failure to perform required maintenance and repair unless written notice of such maintenance or repair is given be Tenant and Landlord fails to commence efforts to remedy the problem in a reasonable time and manner. Landlord shall have the right to erect scaffolding and other apparatus necessary for the purpose of making repairs, and Landlord shall have no liability for interference with Tenant's use because of repairs and installation. Page 3 Please Initial -------- -------- Landlord Tenant Tenant shall have no claim against Landlord for any interruption or reduction of services or interference with Tenant's occupancy, and no such interruption or reduction shall be construed as a constructive or other eviction of Tenant. Repair of damage caused by negligent or intentional acts or breach of this lease by Tenant, its employees or invitees shall be at Tenant's expense. 6.2 ALTERATIONS. Tenant shall not make any alterations, additions, or improvements to the Premises, change the color of the interior, or install any wall or floor coverings without Landlord's prior written consent which may be withheld in Landlord's sole discretion. Any such improvements, alterations, wiring, cables or conduit installed by Tenant shall at once become part of the Premises and belong to Landlord except for removable machinery and unattached moveable trade fixtures. Landlord may at its option require Tenant to remove any improvements, alterations, wiring, cables or conduit installed by Tenant and restore the Premises to the original condition upon termination of this lease. Landlord shall have the right to approve the contractor used by Tenant for any work in the Premises, and to post notices of non responsibility in connection with work being performed by Tenant in Premises. 7.1 INDEMNITY. Tenant shall not allow any liens to attach to the Building or Tenant's interest in the Premises as a result of its activities. Tenant shall indemnify and defend Landlord and its managing agents from any claim, liability, damage, or loss occurring on the Premises, arising out of any activity by Tenant, its agents, or invitees or resulting from Tenant's failure to comply with any term of this lease. Neither Landlord or its managing agent shall have any liability to Tenant because of loss or damage to Tenant's property or for death or bodily injury caused by the acts or omissions of other Tenants of the Building, or by third parties (including criminal acts). 7.2 INSURANCE. Tenant shall carry liability insurance with limits of not less than One Million Dollars ($1,000,000.00) combined single limit bodily injury and property damage which insurance shall have an endorsement naming Landlord and Landlord's managing agent, if any, as an additional insured and covering the liability insured under paragraph 7.1 of this lease. Tenant shall furnish a certificate evidencing such insurance which shall state that the coverage shall not be canceled or materially changed without 10 days advance notice to Landlord and Landlord's managing agent, if any. A renewal certificate shall be furnished at least 10 days prior to expiration of any policy. 8.1 FIRE OR CASUALTY. "Major Damage" means damage by fire or other casualty to the Building or the Premises which causes the Premises or any substantial portion of the Building to be unusable, or which will cost more than 25 per cent of the pre-damage value of the Building to repair, or which is not covered by insurance. In case of major damage, Landlord may elect to terminate this lease by notice in Page 4 Please Initial ------- ------- Landlord Tenant writing to Tenant within 30 days of such date. If this lease is not terminated following major damage, or if damage occurs which is not major damage, Landlord shall promptly restore the Premises to the condition existing just prior to the damage. Tenant shall promptly restore all damage to tenant improvements or alterations installed by Tenant or pay the cost of such restoration to Landlord if Landlord elects to do the restoration of such improvements. Rent shall be reduced from the date of damage until the date restoration work being performed by Landlord is substantially complete, with the reduction to be in proportion to the area of the Premises not usable by Tenant. 8.2 WAIVER OF SUBROGATION. Tenant shall be responsible for insuring its personal property and trade fixtures located on the Premises and any alterations or Tenant improvements it has made to the Premises. Neither Landlord, its managing agent nor Tenant shall be liable to the other for any loss or damage caused by water damage, sprinkler leakage, or any of the risks that are or could be covered by a special all risk property policy, or for any business interruption, and there shall be no subrogated claim by one party's insurance carrier against the other party arising out of any such loss. This waiver is binding only if it does not invalidate the insurance coverage of either party hereto. 9.1 EMINENT DOMAIN. If a condemning authority takes title by eminent domain or by agreement in lieu thereof to the entire Building or a portion sufficient to render the Premises unsuitable for Tenant's use, then either party may elect to terminate this lease effective on the date that possession is taken by the condemning authority. Rent shall be reduced for the remainder in an amount proportionate to the reduction in area of the Premises caused by the taking. All condemnation proceeds shall belong to Landlord, and Tenant shall have no claim against Landlord or the condemnation award because of the taking. 10.1 ASSIGNMENT AND SUBLETTING. This lease shall bind and inure to the benefit of the parties, their respective heirs, successors, and assigns, provided the Tenant shall not assign its interest under this lease or sublet all or any portion of the Premises without first obtaining Landlords consent in writing. This provision shall apply to all transfers by operation of law including but not limited to mergers and changes in control of Tenant. No assignment shall relieve Tenant of its obligation to pay rent or perform other obligations required by this lease, and no consent to one assignment or subletting shall be a consent to any further assignment or subletting. Landlord shall not unreasonably withhold its consent to any assignment or subletting provided the effective rental paid by the sub-tenant or assignee is not less than the current scheduled rental rate of the Building for comparable space and the proposed Tenant is compatible with Landlord's normal standards for the Building. If Tenant proposes a subletting or assignment to which Landlord is required to consent under this paragraph, Landlord shall have the option of terminating this lease and dealing directly with the proposed sub- Page 5 Please Initial -------- --------- Landlord Tenant tenant or assignee, or any third party. If an assignment or subletting is permitted, any cash profit, or the net value of any other consideration received by Tenant shall pay any costs incurred by Landlord in connection with a request for assignment or subletting, including reasonable attorney's fees. 11.1 DEFAULT Any of the following shall constitute a default by Tenant under this lease: (a) Tenant's failure to pay rent or any other charge under this lease within 10 days after it is due, or failure to comply with any other term or condition within 20 days following written notice from Landlord specifying the noncompliance. If such noncompliance cannot be cured within the 20 day period, this provision shall be satisfied if Tenant commences correction within such period and thereafter proceeds in good faith and with reasonable diligence to effect compliance as soon as possible. Time is of the essence of this lease. (b) Tenant's insolvency, business failure or assignment for the benefit of its creditors. Tenant's commencement of proceedings under any provision of any bankruptcy or insolvency law or failure to obtain dismissal of any petition filed against it under such laws within the time required to answer, or the appointment of a receiver for all or any portion of Tenant's properties or financial records. (c) Assignment or subletting by Tenant in violation of paragraph 10.1. (b) Vacation or abandonment of the Premises without the written consent of Landlord or failure to occupy the Premises within 20 days after notice from Landlord tendering possession. 11.2 REMEDIES FOR DEFAULT. In case of default as described in paragraph 11.1 Landlord shall have the right to the following remedies which are intended to be cumulative and in addition to any other remedies provided under applicable law: (a) Landlord may at its option terminate the lease by notice to Tenant. With or without termination, Landlord may retake possession of the Premises and may use or re-let the Premises without accepting a surrender or waiving the right to damages. Following such retaking or possession, efforts by Landlord to re-let the Premises shall be sufficient if Landlord follows its usual procedures for finding Tenants for the space at rates not less than the current rates for comparable space in the Building. If Landlord has other vacant Page 6 Please Initial -------- --------- Landlord Tenant space in the Building, prospective tenants may be placed in such other space without prejudice to Landlord's claim to damages or loss of rentals from Tenant. (b) Landlord may recover all damages caused by Tenant's default which shall include an amount equal to rentals loss because of the default, lease commissions paid for this lease, and the unamortized cost of any tenant improvements installed by Landlord to meet Tenant's special requirements. Landlord may sue periodically to recover damages as they occur throughout the lease term, and no action for accrued damages shall bar a later action for damages subsequently accruing. Landlord may elect in any one action to recover accrued damages plus damages attributable to the remaining term of the lease. Such damages shall be measured by the difference between the rent under this lease and the reasonable rental value of the Premises for the remainder of the term, discounted to the time of judgment at the prevailing interest rate on judgments. (c) Landlord may make any payment or perform any obligation which Tenant has failed to perform, in which case Landlord shall be entitled to recover from Tenant on demand all amounts so expected, plus interest from the date of the expenditure at the rate of one-and-one-half percent per month. Any such payment or performance by Landlord shall not waive Tenant's default. 12.1 SURRENDER. On expiration or early termination of this lease Tenant shall deliver all keys to Landlord and surrender the Premises vacuumed, swept, and free of all debris and in the same condition as at the commencement of the term subject only to reasonable wear from ordinary use. Tenant shall remove all of its furnishings and trade fixtures that remain its property and repair all damage resulting from such removal. Failure to remove shall be an abandonment of the property, and Landlord may dispose of it in any manner without liability. If Tenant fails to vacate the Premises when required, including failure to remove all its personal property, Landlord may elect either: (i) to treat Tenant as a tenant from month to month, subject to the provisions of this lease except that rent shall be one-and-one-half times the total rent being charged when the lease term expired, and any option or other rights regarding extension of the term or expansion of the Premises shall no longer apply; or (ii) to eject Tenant from the Premises and recover damages caused by wrongful holdover. 13.1 REGULATIONS. Landlord shall have the right but shall not be obligated, to make, revise and enforce regulations or policies consistent with this lease for the purpose of promoting safety, health (including moving, use of common areas and prohibition of smoking), order, economy, cleanliness, and good service to all tenants of the Building. All such regulations and policies shall be complied with as if part of this lease. Page 7 Please Initial -------- --------- Landlord Tenant 14.1 ACCESS. During times other than normal Building hours Tenant's officers and employees or those having business with Tenant may be required to identify themselves or show passes in order to gain access to the Building. Landlord shall have no liability for permitting or refusing to permit access by anyone. Landlord shall have the right to enter upon the Premises at any time by passkey or otherwise to determine Tenant's compliance with this lease, to perform necessary services, maintenance and repairs or alterations to the Building or the Premises, or to show the Premises to any prospective tenant or purchasers. Except in case of emergency such entry shall be at such times and in such manner as to minimize interference with the reasonable business use of the Premises by Tenant. 14.2 FURNITURE AND BULKY ARTICLES. Tenant shall move furniture and bulky articles in and out of the building or make independent use of the elevators only at times approved by Landlord following at least 24 hours written notice to Landlord of the intended move. Landlord will not unreasonably withhold its consent under this paragraph. ___________________________________ following mailing, postpaid prepaid, to the address for the party stated in this lease or to such other address as either party may specify by notice to the other. Notice to Tenant may always be delivered to the Premises. Rent shall be payable to Landlord at the same address and in the same manner, but shall be considered paid only when received. 16.1 SUBORDINATION ATTORNMENT. This lease shall be subject to and subordinate to any mortgage, deeds of trust, or land sales contracts (hereafter collectively referred to as encumbrances) now existing against the Building. At Landlord's option this lease shall be subject and subordinate to any future encumbrance hereafter placed against the Building (including the underlying land) or any modifications of existing encumbrances, and Tenant shall execute such documents as may reasonably be requested by Landlord or the holder of the encumbrance to evidence this subordination. If any encumbrance is foreclosed, then if the purchaser at foreclosure sale gives to Tenant a written agreement to recognize Tenant's lease, Tenant shall attorn to such purchaser and this Lease shall continue. 16.2 TRANSFER OF BUILDING. If the Building is sold or otherwise transferred by Landlord or any successor, Tenant shall attorn to the purchaser or transferee and recognize it as the lessor under this lease, and, provided the purchaser or transferee assumes all obligations hereunder, the transferor shall have no further liability hereunder. Page 8 Please Initial -------- -------- Landlord Tenant 16.3 ESTOPPELS. Either party will within 10 days after notice from the other execute, acknowledge and deliver to the other party a certificate certifying whether or not this lease has been modified and is in full force and effect; whether there are any modifications or alleged breaches by the other party; the dates to which rent has been paid in advance, and the amount of any security deposit or prepaid rent; and any other facts that may reasonably be requested. Failure to deliver the certificate within the specified time shall be conclusive upon the party of whom the certificate was requested that the lease is in full force and effect has not been modified except as may be represented by the party requesting the certificate. If requested by the holder of any encumbrance, or any ground lessor, Tenant will agree to give such holder or lessor notice of and an opportunity to cure any default by Landlord under this lease. 17.1 DISPUTE RESOLUTION. INFORMAL DISPUTE CONFERENCES: In the event the Tenant has a grievance against the Landlord, the Tenant shall notify the Landlord of his/her grievance in writing. The Landlord agrees to meet with the Tenant within Twenty (20) days of receiving said grievance. MEDIATION: In the event any grievance between the parties is not resolved in the Informal Dispute Conference discussed above, the parties agree that said dispute be submitted to mediation, prior to the initiation of any litigation. Either Tenant or Landlord may request mediation of dispute by notifying the other party in writing. Within fifteen (15) days of such request, both parties shall select a mediator. In the event that the parties cannot agree on a mediator, a mediator will be selected pursuant to the rules of the Arbitration Services of Portland, Inc. or the American Arbitration Association. The parties and the mediator shall meet at an agreeable time and place within fifteen (15) days of the mediator's selection in an attempt to mediate the dispute. The mediator will select the time and place for the meeting. The mediator will have five (5) days after the hearing to attempt to resolve the dispute. If either party does not agree with the solutions suggested by the mediator, either party may then request that the matter proceed to arbitration. Each party shall pay their own costs and attorney fees, if any, of participation in the mediation. Each party shall pay one half of the mediator's fee. ARBITRATION: In the event that the parties are unable to resolve their dispute in mediation, the matter shall then proceed to final and binding arbitration. Either party may initiate the arbitration process through a written request to the other. The parties shall then confer and attempt to agree on a single arbitrator. If the parties are unable to do so within twenty (20) days of said request, each party shall select its own arbitrator, the two of whom shall then select a third arbitrator. The costs of arbitration shall be shared equally by the parties. Each party shall pay their own attorney fees. The arbitrator(s) will schedule and conduct a hearing within thirty (30) days of the selection of the arbitrator(s). Within twenty-one (21) days of the arbitration hearing, the arbitrator(s) shall serve written notice of their decision on the parties. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association, or the Arbitration Service of Portland, Inc. Page 9 Please Initial -------- -------- Landlord Tenant or such other similar independent public arbitration service that is designed to provide a fair and impartial arbitration process as Landlord shall select. Page 10 Please Initial -------- -------- Landlord Tenant 18.1 QUIET ENJOYMENT. Landlord warrants that so long as Tenant complies with all terms of this lease it shall be entitled to peaceable and undisturbed possession of the Premises free from any eviction or disturbance by Landlord. Neither Landlord or its managing agent shall have any liability to Tenant for loss or damages arising out of the acts, including criminal acts, of other tenants of the Building or third parties, nor any liability for any reason which exceeds the value of its interest in the Building. 19.1 ADDITIONAL RENT: TAX ADJUSTMENT. Whenever for any July 1 - June 30 tax year the real property taxes levied against the Building and its underlying land exceed those levied for the 1996 - 1997 tax year, than the monthly rental for the next succeeding calendar year shall be increased by one-twelfth of such tax increase times Tenant's proportionate share. "Real property taxes" as used herein means all taxes and assessments of any public authority against the Building and the land on which it is located, the cost of contesting any tax and any form of fee or charge imposed on Landlord as a direct consequence of owning or leasing the Premises, including but not limited to rent taxes, gross receipt taxes, leasing taxes, or any fee or charge wholly or partially in lieu of or in substitution for ad valorem real property taxes or assessments, whether now existing or hereafter enacted. If any portion of the Building is occupied tax-exempt tenant so that the Building has a partial tax exemption under ORS 307.112 or a similar statute, than real property taxes shall mean taxes computed as if such partial exemption did not exist. If a separate assessment or identifiable tax increase arises because of improvements to the Premises, than Tenant shall pay 100 percent of such increase. 19.2 TENANT'S PROPORTIONATE SHARE. "Tenant's proportionate share" as used herein means the area of the Premises, divided by the total area of office space in the Building, with area determined using one of the methods of building measurements defined by the Building Owners and Managers Association (BOMA). Tenant's proportionate share as of the lease commencement date shall be 18.97 percent. 19.3 ADDITIONAL RENT: OPERATING EXPENSE ADJUSTMENT. Tenant shall pay as additional rent its proportionate share, as defined in paragraph 19.2, of the amount by which operating expenses for the Building increase over those experienced by Landlord during the calendar year 1997 (base year). Effective January 1 of each year Landlord shall estimate the amount by which operating expenses are expected to increase, if any, over those incurred in the base year. Monthly rental for that year shall be increased by one-twelfth of Tenant's share of the estimated increase. Following the end of each calendar year, Landlord shall compute the actual increase in operating expense and bill Tenant for any deficiency or credit Tenant with any excess collected. As used herein "operating expenses" shall mean all costs of operating and maintaining the Building as determined by standard real estate accounting practice, including, but not limited to: all water and sewer charges; the cost of natural gas and electricity Page 11 Please Initial --------- -------- Landlord Tenant provided to the Building; janitorial and cleaning supplies and services; administration costs and management fees; superintendent fees; security services, if any; insurance premiums; licenses; permits for the operation and maintenance of the Building and all of its component elements and mechanical systems; the annual amortized capital improvement cost (amortized over such a period as Landlord may select but not shorter than the period allowed under the Internal Revenue Code and at a current market interest rate) for any capital improvements to the Building required by any governmental authority or those which have a reasonable probability of improving the operating efficiency of the Building. 20.1 COMPLETE AGREEMENT. This lease and the attached exhibits and schedules if any, constitute the entire agreement of the parties and supersede all prior written and oral agreements and representations. Neither Landlord nor Tenant is relying on any representations other than those expressly set forth herein. 20.2 SPACE LEASED AS IS. Unless otherwise stated in this Lease, the Premises are leased as is in the condition now existing with no alterations or other work to be performed by Landlord. 20.3 CAPTIONS. The titles to the paragraphs of this lease are descriptive only and are not intended to change or influence the meaning of any paragraph or to be part of this lease. 20.4 NON WAIVER. Failure by Landlord to promptly enforce any regulation, remedy or right of any kind under this Lease shall not constitute a waiver of the same and such right or remedy may reasserted at any time after Landlord becomes entitled to the benefit thereof notwithstanding delay in enforcement. 20.5 EXHIBITS. The following Exhibits are attached hereto and incorporated as a part of this Lease: Page 12 Please Initial -------- -------- Landlord Tenant IN WITNESS WHEREOF, the duly authorized representatives of the parties have executed this lease as of the day and year first written above. LANDLORD: By:_____________________ By:______________________ Address for notices: Title:__________________ Title:___________________ 9498 SW Barbur Blvd Suite 200 Portland, OR 97219 By:_____________________ By:_____________________ Title:__________________ Title:__________________ TENANT: By:_____________________ By:______________________ Address for notices: Title:__________________ Title:___________________ _____________________ _____________________ _____________________ By:_____________________ By:_____________________ Title:__________________ Title:__________________ Page 13 Please Initial --------- --------- Landlord Tenant EX-10.11 16 EXHIBIT 10.11 Exhibit 10.11 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (the "AGREEMENT") is entered into as of March 3, 1998, by and between Home Shark, Inc., a California corporation ("BUYER") and The Cobalt Group, Inc., a Washington corporation ("SELLER"). RECITALS Buyer desires to acquire from Seller, and Seller desires to sell to Buyer, all of the assets of Seller's business relating to the online real estate listing service known as "HomeScout", which is made available on the World Wide Web at http://www.homescout.com or http://www.homeontheweb.com (the "BUSINESS"), on the terms and subject to the conditions set forth in this Agreement. AGREEMENT In consideration of the mutual agreements, representations, warranties and covenants set forth below, Buyer and Seller agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: 1.1 "ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. 1.2 "AFFILIATE" means with respect to any Person, a Person directly or indirectly controlling or controlled by or under common control with such Person. 1.3 "GOVERNMENTAL ENTITY" means any court, or any federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality (domestic or foreign). 1.4 "LIEN" means any mortgage, pledge, lien, security interest, option, covenant, condition, restriction, encumbrance, charge or other third-party claim of any kind. 1 1.5 "PERSON" means an individual, corporation, partnership, association, trust, government or political subdivision or agent or instrumentality thereof, or other entity or organization. 1.6 "TAXES" means all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, (i) imposed on Seller by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, for which Buyer could become liable as successor to or transferee of the Business or the Purchased Assets or which could become a charge against or lien on any of the Purchased Assets, which taxes shall include, without limitation, all sales and use taxes, ad valorem taxes, excise taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, real property gains taxes, transfer taxes, payroll and employee withholding taxes, unemployment insurance contributions, social security taxes, and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected, or (ii) any liability for amounts referred to in (i) as a result of any obligations to indemnify another person. 2. SALE AND PURCHASE. 2.1 TRANSFER OF ASSETS. Subject to the terms and conditions of this Agreement and the Seller Disclosure Schedule (as defined in Article 4 hereof), Seller shall sell, assign, grant, transfer, and deliver to Buyer, and Buyer shall purchase and accept from Seller as of the Closing Date (PROVIDED, HOWEVER, that, at Buyer's option, such delivery shall occur at such subsequent time and place as the Buyer shall reasonably request), free and clear of all Liens, all of the Seller's right, title and interest in and to all of the assets, properties and business used in or necessary to the Business (the "PURCHASED ASSETS"), including, without limitation: (a) all tangible personal property and leases of, and other interests in, tangible personal property used in connection with the Business, including, without limitation, the computer equipment and other items listed on SCHEDULE 2.1(a); (b) all rights under each of the license agreements, distribution agreements, marketing agreements, listing agreements, service agreements, linking rights agreements and other agreements and contracts listed on SCHEDULE 2.1(b) (collectively the "CONTRACTS"); (c) all prepaid expenses relating to the operation of the Business including, but not limited to Taxes, leases and rentals; (d) all of Seller's rights, claims, credits, causes of action or rights of set-off against third parties relating to the Purchased Assets, including, without limitation, unliquidated rights under warranties; 2 (e) subject to Section 2.2 below, all technology, intellectual property and general intangibles used in or necessary to the Business, including, without limitation: (i) all copyrights, trademarks, service marks, trade names, logos, domain names and reservations thereof (including, without limitation, homescout.com and homeontheweb.com) and patents (and all applications and registrations related to the foregoing), in each case whether pending, applied for or issued and whether filed in the United States or in other countries, including without limitation the items listed in SCHEDULE 2.1(e)(i), including all royalties therefrom and infringement claims against third parties related thereto; (ii) all trade secrets, proprietary processes and formulae, license rights, specifications, technical manuals and data, drawings, inventions, designs, product information and data, know-how, development work-in-progress, business and marketing plans and other intellectual or intangible property used in or pertaining to the Business; and (iii) all software programs (in both source and object code form), databases, listings, software code (including HTML code), CGI scripts, Java applets, routines and other computer-related materials or information used in or pertaining to the Business, along with all electronic documentation therefor, including without limitation all search engines and related software used in the presentation of real estate listings; (f) all permits, authorizations, consents and approvals of any Governmental Entity affecting or relating in any way to the Business (the "PERMITS"); (g) all books, records, files and papers, whether in hard copy or electronic format, used in the Business, including without limitation, engineering information, sales and promotional literature, manuals and data, sales and purchase correspondence, lists of present, former and prospective suppliers and customers, mailing lists, price lists, personnel and employment records, and any information relating to Taxes imposed on the Business or Purchased Assets; and (h) all goodwill associated with the Business or the Purchased Assets, together with the right to represent to third parties that Buyer is the successor to the Business. 2.2 EXCLUDED ASSETS. Buyer acknowledges and agrees that the intellectual property set forth on SCHEDULE 2.2 (the "EXCLUDED ASSETS") shall be excluded from the Purchased Assets. The Purchased Assets and the Excluded Assets shall be referred to collectively as the "ASSETS." 2.3 ASSUMPTION OF LIABILITIES. Except for those obligations assumed by Buyer under the Contracts, Buyer shall not assume and shall not be liable for, and Seller shall retain and remain solely liable for and obligated to discharge, all of the debts, contracts, agreements, commitments, obligations and other liabilities of any nature whatsoever of Seller, whether known or unknown, accrued or not accrued, fixed or contingent. 3 2.4 PURCHASE PRICE. Subject to the performance by Seller of all of its obligations under this Agreement (including delivering all documents required to be delivered) at the Closing and in consideration of the acquisition by Buyer of the Purchased Assets under Section 2.1 and the assumption of the liabilities set forth in Section 2.3, Buyer shall deliver to Seller at the Closing (a) $500,000 in cash; (b) a promissory note in the principal amount of $1,000,000, which is convertible into 1,583,280 shares of Buyer's Series B Preferred Stock, par value $0.001 per share (the "SHARES"), in the form attached hereto as EXHIBIT A (the "CONVERTIBLE NOTE"); and (c) a secured promissory note in the principal amount of $1,000,000 in the form attached hereto as EXHIBIT B (the "TERM NOTE"). The terms of the Term Note and the Convertible Note provide that they may be prepaid on or before May 3, 1998, in each case at a discount as set forth therein. Such discount reflects Seller's willingness to accept a lower price for the Purchased Assets if payment on such notes is made on or before May 3, 1998. The Cash Consideration, the Convertible Note and the Term Note shall be referred to collectively as the "PURCHASE PRICE." In the event that the Convertible Note is pre-paid, in whole or in part, during the initial sixty (60) day period following the Closing Date as permitted thereby and/or the Term Note is pre-paid, in whole or in part, during the initial sixty (60) day period following the Closing Date as permitted thereby, the aggregate amounts so pre-paid shall be considered Cash Consideration for purposes of Sections 11.4 and 12 of this Agreement. 2.5 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated among the Purchased Assets as provided in EXHIBIT C for purposes of complying with the requirements of Section 1060 of the Internal Revenue Code of 1986, as amended (the "CODE") and the regulations promulgated thereunder. Buyer and Seller agree to each report to the appropriate federal, state and local tax agencies an allocation of the Purchase Price that is consistent with the allocation set forth in EXHIBIT C. 3. CLOSING. 3.1 CLOSING. The closing of the transactions contemplated by this Agreement (the "CLOSING") shall take place at the offices of Venture Law Group at 2775 Sand Hill Road, Menlo Park, California 94025 at 2:00 p.m., local time, on March 3, 1998 or such other time, date and place as shall be fixed by agreement of the parties hereto (the date on which the Closing actually occurs being hereinafter referred to as the "CLOSING DATE"). 3.2 ACTIONS AT THE CLOSING. At the Closing, Seller shall deliver the Purchased Assets to Buyer, Buyer shall deliver the Purchase Price to Seller, and Buyer and Seller shall take such actions and execute and deliver such agreements, bills of sale, and other instruments and documents as necessary or appropriate to effect the transactions contemplated by this Agreement in accordance with its terms. Seller shall deliver all software, documentation, databases and other similar intangible property hereunder via electronic transmission only, without any accompanying physical packaging, disks, CD-ROMs or tangible media of any kind. At the Closing, Seller shall provide reasonable evidence of clear title to all of the Purchased Assets, in form and substance reasonably satisfactory to Buyer. 4 4. REPRESENTATIONS AND WARRANTIES OF SELLER. Each representation and warranty set forth below is qualified by any exception or disclosures set forth in the Seller Disclosure Schedule attached as EXHIBIT D hereto, which exceptions specifically reference the Section(s) to be qualified. Seller hereby represents and warrants to Buyer as follows: 4.1 ORGANIZATION, STANDING AND POWER. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington and has full corporate power and authority and the legal right to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Seller pursuant hereto, and to consummate the transactions contemplated hereby and thereby. Seller has no subsidiaries as of the date hereof. 4.2 AUTHORITY. The execution and delivery of this Agreement (and all other agreements and instruments contemplated under this Agreement) by Seller, the performance by Seller of its obligations hereunder and thereunder, and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action. This Agreement has been duly and validly executed and delivered by Seller and constitutes, and each other agreement or instrument executed and delivered or to be executed and delivered by the Seller pursuant to this Agreement will, upon such execution and delivery, constitute a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms. 4.3 NONCONTRAVENTION. Neither the execution, delivery and performance of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both, (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the Articles of Incorporation or Bylaws of Seller, (b) except as set forth in SCHEDULE 4.4, conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration with or without notice or the passage of time) under, any of the terms, conditions or provisions of any Contract or any contract, notice, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Seller is a party and which relate to or affect any of the Assets, (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Seller or by which any properties or assets of Seller may be bound, or (d) result in the creation of any Lien upon any of the Assets pursuant to any mortgage, indenture, lease, agreement or other instrument to which Seller is a party or by which Seller or any of its property or assets is bound. No "bulk sales" legislation applies to the transactions contemplated by this Agreement. The Seller is not required to give any notice to, or make any filing with, a 5 Governmental Entity or any other Person in connection with the execution by the Seller of this Agreement and consummation and performance of the transactions contemplated hereby. 4.4 CONSENTS. SCHEDULE 4.4 sets forth each agreement, contract or other instrument binding upon Seller requiring a consent as a result of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby (each a "REQUIRED CONSENT"). 4.5 FINANCIAL INFORMATION. Seller has delivered to Buyer a schedule of revenues for the Business for the twelve months ended December 31, 1997, which schedule is true and complete in all respects. 4.6 NO UNDISCLOSED LIABILITIES. Seller does not have any liability, indebtedness, or obligation resulting from or arising out of Seller's operation of the Business, or ownership of the Purchased Assets, prior to the Closing, whether accrued, absolute, contingent, matured, unmatured or other, that is not disclosed in this Agreement or in the Seller Disclosure Schedule. 4.7 ASSETS GENERALLY. (a) The Assets include all properties, tangible and intangible, and only such properties, currently used by Seller in operating the Business. (b) Seller holds good and marketable title, license to or leasehold interest in all of the Assets and has the complete and unrestricted power and the unqualified right to sell, assign and deliver the Purchased Assets to Buyer. Upon consummation of the transactions contemplated by this Agreement, Buyer will acquire good and marketable title, license or leasehold interest to the Purchased Assets free and clear of any Liens and there exists no restriction on the use or transfer of the Purchased Assets other than as described in this Agreement, the Security Agreement or in the Contracts. No Person other than Seller has any right or interest in the Assets, including the right to grant interests in the Assets to third parties. (c) None of the Purchased Assets that constitute tangible personal property are held under any lease, security agreement, conditional sales contract, lien, or other title retention or security arrangement. (d) All of the Assets are in good operating condition and repair (normal wear and tear excepted), as required for their use in the Business as presently conducted, and conform in all material respects to all applicable laws, and no notice of any violation of an law relating to any of the Assets has been received by Seller. (e) To Seller's knowledge: (i) all of the Assets are free from material defects; (ii) all software included within the Assets is free from viruses, expiry codes and material bugs 6 of any kind; (iii) and all software and other technology included within the Assets is fit for the purposes for which it is intended. (f) THE REPRESENTATIONS AND WARRANTIES OF SELLER SET FORTH IN THIS ARTICLE 4 ARE THE ONLY WARRANTIES MADE BY SELLER WITH RESPECT TO THE PURCHASED ASSETS. SELLER MAKES NO OTHER WARRANTY WITH RESPECT TO THE PURCHASED ASSETS AND HEREBY DISCLAIMS ALL OTHER IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 4.8 INTELLECTUAL PROPERTY. (a) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not breach, violate or conflict with any instrument or agreement governing any intellectual property necessary or required for, or used in, the conduct of the Business as presently conducted and will not cause the forfeiture or termination or give rise to a right of forfeiture or termination of any such Intellectual Property or, except as set forth in this Agreement or the Security Agreement, impair the right of Buyer or any of its Affiliates to use, sell, license or dispose of, or to bring any action for the infringement of any such intellectual property or portion thereof; (b) Neither the development, manufacture, marketing, license, sale or use of any product or intellectual property currently licensed, used or sold by Seller in the conduct of the Business or currently under development for use in the Business violates or will violate any license or agreement to which Seller is a party or infringes or will infringe any copyright, patent, trademark, service mark, trade secret or other intellectual property right of any other party. All registered trademarks, service marks, patents and copyrights held by Seller are valid and subsisting. There is no pending or threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any of the Assets nor, to Seller's knowledge and except as disclosed on SCHEDULE 2.1(e)(j), is there any basis for any such claim. Seller has not received any notice asserting that any such Asset or the proposed use, sale, license or disposition thereof conflicts or will conflict with the rights of any other party. To Seller's knowledge, there is no unauthorized use, infringement or misappropriation on the part of any third party of any of the Assets; (c) Seller has taken reasonable steps (including, without limitation, entering into confidentiality and non-disclosure agreements with all officers and employees of and consultants to Seller with access to the Business) to maintain the secrecy and confidentiality of, and its proprietary rights in, the Assets. SCHEDULE 2.1(e)(i) contains a complete and accurate list of all applications, filings and other formal actions made or taken pursuant to federal, state, local and foreign laws by Seller to perfect or protect its interest in the Assets, including, without limitation, all patents, patent applications, trademarks, trademark applications, service marks and copyright registrations. 7 (d) All fees to maintain Seller's rights in the Assets, including, without limitation, patent and trademark registration and prosecution fees and all professional fees in connection therewith pertaining to the Assets due and payable on or before the Closing Date, have been paid by Seller or will be paid by Seller within a reasonable period after the Closing. 4.9 WARRANTIES AND INDEMNITIES. The Seller Disclosure Schedule sets forth a summary of all warranties and indemnities, express or implied, relating to products sold or services rendered by Seller in the conduct of the Business, and no warranty or indemnity has been given by Seller in the conduct of the Business which is not listed on the Seller Disclosure Schedule or which differs therefrom in any material respect. Seller is in compliance with all warranties described in the Seller Disclosure Schedule. The Seller Disclosure Schedule also indicates all warranty and indemnity claims currently pending against Seller. 4.10 LICENSES AND PERMITS. Seller holds all consents, approvals, registrations, certifications, authorizations, permits and licenses of, and has made all filings with, or notifications to, all Governmental Entities pursuant to applicable requirements of all federal, state, local and foreign laws, ordinances, governmental rules or regulations applicable to the Business. The Business is in compliance with all federal, state, local and foreign laws, ordinances, governmental rules and regulations relating to the services rendered by the Business or otherwise related to the Business and Seller has no reason to believe that any consents, approvals, authorizations, registrations, certifications, permits, filings or notifications that it has received or made to operate the Business are invalid or have been or are being suspended, canceled, revoked or questioned. There is no investigation or inquiry to which Seller is a party or, to Seller's knowledge, pending or threatened, relating to the Business and its compliance with applicable federal, state, local or foreign laws, ordinances, governmental rules or regulations. Each such consent, approval, registration, certification, authorization, permit or license is transferable and shall be transferred to Buyer in accordance with the terms of this Agreement. 4.11 EMPLOYEES. (a) SCHEDULE 4.11 sets forth the names and job titles of all of the Seller's employees or independent contractors who provide or have provided service to, or in connection with, the Business (the "BUSINESS EMPLOYEES"). All employees, consultants, officers, directors and shareholders of Seller or any Seller Affiliate that have had access to the Assets are parties to a written agreement (a "CONFIDENTIALITY AGREEMENT"), under which each such person (i) is obligated to disclose and transfer to Seller (subject to applicable laws), without the receipt by such person of any additional value therefor (other than normal salary or fees for consulting services), all inventions, developments and discoveries which, during the period of employment with or performance of services for Seller, he or she makes or conceives of either solely or jointly with others, that relate to any subject matter with which his or her work for Seller may be concerned, or relate to or are connected with the Business, products or projects of Seller, or involve the use of the time, material or facilities of Seller, and (ii) is obligated to maintain the confidentiality of proprietary information of Seller. To Seller's knowledge, the Business 8 Employees are not obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that conflicts with their obligation to promote the interests of Seller with regard to the Business or the Assets or, with respect to Pat Brown and Marci Singer, that would conflict with an obligation to promote the interests of Buyer with regard to the Business or the Assets. To Seller's knowledge, neither the execution nor the delivery of this Agreement, nor the carrying on of the Business by its employees and consultants, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such persons or entities are now obligated. It is currently not necessary for Seller to utilize in the Business any inventions of any employee or consultant made or owned prior to their employment by or affiliation with Seller, nor is it necessary to utilize any other assets or rights of any such persons made or owned prior to their employment with or engagement by Seller, in violation of any registered patents, trade names, trademarks or copyrights or any other limitations or restrictions to which any such persons are a party or to which any of such assets or rights may be subject. To Seller's knowledge, none of Seller's employees, consultants, officers, directors or shareholders that has had knowledge or access to information relating to the Assets has taken, removed or made use of any proprietary documentation, manuals, products, materials, or any other tangible item from his or her previous employer relating to the Assets by such previous employer which has resulted in Seller's access to or use of such proprietary items included in the Assets. (b) Except for the Confidentiality Agreements, there are no written or oral contracts of employment between Seller and any Business Employee. All Business Employees are employees at will. 4.12 EMPLOYEE BENEFIT AND COMPENSATION PLANS. Buyer will incur no liability with respect to, or on account of, and Seller will retain any liability for, and on account of, any employee benefit plan of Seller, any of its Affiliates or an predecessor employer of any Business Employee, including, but not limited to, liabilities Seller may have to such employees under all employee benefit schemes, incentive compensation plans, bonus plans, pension and retirement plans, vacation, profit-sharing plans (including any profit-sharing plan with a cash-or-deferred arrangement) share purchase and option plans, savings and similar plans, medical, dental, travel, accident, life, disability and other insurance and other plans or arrangements, whether written or oral and whether "qualified" or "non-qualified," or to any Business Employee as a result of termination of employment by Seller. Seller has not, with respect to any Business Employee, maintained or contributed to, or been obligated or required to contribute to, any retirement or pension plan or any employee benefit plan. Seller is not a party to any collective bargaining agreement covering any Business Employee and Seller knows of no effort to organize any such employee as a part of any collective bargaining unit. 4.13 TAXES. All Taxes have been or will be paid by Seller for all periods (or portions thereof) prior to and including the Closing Date. Seller and any other person required to file returns or reports of Taxes have duly and timely filed (or will file prior to the Closing Date) all 9 returns and reports of Taxes required to be filed prior to such date, and all such returns and reports are true, correct, and complete. There are no liens for Taxes on any of the Purchased Assets. Seller has complied with all record keeping and tax reporting obligations relating to income and employment taxes due with respect to compensation paid to employees or independent contractors providing services to the Business. Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code. There are no pending or, to Seller's knowledge, threatened proceedings with respect to Taxes, and there are no outstanding waivers or extensions of statutes of limitations with respect to assessments of Taxes. No agreement or arrangement regarding compensation of any employee providing services to the Business provides for any payments which could result in a nondeductible expense to the Buyer pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. 4.14 COMPLIANCE WITH LAW. The operation of the Business has been conducted in all material respects in accordance with all applicable laws, regulations and other requirements of Governmental Entities having jurisdiction over the same. 4.15 ENVIRONMENTAL MATTERS. To Seller's knowledge, the Business is, and at all times has been, conducted in compliance with all applicable federal, state and local environmental laws, rules and regulations. 4.16 CONTRACTS. (a) SCHEDULE 4.16 contains a list of all contracts relating to the Business ("BUSINESS CONTRACTS"), along with the name of the appropriate third party contact for each such contract other than described in subsection (a)(vi) below). "BUSINESS CONTRACTS" shall include, without limitation, the following and shall be categorized in the Seller Disclosure Schedule as follows: (i) each contract (other than routine purchase orders given and pricing quotes received in the ordinary course of the Business and covering a period of less than one year) for the purchase of materials or personal property with any supplier or for the furnishing of services to the Business; (ii) each customer contract and agreement of the Business (other than routine purchase orders, pricing quotes with open acceptance and other tender bids, in each case, entered into in the ordinary course of business and covering a period of less than one year) which (A) involved consideration of more than $5,000 in the aggregate during the fiscal year ended December 31, 1997, (B) is likely to involve consideration of more than $5,000 in the aggregate during the fiscal year ended December 31, 1998, (C) is likely to involve consideration of more than $10,000 in the aggregate over the remaining term of the contract or (D) cannot be canceled by Seller without penalty or further payment; 10 (iii) all distributor, sales representative, broker, franchise, agency and dealer contracts and agreements of the Business and all sales promotion, market research, marketing and advertising contracts and agreements of the Business; (iv) all management contracts with independent contractors or consultants (or similar arrangements) of the Business and which (A) involved consideration or more than $5,000 in the aggregate during the fiscal year ended December 31, 1997, (B) are likely to involve consideration of more than $5,000 in the aggregate during the fiscal year ended December 31, 1998, or (C) are likely to involve consideration of more than $10,000 in the aggregate over the remaining term of the contract; (v) all contracts and agreements under which the Business has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness or under which the Business has imposed (or may impose) a security interest or lien on any of its assets, whether tangible or intangible, to secure indebtedness; (vi) all contracts, whether written or oral, with any real estate listings provider; (vii) all contracts and agreements that limit the ability of any Person related to the Business, or any of its affiliates, to compete in any line of business or with any person or in any geographic area or during any period of time, or to solicit any customer or client; (viii) all contracts pursuant to which the Business has agreed to supply products or provide services to a customer at specified prices, whether directly or through a specific distributor, manufacturer's representative or dealer; and (ix) all contracts pursuant to which Seller has licensed intellectual property to or from a third party that is necessary for, or used in, the business, and all development agreements pursuant to which a third party has developed for Seller any software, technology or other intellectual property. (b) At or prior to the Closing, Seller will furnish Buyer with access to true and complete copies of all Business Contracts together with all amendments, waivers or other changes thereto. (c) Each Contract (as set forth on SCHEDULE 2.1(b)) is a legal, valid and binding agreement of Seller, and none of the Contracts is in default by its terms or has been canceled by the other party; Seller is not in receipt of any claim of default under any Contract; and Seller does not anticipate any termination or change to, or receipt of a proposal with respect to, any Contract as a result of the transactions contemplated hereby. 11 4.17 PRODUCTS AND SERVICES. Each of the products and services produced, sold or provided by Seller in connection with the Business is, and at all times has been, in compliance with all applicable federal, state, local and foreign laws and regulations. 4.18 LITIGATION; OTHER CLAIMS. (a) There are no claims, actions, suits, inquiries, proceedings, or investigations against Seller, or any of its officers, directors or shareholders, relating to the Business or the Assets which are currently pending or, to Seller's knowledge, threatened, at law or in equity or before or by any Governmental Entity, or which challenges or seeks to prevent, enjoin, alter or delay any of the transactions contemplated hereby, nor is Seller aware of any basis for such claims, actions, suits, inquiries, proceedings, or investigations; and, to Seller's knowledge, no Governmental Entity has at any time challenged or questioned the legal right of Seller to produce, sell or provide any of its products or services in the present manner or style thereof. (b) There are no grievance or arbitration proceedings pending or, to Seller's knowledge, threatened, and there are no actual or threatened strikes or work stoppages with respect to the Business, the Assets or the Business Employees, nor is Seller aware of any basis for such proceedings or events. 4.19 DEFAULTS. Seller is not in default under or with respect to any judgment, order, writ, injunction or decree of any court or any Governmental Entity. There does not exist any default by Seller or, to Seller's knowledge, by any other Person, or event that, with notice or lapse of time, or both, would constitute a default by Seller or, to Seller's knowledge, by any other Person, under any agreement entered into by Seller as part of the operations of the Business, and no notices of breach thereof have been received by Seller. 4.20 FULL DISCLOSURE. Neither this Agreement nor any other agreement, exhibit, schedule or officer's certificate being entered into or delivered pursuant to this Agreement contains any untrue statement of a material fact or, when taken as a whole, omits to state any material fact necessary in order to make the statements contained in such documents not misleading in light of the circumstances under which they are made. 4.21 BROKERS AND FINDERS. Except as set forth in SCHEDULE 4.21, neither Seller nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finder's fee in connection with the transactions contemplated by this Agreement. 4.22 NO FRAUDULENT CONVEYANCE. Seller is not now insolvent and will not be rendered insolvent by the sale, transfer and assignment of the Purchased Assets pursuant to the terms of this Agreement. Seller is not entering into this Agreement or any of the other agreements referenced in this Agreement with the intent to defraud, delay or hinder its creditors and the consummation of the transactions contemplated by this Agreement, and the other 12 agreements referenced in this Agreement, will not have any such effect. Assuming that, in the event the Convertible Note is converted into the Shares pursuant to the terms thereof, the Shares have a value equal to approximately $0.6316 per share as of the Closing Date, the transactions contemplated in this Agreement or any agreements referenced in this Agreement will not constitute a fraudulent conveyance by Seller, or otherwise give rise to any right of any creditor Seller to any of the Purchased Assets after the Closing. 4.23 INSURANCE. The Seller Disclosure Schedule lists all insurance policies and fidelity bonds covering the Business or the Purchased Assets. There is no claim by Seller pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies and bonds. All premiums due and payable under all such policies and bonds have been paid and Seller is otherwise in compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). There is no threatened termination of, or premium increase with respect to, any of such policies. 4.24 INVESTMENT IN BUYER SECURITIES. Seller represents and warrants as follows: (a) NO REGISTRATION. Seller acknowledges that the Convertible Note, the Shares issuable upon conversion of such Convertible Note and the Common Stock issuable upon conversion of the Shares (collectively, the "SECURITIES") have not been registered under the Securities Act of 1933, as amended (the "ACT"), and Seller agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of the Securities in the absence of (i) an effective registration statement under the Act as to such shares and registration or qualification of such securities under any applicable U.S. federal or state securities law then in effect, (ii) an opinion of counsel, reasonably satisfactory to Buyer, that such registration and qualification are not required or (iii) such sale is made in accordance with Rule 144 under the Act, provided that Buyer is given prior written notice of such sale. (b) INVESTMENT REPRESENTATION. Seller hereby represents, warrants and covenants that (i) the Securities are being acquired for investment only and not with a view to, or for sale in connection with, any distribution thereof; (ii) Seller has had such opportunity as Seller has deemed adequate to obtain from representatives of Buyer such information as is necessary to permit Seller to evaluate the merits and risks of its investment in Buyer; (iii) Seller is able to bear the economic risk of holding such Securities for an indefinite period; (iv) Seller understands that the Securities will not be registered under the Act and will be "restricted securities" within the meaning of Rule 144 under the Act and that the exemption from registration under Rule 144 will not be available for at least one year from the date of issuance, and even then will not be available unless a public market then exists for the Shares, adequate information concerning Purchaser is then available to the public, and other terms and conditions of Rule 144 are complied with; and (v) the Convertible Note and all stock certificates representing the Shares (and the Common Stock issuable upon conversion of the Shares), if any, issued to Seller may have affixed thereto a legend substantially in the following form: 13 "THESE SECURITIES HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT OR UNLESS EITHER (A) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (B) THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 144." (c) MARKET STANDOFF. In connection with the initial public offering of Buyer's securities and upon request of Buyer or the underwriters managing any underwritten public offering of Buyer's securities, Seller (and any transferee of Seller) agrees (i) not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any shares of Buyer's capital stock without the prior written consent of Buyer or such underwriters, as the case may be, for such period of time from the effective date of such registration as may be requested by Buyer or such managing underwriters but in no event more than 180 days, and (ii) to execute any reasonable form of agreement reflecting the foregoing as may be requested by the underwriters at the time of the public offering. 4.25 TRAFFIC AND GEOGRAPHIC DISTRIBUTION OF LISTINGS. The information regarding traffic and geographic distribution of listings set forth on SCHEDULE 4.25 is true and correct. 5. REPRESENTATIONS AND WARRANTIES OF BUYER. Except as set forth in the Buyer Disclosure Schedule attached as EXHIBIT E hereto (the "BUYER DISCLOSURE SCHEDULE"), Buyer represents and warrants to Seller as follows: 5.1 ORGANIZATION. Buyer is a corporation duly formed and validly existing under the laws of the State of California, and has full corporate power and authority and the legal right to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, and to consummate the transactions contemplated hereby and thereby. 5.2 AUTHORITY. The execution and delivery of this Agreement (and all other agreements and instruments contemplated under this Agreement) by Buyer, the performance by Buyer of its obligations hereunder and thereunder, and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action. This Agreement has been duly and validly executed and delivered by Buyer and constitutes, and each other agreement or instrument executed and delivered or to be executed and delivered by the Buyer pursuant to this Agreement will, upon such execution and delivery, 14 constitute a legal, valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms. 5.2 NO VIOLATION. Neither the execution, delivery and performance of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both, (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the Articles of Incorporation or Bylaws of Buyer, (b) conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any contract, notice, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Buyer is a party or by which any properties or assets of Buyer is bound, (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Buyer or by which any properties or assets of Buyer is bound, or (d) result in the creation of any Lien upon any property or assets of the Buyer pursuant to any mortgage, indenture, lease, agreement or other instrument to which it is a party or by which it or any of its property or assets is bound. Assuming the accuracy of the representations set forth in Section 4.3 above, the Buyer is not required to give any notice to, or make any filing with, a Governmental Entity or any other Person in connection with the execution by the Buyer of this Agreement and consummation and performance of the transactions contemplated hereby. 5.4 ADDITIONAL REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer set forth in Sections 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.19, 3.20, 3.21, 3.22, 3.23 and 3.24 of the Series B Preferred Stock Purchase Agreement dated December 31, 1997, as modified by the Buyer Disclosure Schedule (the "SERIES B AGREEMENT"), which Series B Agreement is attached as EXHIBIT F hereto, are true and correct as of the date hereof. 5.5 CAPITALIZATION. The authorized capital stock of Buyer consists of 40,000,000 shares of Common Stock, 4,240,000 of which are issued and outstanding, and 20,818,604 shares of Preferred Stock of which 2,492,900 are designated as Series A Preferred Stock, all of which are issued and outstanding, 2,492,900 are designated as Series A-1 Preferred Stock, none of which are issued and outstanding as of the Closing Date, 7,916,402 are designated as Series B Preferred Stock, 5,168,986 are issued and outstanding prior to the Closing and 7,916,402 are designated as Series B-1 Preferred Stock, none of which are issued and outstanding as of the Closing Date. All such issued and outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable and were issued in compliance with applicable federal and state securities laws. Buyer has reserved an aggregate of 7,916,402 shares of Common Stock for issuance upon conversion of the Series B Preferred Stock and/or the Series B-1 Preferred Stock, as the case may be, and 2,777,100 shares of its Common Stock for issuance to officers, directors, employees, sales representatives and consultants of Buyer under Buyer's 1997 Stock Option Plan. The Series B Preferred Stock and Series B-1 Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in Buyer's Amended and Restated 15 Articles of Incorporation, a copy of which has been provided to Seller (the "RESTATED ARTICLES"). Except as referenced herein, in the Rights Agreement or in the Buyer Disclosure Schedule, there are no options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the capital stock or other securities of Buyer, nor any agreements or understandings with respect thereto. Except for the Voting Agreement, Buyer is not a party or subject to any agreement or understanding and, to Buyer's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of consents with respect to any security of Buyer. Buyer currently intends to authorize and issue additional shares of Series B Preferred Stock in connection with additional financing for Buyer, and in such event the representations and warranties in this Section 5.5 shall not be deemed inaccurate for any purpose so long as Buyer updates this Section 5.5 in writing and delivers such information to Seller prior to the Closing. 5.6 VALIDITY OF SHARES. The Shares, when and if issued, sold and delivered in compliance with the provisions of this Agreement and the Convertible Note, will be duly and validly issued and will be fully paid and nonassessable and free and clear of all liens and encumbrances, and the Common Stock issuable upon conversion of the Shares has been duly and validly reserved and, when issued and delivered in compliance with the provisions of the Restated Articles, will be duly and validly issued and will be fully paid and nonassessable and free and clear of all liens and encumbrances and restrictions on transfer other than as set forth in this Agreement and the Rights Agreement; PROVIDED, HOWEVER, that the Shares (and the Common Stock issuable upon conversion of the Shares) may be subject to restrictions on transfer under state and/or federal securities laws. Except as set forth herein or in the Rights Agreement (as defined in Section 6.15), there are no outstanding rights of first refusal or preemptive rights applicable to the Shares. 5.7 BROKERS AND FINDERS. Neither Buyer nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finder's fee in connection with the transactions contemplated by this Agreement. 5.8 NO FRAUDULENT CONVEYANCE. Buyer is not now insolvent and will not be rendered insolvent by the payment of the Consideration pursuant to the terms of this Agreement. Buyer is not entering into this Agreement or any of the other agreements referenced in this Agreement with the intent to defraud, delay or hinder its creditors and the consummation of the transactions contemplated by this Agreement, and the other agreements referenced in this Agreement, will not have any such effect. Assuming that the value of the (a) Purchased Assets, (b) the license granted to Buyer pursuant to Article 7 hereof and (c) the non-competition obligations set forth in Section 6.8 hereof equals or exceeds the value of the Purchase Price, the transactions contemplated in this Agreement or any agreements referenced in this Agreement will not constitute a fraudulent conveyance by Buyer, or otherwise give rise to any right of any creditor of Buyer to any of the Consideration after the Closing. 16 5.9 FULL DISCLOSURE. Neither this Agreement nor any other agreement, exhibit, schedule or officer's certificate being entered into or delivered pursuant to this Agreement contains any untrue statement of a material fact or, when taken as a whole, omits to state any material fact necessary in order to make the statements contained in such documents not misleading in light of the circumstances under which they are made. 6. COVENANTS. 6.1 TRANSITION; ACCESS TO INFORMATION. (a) Buyer and Seller shall use commercially reasonable efforts to cooperate with each other, and shall cause their respective officers, employees, agents, auditors and representatives to cooperate with each other, for a period of not less than 180 days after the Closing, Date, to ensure the orderly transition of the Purchased Assets from Seller to Buyer and to minimize any disruption to the Business that might result from the transition of ownership contemplated hereby. Seller shall use its commercially reasonable efforts to enable the transition and continuing existence of all relationships that exist between Seller and third party real estate listings providers as of the Closing Date in accordance with the Support Services terms set forth as EXHIBIT G hereto (the "SUPPORT SERVICES"). (b) After the Closing, upon reasonable written notice, Buyer and the Seller shall furnish or cause to be furnished to each other and their employees, counsel, auditors and representatives access, during normal business hours and at the expense of the requesting party, to such information as is reasonably necessary for financial reporting and accounting matters, the preparation and filing of any tax returns, reports or forms or the defense of any claim by a Governmental Entity or other third party. (c) On the Closing Date, or as soon thereafter as practicable, Seller shall deliver or cause to be delivered to Buyer all agreements, documents, books, records and files, including records and files stored on computer disks or tapes or any other storage medium, if any, in the possession of the Seller relating to the Business or the Purchased Assets, provided that Seller may retain any tax returns, reports or forms (and Buyer shall be provided with copies of such returns, reports or forms) only to the extent that they relate to separate returns or separate tax liability of Seller. 6.2 THIRD PARTY CONSENTS. Seller and Buyer shall use commercially reasonable efforts to obtain, within the applicable time periods required, all Required Consents, waivers, permits, consents and approvals and to effect all registrations, filings and notices with or to third parties or Governmental Entities which are necessary to consummate the transactions contemplated by this Agreement. 17 6.3 TAX RETURNS. Seller shall file in a timely manner all returns and reports relating to Taxes for periods prior to the Closing, and such returns and reports shall be true, correct and complete and Seller shall be responsible for and pay when due any and all such Taxes. 6.4 POST-CLOSING COOPERATION. Seller agrees that, if reasonably requested by Buyer, it will cooperate with Buyer, at Buyer's expense, in enforcing the terms of any agreements between Seller and any third party involving the Business, including without limitation terms relating to confidentiality and the protection of intellectual property rights. 6.5 NO POST-CLOSING RETENTION OF COPIES. Upon the later of (i) payment in full of the Term Note and (ii) completion of Seller's Support Services obligations, Seller shall deliver to Buyer or destroy copies of Purchased Assets in Seller's possession that are in addition to copies delivered to Buyer as part of the Closing, whether such copies are in paper form, on computer media or stored in another form; PROVIDED, HOWEVER, that Seller may retain and use copies of financial books and records relating to the Business as well as other documents required by law to be kept by Seller for the sole purposes of preparing its statutory accounts, preparing reports relating to the Taxes and performing its Support Services obligations. Seller shall not be permitted to use the financial books and records of the Business for any other reason. 6.6 PUBLIC ANNOUNCEMENTS. Neither Buyer nor Seller will make any public disclosure with respect this Agreement or the transactions contemplated hereby unless both parties agree on the text and timing of such public disclosure; PROVIDED, HOWEVER, that nothing contained herein shall prevent either party at any time from furnishing any information to any Governmental Entity. 6.7 FURTHER ASSURANCES. Subsequent to the Closing Date, each of Buyer and Seller shall, from time to time, execute and deliver, upon the request of the other party, all such other and further materials and documents and instruments of conveyance, transfer or assignment as may reasonably be requested by such other party to effect, record or verify the transfer to, and vesting in Buyer and Seller, of all right, title and interest in and to the Purchased Assets and the Shares, respectively, each free and clear of all Liens, in accordance with the terms of this Agreement. 6.8 NON-COMPETITION AGREEMENT. (a) In consideration of the Buyer entering into this Agreement: (i) Seller undertakes that for the two (2) year period following the Closing Date it will not: (A) participate, assist or otherwise be directly or indirectly involved or concerned, financially or otherwise, as a member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, beneficiary, partner, associate, trustee, 18 financier or otherwise in any Restricted Business; PROVIDED, HOWEVER, that the identified individuals may own up to 1% of the outstanding capital stock of a publicly-traded corporation that engages in a Restricted Business; (B) solicit, approach or accept any offer from any person or entity who was at any time during the one (1) year immediately preceding the Closing Date a customer or supplier of the Business with a view to establishing a relationship with or obtaining the patronage of that person or entity in a Restricted Business; (C) interfere or seek to interfere, directly or indirectly, with any relationship between Buyer and any client, customer, employee or supplier of the Business. (b) If any of the separate and independent covenants and restraints referred to in clauses (a) and (b) of this Section 6.8 are or become invalid or unenforceable for any reason then that invalidity or unenforceability will not affect the validity or enforceability of any other separate and independent covenants and restraints. (c) If any prohibition or restriction contained in clauses (a) or (b) of this Section 6.8 is judged to go beyond what is reasonable in the circumstances, but would be judged reasonable if that activity was deleted or that period or area was reduced, then the prohibitions or restrictions apply with that activity deleted or period or area reduced by the minimum amount necessary. (d) Seller acknowledges that the prohibitions and restrictions contained in clause (a) of this Section 6.8 are reasonable and necessary and, in Seller's opinion, are fair in light of the consideration provided to Seller under this Agreement. (e) Seller and Buyer acknowledge and agree that it will likely be difficult or impossible to determine the amount of damage or loss to Buyer if Seller violated any of its agreements under this Section 6.8, that Buyer will likely be without an adequate legal remedy if Seller violated the provisions of this Section 6.8, and that any such violation may cause substantial irreparable injury and damage to Buyer not fully compensable by monetary damages. Therefore, Seller and Buyer agree that in the event of any violation by Seller of this Section 6.8, Buyer, in addition to any other rights and remedies it may have under this Agreement, shall be entitled to seek and obtain specific performance, injunctive or other equitable relief, of either a preliminary or permanent type. 6.9 NON-SOLICITATION. Except as otherwise set forth in Section 8 below, for a period of one (1) year following the conclusion of the parties' Support Services obligations, neither party shall solicit, induce or encourage, directly or indirectly, any employee of the other party to leave the employment of such other party. Seller's non-solicitation obligation hereunder shall extend to any Transferred Employees (as defined in Section 8.1 below). 19 6.10 PERMITS. Seller will assist Buyer in obtaining any licenses, permits or authorizations required for carrying on the Business but which are not transferable provided that Seller shall in no event be required to pay any fees or otherwise incur obligations in connection therewith. 6.11 TAXES. Seller shall be responsible for paying, shall promptly discharge when due, and shall reimburse, indemnify and hold harmless Buyer from, any sales or use, transfer, real property gains, excise, stamp, or other similar Taxes arising from, imposed on or attributable to the transactions contemplated by this Agreement. 6.12 NO CONFLICTS OF INTEREST. (a) Seller shall take all reasonable and necessary measures to prevent the disclosure of any of Buyer's confidential or proprietary information including, without limitation, patents, patent applications, research, product or service plans, products, developments, inventions, processes, designs, drawings, engineering plans, formulae, software (including source and object code), computer programs, business plans, agreements with third parties, customer or supplier lists, or marketing or financial information of Buyer, to any shareholder, director or strategic partner of Seller that is a member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, beneficiary, partner, associate, trustee, or financier of a Restricted Business. In addition, in the event that (i) the Convertible Note is converted into the Shares, or any portion thereof, pursuant to the terms thereof and (ii) any director of Seller is a member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, beneficiary, partner, associate, trustee, or financier of a Restricted Business, Seller shall cause such director to be recused from all board actions related to the voting of the Shares. (b) In the event that the Convertible Note is converted into the Shares, or any portion thereof, pursuant to the terms thereof, Seller shall not transfer any such Shares to a Restricted Business or to an officer, director, Affiliate or 5% or greater shareholder of a Restricted Business without the prior written consent of Buyer. 6.13 SECURITY INTEREST. Buyer shall take all necessary measures including, without limitation, the execution and delivery of the Security Agreement attached as EXHIBIT H hereto (the "SECURITY AGREEMENT") and any necessary financing statements, to ensure that Seller receives a valid, enforceable, perfected, first-priority security interest in the Assets until such time as the Term Note is paid in full; PROVIDED, HOWEVER, that Buyer shall not be required to register any copyrightable Assets with the United States Copyright Office or file applications for any trademarks included within the Assets (other than the maintenance of the "HomeScout" trademark application) with the United States Patent and Trademark Office. Buyer further agrees that, until the Term Note is paid in full, Buyer will not license, sell, assign, pledge or otherwise transfer any of the Assets in any manner, shall keep the Assets in good condition (reasonable wear and tear excepted) and shall keep the Assets free of any Liens other than the security interest in favor of Seller granted pursuant to the Security Agreement or as otherwise approved 20 by Seller; PROVIDED, HOWEVER, that Buyer may, subject to the restrictions set forth in this Agreement and the Security Agreement, grant non-exclusive licenses to the Assets in the ordinary course of its business and provide for escrows of related intellectual property in connection therewith and; PROVIDED FURTHER, that Buyer may grant a security interest, subordinated to that of Seller, in the Assets to Imperial Bank in connection with the extension of financial credit to the Company by Imperial Bank. 6.14 FUTURE CONTRACTS. Until repayment in full of the Term Note, Buyer shall not, without Seller's prior written consent, (a) enter into an agreement with a third party whereby Buyer permits all or a portion of the Purchased Assets to reside on a server owned or controlled by such third party unless such agreement is terminable at will by Buyer (or a successor-in-interest to the Business) within ninety (90) days following (i) an Event of Default under the Security Agreement or (ii) the exercise by Buyer of its right of rescission pursuant to Section 12 hereof, or (b) enter into an agreement whereby a third party is permitted to provide listings search functionality using the Assets under such party's branded service, which agreement is not terminable at will by Buyer (or a successor-in-interest to the Business) within one (1) year following (i) an Event of Default under the Security Agreement or (ii) the exercise by Buyer of its right of rescission pursuant to Section 12 hereof. 6.15 SHAREHOLDER AGREEMENTS. In the event that the Convertible Note is converted into the Shares, or any portion thereof, pursuant to the terms thereof, Seller and Buyer shall, and Buyer shall cause all necessary and appropriate Buyer shareholders to, execute and deliver (i) the Amended and Restated Voting Agreement substantially in the form attached hereto as EXHIBIT I (the "VOTING AGREEMENT") and (ii) the Amended and Restated Investor Rights Agreement substantially in the form attached hereto as EXHIBIT J (the "RIGHTS AGREEMENT"). The Voting Agreement and the Rights Agreement shall be referred to collectively as the "SHAREHOLDER AGREEMENTS." 7. LICENSE TO EXCLUDED ASSETS. Except as set forth on SCHEDULE 2.2, Seller hereby grants to Buyer, and Buyer accepts from Seller, a sublicensable, royalty-free, worldwide right and license under all applicable intellectual property rights (a) to use, modify and reproduce the source code for any software included within the Excluded Assets, (b) to use, modify and reproduce the technology, know-how and trade secrets included within the Excluded Assets, and (c) to use, modify, publicly display, publicly perform, distribute and transmit the software, content and other data included within the Excluded Assets. Buyer's right and license hereunder shall be irrevocable and perpetual so long as there has not been an Event of Default under the terms of the Security Agreement and as long as Buyer has not exercised its right of recession pursuant to Section 12 hereof. 21 8. EMPLOYEE MATTERS. 8.1 TRANSFERRED EMPLOYEES. (a) OFFER OF EMPLOYMENT. Seller agrees that Buyer may make offers of employment to the Seller employees set forth on SCHEDULE 8.1 (the "SELECTED EMPLOYEES") and such Selected Employees shall be free to accept employment with Buyer. As soon as reasonably practicable following the Closing, Buyer shall hire those Selected Employees to whom it has made an offer in accordance with this Section 8.1 and who accept such offer in the manner and within the time frame reasonably established by Buyer. Each such Selected Employee who is employed by Seller on the Closing Date and who actually transfers to employment with Buyer at or after the Closing Date as a result of an offer of employment made by Buyer is hereafter referred to as a "TRANSFERRED EMPLOYEE." (b) PRIOR BENEFITS. Seller, and not Buyer, shall be obligated to make all payments of salary, compensation, wages, health or similar benefits, commissions, bonuses (deferred or otherwise), severance, stock or stock options or any other sums accruing (i) to any Transferred Employee prior to 12:01 a.m. on the day after the Closing Date (or the end of the day at such later date on which such Transferred Employee ceases to be employed by Seller) or (ii) to any Business Employees other than the Transferred Employees. In addition, Seller will be fully responsible for all amounts payable to any Business Employee, including (without limitation) all termination payments, redundancy compensation, severance pay, accrued vacation pay and other amounts payable in respect of the termination of employment of any employee in connection with the sale of the Purchased Assets to the Buyer. 8.2 COMPENSATION AND BENEFITS OF TRANSFERRED EMPLOYEES. Coverage for Transferred Employees under Buyer's compensation and benefit plans and other programs shall commence as of 12:01 a.m. on the day after the Closing Date (or at such later date on which such Transferred Employee commences employment with Buyer). Buyer shall be free to establish its own employee benefit plans; Buyer shall have no obligation to offer benefit plans of the same type or with terms similar to or better than the terms of Seller's current employee benefit plans. Buyer may, at its option, give each Transferred Employee credit for such Transferred Employee's years of most recent continuous service with Seller for purposes of determining participation and benefit levels under all of Buyer's vacation policies and benefit plans and programs. 8.3 NO RIGHT TO CONTINUED EMPLOYMENT OR BENEFITS. No provision in this Agreement, other than the indemnification provisions of Section 11 hereof, shall create any third party beneficiary or other right in any Person (including any beneficiary or dependent thereof) for any reason, including, without limitation, in respect of continued, resumed or new employment with Seller or Buyer or in respect of any benefits that may be provided, directly or indirectly, under any plan or arrangement maintained by Seller or Buyer. Buyer is under no obligation to hire any employee of Seller, or to make any payments or provide any benefits to those employees of Seller whom Buyer chooses not to employ. 22 9. CONDITIONS TO BUYER'S OBLIGATIONS The obligations of Buyer under this Agreement are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions, all or any of which may be waived by Buyer in writing, except as otherwise provided by law: 9.1 REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE; CERTIFICATE. (a) The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date; (b) Seller shall have performed and complied with all of its agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date; (c) The conditions set forth in this Section 9 have been fulfilled or satisfied, unless otherwise waived in writing by Buyer; and (d) Buyer shall have received a certificate, dated as of the Closing Date, signed and verified by an officer of Seller on behalf of Seller certifying to the matters set forth in Sections 9.1(a) and 9.1(b) above. 9.2 CONSENTS. All Governmental Authorizations, Required Consents and consents required to transfer the Contracts to Buyer on the terms and conditions provided to Seller, without change as a result of the transfer to Buyer, shall have been obtained. 9.3 NO PROCEEDINGS OR LITIGATION. (a) No preliminary or permanent injunction or other order shall have been issued by any Governmental Entity, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any Governmental Entity which prevents the consummation of the transactions contemplated by this Agreement. (b) No suit, action, claim, proceeding or investigation before any Governmental Entity shall have been commenced and be pending against any of the parties, or any of their respective Affiliates, associates, officers or directors, seeking to prevent transactions contemplated by this Agreement, including, without limitation, the sale of the Purchased Assets or asserting that the sale of the Purchased Assets would be illegal or create liability for damages or which may have an adverse effect on the Business or the Assets. 23 9.4 DOCUMENTS. This Agreement, the exhibits and schedules attached hereto, and any other instruments of conveyance and transfer and all other documents to be delivered by Seller at the Closing and all actions of Seller required by this Agreement and the exhibit agreements, or incidental thereto, and all related matters, shall be in form and substance reasonably satisfactory to Buyer and Buyer's counsel and shall be in full force and effect. 9.5 GOVERNMENTAL FILINGS. The parties shall have made any required filing with Governmental Entities in connection with this Agreement and the exhibit agreements, and any approvals related thereto shall have been obtained or any applicable waiting periods shall have expired. If a proceeding or review process by a Governmental Entity is pending in which a decision is expected, Buyer shall not be required to consummate the transactions contemplated by this Agreement until such decision is reached or rendered, notwithstanding Buyer's legal ability to consummate the transactions contemplated by this Agreement prior to such decision being, reached or rendered. 9.6 LEGAL OPINION. Buyer shall have received a legal opinion from Stoel Rives LLP, legal counsel to Seller, dated the Closing Date, in a form reasonably satisfactory to Buyer. 9.7 DUE DILIGENCE. Buyer shall have satisfactorily completed its due diligence review of the Business and the Assets. 9.8 EMPLOYMENT. Buyer shall have entered into satisfactory employment arrangements with each of Patricia Brown and Marci Singer, which arrangements shall include satisfactory assurances to the Buyer that Patricia Brown and Marci Singer will provide continued service, at Buyer's discretion, for up to one (1) year following the Closing Date (collectively, the "EMPLOYMENT AGREEMENTS"). 9.9 NO MATERIAL ADVERSE EFFECT. Subsequent to the date of this Agreement, no event has occurred that has had or could reasonably be expected to have a material adverse effect on the Assets. 10. CONDITIONS TO SELLER'S OBLIGATIONS The obligations of Seller under this Agreement are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions, all or any of which may be waived in writing by Seller, except as otherwise provided by law: 10.1 REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE. (a) The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date; 24 (b) Buyer shall have performed and complied with all of its agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date; (c) Seller shall have received a certificate, dated as of the Closing Date, signed and verified by an officer of Buyer on behalf of Buyer certifying to the matters set forth in Sections 10.1(a) and 10.1(b) above. 10.2 NO PROCEEDING OR LITIGATION. (a) No preliminary or permanent injunction or other order shall have been issued by any Governmental Entity, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any Governmental Entity which prevents the consummation of the transactions contemplated by this Agreement. (b) No suit, action, claim, proceeding or investigation before any Governmental Entity shall have been commenced and be pending against any of the parties, or any of their respective Affiliates, associates, officers or directors, seeking to prevent the sale of the Purchased Assets or asserting that the sale of the Assets would be illegal or create liability for damages. 10.3 DOCUMENTS. This Agreement, any other instruments of conveyance and transfer and all other documents to be delivered by Buyer to Seller at the Closing and all actions of Buyer required by this Agreement or incidental thereto, and all related matters, shall be in form and substance reasonably satisfactory to Seller and Seller's counsel. 10.4 GOVERNMENTAL FILINGS. The parties shall have made any filing required with Governmental Entities, and any approvals shall have been obtained or any applicable waiting periods shall have expired. If a proceeding or review process by a Governmental Entity is pending, in which a decision is expected, Seller shall not be required to consummate the transactions contemplated by this Agreement until such decision is reached or rendered, notwithstanding Seller's legal ability to consummate the transactions contemplated by this Agreement prior to such decision being reached or rendered. 10.5 LEGAL OPINION. Seller shall have received a legal opinion from Venture Law Group, A Professional Corporation, legal counsel to Buyer, dated the Closing Date, in a form reasonably satisfactory to Seller. 10.6 NOTES AND SECURITY AGREEMENT. Buyer shall have executed and delivered to Seller the Convertible Note, the Term Note and the Security Agreement. 10.7 CONSENTS. All consents required for Buyer to execute, deliver and per-form this Agreement, or any agreement contemplated hereby, shall have been obtained. 25 10.8 NO MATERIAL ADVERSE EFFECT. Subsequent to the date of this Agreement, no event has occurred that has had or could reasonably be expected to have a material adverse effect on the financial condition or solvency of Buyer. 11. INDEMNIFICATION 11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of Buyer and Seller contained in this Agreement shall survive the Closing (even if the damaged party knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect for a period of eighteen (18) months from the Closing Date. 11.2 INDEMNIFICATION BY SELLER. (a) In the event the Seller breaches (or in the event any third party alleges facts that, if true, would mean the Seller has breached) any of its representations, warranties and covenants contained in this Agreement, and, if there is an applicable survival period pursuant to Section 11.1, provided that the Buyers make a written claim for indemnification against the Seller within such survival period, then the Seller agrees to indemnify the Buyer, its officers, directors, employees, contractors, agents and representatives (collectively, the "BUYER INDEMNIFIED PARTIES") from and against any Adverse Consequences such Buyer Indemnified Party may suffer through and after the date of the claim for indemnification (including any Adverse Consequences such party may suffer after the end of any applicable survival period) caused by the breach or the alleged breach. (b) In addition, the Seller agrees to indemnify the Buyer Indemnified Parties from and against any Adverse Consequences such parties may suffer caused by: (i) any liability of the Seller that becomes a liability of the Buyer Indemnified Parties under any bulk transfer law of any jurisdiction, under any common law doctrine of de facto merger or successor liability, under environmental, health, and safety requirements or otherwise by operation of law; (ii) the retained liabilities of the Seller; and (iii) any liability arising from claims relating to the Closing or periods prior to the Closing brought by any employees or contractors of Seller who are terminated at or prior to the Closing or in connection with the transactions contemplated hereby. 11.3 INDEMNIFICATION BY BUYER In the event that Buyer breaches (or in the event a third party alleges facts that, if true, would mean Buyer has breached) any of its representations, warranties and covenants contained in this Agreement, and, if there is an applicable survival period pursuant to Section 11.1, provided that the Seller makes a written claim for 26 indemnification against the breaching Buyer within such survival period, then Buyer agrees to indemnify the Seller, its officers, directors, employees, contractors, agents and representatives (collectively, the "SELLER INDEMNIFIED PARTIES") from and against any Adverse Consequences the Seller Indemnified Parties may suffer through and after the date of the claim for indemnification caused by the breach or the alleged breach. 11.4 LIABILITY LIMITATION. (a) The maximum amount of liability of the Seller to the Buyer Indemnified Parties under this Section 11, and the maximum amount of liability of the Buyer to the Seller Indemnified Parties under this Section 11, shall be limited in each case to an aggregate amount equal to the Purchase Price (assuming, in the event that the Convertible Note is converted into the Shares pursuant to the terms thereof, that the value of the Shares is $1,000,000 (the "CAP"); PROVIDED, HOWEVER, that, in the event that the Convertible Note is pre-paid, in whole or in part, during the initial sixty (60) day period following the Closing Date as permitted thereby, the Cap shall be reduced by the Discount (as defined in the Convertible Note) and, further, in the event the Term Note is pre-paid, in whole or in part, during the initial sixty (60) day period following the Closing Date as permitted thereby, the Cap shall be reduced by the Discount (as defined in the Term Note); and PROVIDED FURTHER, that upon the expenditure by Seller of an amount equal to the Cash Consideration in satisfying any obligations under this Section 11, Seller may satisfy any additional liability to Buyer hereunder by, at Seller's election, (i) cancellation of principal amounts owing on the Convertible Note and Term Note, if outstanding, dollar for dollar, (ii) in the event that the Convertible Note is converted into the Shares, or any portion thereof, pursuant to the terms thereof, returning to Buyer for cancellation a number of Shares having a value equal to such additional liability, or (iii) a combination of (i) and (ii) above. For the purposes of this Section 11.4, the Shares shall have a value equal to $0.6316 per share, which was the per-share purchase price of Buyer's Series B Preferred Stock. (b) Seller shall have no obligation to indemnify the Buyer Indemnified Parties pursuant to this Section 11 above for any Adverse Consequences suffered by such Buyer Indemnified Parties unless and until the aggregate amount of such Adverse Consequences exceeds $50,000, at which point Seller shall be responsible for indemnifying such Buyer Indemnified Parties for the amount of such Adverse Consequences that exceed the $50,000 threshold (subject to the limitations set forth in Section 11.4(a) above). (c) Buyer shall have no obligation to indemnify the Seller Indemnified Parties pursuant to this Section 11.3 above for any Adverse Consequences suffered by such Seller Indemnified Parties unless and until the aggregate amount of such Adverse Consequences exceeds $50,000, at which point Buyer shall be responsible for indemnifying such Seller Indemnified Parties for the amount of such Adverse Consequences that exceed the $50,000 threshold (subject to the limitations set forth in Section 11.4(a) above). 11.5 MATTERS INVOLVING THIRD PARTIES. 27 (a) If any third party shall notify any party to this Agreement (the "INDEMNIFIED PARTY") with respect to any matter (a "THIRD PARTY CLAIM") which may give rise to a claim for indemnification against any other party to this Agreement (the "INDEMNIFYING PARTY") under this Section 11, then the Indemnified Party shall promptly notify each Indemnifying Party thereof in writing; PROVIDED, HOWEVER, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (i) the Indemnifying Party notifies the Indemnified Party in writing within twenty (20) days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against any Adverse Consequences the Indemnified Party may suffer that are caused by the Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder, (iii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, (iv) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice materially adverse to the continuing business interests of the Indemnified Party, and (v) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (c) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with (b) above, (i) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, (ii) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably), and (iii) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). (d) In the event any of the conditions in (b) above is or becomes unsatisfied, however, (i) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it reasonably may deem appropriate, provided it obtains the prior written consent of the Indemnifying Party (not to be withheld unreasonably), (ii) the Indemnifying Party will reimburse the Indemnified Party for the Indemnified Party's out-of-pocket expenses incurred in defending against the Third Party Claim upon receipt of a monthly invoice provided by the Indemnified Party, and (iii) the Indemnifying Party will remain responsible for any Adverse Consequences the Indemnified Party may suffer as a result of the Third Party Claim to the fullest extent provided in this Section 11. 28 (e) Notwithstanding anything contained in this Section 11.5, the Indemnified Party shall advance one-half of the out-of-pocket expenses incurred by the Indemnifying Party in the defense of any third-party claim under this Section 11.5, upon receipt of a monthly invoice provided by the Indemnifying Party or, in the event that the Indemnified Party is defending the third party claim in accordance with Section 11.5(d) above, the Indemnifying Party shall, in lieu of its obligations under 11.5(d)(ii), reimburse the Indemnified Party for one-half of the Indemnified Party's out-of-pocket expenses incurred in defending against the Third Party Claim upon receipt of a monthly invoice provided by the Indemnified Party. Upon any final resolution of the third-party claim, the Indemnified Party shall be entitled to (i) a refund from the Indemnifying Party of all advances made in accordance with this Section 11.5(e) or, (ii) in the event that the Indemnified Party is defending the third party claim in accordance with Section 11.5(d) above, payment from the Indemnifying Party of the remaining one-half of the out-of-pocket expenses invoiced to the Indemnifying Party pursuant to Section 11.5(d)(ii) above, unless the claim is conclusively determined not to be subject to indemnification hereunder. 11.6 EXCLUSIVITY OF REMEDY. The foregoing indemnification provisions shall be the exclusive remedy of Buyer and Seller with respect to any breach of the representations, warranties, or covenants made pursuant to this Agreement. 12. CERTAIN REMEDIES OF BUYER. In the event that on or after the sixtieth (60th) day following the Closing Date, despite Buyer's commercially reasonable best efforts (which efforts shall not include making payments to listings providers), Buyer has permission to use and display summary information on fewer than 450,000 real estate listings in the Business database, Buyer, at its option, may rescind this Agreement, and all transactions contemplated hereby. If Buyer elects to rescind this Agreement and all transactions contemplated hereby pursuant to this Section 12, Buyer shall provide written notice thereof to Seller, whereupon, (a) this Agreement, and all agreements contemplated hereby including, without limitation, the Security Agreement and Seller's rights and obligations under the Shareholder Agreements, shall terminate and be of no further force or effect, (b) Seller shall, within ten (10) days following receipt of such written notice, (i) return to Buyer the Cash Consideration and (ii) surrender for cancellation the Convertible Note and the Term Note, if outstanding, and the Shares, if applicable, in each case free from all Liens and (c) Buyer shall, within ten (10) days following Seller's return of the Cash Consideration and surrender of the Convertible Note, Term Note and Shares, as applicable, return the Purchased Assets in good condition (normal wear and tear excepted). 13. DISPUTE RESOLUTION. Any dispute between Buyer and Seller involving the interpretation of this Agreement or the rights and obligations of, or remedies available to, the parties hereto shall be determined by binding arbitration in accordance with the arbitration rules of JAMS-Endispute in San Francisco County, California, in the event that such arbitration is initiated by Seller, or in Seattle, 29 Washington, in the event that such arbitration is initiated by Buyer. The arbitrator shall be knowledgeable in the relevant industry, shall be mutually acceptable to the parties and shall have the authority to permit discovery upon request of a party. The cost of such arbitration shall be shared equally by the parties. Any determination or award issued from such arbitration may be enforced in any court of competent jurisdiction in the United States. 14. MISCELLANEOUS. 14.1 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived with the written consent of the parties or their respective successors and assigns. Any amendment or waiver effected in accordance with this Section 14.1 shall be binding upon the parties and their respective successors and assigns. 14.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 14.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Washington, without giving effect to principles of conflicts of law. 14.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 14.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 14.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in the regular mail as certified or registered mail with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below, or as subsequently modified by written notice, and (a) if to Buyer, with a copy to Venture Law Group, 2775 Sand Hill Road, Menlo Park, CA 94025, Attn: Jim Brock, or (b) if to Seller, with a copy to Stoel Rives LLP, 600 University Street, Suite 3600, Seattle, WA 98101, Attn: Ronald J. Lone. 14.7 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, 30 in order to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. 14.8 ENTIRE AGREEMENT. This Agreement and the documents referred to herein are the product of both of the parties hereto, and constitute the entire agreement between such parties pertaining to the subject matter hereof and thereof, and merge all prior negotiations and drafts of the parties with regard to the transactions contemplated herein and therein. Any and all other written or oral agreements existing between the parties hereto regarding such transactions are expressly canceled. 14.9 ADVICE OF LEGAL COUNSEL. Each party acknowledges and represents that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. This Agreement shall not be construed against any party by reason of the drafting or preparation thereof. [Signature Page Follows] 31 This Agreement has been duly executed and delivered by the duly authorized officers of Seller and Buyer as of the date first above written. HOME SHARK, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- THE COBALT GROUP, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- The following individuals are executing this Purchase Agreement solely for the purposes of Section 6.8. GEOF BARKER ----------------------------------------- JOHN HOLT ----------------------------------------- PATRICIA BROWN ----------------------------------------- SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT 32 This Agreement has been duly executed and delivered by the duly authorized officers of Seller and Buyer as of the date first above written. HOME SHARK, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- THE COBALT GROUP, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- The following individuals are executing this Purchase Agreement solely for the purposes of Section 6.8. GEOF BARKER ----------------------------------------- JOHN HOLT ----------------------------------------- PATRICIA BROWN ----------------------------------------- SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT 33 EX-10.12 17 EXHIBIT 10.12 Exhibit 10.12 OFFICE LEASE This lease, made and entered into at Portland, Oregon, this 1st day of December, 1997 by and between LANDLORD: CTL Management, Inc. and TENANT: Parts Voice Landlord hereby leases to Tenant the following: 3,772 SQ.FT KNOWN AS SUITES 104 AND 215 (the premises) in LEWIS AND CLARK BUILDING (the building) at 8305 SE MONTEREY, Oregon, for a term commencing DECEMBER 1, 1997. and continuing through NOVEMBER 30, 1999 at a Monthly Base Rental as follows: YEAR 1 YEAR 2 ------ ------ $15.00/SQ.FT. = $4,715/MONTH $15.50/SQ.FT. = 4,872/MONTH Rent is payable in advance on the 1ST DAY of each month commencing December 1, 1997. Landlord and Tenant covenant and agree as follows: 1.1 DELIVERY OF POSSESSION. Should Landlord be unable to deliver possession of the premises on the date fixed for the commencement of the term, commencement will be deferred and Tenant shall owe no rent until notice from the Landlord tendering possession to Tenant. If possession is not so tendered within 90 days following commencement of the term, then Tenant may elect to cancel this lease by notice to Landlord within 10 days following expiration of the 90 day period. Landlord shall have no Page 1 Landlord Tenant ---------- -------- liability to Tenant for delay in delivering possession, nor shall such delay extend the term of this lease in any manner. 2.1 RENT PAYMENT. Tenant shall pay the Base Rent for the premises and any additional rent provided herein without deduction or offset. Rent for any partial month during the lease term shall be prorated to reflect the number of days during the month that Tenant occupies the premises. Additional rent means amounts determined under section 19 of this lease and any other sums payable by Tenant to Landlord under this lease. Rent not paid when due shall bear interest at the rate of one-and-one-half per month until paid. Landlord may at its option impose a late charge of $.05 for each $1 of rent for rent payments made more than 10 days late in lieu of interest for the first month of delinquency, without waiving any other remedies available for default. Failure to impose a late charge shall not be a waiver of Landlord's rights hereunder. 3.1 LEASE CONSIDERATION. Upon execution of the lease Tenant has paid the Base Rent for the first full month to the lease term for which rent is payable and in addition has paid the sum of $ -0- as lease consideration. Landlord may apply the lease consideration to pay the cost of performing any obligation which Tenant fails to perform within the time required by this lease, but such application by Landlord shall not be the exclusive remedy for Tenant's default. If the lease consideration is applied by Landlord, Tenant shall on demand, pay the sum necessary to replenish the lease consideration to its original amount. To the extent not applied by Landlord to cure defaults by Tenant, the lease consideration shall be applied against the rent payable for the last month of the term. The lease consideration shall not be refundable. 4.1 USE. Tenant shall use the Premises for business for and for no other purpose without Landlord's written consent. In connection with its use, Tenant shall at its expense promptly comply with all applicable laws, ordinances, rules and regulations of any public authority and shall not annoy, obstruct, or interfere with the rights of other Tenants of the building. Tenant shall create no nuisance nor allow any objectionable fumes, noise, or vibrations to be emitted from the Premises. Tenant shall not conduct any activities that will increase Landlords insurance rates for any portion of the building or that will in any manner degrade or damage the reputation of the Building. 4.2 EQUIPMENT. Tenant shall install in the Premises only such office equipment as is customary for general office use and shall not overload the floors or electrical circuits of the Premises or Building or alter the plumbing or wiring of the Premises or Building. Landlord must approve in advance the location of and manner of installing any wiring or electrical, heat generating or communications equipment or exceptionally heavy articles. All telecommunications equipment, conduit, cables and wiring Page 2 Please Initial -------- -------- Landlord Initial and any additional air conditioning required because of heat generating equipment or special lighting installed by Tenant shall be installed and operated at Tenant's expense. 4.3 SIGNS. No signs, awnings, antennas, or other apparatus shall be painted on or attached to the Building or anything placed on any glass or woodwork of the Premises or positioned so as to be visible from outside the Premises without Landlords written approval as to design, size, location, and color. All signs installed by Tenant shall comply with Landlord's standards for signs and all applicable codes and all signs and sign hardware shall be removed upon termination of this lease with the sign location restored to its former state unless Landlord elects to retain all or any portion thereof. 5.1 UTILITIES AND SERVICES. Landlord will furnish water, electricity and elevator service and, during the normal Building hours of 8:00 AM to 6:00 PM Monday through Friday except holidays, will furnish heat and air conditioning (if the Building is air conditioned). Janitorial services will be provided in accordance with the regular schedule of the Building, which schedule and service may change from time to time. Tenant shall comply with all government laws or regulations regarding the use or reduction of utilities on the Premises. Interruption of services or utilities shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, render Landlord liable to Tenant for damages, or relieve Tenant from performance of Tenant's obligations under this lease. Landlord shall take all reasonable steps to correct any interruptions of service. Electrical service will be 110 volts unless different service already exist in the Premises. Tenant shall provide its own surge protection for power furnished to computers. 5.2 EXTRA USAGE. If Tenant uses excess amounts of utilities or services of any kind because of operation outside of normal Building hours, high demands from office machinery and equipment, nonstandard lighting, r any other cause, Landlord may impose a reasonable charge for supplying such extra utilities of services, which charge shall be payable monthly by Tenant in conjunction with rent payments. In case of dispute over any extra charge under this paragraph, Landlord shall designate a qualified independent engineer whose decision shall be conclusive on both parties. Landlord and Tenant shall each pay one-half of the cost of such determination. 6.1 MAINTENANCE AND REPAIR. Landlord shall have no liability for failure to perform required maintenance and repair unless written notice of such maintenance or repair is given be Tenant and Landlord fails to commence efforts to remedy the problem in a reasonable time and manner. Landlord shall have the right to erect scaffolding and other apparatus necessary for the purpose of making repairs, and Landlord shall have no liability for interference with Tenant's use because of repairs and installation. Page 3 Please Initial -------- -------- Landlord Tenant Tenant shall have no claim against Landlord for any interruption or reduction of services or interference with Tenant's occupancy, and no such interruption or reduction shall be construed as a constructive or other eviction of Tenant. Repair of damage caused by negligent or intentional acts or breach of this lease by Tenant, its employees or invitees shall be at Tenant's expense. 6.2 ALTERATIONS. Tenant shall not make any alterations, additions, or improvements to the Premises, change the color of the interior, or install any wall or floor coverings without Landlord's prior written consent which may be withheld in Landlord's sole discretion. Any such improvements, alterations, wiring, cables or conduit installed by Tenant shall at once become part of the Premises and belong to Landlord except for removable machinery and unattached moveable trade fixtures. Landlord may at its option require Tenant to remove any improvements, alterations, wiring, cables or conduit installed by Tenant and restore the Premises to the original condition upon termination of this lease. Landlord shall have the right to approve the contractor used by Tenant for any work in the Premises, and to post notices of non responsibility in connection with work being performed by Tenant in Premises. 7.1 INDEMNITY. Tenant shall not allow any liens to attach to the Building or Tenant's interest in the Premises as a result of its activities. Tenant shall indemnify and defend Landlord and its managing agents from any claim, liability, damage, or loss occurring on the Premises, arising out of any activity by Tenant, its agents, or invitees or resulting from Tenant's failure to comply with any term of this lease. Neither Landlord or its managing agent shall have any liability to Tenant because of loss or damage to Tenant's property or for death or bodily injury caused by the acts or omissions of other Tenants of the Building, or by third parties (including criminal acts). 7.2 INSURANCE. Tenant shall carry liability insurance with limits of not less than One Million Dollars ($1,000,000.00) combined single limit bodily injury and property damage which insurance shall have an endorsement naming Landlord and Landlord's managing agent, if any, as an additional insured and covering the liability insured under paragraph 7.1 of this lease. Tenant shall furnish a certificate evidencing such insurance which shall state that the coverage shall not be canceled or materially changed without 10 days advance notice to Landlord and Landlord's managing agent, if any. A renewal certificate shall be furnished at least 10 days prior to expiration of any policy. 8.1 FIRE OR CASUALTY. "Major Damage" means damage by fire or other casualty to the Building or the Premises which causes the Premises or any substantial portion of the Building to be unusable, or which will cost more than 25 per cent of the pre-damage value of the Building to repair, or which is not covered by insurance. In case of major damage, Landlord may elect to terminate this lease by notice in Page 4 Please Initial -------- -------- Landlord Tenant writing to Tenant within 30 days of such date. If this lease is not terminated following major damage, or if damage occurs which is not major damage, Landlord shall promptly restore the Premises to the condition existing just prior to the damage. Tenant shall promptly restore all damage to tenant improvements or alterations installed by Tenant or pay the cost of such restoration to Landlord if Landlord elects to do the restoration of such improvements. Rent shall be reduced from the date of damage until the date restoration work being performed by Landlord is substantially complete, with the reduction to be in proportion to the area of the Premises not usable by Tenant. 8.2 WAIVER OF SUBROGATION. Tenant shall be responsible for insuring its personal property and trade fixtures located on the Premises and any alterations or Tenant improvements it has made to the Premises. Neither Landlord, its managing agent nor Tenant shall be liable to the other for any loss or damage caused by water damage, sprinkler leakage, or any of the risks that are or could be covered by a special all risk property policy, or for any business interruption, and there shall be no subrogated claim by one party's insurance carrier against the other party arising out of any such loss. This waiver is binding only if it does not invalidate the insurance coverage of either party hereto. 9.1 EMINENT DOMAIN. If a condemning authority takes title by eminent domain or by agreement in lieu thereof to the entire Building or a portion sufficient to render the Premises unsuitable for Tenant's use, then either party may elect to terminate this lease effective on the date that possession is taken by the condemning authority. Rent shall be reduced for the remainder in an amount proportionate to the reduction in area of the Premises caused by the taking. All condemnation proceeds shall belong to Landlord, and Tenant shall have no claim against Landlord or the condemnation award because of the taking. 10.1 ASSIGNMENT AND SUBLETTING. This lease shall bind and inure to the benefit of the parties, their respective heirs, successors, and assigns, provided the Tenant shall not assign its interest under this lease or sublet all or any portion of the Premises without first obtaining Landlords consent in writing. This provision shall apply to all transfers by operation of law including but not limited to mergers and changes in control of Tenant. No assignment shall relieve Tenant of its obligation to pay rent or perform other obligations required by this lease, and no consent to one assignment or subletting shall be a consent to any further assignment or subletting. Landlord shall not unreasonably withhold its consent to any assignment or subletting provided the effective rental paid by the sub-tenant or assignee is not less than the current scheduled rental rate of the Building for comparable space and the proposed Tenant is compatible with Landlord's normal standards for the Building. If Tenant proposes a subletting or assignment to which Landlord is required to consent under this paragraph, Landlord shall have the option of terminating this lease and dealing directly with the proposed sub- Page 5 Please Initial -------- -------- Landlord Tenant tenant or assignee, or any third party. If an assignment or subletting is permitted, any cash profit, or the net value of any other consideration received by Tenant shall pay any costs incurred by Landlord in connection with a request for assignment or subletting, including reasonable attorney's fees. 11.1 DEFAULT Any of the following shall constitute a default by Tenant under this lease: (a) Tenant's failure to pay rent or any other charge under this lease within 10 days after it is due, or failure to comply with any other term or condition within 20 days following written notice from Landlord specifying the noncompliance. If such noncompliance cannot be cured within the 20 day period, this provision shall be satisfied if Tenant commences correction within such period and thereafter proceeds in good faith and with reasonable diligence to effect compliance as soon as possible. Time is of the essence of this lease. (b) Tenant's insolvency, business failure or assignment for the benefit of its creditors. Tenant's commencement of proceedings under any provision of any bankruptcy or insolvency law or failure to obtain dismissal of any petition filed against it under such laws within the time required to answer, or the appointment of a receiver for all or any portion of Tenant's properties or financial records. (c) Assignment or subletting by Tenant in violation of paragraph 10.1. (b) Vacation or abandonment of the Premises without the written consent of Landlord or failure to occupy the Premises within 20 days after notice from Landlord tendering possession. 11.2 REMEDIES FOR DEFAULT. In case of default as described in paragraph 11.1 Landlord shall have the right to the following remedies which are intended to be cumulative and in addition to any other remedies provided under applicable law: (a) Landlord may at its option terminate the lease by notice to Tenant. With or without termination, Landlord may retake possession of the Premises and may use or re-let the Premises without accepting a surrender or waiving the right to damages. Following such retaking or possession, efforts by Landlord to re-let the Premises shall be sufficient if Landlord follows its usual procedures for finding Tenants for the space at rates not less than the current rates for comparable space in the Building. If Landlord has other vacant Page 6 Please Initial -------- -------- Landlord Tenant space in the Building, prospective tenants may be placed in such other space without prejudice to Landlord's claim to damages or loss of rentals from Tenant. (b) Landlord may recover all damages caused by Tenant's default which shall include an amount equal to rentals loss because of the default, lease commissions paid for this lease, and the unamortized cost of any tenant improvements installed by Landlord to meet Tenant's special requirements. Landlord may sue periodically to recover damages as they occur throughout the lease term, and no action for accrued damages shall bar a later action for damages subsequently accruing. Landlord may elect in any one action to recover accrued damages plus damages attributable to the remaining term of the lease. Such damages shall be measured by the difference between the rent under this lease and the reasonable rental value of the Premises for the remainder of the term, discounted to the time of judgment at the prevailing interest rate on judgments. (c) Landlord may make any payment or perform any obligation which Tenant has failed to perform, in which case Landlord shall be entitled to recover from Tenant on demand all amounts so expected, plus interest from the date of the expenditure at the rate of one-and-one-half percent per month. Any such payment or performance by Landlord shall not waive Tenant's default. 12.1 SURRENDER. On expiration or early termination of this lease Tenant shall deliver all keys to Landlord and surrender the Premises vacuumed, swept, and free of all debris and in the same condition as at the commencement of the term subject only to reasonable wear from ordinary use. Tenant shall remove all of its furnishings and trade fixtures that remain its property and repair all damage resulting from such removal. Failure to remove shall be an abandonment of the property, and Landlord may dispose of it in any manner without liability. If Tenant fails to vacate the Premises when required, including failure to remove all its personal property, Landlord may elect either: (i) to treat Tenant as a tenant from month to month, subject to the provisions of this lease except that rent shall be one- and-one-half times the total rent being charged when the lease term expired, and any option or other rights regarding extension of the term or expansion of the Premises shall no longer apply; or (ii) to eject Tenant from the Premises and recover damages caused by wrongful holdover. 13.1 REGULATIONS. Landlord shall have the right but shall not be obligated, to make, revise and enforce regulations or policies consistent with this lease for the purpose of promoting safety, health (including moving, use of common areas and prohibition of smoking), order, economy, cleanliness, and good service to all tenants of the Building. All such regulations and policies shall be complied with as if part of this lease. Page 7 Please Initial -------- -------- Landlord Tenant 14.1 ACCESS. During times other than normal Building hours Tenant's officers and employees or those having business with Tenant may be required to identify themselves or show passes in order to gain access to the Building. Landlord shall have no liability for permitting or refusing to permit access by anyone. Landlord shall have the right to enter upon the Premises at any time by passkey or otherwise to determine Tenant's compliance with this lease, to perform necessary services, maintenance and repairs or alterations to the Building or the Premises, or to show the Premises to any prospective tenant or purchasers. Except in case of emergency such entry shall be at such times and in such manner as to minimize interference with the reasonable business use of the Premises by Tenant. 14.2 FURNITURE AND BULKY ARTICLES. Tenant shall move furniture and bulky articles in and out of the building or make independent use of the elevators only at times approved by Landlord following at least 24 hours written notice to Landlord of the intended move. Landlord will not unreasonably withhold its consent under this paragraph. - ----------------------------------- following mailing, postpaid prepaid, to the address for the party stated in this lease or to such other address as either party may specify by notice to the other. Notice to Tenant may always be delivered to the Premises. Rent shall be payable to Landlord at the same address and in the same manner, but shall be considered paid only when received. 16.1 SUBORDINATION ATTORNMENT. This lease shall be subject to and subordinate to any mortgage, deeds of trust, or land sales contracts (hereafter collectively referred to as encumbrances) now existing against the Building. At Landlord's option this lease shall be subject and subordinate to any future encumbrance hereafter placed against the Building (including the underlying land) or any modifications of existing encumbrances, and Tenant shall execute such documents as may reasonably be requested by Landlord or the holder of the encumbrance to evidence this subordination. If any encumbrance is foreclosed, then if the purchaser at foreclosure sale gives to Tenant a written agreement to recognize Tenant's lease, Tenant shall attorn to such purchaser and this Lease shall continue. 16.2 TRANSFER OF BUILDING. If the Building is sold or otherwise transferred by Landlord or any successor, Tenant shall attorn to the purchaser or transferee and recognize it as the lessor under this lease, and, provided the purchaser or transferee assumes all obligations hereunder, the transferor shall have no further liability hereunder. Page 8 Please Initial -------- -------- Landlord Tenant 16.3 ESTOPPELS. Either party will within 10 days after notice from the other execute, acknowledge and deliver to the other party a certificate certifying whether or not this lease has been modified and is in full force and effect; whether there are any modifications or alleged breaches by the other party; the dates to which rent has been paid in advance, and the amount of any security deposit or prepaid rent; and any other facts that may reasonably be requested. Failure to deliver the certificate within the specified time shall be conclusive upon the party of whom the certificate was requested that the lease is in full force and effect has not been modified except as may be represented by the party requesting the certificate. If requested by the holder of any encumbrance, or any ground lessor, Tenant will agree to give such holder or lessor notice of and an opportunity to cure any default by Landlord under this lease. 17.1 DISPUTE RESOLUTION. INFORMAL DISPUTE CONFERENCES: In the event the Tenant has a grievance against the Landlord, the Tenant shall notify the Landlord of his/her grievance in writing. The Landlord agrees to meet with the Tenant within Twenty (20) days of receiving said grievance. MEDIATION: In the event any grievance between the parties is not resolved in the Informal Dispute Conference discussed above, the parties agree that said dispute be submitted to mediation, prior to the initiation of any litigation. Either Tenant or Landlord may request mediation of dispute by notifying the other party in writing. Within fifteen (15) days of such request, both parties shall select a mediator. In the event that the parties cannot agree on a mediator, a mediator will be selected pursuant to the rules of the Arbitration Services of Portland, Inc. or the American Arbitration Association. The parties and the mediator shall meet at an agreeable time and place within fifteen (15) days of the mediator's selection in an attempt to mediate the dispute. The mediator will select the time and place for the meeting. The mediator will have five (5) days after the hearing to attempt to resolve the dispute. If either party does not agree with the solutions suggested by the mediator, either party may then request that the matter proceed to arbitration. Each party shall pay their own costs and attorney fees, if any, of participation in the mediation. Each party shall pay one half of the mediator's fee. ARBITRATION: In the event that the parties are unable to resolve their dispute in mediation, the matter shall then proceed to final and binding arbitration. Either party may initiate the arbitration process through a written request to the other. The parties shall then confer and attempt to agree on a single arbitrator. If the parties are unable to do so within twenty (20) days of said request, each party shall select its own arbitrator, the two of whom shall then select a third arbitrator. The costs of arbitration shall be shared equally by the parties. Each party shall pay their own attorney fees. The arbitrator(s) will schedule and conduct a hearing within thirty (30) days of the selection of the arbitrator(s). Within twenty-one (21) days of the arbitration hearing, the arbitrator(s) shall serve written notice of their decision on the parties. The arbitration shall be conducted pursuant to the rules of the American Arbitration Association, or the Arbitration Service of Portland, Inc. Page 9 Please Initial -------- -------- Landlord Tenant or such other similar independent public arbitration service that is designed to provide a fair and impartial arbitration process as Landlord shall select. Page 10 Please Initial -------- -------- Landlord Tenant 18.1 QUIET ENJOYMENT. Landlord warrants that so long as Tenant complies with all terms of this lease it shall be entitled to peaceable and undisturbed possession of the Premises free from any eviction or disturbance by Landlord. Neither Landlord or its managing agent shall have any liability to Tenant for loss or damages arising out of the acts, including criminal acts, of other tenants of the Building or third parties, nor any liability for any reason which exceeds the value of its interest in the Building. 19.1 ADDITIONAL RENT: TAX ADJUSTMENT. Whenever for any July 1 - June 30 tax year the real property taxes levied against the Building and its underlying land exceed those levied for the 1996 - 1997 tax year, than the monthly rental for the next succeeding calendar year shall be increased by one-twelfth of such tax increase times Tenant's proportionate share. "Real property taxes" as used herein means all taxes and assessments of any public authority against the Building and the land on which it is located, the cost of contesting any tax and any form of fee or charge imposed on Landlord as a direct consequence of owning or leasing the Premises, including but not limited to rent taxes, gross receipt taxes, leasing taxes, or any fee or charge wholly or partially in lieu of or in substitution for ad valorem real property taxes or assessments, whether now existing or hereafter enacted. If any portion of the Building is occupied tax-exempt tenant so that the Building has a partial tax exemption under ORS 307.112 or a similar statute, than real property taxes shall mean taxes computed as if such partial exemption did not exist. If a separate assessment or identifiable tax increase arises because of improvements to the Premises, than Tenant shall pay 100 percent of such increase. 19.2 TENANT'S PROPORTIONATE SHARE. "Tenant's proportionate share" as used herein means the area of the Premises, divided by the total area of office space in the Building, with area determined using one of the methods of building measurements defined by the Building Owners and Managers Association (BOMA). Tenant's proportionate share as of the lease commencement date shall be 18.97 percent. 19.3 ADDITIONAL RENT: OPERATING EXPENSE ADJUSTMENT. Tenant shall pay as additional rent its proportionate share, as defined in paragraph 19.2, of the amount by which operating expenses for the Building increase over those experienced by Landlord during the calendar year 1997 (base year). Effective January 1 of each year Landlord shall estimate the amount by which operating expenses are expected to increase, if any, over those incurred in the base year. Monthly rental for that year shall be increased by one-twelfth of Tenant's share of the estimated increase. Following the end of each calendar year, Landlord shall compute the actual increase in operating expense and bill Tenant for any deficiency or credit Tenant with any excess collected. As used herein "operating expenses" shall mean all costs of operating and maintaining the Building as determined by standard real estate accounting practice, including, but not limited to: all water and sewer charges; the cost of natural gas and electricity Page 11 Please Initial -------- -------- Landlord Tenant provided to the Building; janitorial and cleaning supplies and services; administration costs and management fees; superintendent fees; security services, if any; insurance premiums; licenses; permits for the operation and maintenance of the Building and all of its component elements and mechanical systems; the annual amortized capital improvement cost (amortized over such a period as Landlord may select but not shorter than the period allowed under the Internal Revenue Code and at a current market interest rate) for any capital improvements to the Building required by any governmental authority or those which have a reasonable probability of improving the operating efficiency of the Building. 20.1 COMPLETE AGREEMENT. This lease and the attached exhibits and schedules if any, constitute the entire agreement of the parties and supersede all prior written and oral agreements and representations. Neither Landlord nor Tenant is relying on any representations other than those expressly set forth herein. 20.2 SPACE LEASED AS IS. Unless otherwise stated in this Lease, the Premises are leased as is in the condition now existing with no alterations or other work to be performed by Landlord. 20.3 CAPTIONS. The titles to the paragraphs of this lease are descriptive only and are not intended to change or influence the meaning of any paragraph or to be part of this lease. 20.4 NON WAIVER. Failure by Landlord to promptly enforce any regulation, remedy or right of any kind under this Lease shall not constitute a waiver of the same and such right or remedy may reasserted at any time after Landlord becomes entitled to the benefit thereof notwithstanding delay in enforcement. 20.5 EXHIBITS. The following Exhibits are attached hereto and incorporated as a part of this Lease: Page 12 Please Initial -------- -------- Landlord Tenant IN WITNESS WHEREOF, the duly authorized representatives of the parties have executed this lease as of the day and year first written above. LANDLORD: By: By: Address for notices: ----------------------- ----------------------- 9498 SW Barbur Blvd Title: Title: Suite 200 -------------------- -------------------- Portland, OR 97219 By: By: ----------------------- ----------------------- Title: Title: -------------------- -------------------- TENANT: By: By: Address for notices: ----------------------- ----------------------- Title: Title: - --------------------- -------------------- -------------------- - --------------------- - --------------------- By: By: ----------------------- ----------------------- Title: Title: -------------------- -------------------- Page 13 Please Initial -------- -------- Landlord Tenant EX-10.13 18 EXHIBIT 10.13 PURCHASE AGREEMENT DATED OCTOBER 7, 1998 BY AND AMONG THE COBALT GROUP, INC. AND THE PURCHASER NAMED HEREIN TABLE OF CONTENTS
Page ---- 1. AUTHORIZATION AND CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1.1 AUTHORIZATION OF THE SERIES B PREFERRED STOCK . . . . . . . . . . .4 1.2 PURCHASE AND SALE OF THE SERIES B PREFERRED STOCK . . . . . . . . .4 1.3 THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2. CONDITIONS OF THE PURCHASER'S OBLIGATION AT THE CLOSING . . . . . . . . . . . .5 2.1 REPRESENTATIONS AND WARRANTIES; COVENANTS . . . . . . . . . . . . .5 2.2 AMENDMENT OF ARTICLES OF INCORPORATION. . . . . . . . . . . . . . .5 2.3 REGISTRATION AGREEMENT. . . . . . . . . . . . . . . . . . . . . . .5 2.4 SHAREHOLDERS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . .5 2.5 SALE OF SERIES B PREFERRED STOCK TO THE PURCHASER . . . . . . . . .6 2.6 KEY-MAN LIFE INSURANCE. . . . . . . . . . . . . . . . . . . . . . .6 2.7 BLUE SKY CLEARANCE. . . . . . . . . . . . . . . . . . . . . . . . .6 2.8 OPINION OF THE COMPANY'S COUNSEL. . . . . . . . . . . . . . . . . .6 2.9 MANAGEMENT SERVICES AGREEMENT . . . . . . . . . . . . . . . . . . .6 2.10 CONFIDENTIALITY AND NONCOMPETITION AGREEMENT. . . . . . . . . . . .6 2.11 DELIVERY OF REDEMPTION OFFER. . . . . . . . . . . . . . . . . . . .7 2.12 CLOSING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . .7 3. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 3.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. . . . . . . . . . . . .7 3.2 INSPECTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . .9 3.3 RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 3.4 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 12 3.5 COMPLIANCE WITH AGREEMENTS. . . . . . . . . . . . . . . . . . . . 13 3.6 CURRENT PUBLIC INFORMATION. . . . . . . . . . . . . . . . . . . . 13 3.7 RESERVATION OF COMMON STOCK . . . . . . . . . . . . . . . . . . . 14 3.8 FIRPTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.9 REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4. TRANSFER OF RESTRICTED SECURITIES . . . . . . . . . . . . . . . . . . . . . . 15 4.1 GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . 15 4.2 OPINION DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . 15 4.3 LEGEND REMOVAL. . . . . . . . . . . . . . . . . . . . . . . . . . 16 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . 16 5.1 ORGANIZATION AND CORPORATE POWER. . . . . . . . . . . . . . . . . 16 -2- 5.2 CAPITAL STOCK AND RELATED MATTERS . . . . . . . . . . . . . . . . 16 5.3 SUBSIDIARIES; INVESTMENTS . . . . . . . . . . . . . . . . . . . . 17 5.4 AUTHORIZATION; NO BREACH. . . . . . . . . . . . . . . . . . . . . 17 5.5 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . 18 5.6 ABSENCE OF UNDISCLOSED LIABILITIES. . . . . . . . . . . . . . . . 18 5.7 NO MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . 19 5.8 ABSENCE OF CERTAIN DEVELOPMENTS . . . . . . . . . . . . . . . . . 19 5.9 ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.10 TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.11 CONTRACTS AND COMMITMENTS . . . . . . . . . . . . . . . . . . . . 21 5.12 PROPRIETARY RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . 23 5.13 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.14 BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.15 GOVERNMENTAL CONSENT. . . . . . . . . . . . . . . . . . . . . . . 24 5.16 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.17 EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.18 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.19 COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . . . . 27 5.20 AFFILIATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 27 5.21 REAL PROPERTY HOLDING CORPORATION STATUS. . . . . . . . . . . . . 27 5.22 DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.23 CLOSING DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.24 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 6. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.1 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.2 REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.3 PURCHASER'S INVESTMENT REPRESENTATIONS. . . . . . . . . . . . . . 31 6.4 CONSENT TO AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . 32 6.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . 32 6.6 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . 32 6.7 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.8 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.9 DESCRIPTIVE HEADINGS; INTERPRETATION. . . . . . . . . . . . . . . 33 6.10 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.11 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-3- PURCHASE AGREEMENT THIS AGREEMENT is made as of October 7, 1998 by and among The Cobalt Group, Inc., a Washington corporation (the "Company"), and the Person listed on the Schedule of Purchasers attached hereto (referred to herein as the "Purchaser"). Except as otherwise indicated herein, capitalized terms used herein are defined in Section 6 hereof. The parties hereto agree as follows: 1. AUTHORIZATION AND CLOSING 1.1 AUTHORIZATION OF THE SERIES B PREFERRED STOCK The Company shall authorize the issuance and sale to the Purchaser of 1,858,100 shares of its Series B Preferred Stock, par value $0.01 per share, and 5,118,091 shares of its Series B-1 Preferred Stock, par value $0.01 per share (together, the "Series B Preferred Stock," which Series B Preferred Stock, together with the Company's outstanding and issued shares of Series A Preferred Stock shall be herein referred to as the "Preferred Stock"). The Preferred Stock is convertible into shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock"). 1.2 PURCHASE AND SALE OF THE SERIES B PREFERRED STOCK At the Closing, the Company shall sell to the Purchaser and, subject to the terms and conditions set forth herein, the Purchaser shall purchase from the Company the number of shares of Series B Preferred Stock set forth opposite such Purchaser's name on the Schedule of Purchasers attached hereto at a price of $4.20 per share, for a total price of $29,300,002.20 (the "Purchase Price"). 1.3 THE CLOSING The closing of the purchase and sale of the Series B Preferred Stock (the "Closing") shall take place at the offices of Stoel Rives LLP, 3600 One Union Square, Seattle, WA 98101 at 7:00 a.m. on October 7, 1998, or at such other place, date or time as may be mutually agreeable to the Company and the Purchaser. At the Closing, the Company shall deliver to the Purchaser stock certificates evidencing the Series B Preferred Stock to be purchased by such Purchaser, registered in such Purchaser's or its nominee's name, upon payment of the purchase price thereof by wire transfer of immediately available funds to the Company's account at Silicon Valley Bank in Seattle, Washington in the aggregate amount set forth on the Schedule of Purchasers. -4- 2. CONDITIONS OF THE PURCHASER'S OBLIGATION AT THE CLOSING The obligation of the Purchaser to purchase and pay for the Series B Preferred Stock at the Closing is subject to the satisfaction as of the Closing of the following conditions: 2.1 REPRESENTATIONS AND WARRANTIES; COVENANTS The representations and warranties contained in Section 5 hereof shall be true and correct in all material respects at and as of the Closing as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and the Company shall have performed in all material respects all of the covenants required to be performed by it hereunder prior to the Closing. 2.2 AMENDMENT OF ARTICLES OF INCORPORATION The Company's Articles of Incorporation (the "Articles of Incorporation") shall have been amended to include the provisions set forth in EXHIBIT A hereto, shall be in full force and effect under the laws of the State of Washington as of the Closing as so amended and shall not have been further amended or modified. 2.3 REGISTRATION AGREEMENT The Productivity Fund III, L.P., a Delaware limited partnership (the "Productivity Fund"), Environmental Private Equity Fund II, L.P., a Delaware limited partnership (the "Environmental Private Equity Fund") and Mark Koulogeorge (together, the "Series A Purchasers"), the Company and the Purchaser shall have entered into a First Amendment to the Registration Agreement, dated February 28, 1997 in the form and substance as set forth in EXHIBIT B attached hereto (the "Registration Agreement"), and the Registration Agreement shall be in full force and effect as of the Closing. 2.4 SHAREHOLDERS AGREEMENT The Company, the Purchaser, the Series A Purchasers, Geoffrey Barker, John Holt and the individual shareholders named therein shall have entered into a First Amendment to the Amended and Restated Shareholders Agreement dated May 18, 1995 and amended and restated as of February 28, 1997 in the form and substance as set forth in EXHIBIT C attached hereto (the "Shareholders Agreement"), and the Shareholders Agreement shall be in full force and effect as of the Closing. -5- 2.5 SALE OF SERIES B PREFERRED STOCK TO THE PURCHASER The Company shall have sold to the Purchaser the Series B Preferred Stock to be purchased by it hereunder at the Closing and shall have received payment therefor in full. 2.6 KEY-MAN LIFE INSURANCE The Company shall have obtained key-man life insurance policies on the lives of each of Geoffrey T. Barker and John W.P. Holt in the face amount of $1,500,000 each, which policies shall be in full force and effect as of the Closing. Such insurance policies shall name the Purchaser as beneficiary and shall provide that such insurance policies may not be cancelled unless the insurance carrier gives at least 30 days' prior written notice of such cancellation to the Purchaser. An executed copy of both policies (with evidence of all corporate and board approval) shall be delivered to the Purchaser within 10 business days of the date hereof. 2.7 BLUE SKY CLEARANCE The Company shall have made all filings under applicable state securities laws necessary to consummate the issuance of the Series B Preferred Stock pursuant to this Agreement in compliance with such laws. 2.8 OPINION OF THE COMPANY'S COUNSEL The Purchaser shall have received from Stoel Rives LLP, counsel for the Company, an opinion with respect to the matters set forth in EXHIBIT D attached hereto, which shall be addressed to the Purchaser, dated the date of the Closing and in form and substance reasonably satisfactory to the Purchaser. 2.9 MANAGEMENT SERVICES AGREEMENT First Analysis Securities Corporation ("First Analysis") and the Company shall have entered into a First Amendment to the Management Services Agreement, dated as of February 28, 1997 in the form and substance as set forth in EXHIBIT E attached hereto. 2.10 CONFIDENTIALITY AND NONCOMPETITION AGREEMENT The Company shall have entered into a confidentiality and noncompetition agreement in form and substance as set forth in EXHIBIT F attached hereto (the "Confidentiality and Noncompetition Agreement"), with each of Geoffrey T. Barker and John W.P. Holt and the -6- Confidentiality and Noncompetition Agreement shall be in full force and effect as of the Closing. 2.11 DELIVERY OF REDEMPTION OFFER The Company shall have delivered written notice of the offer of redemption (the "Redemption Offer") to each holder of shares of Common Stock and of shares of Series A Preferred Stock to be redeemed in accordance with the provisions of paragraph 3.9, below, and shall have received binding acceptances of the Redemption Offer with respect to at least 2,173,204 shares of Common Stock and at least 2,404,652 shares of Series A Preferred Stock, pursuant to which the Company shall redeem the above shares (the "Redemption"). Such Redemption shall be effective as of the Closing Date. 2.12 CLOSING DOCUMENTS The Company shall have delivered to the Purchaser all of the following documents: (i) an Officer's Certificate, dated the date of the Closing, stating that the conditions specified in Section 1 and paragraphs 2.1 through 2.9, inclusive, have been fully satisfied; (ii) certified copies of the resolutions duly adopted by the Company's board of directors authorizing the execution, delivery and performance of this Agreement, the Registration Agreement, the Shareholders Agreement, and each of the other agreements contemplated hereby, the filing of the amendment to the Articles of Incorporation referred to in paragraph 2.2, the issuance and sale of the Series B Preferred Stock, the reservation for issuance upon conversion of the Series B Preferred Stock an aggregate of 6,976,190 shares of Common Stock and the consummation of all other transactions contemplated by this Agreement; (iii) certified copies of the Amended and Restated Articles of Incorporation and the Company's bylaws, each as in effect at the Closing; and copies of all third party and governmental consents, approvals and filings required in connection with the consummation of the transactions hereunder (including, without limitation, all blue sky law filings). 3. COVENANTS 3.1 FINANCIAL STATEMENTS AND OTHER INFORMATION -7- The Company shall deliver to the Purchaser, who is at the time a holder of Underlying Common Stock: (i) as soon as available but in any event within 30 days after the end of each monthly accounting period in each fiscal year, unaudited statements of income and cash flows of the Company for such monthly period and for the period from the beginning of the fiscal year to the end of such month, and balance sheets of the Company as of the end of such monthly period, selling forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments; (ii) within 90 days after the end of each fiscal year, statements of income and cash flows of the Company for such fiscal year, and a balance sheet of the Company as of the end of such fiscal year, setting forth in each case comparisons to the annual budget and to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by (a) an opinion of an independent accounting firm of recognized national standing selected by the board of directors; (iii) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations or financial affairs given to the Company by its independent accountants (and not otherwise contained in other materials provided hereunder); (iv) prior to the beginning of each fiscal year, an annual budget prepared on a monthly basis for the Company for such fiscal year (displaying anticipated statements of income and cash flows and balance sheets), and promptly upon preparation thereof any other significant budgets prepared by the Company and any revisions of such annual or other budgets; (v) within ten days after transmission thereof, copies of all financial statements, proxy statements, reports and any other general written communications which the Company sends to its stockholders and copies of all registration statements and all regular, special or periodic reports which it files, or (to its knowledge) any of its officers or directors file with respect to the Company, with the Securities and Exchange Commission or with any securities exchange on which any of its securities are then listed, and copies of all press release and other statements made available generally by the Company to the public concerning material developments in the Company's business, and -8- (vi) with reasonable promptness, such other operating information and financial data concerning the Company as any Person entitled to receive information under this paragraph 3.1 may reasonably request. Each of the financial statements referred to in subparagraphs (i) and (ii) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company). For purposes of this Agreement and the Registration Agreement, all holdings of Underlying Common Stock by Persons who are Affiliates of each other shall be aggregated for purposes of meeting any threshold tests under this Agreement and the Registration Agreement. 3.2 INSPECTION OF PROPERTY Prior to a Qualified Public Offering (used herein as defined in the Registration Agreement), the Company shall permit representatives designated by any Purchaser who is at the time a holder of the Underlying Common Stock, upon reasonable notice, during normal business hours and upon delivery of an executed confidentiality agreement by such representative in a form reasonably satisfactory to the Company to (i) visit and inspect any of the properties of the Company, (ii) examine the corporate and financial records of the Company and make copies thereof or extracts therefrom and (iii) discuss the affairs, finances and accounts of the Company with the directors, officers, key employees and independent accountants of the Company. The presentation of an executed copy of this Agreement by any Purchaser to the Company's independent accountants shall constitute the Company's permission to its independent accountants to participate in discussions with such representatives. Each holder of Underlying Common Stock that is a "venture capital operating company" for purposes of Department of Labor Regulation Section 2510.3-101 shall in addition to all other rights granted under this Agreement have the right to consult with and advise the officers of the Company with respect to the management of the Company. 3.3 RESTRICTIONS Subject to the last sentence of this Section 3.3, without the consent of the majority of the holders of Underlying Common Stock, the Company shall not: (i) directly or indirectly declare or pay any dividends or make any distributions upon any of its equity securities; -9- (ii) except as expressly contemplated by this Agreement, directly or indirectly redeem, purchase or otherwise acquire any of the Company's equity securities (including, without limitation, warrants, options and other rights to acquire equity securities) other than the Preferred Stock pursuant to the terms of the Articles of Incorporation; (iii) except as expressly contemplated by this Agreement, authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of any securities of the Company (including, without limitation, warrants, options and other rights to acquire equity securities); (iv) make any loans or advances to, guarantees for the benefit of, or Investments in, any Person except for (a) reasonable advances to employees in the ordinary course of business, (b) acquisitions permitted pursuant to subparagraph (viii) below and (c) Investments having a stated maturity no greater than one year from the date the Company makes such Investment (or similar Investment) in (1) obligations of the United States government or any agency thereof or obligations guaranteed by the United States government, (2) certificates of deposit of commercial banks having combined capital and surplus of at least $50 million or (3) commercial paper with a rating of at least "Prime-1" by Moody's Investors Service, Inc.; (v) merge or consolidate with any Person; (vi) sell, lease or otherwise dispose of more than 25% of the assets of the Company in any transaction or series of related transactions or sell or permanently dispose of any of its Proprietary Rights; (vii) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization into partnership or limited liability company form); (viii) acquire any interest in any business (whether by a purchase of assets, purchase of stock, merger or otherwise) or enter into any joint venture, involving an aggregate consideration (including the assumption of liabilities whether direct or indirect) exceeding $1,000,000 in any one transaction or exceeding $2,000,000 in any twelve-month period; (ix) enter into the ownership, active management or operation of any business other than as presently conducted; (x) become subject to any agreement or instrument which by its terms would (under any circumstances) restrict the Company's right to perform the provisions of this Agreement, the Registration Agreement, the Shareholders Agreement, the Articles of -10- Incorporation or the Company's bylaws (including, without limitation, provisions relating to making redemptions and conversions of the Preferred Stock); (xi) except as expressly contemplated by this Agreement, make any amendment to the Amended and Restated Articles of Incorporation or the Company's bylaws, or file any resolution of the board of directors with the Washington Secretary of State containing any provisions which would increase the number of authorized shares of the Common Stock or the Preferred Stock or adversely affect or otherwise impair the rights or relative priority of the holders of the Preferred Stock or Underlying Common Stock under this Agreement, the Articles of Incorporation, the Company's bylaws, the Registration Agreement, or the Shareholders Agreement; (xii) enter into any transaction with any of its officers, directors, employees or Affiliates or any individual related by blood or marriage to any such Person (a "Relative") or any entity in which any such Person or individual owns a beneficial interest (an "Interested Entity"), except for normal employment arrangements and benefit programs on reasonable terms, which arrangements or programs must be approved by the Compensation Committee (as defined) if Geoffrey Barker, John Holt, or any Affiliate, Relative or Interested Entity thereof is a party thereto, and except as otherwise expressly contemplated by this Agreement; (xiii) the Company shall not increase the compensation of any officer of the Company, unless approved by the compensation committee of the board of directors, which shall be comprised of two directors representing the Investors and one director representing the Executives (as such terms are used in the Shareholders Agreement) (the "Compensation Committee"); (xiv) establish or acquire (a) any Subsidiaries other than wholly-owned Subsidiaries or (b) any Subsidiaries organized outside of the United States and its territorial possessions; (xv) create, incur, assume or suffer to exist indebtedness for borrowed money exceeding in the aggregate [$1,000,000] outstanding at any time; (xvi) make any capital expenditures (including, without limitation, payments with respect to capitalized leases, as determined in accordance with generally accepted accounting principles consistently applied) exceeding [$300,000] in the aggregate during any twelve-month period; (xvii) enter into any leases or other rental agreements (excluding (a) capitalized leases, as determined in accordance with generally accepted accounting principles consistently applied and (b) the lease of the Company's offices at 2030 First Avenue, Suite 300, Seattle, -11- Washington 98121) under which the amount of the aggregate lease payments for all such agreements exceeds [$150,000] for any twelve-month period; (xviii) enter into (a) any contract triggered by any change of control or (b) any golden parachute agreement or (c) any employment agreement; (xix) change its fiscal year; or (xx) increase the authorized size of its board of directors above six members. Notwithstanding the foregoing, the board of directors' discretion in administering The Cobalt Group, Inc. 1995 Stock Option Plan (the "Stock Option Plan") shall not be limited or restricted. 3.4 AFFIRMATIVE COVENANTS Prior to the consummation of a Qualified Public Offering (used herein as defined in the Registration Agreement), the Company shall: (i) at all times cause to be done all things necessary to maintain, preserve and renew its corporate existence and all material licenses, authorizations and permits necessary to the conduct of its business; (ii) maintain and keep its properties in good repair, working order and condition, and from time to time make all necessary or desirable repairs, renewals and replacements, so that its business may be properly and advantageously conducted at all times; (iii) pay and discharge when payable all taxes, assessments and governmental charges imposed upon its properties or upon the income or profits therefrom (in each case before the same becomes delinquent and before penalties accrue thereon) and all claims for labor, materials or supplies to the extent to which the failure to pay or discharge such obligations would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of the Company, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with generally accepted accounting principles, consistently applied) have been established on its books with respect thereto; (iv) comply with all other material obligations which it incurs pursuant to any contract or agreement, whether oral or written, express or implied, as such obligations become due to the extent to which the failure to so comply would reasonably be expected to -12- have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of the Company, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with generally accepted accounting principles, consistently applied) have been established on its books with respect thereto; (v) comply with all applicable laws, rules and regulations of all governmental authorities, the violation of which would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of the Company; (vi) maintain the key-man life insurance policies referred to in paragraph 2.6 hereof; (vii) maintain proper books of record and account which fairly present its financial condition and results of operations and make provisions on its financial statements for all such proper reserves as in each case are required in accordance with generally accepted accounting principles, consistently applied; and 3.5 COMPLIANCE WITH AGREEMENTS The Company shall perform and observe (i) all of its obligations to each holder of the Preferred Stock and the Underlying Common Stock set forth in the Amended and Restated Articles of Incorporation and the Company's bylaws, and (ii) all of its obligations to each holder of Registrable Securities set forth in the Registration Agreement. 3.6 CURRENT PUBLIC INFORMATION At all times after the Company has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities Exchange Act, the Company shall file all reports required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Securities and Exchange thereunder and shall take such further action as may be required by Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission ("Rule 144"), all to the extent required to enable such holders to sell Restricted Securities pursuant to (i) Rule 144 or (ii) a registration statement on Form S-1 or S-3 or any similar registration form hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to any holder of Restricted Securities a written statement as to whether it has complied with such requirements. -13- 3.7 RESERVATION OF COMMON STOCK The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the conversion of the Series B Preferred Stock, such number of shares of Common Stock issuable upon the conversion of all outstanding Series B Preferred Stock. All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). 3.8 FIRPTA The Company acknowledges that certain Purchasers may be foreign entities or have foreign persons and entities as partners and that the Company may be required to file or cause to be filed in the future with the IRS certain statements with its United States income tax returns required under Section 1.897-2(h) of the Treasury Regulations. The Company shall use reasonable efforts consistent with sound business practice to avoid becoming a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the IRC. Upon any Purchaser's request, the Company shall provide such Purchaser with a statement that the Company is or is not a "United States real property holding corporation" as of the date specified by the Purchaser (or as of the date of the request if the Purchaser does not specify a date) and shall send a copy of such statement to the IRS in a form and manner which identifies the Purchaser and which otherwise satisfies the requirements of Section 1.89-2(h)(2) of the Treasury Regulations. In the event the Company in the future becomes a "United States real property holding corporation," the Company shall promptly notify the Purchaser in writing of such fact. Thereafter, upon written request from any Purchaser, the Company shall provide information, documentation and assistance to such Purchaser reasonably related to the Company's status as a "United States real property holding corporation," including but not limited to (i) an affidavit stating (if true) that the stock held by such Purchaser is of a class that is regularly traded (as defined by Sections 1.897-l(n) and 1.897-9T of the Treasury Regulations) on an established securities market (as defined by Section 1.897-l(m) of the Treasury Regulations), and (ii) information or assistance which would enable such Purchaser to obtain a withholding certificate permitting a transferee of such Purchaser's stock to avoid or reduce any withholding obligation such transferee would otherwise have under federal tax law. -14- 3.9 REDEMPTION From the Purchase Price received by the Company upon the purchase and sale of the Series B Preferred Stock, as provided in Section 1.2 above, the Company shall redeem at least 2,173,204 of outstanding shares of Common Stock and at least 2,404,652 of outstanding shares of Series A Preferred Stock, and on the date stated in the Redemption Offer, which Redemption Offer as provided in paragraph 2.10 shall have been delivered as a condition to the Closing to each holder thereof, the Company shall be obligated to pay each such holder an amount equal to (i) $4.20 per share of Common Stock, and (ii) $4.20 per share of Series A Preferred Stock. 4. TRANSFER OF RESTRICTED SECURITIES 4.1 GENERAL PROVISIONS Restricted Securities are transferable only pursuant to (i) public offerings registered under the Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule is available and (iii) subject to the conditions specified in paragraph 4.2 below, any other legally available means of transfer. 4.2 OPINION DELIVERY In connection with the transfer of any Restricted Securities (other than a transfer described in paragraph 4.1(i) or (ii) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer, together with an opinion of Perkins Coie, LLP or other counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities law matters to the effect that such transfer of Restricted Securities may be effected without registration of such Restricted Securities under the Securities Act. In addition, if the holder of the Restricted Securities delivers to the Company an opinion of Perkins Coie, LLP or such other counsel that no subsequent transfer of such Restricted Securities shall require registration under the Securities Act, the Company shall promptly upon such contemplated transfer deliver new certificates for such Restricted Securities which do not bear the Securities Act legend set forth in paragraph 7.3. If the Company is not required to deliver new certificates for such Restricted Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to the Company in writing its agreement to be bound by the conditions contained in this paragraph 4.2 and paragraph 7.3. -15- 4.3 LEGEND REMOVAL Upon the request of any holder of Restricted Securities, the Company shall remove the Securities Act legend set forth in paragraph 7.3 from the certificates for such holder's Restricted Securities; provided that such Restricted Securities are eligible for sale pursuant to Rule 144(k). 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY As a material inducement to the Purchaser to enter into this Agreement and purchase the Series B Preferred Stock, the Company hereby represents and warrants that: 5.1 ORGANIZATION AND CORPORATE POWER The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington and is qualified to do business in every jurisdiction in which its ownership of property or conduct of business requires it to qualify and in which the failure to qualify would have a material adverse affect on the financial condition, operating results, assets, operations or business prospects of the Company. The Company has all requisite corporate power and authority and all material licenses, permits and authorizations necessary to own and operate its properties, to carry on its business as now conducted and presently proposed to be conducted and to carry out the transactions contemplated by this Agreement. The copies of the Company's Amended and Restated Articles of Incorporation and bylaws which have been furnished to the Purchaser's special counsel reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 5.2 CAPITAL STOCK AND RELATED MATTERS (i) As of the Closing and immediately after giving effect to the Redemption, the authorized capital stock of the Company shall consist of (a) 4,510,934 shares of Series A Preferred Stock of which 2,106,282 shares shall be issued and outstanding, (b) 8,000,000 shares of Series B Preferred Stock of which 1,858,100 shares shall be issued and outstanding, (c) 7,000,000 shares of Series B-1 Preferred Stock of which 5,118,091 shares shall be issued and outstanding and (d) 200,000,000 shares of Common Stock, of which 1,329,685 shares shall be issued and outstanding and (i) 2,106,282 reserved for issuance upon conversion of the Series A Preferred Stock, (ii) 1,858,100 reserved for issuance upon conversion of the Series B Preferred Stock and (iii) 5,118,091 reserved for issuance upon conversion of the Series B-1 Preferred Stock. As of the Closing, the Company shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor shall it have outstanding any rights or options to subscribe for -16- or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock; or any stock appreciation rights or phantom stock plans other than as set forth on Schedule 5.2(i). As of the Closing, the Company shall not be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, except pursuant to the Amended and Restated Articles of Incorporation, the permitted redemptions described in Section 3.9 or as otherwise provided herein. As of the Closing, all of the outstanding shares of the Company's capital stock shall be validly issued, fully paid and nonassessable. (ii) There are no statutory or, to the best of the Company's knowledge, contractual stockholders preemptive rights or rights of refusal with respect to the issuance of the Series B Preferred Stock hereunder or the issuance of the Common Stock upon conversion of the Series B Preferred Stock. To the best of the Company's knowledge, the Company has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock, and the offer, sale and issuance of the Series B Preferred Stock hereunder do not require registration under the Securities Act or any applicable state securities laws. Other than as described on Schedule 5.2(ii), to the best of the Company's knowledge, there are no agreements between the Company's stockholders with respect to the voting or transfer of the Company's capital stock or with respect to any other aspect of the Company's affairs. 5.3 SUBSIDIARIES; INVESTMENTS Except as described on Schedule 5.3, the Company does not own or hold any rights to acquire any shares of stock or any other security or interest in any other Person, and the Company has never had any Subsidiary. 5.4 AUTHORIZATION; NO BREACH The execution, delivery and performance of this Agreement, the Registration Agreement, the Shareholders Agreement, and all other agreements contemplated hereby to which the Company is a party, and the filing of the Articles of Incorporation have been duly authorized by the Company. This Agreement, the Registration Agreement, the Shareholders Agreement, the Amended and Restated Articles of Incorporation, and all other agreements contemplated hereby each constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, except as it may be limited by applicable bankruptcy, insolvency; reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity. The execution and delivery by the Company of this Agreement, the Registration Agreement, the Shareholders Agreement, and all other agreements contemplated hereby to which the Company is a party, the offering, sale and -17- issuance of the Series B Preferred Stock hereunder, the issuance of the Common Stock upon conversion of the Series B Preferred Stock, the Amended and Restated Articles of Incorporation and the fulfillment of and compliance with the respective terms hereof and thereof by the Company, do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon the Company's capital stock or assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to the Amended and Restated Articles of Incorporation or bylaws of the Company, or any law, statute, rule or regulation to which the Company is subject, or any agreement, instrument, order, judgment or decree to which the Company is subject. 5.5 FINANCIAL STATEMENTS Attached hereto as the "Financial Statements Schedule" are the following financial statements: (i) the unaudited balance sheets of the Company as of December 31, 1996 and December 31, 1997, and the related statements of income and cash flows (or the equivalent) for the respective twelve-month periods then ended; and (ii) the unaudited balance sheet of the Company as of August 31, 1998 (the "Latest Balance Sheet"). Each of the foregoing financial statements (including in all cases the notes thereto, if any) is accurate and complete in all material respects, is consistent with the books and records of the Company (which, in turn, are accurate and complete in all material respects) and has been prepared in accordance with generally accepted accounting principles, consistently applied, subject to the lack of footnote disclosure and changes resulting from normal year-end adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company). 5.6 ABSENCE OF UNDISCLOSED LIABILITIES Except as set forth on the attached "Liabilities Schedule," the Company does not have any material obligation or liability (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known to the Company, whether due or to become due and regardless of when asserted) arising out of transactions entered into at or prior to the Closing, or any action or inaction at or prior to the Closing, or any state of facts existing at or prior to -18- the Closing other than: (i) liabilities set forth on the Latest Balance Sheet (including any notes thereto), (ii) liabilities and obligations which have arisen after the date of the Latest Balance Sheet in the ordinary course of business (none of which is a liability resulting from breach of contract, breach of warranty, tort, infringement, claim or lawsuit) and (iii) other liabilities and obligations expressly disclosed in the other Schedules to this Agreement. 5.7 NO MATERIAL ADVERSE CHANGE Except as set forth on the attached "Adverse Change Schedule," since the date of the Latest Balance Sheet, there has been no material adverse change in the financial condition, operating results, assets, operations, business prospects, employee relations or customer or supplier relations of the Company. 5.8 ABSENCE OF CERTAIN DEVELOPMENTS (i) Except as expressly contemplated by this Agreement or as set forth on the attached "Developments Schedule," since the date of the Latest Balance Sheet, the Company has not (a) issued any notes, bonds or other debt securities or any equity securities or any securities convertible, exchangeable or exercisable into any equity securities; (b) borrowed any amount or incurred or become subject to any material liabilities, except current liabilities incurred in the ordinary course of business and liabilities under contracts entered into in the ordinary course of business; (c) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability, other than current liabilities paid in the ordinary course of business; (d) declared or made any payment or distribution of cash or other property to its stockholders with respect to its stock or purchased or redeemed any shares of its stock or any warrants, options or other rights to acquire its stock; (e) pledged any of its properties or assets or subjected them to any material lien, security interest, charge or other encumbrance, except liens for current property taxes not yet due and payable; (f) sold, assigned or transferred any of its tangible assets, except in the ordinary course of business, or cancelled any material debts or claims; -19- (g) sold, assigned or transferred any patents or patent applications, trademarks, service marks, trade names, corporate names, copyrights or copyright registrations, trade secrets or other intangible assets, or disclosed any material proprietary confidential information to any Person; (h) suffered any material extraordinary losses or waived any rights of material value, whether or not in the ordinary course of business or consistent with past practice; (i) made capital expenditures or commitments therefor that aggregate in excess of $50,000; (j) entered into any other material transaction other than in the ordinary course of business or entered into any other material transaction; whether or not in the ordinary course of business; (k) made any loans or advances to, guarantees for the benefit of, or any Investments in, any Persons in excess of $50,000 in the aggregate; (l) made any charitable contributions or pledges; (m) suffered any damage, destruction or casualty loss exceeding in the aggregate $50,000, whether or not covered by insurance; or (n) made any Investment in or taken steps to incorporate any Subsidiary. (ii) The Company has not at any time made any payments for political contributions or made any bribes, kickback payments or other illegal payments. 5.9 ASSETS Except as set forth on the attached "Assets Schedule," the Company has good and marketable title to, or a valid leasehold interest in, the properties and assets used by it, located on its premises or shown on the Latest Balance Sheet or acquired thereafter, free and clear of all liens, security interests, charges and encumbrances, except for properties and assets disposed of in the ordinary course of business since the date of the Latest Balance Sheet and except for liens disclosed on the Latest Balance Sheet (including any notes thereto) and liens for current property taxes not yet due and payable. Except as described on the Assets Schedule, the Company's buildings, equipment and other tangible assets are in good operating condition in all material respects and are fit for use in the ordinary course of business. The Company owns, or has a valid -20- leasehold interest in, all assets necessary for the conduct of its business as presently conducted and as presently proposed to be conducted. 5.10 TAX MATTERS Except as set forth in the attached "Taxes Schedule" the Company has filed all tax returns which it is required to file under applicable laws and regulations; all such returns are complete and correct in all material respects; the Company in all material respects has paid all taxes due and owing by it and has withheld and paid over all taxes which it is obligated to withhold from amounts paid or owing to any employee, stockholder, creditor or other third party; the Company has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to a tax assessment or deficiency; the accrual for current taxes on the Latest Balance Sheet would be adequate to pay all of the Company's current tax liabilities if its current tax year were treated as ending on the date of the Latest Balance Sheet; the assessment of any additional taxes for periods for which returns have been filed is not expected to exceed the recorded liability therefor on the Latest Balance Sheet; no foreign, federal, state or local tax audits are pending or being conducted with respect to the Company, no information related to tax matters has been requested by any foreign, federal, state or local taxing authority and no notice indicating an intent to open an audit or other review has been received by the Company from any foreign, federal, state or local taxing authority; and there are no material unresolved questions or claims concerning the Company's tax liability. 5.11 CONTRACTS AND COMMITMENTS (i) Except as expressly contemplated by this Agreement or as set forth on the attached "Contracts Schedule," as of the Closing, the Company is not a party to any written or oral: (a) pension, profit sharing, stock option, employee stock purchase or other plan or arrangement providing for deferred or other compensation to employees or any other employee benefit plan or arrangement, or any contract with any labor union, or any severance agreements; (b) contract for the employment of any officer, individual employee or other Person on a full-time, part-time, consulting or other basis providing annual compensation in excess of $50,000 or contract relating to loans to officers, directors or affiliates; (c) contract under which the Company has advanced or loaned any other Person amounts in the aggregate exceeding $50,000; -21- (d) agreement or indenture relating to the borrowing of money or the mortgaging, pledging or otherwise placing a lien on any material asset or material group of assets of the Company; (e) guarantee of any obligation in excess of $50,000; (f) lease or agreement under which the Company is lessee of or holds or operates any property, real or personal, owned by any other party, except for any lease of real or personal property under which the aggregate annual rental payments do not exceed $50,000; (g) lease or agreement under which the Company is lessor of or permits any third party to hold or operate any property, real or personal, owned or controlled by the Company; (h) contract or group of related contracts with the same party or group of affiliated parties the performance of which involves a consideration in excess of $50,000; (i) assignment, license, indemnification or agreement with respect to any intangible property (including, without limitation, any patent, trademark, trade name, copyright, know-how, trade secret or confidential information); (j) warranty agreement with respect to its services rendered or its products sold or leased; (k) agreement under which it has granted any Person any registration rights (including piggyback rights); (l) contract, agreement or other arrangement with any officer, director, employee or Affiliate, or any Affiliate of any officer, director or employee; (m) contract or agreement prohibiting it from freely engaging in any business or competing anywhere in the world; or (n) any other agreement which is material to its operations and business prospects or involves a consideration in excess of $50,000 annually. (ii) All of the contracts, agreements and instruments set forth on the Contracts Schedule are valid, binding and enforceable in accordance with their respective terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in -22- equity. The Company has performed all material obligations required to be performed by it and is not in default under or in breach of nor in receipt of any claim of default or breach under any material contract, agreement or instrument to which the Company is subject; no event has occurred which with the passage of time or the giving of notice or both would result in a default, breach or event of noncompliance under any material contract, agreement or instrument to which the Company is subject; the Company does not have any present expectation or intention of not fully performing all such obligations; the Company has no knowledge of any breach or anticipated breach by the other parties to any material contract or commitment to which it is a party; and the Company is not a party to any materially adverse contract or commitment. 5.12 PROPRIETARY RIGHTS The attached "Proprietary Rights Schedule" contains a complete and accurate list of (i) all patented and registered Proprietary Rights owned by the Company, (ii) all pending patent applications and applications for registrations of other Proprietary Rights filed by the Company, (iii) all unregistered trade names and corporate names owned or used by the Company, and (iv) all unregistered trademarks, service marks and copyrights and computer software which are material to the financial condition, operating results, assets, operations or business prospects of the Company. The Proprietary Rights Schedule also contains a complete and accurate list of all licenses and other rights granted by the Company to any third party with respect to any Proprietary Rights and all licenses and other rights granted by any third party to the Company with respect to any Proprietary Rights. The Company owns or has the right to use pursuant to a valid license all Proprietary Rights necessary for the operation of the business of the Company as presently conducted and as presently proposed to be conducted. Except as set forth on the Proprietary Rights Schedule, the loss or expiration of any Proprietary Right or related group of Proprietary Rights would not have a material adverse effect on the conduct of the Company's business, and no such loss or expiration is to the best of the Company's knowledge, threatened, pending or reasonably foreseeable. The Company has taken all reasonable and appropriate actions to maintain and protect the Proprietary Rights which it owns and uses. To the best of the Company's knowledge, the owners of any Proprietary Rights licensed to the Company have taken all reasonable and appropriate actions to maintain and protect the Proprietary Rights which are subject to such licenses. Except as indicated on the Proprietary Rights Schedule, (i) the Company owns all right, title, and interest in and to all of the Proprietary Rights listed on such Schedule and all other Proprietary Rights material to the operation of the business of the Company, (ii) there have been no claims made against the Company asserting the invalidity, misuse or unenforceability of any of such rights and, to the best of the Company s knowledge, there are no grounds for the same, (iii) the Company has not received a notice of conflict with the asserted rights of others within the last five years, and (iv) the conduct of the Company's business has not infringed or misappropriated and does not infringe or misappropriate any Proprietary Rights of other Persons, nor would any future conduct as presently contemplated infringe any Proprietary Rights of other Persons. -23- 5.13 LITIGATION Except as set forth on the attached "Litigation Schedule," there are no actions, suits, proceedings, orders, investigations or claims pending or, to the best of the Company's knowledge, threatened against or affecting the Company (or to the best of the Company's knowledge, pending or threatened against or affecting any of the officers, directors or employees of the Company with respect to its business or proposed business activities) at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality (including, without limitations, any actions, suit, proceedings or investigations with respect to the transactions contemplated by this Agreement); the Company is not subject to any arbitration proceedings under collective bargaining agreements or otherwise or, to the best of the Company's knowledge, any governmental investigations or inquiries, and, to the best of the Company's knowledge, there is no basis for any of the foregoing. The Company is not subject to any judgment, order or decree of any court or other governmental agency. The Company has not received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed, from a legal standpoint, to any liability which is material to its business. 5.14 BROKERAGE Except as described in the attached "Brokerage Schedule," there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Company. The Company shall pay, and hold the Purchaser harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any such claim. 5.15 GOVERNMENTAL CONSENT No permit, consent, approval or authorization of, or declaration to or filing with, any governmental authority is required in connection with the execution, delivery and performance by the Company of this Agreement or the other agreements contemplated hereby, or the consummation by the Company of any other transactions contemplated hereby or thereby, except as set forth on the attached "Consents Schedule" and except as expressly contemplated herein or in the exhibits hereto. 5.16 INSURANCE The attached "Insurance Schedule" contains a description of each insurance policy maintained by the Company with respect to its properties, assets and businesses, and each such policy is in full force and effect as of the Closing. The Company is not in default with respect -24- to its obligations under any insurance policy maintained by it. The insurance coverage of the Company is customary for corporations of similar size engaged in similar lines of business. 5.17 EMPLOYEES The Company is not aware that any executive or key employee of the Company or any group of employees of the Company has any plans to terminate employment with the Company. The Company has complied in all material respects with all laws relating to the employment of labor, including provisions thereof relating to wages, hours, equal opportunity, collective bargaining and the payment of social security and other taxes, and the Company is not aware that it has any material labor relations problems (including any union organization activities, threatened or actual strikes or work stoppages or material grievances). Except as set forth on Schedule 5.17, neither the Company nor, to the best of the Company's knowledge, any of its employees is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreements relating to, affecting or in conflict with the present or proposed business activities of the Company except for agreements between the Company and its present and former employees. 5.18 ERISA (i) The "ERISA Schedule" attached hereto lists each Employee Benefit Plan that the Company maintains or to which the Company contributes. (a) Each such Employee Benefit Plan (and each related trust, insurance contract, or fund) complies in form and in operation in all respects with the applicable requirements of ERISA, the IRC, and other applicable laws. (b) All required reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports, PBGC-l's, and Summary Plan Descriptions) have been filed or distributed appropriately with respect to each such Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and of Section Sec. 4980B of the IRC have been met with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan. (c) All contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each such Employee Benefit Plan which is an Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing which are not yet due have been paid to each such Employee Pension Benefit Plan or accrued in accordance with the past custom and practice of the Company. All premiums or other payments for all periods ending on or before the Closing have been paid with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan. -25- (d) Each such Employee Benefit Plan which is an Employee Pension Benefit Plan and which is described on the ERISA Schedule as meeting the requirements of Section 401(a) of the IRC, meets the requirements of a "qualified plan" under Section 401(a) of the IRC and has within the last two years, either received a favorable determination letter from the IRS or has requested such a letter within the remedial amendment period of Section 401(b) of the IRC. (e) The market value of assets under each such Employee Benefit Plan which is an Employee Pension Benefit Plan (other than any Multiemployer Plan) equals or exceeds the present value of all vested and nonvested liabilities thereunder determined in accordance with PBGC methods, factors, and assumptions applicable to an Employee Pension Benefit Plan terminating on the date for determination. (f) The Company has delivered to the Purchaser correct and complete copies of the plan documents and Summary Plan Descriptions, the most recent determination letter received from the IRS, the most recent Form 5500 Annual Report, and all related trust agreements, insurance contracts, and other funding agreements which implement each such Employee Benefit Plan. (ii) With respect to each Employee Benefit Plan that the Company maintains or ever has maintained or to which it contributes, ever has contributed, or ever has been required to contribute: (a) No such Employee Benefit Plan which is an Employee Pension Benefit Plan (other than any Multiemployer Plan) has been completely or partially terminated or been the subject of a reportable event as to which notices would be required to be filed with the PBGC. No proceeding by the PBGC to terminate any such Employee Pension Benefit Plan (other than any Multiemployer Plan) has been instituted or threatened. (b) There have been no Prohibited Transactions with respect to any such Employee Benefit Plan. No Fiduciary has any liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Employee Benefit Plan. No action, suit, proceeding, hearing, or investigation with respect to the administration or the investment of the assets of any such Employee Benefit Plan (other than routine claims for benefits) is pending or threatened. The Company does not have any knowledge of any basis for any such action, suit, proceeding, hearing, or investigation. (c) The Company has not incurred, or will incur, any liability to the PBGC (other than PBGC premium payments) or otherwise under Title IV of ERISA (including any withdrawal liability) or under the IRC with respect to any such Employee Benefit Plan which is an Employee Pension Benefit Plan. -26- (iii) Except as set forth on the ERISA Schedule, the Company does not contribute to, has not contributed to, or has not been required to contribute to any Multiemployer Plan or has any liability (including withdrawal liability) under any Multiemployer Plan. (iv) Except as set forth on the ERISA Schedule, the Company does not maintain and has not maintained and does not contribute, has not contributed, or ever has been required to contribute to any Employee Welfare Benefit Plan providing medical, health, or life insurance or other welfare-type benefits for current or future retired or terminated employees, their spouses, or their dependents (other than in accordance with Section 4980B of the IRC). 5.19 COMPLIANCE WITH LAWS Except as set forth on the attached "Compliance Schedule," the Company has not violated any law or any governmental regulation or requirement which violation would reasonably be expected to have a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of the Company, and the Company has not received notice of any such violation. The Company is not subject to any clean up liability, and has no has reason to believe it may become subject to any clean up liability, under any federal, state or local environmental law, rule or regulation. 5.20 AFFILIATED TRANSACTIONS Except as set forth on the attached "Affiliated Transactions Schedule," no officer, director, shareholder or Affiliate of the Company or any individual related by blood or marriage to any such Person or any entity in which any such Person or individual owns any beneficial interest, is a party to any agreement, contract, commitment or transaction with the Company or has any material interest in any material property used by the Company. 5.21 REAL PROPERTY HOLDING CORPORATION STATUS Since its date of incorporation the Company has not been, and as of the date of the Closing shall not be, a "United States real property holding corporation," as defined in Section 897(c)(2) of the IRC, and in Section 1.897-2(b) of the Treasury Regulations issued thereunder. The Company has no current plans or intentions which would cause the Company to become a "United States real property holding company," and the Company has filed with the IRS all statements, if any, with its United States income tax returns which are required under Section 1.897-2(h) of the Treasury Regulations. -27- 5.22 DISCLOSURE Neither this Agreement nor any of the schedules, attachments, written statements, documents, certificates or other items prepared or supplied to any Purchaser by or on behalf of the Company with respect to the transactions contemplated hereby contain any untrue statement of a material fact or omit a material fact necessary to make each statement contained herein or therein, in light of the circumstances under which such statements were made, not misleading. There is no fact which the Company has not disclosed to the Purchaser in writing and of which any of its officers, directors or executive employees is aware and which has had or would reasonably be anticipated to have a material adverse effect upon the existing or expected financial condition, operating results, assets, customer or supplier relations, employee relations or business prospects of the Company. 5.23 CLOSING DATE The representations and warranties of the Company contained in this Section 5 and elsewhere in this Agreement and all information contained in any exhibit, schedule or attachment hereto or in any writing delivered by, or on behalf of, the Company to any Purchaser shall be true and correct in all material respects on the date of the Closing as though then made, except as affected by the transactions expressly contemplated by this Agreement. 5.24 DEFINITIONS For the purposes of this Agreement, the following terms have the meanings set forth below: "AFFILIATE" of any particular person or entity means any other person or entity controlling, controlled by or under common control with such particular person or entity. "EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan), (d) Employee Welfare Benefit Plan, or (e) any bonus, incentive, severance, stock option, stock purchase, short-term disability plan or other material fringe benefit plan, program or arrangement, including policies concerning holidays, vacations and salary continuation during short absences for illness or otherwise. "EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA Section 3(2). "EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA Section 3(1). -28- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "FIDUCIARY" has the meaning set forth in ERISA Section 3(21). "INVESTMENT" as applied to any Person means (i) any direct or indirect purchase or other acquisition by such Person of any notes, obligations, instruments, stock, securities or ownership interest (including partnership interests and joint venture interests) of any other Person and (ii) any capital contribution by such Person to any other Person. "IRC" means the Internal Revenue Code of 1986, as amended, and any reference to any particular IRC section shall be interpreted to include any revision of or successor to that section regardless of how numbered or classified. "IRS" means the United States Internal Revenue Service. "MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37). "OFFICER'S CERTIFICATE" means a certificate signed by one of the Company's Co-Chief Executive Officers, stating that (i) he has made or has caused to be made such investigations as are necessary in order to permit him to verify the accuracy of the information set forth in such certificate and (ii) to the best of his knowledge, such certificate does not misstate any material fact and does not omit to state any fact necessary to make the certificate not misleading. "PBGC" means the Pension Benefit Guaranty Corporation. "PERSON" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "PROHIBITED TRANSACTION" has the meaning set forth in ERISA Section 406 and Section 4975 of the IRC. "PROPRIETARY RIGHTS" means all (i) patents, patent applications, patent disclosures and inventions, (ii) trademarks, service marks, trade dress, trade names and corporate names and registrations and applications for registration thereof, (iii) copyrights and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data and documentation, (vi) trade secrets and other confidential information (including, without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial -29- and marketing plans and customer and supplier lists and information), (vii) other intellectual property rights, and (viii) copies and tangible embodiments thereof (in whatever form or medium). "RESTRICTED SECURITIES" means (i) the Series B Preferred Stock issued hereunder, (ii) the Common Stock issued upon conversion of the Series B Preferred Stock and (iii) any securities issued with respect to the securities referred to in clauses (i) or (ii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Restricted Securities, such securities shall cease to be Restricted Securities when they have (a) been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) become eligible for sale pursuant to Rule 144 (or any similar provision then in force) under the Securities Act or (c) been otherwise transferred and new certificates for them not bearing the Securities Act legend set forth in paragraph 7.3 have been delivered by the Company in accordance with paragraph 4.2. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in paragraph 7.3. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any similar federal law then in force. "SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar federal law then in force. "SECURITIES AND EXCHANGE COMMISSION" includes any governmental body or agency succeeding to the functions thereof. "SUBSIDIARY" means any corporation of which the securities having a majority of the ordinary voting power in electing the board of directors are, at the time as of which any determination is being made, owned by the Company either directly or through one or more Subsidiaries. "TREASURY REGULATIONS" means the United States Treasury Regulations promulgated under the IRC, and any reference to any particular Treasury Regulation section shall be interpreted to include any final or temporary revision of or successor to that section regardless of how numbered or classified. "UNDERLYING COMMON STOCK" means (i) the Common Stock issued or issuable upon conversion of the Preferred Stock and (ii) any Common Stock issued or issuable with respect to the-securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other -30- reorganization. For purposes of this Agreement, any Person who holds Preferred Stock shall be deemed to be the holder of the Underlying Common Stock obtainable upon conversion of the Preferred Stock in connection with the transfer thereof or otherwise regardless of any restriction or limitation on the conversion of the Preferred Stock. As to any particular shares of Underlying Common Stock, such shares shall cease to be Underlying Common Stock when they have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them or (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force). 6. MISCELLANEOUS 6.1 EXPENSES The Company agrees to pay, and hold the Purchaser and all holders of Underlying Common Stock harmless against liability for the payment of, (i) the reasonable and documented fees and expenses of Perkins Coie, LLP not to exceed $35,000 arising in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated by this Agreement which shall be payable at the Closing and (ii) stamp and other taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance, delivery or acquisition of any shares of Series B Preferred Stock or any shares of Common Stock issuable upon conversion of the Series B Preferred Stock. 6.2 REMEDIES Each holder of Preferred Stock and Underlying Common Stock shall have all rights and remedies set forth in this Agreement and the Amended and Restated Articles of Incorporation and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. 6.3 PURCHASER'S INVESTMENT REPRESENTATIONS The Purchaser hereby represents that it or he is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act of 1933, as amended, and is acquiring the Restricted Securities purchased hereunder or acquired pursuant hereto for its or his own account with the present intention of holding such securities for purposes of investment, and that it or he has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained -31- herein shall prevent any Purchaser and subsequent holders of Restricted Securities from transferring such securities in compliance with the provisions of Section 4 hereof. Each certificate for Restricted Securities shall be imprinted with a legend in substantially the following form: "The securities represented by this certificate were originally issued on October 7, 1998, and have not been registered under the Securities Act of 1933, as amended. The transfer of the securities represented by this certificate is subject to the conditions specified in the Purchase Agreement, dated as of October 7, 1998 between the issuer (the "Company") and certain investors, and the Company reserves the right to refuse the transfer of such securities until such conditions have been fulfilled with respect to such transfer. A copy of such conditions shall be furnished by the Company to the holder hereof upon written request and without charge." 6.4 CONSENT TO AMENDMENTS Except as otherwise expressly provided herein, the provisions of this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the holders of a majority of the Underlying Common Stock. No other course of dealing between the Company and the holder of any Underlying Common Stock or any delay in exercising any rights hereunder or under the Amended and Restated Articles of Incorporation shall operate as a waiver of any rights of any such holders. For purposes of this Agreement, shares of Preferred Stock or Underlying Common Stock held by the Company shall not be deemed to be outstanding. 6.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES All representations and warranties contained herein or made in writing by any party in connection herewith shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, regardless of any investigation made by any Purchaser or on its behalf, for a period of two years from the Closing. 6.6 SUCCESSORS AND ASSIGNS Except with respect to the rights granted in paragraphs 3.1 and 3.2 and as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for any Purchaser's benefit as a purchaser or holder of Preferred Stock or Underlying Common Stock are -32 also for the benefit of, and enforceable by, any subsequent holder of such Preferred Stock or such Underlying Common Stock, except for the provisions in paragraphs 3.1 and 3.2. 6.7 SEVERABILITY Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 6.8 COUNTERPARTS This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 6.9 DESCRIPTIVE HEADINGS; INTERPRETATION The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. 6.10 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Washington without giving effect to any choice or conflict of law provision or rule (either of the State of Washington or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Washington. 6.11 NOTICES All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable express courier service (charges prepaid) or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the Purchaser at the address indicated on the Schedule of Purchasers and to the Company at the address indicated below: -33- The Cobalt Group, Inc. 2030 First Avenue Suite 300 Seattle, Washington 98121 Attention: John W.P. Holt Geoffrey T. Barker or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. THE COBALT GROUP, INC. By: ------------------------------------ Name: --------------------------- Title: -------------------------- WARBURG, PINCUS EQUITY PARTNERS, L.P. By: Warburg, Pincus & Co., Inc. Its: General Partner By: ---------------------------- Joseph P. Landy Its --------------------- -34- SCHEDULE OF PURCHASERS
TOTAL PURCHASE NUMBER OF SHARES PRICE OF SHARES OF NAME AND ADDRESS OF SERIES B PREFERRED STOCK SERIES B PREFERRED STOCK Warburg, Pincus Equity Series B 1,858,100 Series B $7,804,020 Partners, L.P. Series B-1 5,118,091 Series B-1 $21,495,982 466 Lexington Avenue New York, NY 10017
-35- EX-10.14 19 EXHIBIT 10.14 Exhibit 10.14 INFORMATION RIGHTS AGREEMENT This Information Rights Agreement (the "Agreement") is entered into as of October 7, 1998 by and between The Cobalt Group, Inc., a Washington corporation, and the undersigned holders of Series A Preferred Stock of the Company (the "Series A Purchasers"). RECITALS A. The Company and the Series A Purchasers are parties to an Agreement to Terminate Series A Purchase Agreement dated October 2, 1998. B. The Company and the Series A Purchasers have determined that it is in their best interests to continue the information rights contained in the previous Series A Purchase Agreement on the terms and conditions set forth herein. AGREEMENT 1. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall deliver to each of the Series A Purchasers, who is at the time a holder of (i) the Common Stock issued or issuable upon conversion of the Series A Preferred Stock and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization (the "Underlying Common Stock"): (i) as soon as available but in any event within 30 days after the end of each monthly accounting period in each fiscal year, unaudited statements of income and cash flows of the Company for such monthly period and for the period from the beginning of the fiscal year to the end of such month, and balance sheets of the Company as of the end of such monthly period, setting forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, and all such statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year-end adjustments; (ii) within 90 days after the end of each fiscal year, statements of income and cash flows of the Company for such fiscal year, and a balance sheet of the Company as of the end of such fiscal year, setting forth in each case comparisons to the annual budget and to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by (a) an opinion of an -1- independent accounting firm of recognized national standing selected by the board of directors; (iii) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations or financial affairs given to the Company by its independent accountants (and not otherwise contained in other materials provided hereunder); (iv) prior to the beginning of each fiscal year, an annual budget prepared on a monthly basis for the Company for such fiscal year (displaying anticipated statements of income and cash flows and balance sheets), and promptly upon preparation thereof any other significant budgets prepared by the Company and any revisions of such annual or other budgets; (v) within ten days after transmission thereof, copies of all financial statements, proxy statements, reports and any other general written communications which the Company sends to its stockholders and copies of all registration statements and all regular, special or periodic reports which it files, or (to its knowledge) any of its officers or directors file with respect to the Company, with the Securities and Exchange Commission or with any securities exchange on which any of its securities are then listed, and copies of all press release and other statements made available generally by the Company to the public concerning material developments in the Company's business; and (vi) with reasonable promptness, such other operating information and financial data concerning the Company as any Person entitled to receive information under this paragraph may reasonably request. Each of the financial statements referred to in subparagraphs (i) and (ii) shall be true and correct in all material respects as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company). For purposes of this Agreement, any individual, partnership, corporation, limited liability company, association, joint stock company, trust, joint venture, unincorporated organization, or governmental agency or department, agency or political subdivision thereof ("Person") who holds Series A Preferred Stock shall be deemed to be the holder of the Common Stock obtainable upon conversion of the Preferred Stock in connection with the transfer thereof or otherwise regardless of any restriction or limitation on the conversion of the Preferred Stock. For purposes of this Agreement, all holdings of Underlying Common Stock by Persons who are controlled by or under common control with each other shall be aggregated for purposes of meeting any threshold tests under this Agreement. -2- 2. CURRENT PUBLIC INFORMATION. At all times after the Company has filed a registration statement with the Securities and Exchange Commission pursuant to the requirements of either the Securities Act or the Securities Exchange Act, the Company shall file all reports required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder and shall take such further action as may be required by Rule 144 adopted by the Securities and Exchange Commission under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the Securities and Exchange Commission ("Rule 144"), all to the extent required to enable such holders to sell Restricted Securities pursuant to (i) Rule 144 or (ii) a registration statement on Form S-1 or S-3 or any similar registration form hereafter adopted by the Securities and Exchange Commission. Upon request, the Company shall deliver to any holder of Restricted Securities a written statement as to whether it has complied with such requirements. 3. RESERVATION OF COMMON STOCK. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the conversion of the Preferred Stock, such owner of shares of Common Stock issuable upon the conversion of all outstanding Preferred Stock. All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). 4. SUCCESSORS AND ASSIGNS. Except with respect to the rights granted in paragraph 1 and as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for any Series A Purchaser's benefit as a purchaser or holder of Preferred Stock or Underlying Common Stock are also for the benefit of, and enforceable by, any subsequent holder of such Preferred Stock or such Underlying Common Stock, except for the provisions in paragraph 1. 5. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. -3- 6. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. 7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Washington without giving effect to any choice or conflict of law provision or rule (either of the State of Washington or any other jurisdiction) that cause the application of the laws of any jurisdiction other than the State of Washington. -4- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. THE COBALT GROUP, INC. By: --------------------------------------- Name: Title: THE PRODUCTIVITY FUND III, L.P., a Delaware limited partnership By: First Analysis Management Company III, L.L.C., Its: General Partner By: ------------------------------- Its ENVIRONMENTAL PRIVATE EQUITY FUND II, L.P., a Delaware limited partnership By: Environmental Private Equity Management II, L.P. Its: General Partner By: First Analysis EPEF Management Company II, a General Partner By: First Analysis Corporation, a General Partner By: ------------------------------- ------------------------------------------ Mark Koulogeorge -5- EX-10.15 20 EXHIBIT 10.15 EXHIBIT 10.15 PURCHASE AGREEMENT BY AND AMONG LOCATORS, INC., PARTS FINDER LOCATING SYSTEMS, INC. AND COMPU-TIME, INC., AS SELLERS, AND THE COBALT GROUP, INC., AS PURCHASER DATED APRIL 19, 1999 TABLE OF CONTENTS
PAGE ---- SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 SECTION 2. SALE AND PURCHASE OF THE UNITS . . . . . . . . . . . . . . . . . . . . .5 SECTION 3. CLOSING AND CLOSING DOCUMENTS. . . . . . . . . . . . . . . . . . . . . .5 3.1 CLOSING; EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . .5 3.2 CLOSING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . .6 3.3 LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . .7 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS. . . . . . . . . . . . . .7 4.1 ORGANIZATION, STANDING, OWNERSHIP . . . . . . . . . . . . . . .7 4.2 TITLE TO UNITS. . . . . . . . . . . . . . . . . . . . . . . . .8 4.3 AUTHORITY AND BINDING EFFECT. . . . . . . . . . . . . . . . . .8 4.4 VALIDITY OF CONTEMPLATED TRANSACTIONS . . . . . . . . . . . . .8 4.5 FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. . . . . . . .9 4.6 ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . . .9 4.7 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.8 REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . 11 4.9 ENVIRONMENTAL COMPLIANCE. . . . . . . . . . . . . . . . . . . 11 4.10 PERSONAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . 11 4.11 COPYRIGHTS, PATENTS AND TRADEMARKS. . . . . . . . . . . . . . 12 4.12 PERSONNEL . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.13 CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.14 CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.15 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.16 EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . 14 4.17 PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.18 COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . . 15 4.19 BUSINESS RELATIONS. . . . . . . . . . . . . . . . . . . . . . 15 4.20 WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.21 INTEREST IN COMPETITORS, SUPPLIERS, DEALERS, CUSTOMERS. . . . 15 4.22 BROKERS' AND FINDERS' FEES. . . . . . . . . . . . . . . . . . 16 4.23 ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . 16 4.24 INVESTMENT INTENT; SHAREHOLDERS AGREEMENT . . . . . . . . . . 16 SECTION 5. REPRESENTATIONS AND WARRANTIES OF COBALT . . . . . . . . . . . . . . . 16 5.1 ORGANIZATION AND STANDING . . . . . . . . . . . . . . . . . . 17 5.2 AUTHORITY AND BINDING EFFECT. . . . . . . . . . . . . . . . . 17 5.3 VALIDITY OF CONTEMPLATED TRANSACTIONS . . . . . . . . . . . . 17 5.4 INVESTMENT INTENT . . . . . . . . . . . . . . . . . . . . . . 17 5.5 ACCESS TO INFORMATION AND INSPECTION. . . . . . . . . . . . . 18 5.6 RESTRICTED SECURITIES . . . . . . . . . . . . . . . . . . . . 18 5.7 BROKERS' AND FINDERS' FEES. . . . . . . . . . . . . . . . . . 18 PAGE ---- 5.8 ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . 18 5.9 FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. . . . . . . 18 5.10 NO BREACH . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 6. TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.1 ACCESS TO RECORDS FOLLOWING CLOSING . . . . . . . . . . . . 19 6.2 PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . 19 6.3 PARTNERSHIP TERMINATION; SECTION 754 ELECTION . . . . . . . . 19 6.4 TAX TREATMENT AS ASSET ACQUISITION . . . . . . . . . . . . . 20 SECTION 7. FURTHER ASSURANCES; SURVIVAL . . . . . . . . . . . . . . . . . . . . . 20 7.1 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . 20 7.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . 20 SECTION 8. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.1 SELLERS' INDEMNITY. . . . . . . . . . . . . . . . . . . . . . 20 8.2 COBALT'S INDEMNITY. . . . . . . . . . . . . . . . . . . . . . 21 8.3 CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.4 RIGHT OF OFFSET . . . . . . . . . . . . . . . . . . . . . . . 22 8.5 GUARANTEES; ESCROW. . . . . . . . . . . . . . . . . . . . . . 22 8.6 KNOWLEDGE PRIOR TO CLOSING. . . . . . . . . . . . . . . . . . 23 SECTION 9. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9.1 ASSIGNMENT; SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . 23 9.2 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9.3 GOVERNING LAW; JURISDICTION; VENUE. . . . . . . . . . . . . . 25 9.4 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 25 9.5 SECTION HEADINGS. . . . . . . . . . . . . . . . . . . . . . . 25 9.6 COOPERATION . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.7 ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . 25 9.8 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . 26 9.9 INTERPRETATION, KNOWLEDGE . . . . . . . . . . . . . . . . . . 26 9.10 PAYMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . . 26
PURCHASE AGREEMENT This Purchase Agreement ("Agreement"), dated April 19, 1999 (the "Effective Date"), is made and entered into between and among Locators, Inc., an Oregon corporation, Parts Finder Locating Systems, Inc., an Oregon corporation, and Compu-Time, Inc., an Oregon corporation (collectively, "Sellers"), Brian Allen and Shirley Atherton (each, individually, a "Guarantor"), and The Cobalt Group, Inc., a Washington corporation ("Cobalt"). RECITALS A. The Sellers are the owners of all of the membership interests in PartsVoice LLC, an Oregon limited liability company ("Company"), which membership interests constitute all of the issued and outstanding equity of Company (the "Units"). B. Cobalt desires to purchase from the Sellers, and the Sellers desire to sell to Cobalt, the Units in accordance with the terms and conditions of this Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: SECTION 1. DEFINITIONS For convenience and brevity, certain terms used in various parts of this Agreement are listed in alphabetical order and defined or referred to below. "ACQUISITION" means the acquisition of the Units by Cobalt and all related transactions provided for in this Agreement and the Exhibits hereto. "AFFILIATE" means any entity or person which, directly or indirectly, through one or more intermediaries controls, is controlled by, or is under common control with such entity. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or the policies of an entity, whether through the ownership of voting securities, by contract or otherwise. "AGREED DISTRIBUTION" means the cash, receivables and accounts payable represented on the balance sheet of Company as of April 30, 1999 for billing and payment periods through April 30, 1999, which items shall have been distributed or otherwise transferred and conveyed to the Sellers at or prior to April 30, 1999. 1 "ASSETS" means all of the assets, properties, business, goodwill and rights of every kind and description, real and personal, tangible and intangible, wherever situated and whether or not reflected on the Financial Statements, necessary for and used in the Business, other than the items comprising the Agreed Distribution. "BUSINESS" means the business known as "PartsVoice," which business includes, but is not limited to, conducting a national and international parts locating service for the motor vehicle industry under the trade name PARTSVOICE-Registered Trademark- for itself and under various other names for various motor vehicle manufacturers and others related to the motor vehicle industry and the gathering of inventory, financial and service data from dealers and providing specialized reports of such data to dealers and manufacturers, and which was, prior to the formation of the Company, conducted by the Sellers. "BUSINESS DAY" means any calendar day which is not a Saturday, Sunday or public holiday under the laws of the State of Oregon. "CLAIM NOTICE" is defined in Section 8.2(a). "CLOSING" is defined in Section 3.1 hereof. "CLOSING DATE" means the date of the Closing. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" means PartsVoice LLC, an Oregon limited liability company, which, as of the date hereof and the Closing Date, is the owner of the Assets and the entity through which the Business is conducted. "CONTRACT" means any written or oral contract, agreement, lease, instrument or other commitment that is binding on any person or its property under applicable law. "DEFAULT" means (i) a material breach of or material default under any Contract, (ii) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a material breach of or material default under any Contract, or (iii) the occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any Contract. "DISCLOSURE SCHEDULE" is defined in Section 4. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2 "EXCLUDED LIABILITY" means all Losses arising from or related to the pending audit of the Business by Texas state tax authorities for the years 1989 through 1996. "FACILITIES" means the facilities and offices in which the Business is conducted at 8305 SE Monterey in Portland, Oregon. "FINANCIAL STATEMENTS" is defined in Section 4.5. "GROUP" means, individually and collectively, (i) Company and (ii) any individual, trust, corporation, partnership or any other entity as to which Company is liable for Taxes incurred by such individual or entity either as a transferee, or pursuant to any other provision of federal, territorial, state, local or foreign law or regulations. "HAZARDOUS MATERIALS" means any oil or petrochemical products, PCB's, asbestos, urea formaldehyde, flammable explosives, radioactive materials, solid or hazardous wastes, chemicals, toxic substances or related materials, including, without limitation, any substances defined as or included in the definition of "hazardous substances," "Hazardous wastes," "hazardous materials," or "toxic substances" under any applicable federal or state laws or regulations. "HAZARDOUS MATERIALS REGULATIONS" means any Regulations governing the use, generation, handling, storage, treatment, disposal or release of Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and the Federal Water Pollution Control Act. "INTELLECTUAL PROPERTY" is defined in Section 4.11. "IRS" means the Internal Revenue Service. "LIABILITIES" means Company's accounts payable, accrued vacation, accrued property taxes, accrued incentive payments and other payroll expenses and all other accrued general liabilities. "LIEN" means any mortgage, lien, security interest, pledge, encumbrance, restriction on transferability or charge on any property or property interest. "LITIGATION" means any lawsuit, action, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry involving Company, the Business, the Assets or any Contracts to which Company is a party or by which it or any of the Assets or the Business is bound. 3 "LOSSES" means all damages, losses, deficiencies, liabilities, fines, penalties, costs and expenses, including attorneys' fees. "ORDER" means any judgment, decree, injunction, order or ruling of any federal, state or local court or governmental or regulatory body or authority that is binding on any person or its property under applicable law. "PERMITS" is defined in Section 4.17. "REAL PROPERTY" means the real property upon which the Facilities are located. "REAL PROPERTY INTERESTS" is defined in Section 4.8. "REGISTRATIONS" is defined in Section 4.11. "REGULATION" means any applicable statute, law, ordinance, regulation, order or rule of any federal, state, local or other governmental agency or body or of any other type of regulatory body. "RELATED DOCUMENTS" means the 90-Day Notes, the 270-Day Notes, the Warrants, the Management Agreement and the Pledge Agreement. "RETURNS" means all reports, estimates, declarations of estimated tax, information statements and returns relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties. "TAXES" means all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include all income or profits taxes (including, but not limited to, federal income taxes and state income taxes), payroll and employee withholding taxes, unemployment insurance taxes, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which the Group is required to pay, withhold or collect. "UNITS" means all of the membership interests comprising the ownership equity of Company, as described in the preamble of this Agreement and as set forth on the Schedule of Sellers. 4 "WORKPLACE REGULATIONS" means any Regulations relating to the health of workers or the safety of the workplace, including, without limitation, any Regulations promulgated pursuant to the Occupational Safety and Health Act. SECTION 2. SALE AND PURCHASE OF THE UNITS At Closing, the Sellers shall sell to Cobalt and Cobalt shall purchase from the Sellers the Units for an aggregate purchase price consisting of the following: (a) $3,000,000 in cash; (b) promissory notes in the aggregate face amount of $12,000,000, bearing interest at the rate of 8.75% per annum and maturing on July 30, 1999, in the form attached as Exhibit A-1 hereto (the "90-Day Notes"); provided, however, that the Sellers may, by written notice given to Cobalt at least two business days prior to the Closing Date, elect to receive, in lieu of up to $10,000,000 of principal amount of the 90-Day Notes, up to 1,250,000 Shares (as defined in Section 2(e) below) at a rate of $8.00 per share; (c) promissory notes in the aggregate face amount of $15,000,000, bearing interest at the rate of 8.75% per annum and maturing on January 25, 2000, in the form attached as Exhibit A-2 hereto (the "270-Day Notes"); (d) warrants to purchase an aggregate of 160,000 shares of Cobalt common stock, in the form attached as Exhibit B hereto (the "Warrants"); and (e) up to 1,250,000 shares of Series C Preferred Stock of Cobalt having the rights and preferences described in the Cobalt Amended and Restated Articles of Incorporation attached as Exhibit J hereto (the "Shares"), such number of Shares being determined prior to the Closing Date by the election described in Section 2(b) above. The aggregate purchase price shall be allocated among the respective Sellers in accordance with the Schedule of Sellers attached hereto. The cash portion of the purchase price shall be paid by Cobalt to the Sellers at Closing by wire transfer of immediately available funds to the bank accounts designated by the Sellers prior to Closing. SECTION 3. CLOSING AND CLOSING DOCUMENTS 3.1 CLOSING; EFFECTIVE DATE The closing of the sale and purchase of the Units and the other transactions contemplated under this Agreement (the "Closing") shall take place at the offices of Stoel 5 Rives LLP, 900 S.W. Fifth Avenue, Portland, Oregon 97204, at 10:00 a.m. local time, on April 30, 1999. 3.2 CLOSING DOCUMENTS At the Closing, subject to the provisions of this Agreement: (a) Cobalt shall receive from the Sellers or the Manager, as appropriate: (i) certificates representing the Units of each Seller duly endorsed in blank, or with separate transfer powers attached thereto and endorsed in blank; (ii) a certificate of the Manager of Company certifying true copies of the Articles of Organization of Company, with original certification by the Secretary of State of Oregon, and the Amended Operating Agreement of Company; (iii) a true copy of resolutions of such Seller authorizing the sale of the Units of such Seller and the execution, delivery and performance by such Seller of this Agreement and the transactions provided for herein and therein, and attesting that such resolutions are in full force and effect without amendment or modification on the Closing Date; (iv) opinions of counsel to each Seller and Company satisfying the requirements set forth in Section 3.3(a); and (v) Consulting and Employment Agreements, duly executed by Company and each of Alex DeLucia and Brian Allen, respectively, in the forms attached as Exhibits C-1 and C-2 hereto; (b) Cobalt shall deliver to the Sellers as set forth in Section 2 and the Schedule of Sellers: (i) the cash portion of the purchase price; (ii) the 90-Day Notes, 270-Day Notes, the Warrants and certificates for the Shares, all duly executed by Cobalt; (iii) the Agreement for Management of Security, in the form attached as Exhibit D-1 hereto ("Management Agreement") and the Pledge and Security Agreement, in the form attached as Exhibit D-2 hereto ("Pledge Agreement"), 6 each duly executed by Cobalt and the related documents required pursuant to the terms of the Pledge Agreement; (iv) a certificate of the Secretary of Cobalt certifying a copy of resolutions duly adopted by the Board of Directors of Cobalt authorizing the purchase of the Units and the execution, delivery and performance of this Agreement and the Related Documents and the issuance of the Shares, and the transactions provided for herein or therein, and attesting that such resolutions are in full force and effect without amendment or modification on the Closing Date; (v) an opinion of counsel to Cobalt satisfying the requirements set forth in Section 3.3(b). 3.3 LEGAL OPINIONS (a) Each Seller shall cause the delivery to Cobalt at Closing of an original opinion of counsel to such Seller and of counsel to the Company, dated as of the Closing Date, in form and substance satisfactory to counsel to Cobalt, addressing substantially the matters described on Exhibits G-1 and G-2, respectively. (b) Cobalt shall cause the delivery to the Sellers and Company at Closing of an original opinion of counsel to Cobalt, dated as of the Closing Date, in form and substance satisfactory to counsel to the Company, addressing substantially the matters described on Exhibit G-3. SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS The Sellers hereby make the following representations and warranties to Cobalt as of the date hereof and the Closing Date. Any representations and warranties made below with respect to "the Sellers" or any "Seller," individually, or with respect to the Units being conveyed to Cobalt by a Seller, are made separately by each Seller as to itself and its Units and not as to any other Seller or such other Seller's Units. All representations and warranties below are subject to the exceptions and qualifications reflected in the disclosure schedule attached hereto as Exhibit E ("Disclosure Schedule"): 4.1 ORGANIZATION, STANDING, OWNERSHIP Company is a limited liability company duly organized and validly existing under the laws of the state of Oregon and has full power and authority to carry on the Business and to own, lease and operate the Assets. To the knowledge of the Sellers, Company is duly qualified to do business and is in good standing as a foreign limited liability company in each 7 jurisdiction in which such qualification is required, other than such jurisdictions where the failure to so qualify would not have a material adverse effect on the business of Company. Company owns all of the Assets free and clear of all Liens. 4.2 TITLE TO UNITS Sellers are the record and beneficial owners of the Units. The Units represent all of the issued and outstanding equity interests of Company. Sellers have good title to the Units, free and clear of all Liens other than restrictions on transfer in the Amended Operating Agreement of Company. Sellers have full power and right and authority to sell and deliver the Units to Cobalt in the manner provided for in this Agreement and at Closing Cobalt shall receive good title to the Units free and clear of all Liens. Other than the Amended Operating Agreement, there are no existing Contracts, subscriptions, options, warrants, calls, commitments or rights of any character to purchase or otherwise acquire any equity of Company whether or not presently issued or outstanding. 4.3 AUTHORITY AND BINDING EFFECT Each Seller has full power and authority to execute, deliver and perform this Agreement and has taken all actions necessary to secure all approvals required in connection therewith. This Agreement constitutes legal, valid and binding obligations of each Seller, enforceable against each such Seller in accordance with its terms, except as enforceability may be limited or affected by applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, or other laws of general application relating to or affecting the enforcement of creditors' rights, and except as enforceability may be limited by equitable principles, including those limiting the availability of specific performance, injunctive relief and other equitable remedies providing for defenses based on fairness and reasonableness, regardless of whether considered in a proceeding in equity or at law. 4.4 VALIDITY OF CONTEMPLATED TRANSACTIONS To the knowledge of the Sellers, neither the execution and delivery of this Agreement by the Sellers nor the consummation of the transactions provided for herein will contravene or violate any Regulation or Order which is applicable to the Sellers or Company or will result in a Default under, or require the consent or approval of any party to, any Contract relating to the Business or the Assets or to or by which the Sellers or Company is a party or otherwise bound or affected, or require any of the Sellers or the Company to notify or obtain any Permits or consents from any federal, state, local or other court or governmental agency or body or from any other regulatory authority, other than such Defaults, consents, approvals or Permits the failure to cure or obtain would not have a material adverse effect on the Business or Company. 8 4.5 FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES The Sellers have delivered to Cobalt unaudited (i) balance sheets as of December 31, 1998 and 1997 for the Business, (ii) statements of income and cash flows for the Business for the twelve month periods ended December 31, 1998, 1997 and 1996, and (iii) all related notes and schedules (such financial statements are collectively referred to herein as the "Financial Statements"). True, correct and complete copies of the Financial Statements are included in the Disclosure Schedule. All of the Financial Statements, including any notes or schedules thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and fairly present the financial position and results of operations of the Business at the dates and for the periods covered and include all adjustments that are necessary for a fair presentation of the information shown. The Company has no material obligations or liabilities except for those reflected in the balance sheet as of December 31, 1998 included in the Financial Statements or those that have arisen since December 31, 1998 in the ordinary course of business. 4.6 ABSENCE OF CERTAIN CHANGES To the knowledge of the Sellers, since December 31, 1998, other than the Agreed Distribution, there has not been: (a) any material adverse change in the business, operations or financial condition of the Business or Company; (b) any damage, destruction or loss of any material part of the Assets; (c) any amendment or termination of any Contract which materially and adversely affects Company or the Business; (d) any indebtedness incurred by Company for borrowed money, any mortgage, pledge or other encumbrance of the Assets; (e) any expenditure of or commitment to expend capital in an amount in excess of $30,000 in an annual period; (f) any material transaction involving Company or the Business not in the ordinary course of business; or (g) any operation of the Business in a manner materially different than it had been operated during the period covered by the Financial Statements. 9 4.7 TAXES (a) All Returns required to have been filed by or on behalf of members of the Group have been duly filed on a timely basis and such Returns are true, complete and correct in all material respects. All Taxes shown to be payable on the Returns or on subsequent assessments with respect thereto have been paid in full on a timely basis, and no other Taxes are payable by the Group with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns) or, unless an adequate reserve has been established, with respect to any other period ending on or before the Closing Date. Each member of the Group has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. There are no liens on any of the Assets with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that a member of the Group is contesting in good faith through appropriate proceedings and for which appropriate reserves have been established. (b) Cobalt has been furnished by Sellers and Company true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by the Group or on behalf of the Group relating to Taxes and (ii) all federal and state income or franchise tax returns for the Group for all periods ending on and after December 31, 1994. (c) Except as described in the Disclosure Schedule, the Returns of the Group have never been audited by a government or taxing authority, nor is any such audit in process, pending or threatened (either in writing or verbally, formally or informally); no deficiencies exist or have been asserted (either in writing or verbally, formally or informally) or are expected to be asserted with respect to Taxes of the Group, and no member of the Group has received notice (either in writing or verbally, formally or informally) or expects to receive notice that it has not filed a Return or paid Taxes required to be filed or paid by it; and the Group is neither a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened (either in writing or verbally, formally or informally) against the Group or any of the Assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of the Group. Each member of the Group has disclosed on its federal income tax returns all positions taken therein that could give rise to a substantial understatement penalty within the meaning of Code Section 6662. (d) Company is not (and never has been) a party to any tax sharing agreement and has not assumed the liability of any other person under contract. Company has never made any elections under Treasury Regulation Section 301.7701-3 or Code Section 761(a). No member of the Group is or has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) and Cobalt is not required to withhold Tax on the purchase of 10 the Units by reason of Code Section 1445. Sellers are not "foreign persons" (as that term is defined in Code Section 1445). No member of the Group has entered into any compensatory agreements with respect to the performance of services for which payment thereunder would result in a nondeductible expense to the Group pursuant to Code Section 280G. 4.8 REAL PROPERTY The Company owns no Real Property. All interests in and rights to real property and improvements located thereon used in and necessary for the Business are leased by Company and are listed on the Disclosure Schedule (the "Real Property Interests"). Company leases the Real Property Interests indicated on the Disclosure Schedule free and clear of all Liens. To the knowledge of the Sellers, the present uses of the Real Property Interests are in material compliance with all applicable zoning and land use and development laws and ordinances. Neither the Sellers nor Company has received any notice, oral or written, that any governmental body having jurisdiction over the Real Property Interests intends to exercise the power of eminent domain or a similar power with respect to all or any part of the Real Property Interests. Neither the Sellers nor Company has received any notice, oral or written, from any governmental body, that the Real Property Interests or any improvements erected or situate thereon, or the uses conducted thereon or therein, violate any Regulations of any governmental body having jurisdiction over the Real Property Interests. 4.9 ENVIRONMENTAL COMPLIANCE Other than the storage and use of cleaning materials in an amount and manner consistent with the normal operation of an office, to the knowledge of the Sellers, neither the Sellers nor Company has caused or permitted the Business to use, generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials, except in compliance with all applicable Hazardous Materials Regulations and, to the knowledge of the Sellers, there has been no release of any Hazardous Materials on- or off-site of any of the Real Property which might affect the Real Property or Company. In addition, to the knowledge of the Sellers, there are no substances or conditions on the Real Property which may support a claim or cause of action, whether by a governmental agency or body, private party or individual, under any Hazardous Materials Regulations. 4.10 PERSONAL PROPERTY The Disclosure Schedule sets forth each item of personal property used, but not owned, by Company that requires rental or lease payments. Neither Sellers nor Company make any representations or warranties with respect to the operating condition or suitability for the purpose of use by Company of any of the items of tangible personal property included in the Assets. 11 4.11 COPYRIGHTS, PATENTS AND TRADEMARKS The Disclosure Schedule lists those patents, patent applications, trademark registrations and copyrights that are registered in the name of any of the Sellers and which are used in and necessary for the Business (the "Registrations"). To the knowledge of the Sellers, Company has good title to, or possesses adequate right to use, its respective Registrations, and all other unregistered copyrights and trademarks, trade names, inventions, processes, designs, formulae, trade secrets, know-how, and other proprietary rights (collectively, the "Intellectual Property") necessary for the conduct of the Business. To the knowledge of the Sellers, Company has the sole and exclusive right to the Intellectual Property reflected in the Registrations, and, except as set forth in the Disclosure Schedule, Sellers have taken reasonable steps and precautions to protect and prevent the disclosure of the Intellectual Property which is not disclosed by a Registration and is material to the Business. Except as set forth in the Disclosure Schedule, to the knowledge of Sellers, none of the Registrations or Intellectual Property of Company is subject to any outstanding order, decree, judgment, stipulation or agreement restricting its scope of use or is the subject of any pending or threatened proceeding and there are no licenses, sublicenses, or agreements now in effect relating to the use by others of any of the foregoing. To the knowledge of the Sellers, Company has not infringed or violated, and the conduct of the Business as presently conducted does not infringe or violate, any patent, trademark, trade name, trade secret, or other intellectual property right of any other person or entity, and no such claim is pending, has been made, or, to the knowledge of the Sellers, is threatened to such effect. The Sellers have no knowledge of any current or past infringement by others of the Registrations or Intellectual Property. The Company or Sellers have provided to Cobalt copies of all written reports of tests that the Sellers have conducted to ascertain whether any of the computer software, firmware or hardware used in the Business will malfunction, will cease to function, will generate incorrect data or will produce incorrect results as a result of processing, providing or receiving (i) date-related data into and between the twentieth and twenty-first centuries or (ii) date-related data in connection with any valid date in the twentieth and twenty-first centuries. 4.12 PERSONNEL To the knowledge of the Sellers, Sellers and Company are in compliance in all material respects with all federal and state laws respecting employment and employment practices, terms and conditions of employment, and wages and hours, and are not engaged in any unfair labor or discriminatory practices. There is no unfair labor practice claim against Company before the National Labor Relations Board, or any strike, dispute, arbitration, slowdown, or stoppage pending or any discrimination claim, to the knowledge of the Sellers, threatened against or involving Company. 12 4.13 CONTRACTS (a) The Disclosure Schedule sets forth a complete and correct list of all consents or approvals required under any Contracts that are necessary for the Sellers to complete the transactions provided for herein or to avoid a Default under such Contracts and the Sellers or Company, as the case may be, have obtained all such consents or approvals. (b) The Disclosure Schedule identifies all of the following Contracts which Company or the Business is bound by or a party to: (i) Contracts involving an amount in the aggregate in excess of Ten Thousand Dollars ($10,000) for the future purchase of or payment for, supplies or products or services; (ii) Contracts involving an amount in the aggregate in excess of Ten Thousand Dollars ($10,000) to sell or supply products or to perform services; (iii) Contracts limiting or restraining Company from engaging or competing in any lines of business with any person, firm, corporation or other entity; (iv) material license, franchise, distribution or other Contracts, including those which relate in whole or in part to any ideas, technical assistance or other know-how; or (v) Contracts not entered into in the ordinary course of business which involve the payment or receipt in the aggregate of Ten Thousand Dollars ($10,000) or more. (c) All of the Contracts to which Company is a party or by which it or any of the Assets or the Business is bound or affected and that are material to the Business are valid, binding and enforceable by Company in accordance with their terms. To the knowledge of the Sellers, no Default exists with respect to such Contracts and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a Default, except for such Contracts the Default under which would not have a material adverse effect on the Business. To the knowledge of the Sellers, all other parties to such Contracts have complied in all material respects with the provisions thereof and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default by such other party. 13 4.14 CLAIMS Except as set forth on the Disclosure Schedule, there is no Litigation pending or, to the knowledge of Sellers, threatened against Company, the Business or the Assets that would materially and adversely affect the financial condition of Company, the Business or the Assets as of the date hereof, and, to the knowledge of Sellers, no such claim has been asserted in writing. 4.15 INSURANCE The Disclosure Schedule contains a true and complete list of the insurance coverage applicable to the Business. All such coverage is in full force and effect. There are no pending claims against such insurance by or on behalf of Sellers or Company as to which the insurers have denied liability, and to the knowledge of Sellers, there exist no material claims under such insurance that have not been filed by Sellers or Company. The Disclosure Schedule lists any claims under such insurance that have been filed but not paid as of the date of this Agreement. 4.16 EMPLOYEE BENEFIT PLANS Neither Company nor the Business is a party to or bound by any type of collective bargaining agreement, written employment agreement applicable to the employees of the Business (other than those that are terminable upon notice of 30 days or less), multi-employer plan of any type, or any profit sharing or pension plan or plan subject to ERISA. Company is not a party to any employment agreement or plan providing any employees with severance or other post-employment benefits. 4.17 PERMITS To the knowledge of the Sellers, Company possesses all permits, licenses, orders or approvals of any federal, state, county, local or foreign governmental or regulatory body, required by any Regulation, that are material to the conduct of the Business (collectively, the "Permits"). The Permits are listed on the Disclosure Schedule. To the knowledge of Sellers, all such Permits as have been obtained are in full force and effect, no written notice of any material violations has been received by Company, no proceeding is pending or threatened to revoke or limit any such Permits, and the Sellers have no knowledge of any circumstances which could result in a revocation or limitation with respect to any Permit and all consents necessary to be obtained from the Permit issuers with respect to the transactions provided for herein have been obtained. 14 4.18 COMPLIANCE WITH LAWS Company has received no written notice or written advice from legal counsel that it is in violation of, or that the Assets or the Business have been used or operated in violation of, any Order, Permits or any Workplace Regulation or any other Regulation the violation of which would have a material adverse effect on the Business or Company. 4.19 BUSINESS RELATIONS The Sellers have no knowledge that any customer, supplier or distributor that is material to the Business will cease to do business with Company after the consummation of the transactions provided for herein in the same manner as previously conducted with Company and/or the Sellers. 4.20 WARRANTIES The Disclosure Schedule sets forth a list and brief description of all express warranties and guarantees made by Company or Sellers to third parties with respect to products sold or services rendered by the Business, as well as a list of all written warranty claims for breach of any presently effective product or service warranty by customers of the Business, together with a description of each defect or problem to which such claims or series of claims relate, the product or service which is the subject of such claims or series of claims, the amount expended prior to the date hereof in satisfying such claims or series of claims, and the amount reasonably expected to be expended following the date hereof in satisfying such claims or series of claims. Except as set forth on the Disclosure Schedule, and except for non-recurring claims for breach of any presently effective product or service warranty against Company or Sellers which are not material, no written claim for breach of any presently effective product or service warranty by any customer has been made against Company and, to the knowledge of the Sellers, no state of facts exists, and no event has occurred, which may form the basis of any present claim against Company or Sellers for liability on account of any express or implied written warranty to any third party in connection with products sold or services rendered by the Business. 4.21 INTEREST IN COMPETITORS, SUPPLIERS, DEALERS, CUSTOMERS Neither the Company nor any of the Sellers nor any officer, director or owner of any of the Sellers has any ownership interest in any competitor, supplier, dealer or customer of the Business (other than ownership of securities of a publicly-held corporation of which such person owns, or has real or contingent rights to own, less than two percent of any class of outstanding securities) or in any property used in the operation of the Business. 15 4.22 BROKERS' AND FINDERS' FEES No broker, agent, person or firm acting on behalf of Company or the Sellers is, or will be, entitled to any commission or broker's or finder's fee from any of the parties hereto, or from any Affiliate of any of the parties hereto, in connection with any of the transactions contemplated hereby. 4.23 ADDITIONAL INFORMATION No information furnished by the Sellers or Company to Cobalt in connection with this Agreement, including the Financial Statements and all information in the exhibits and schedules hereto, is false or misleading in any material respect. In connection with such information and this Agreement, neither Company nor the Sellers have made any untrue statement of a material fact or omitted to state or will omit to state a material fact necessary in order to make the statements made or information delivered, in the light of the circumstances under which they were made or not made, not misleading. 4.24 INVESTMENT INTENT; SHAREHOLDERS AGREEMENT Each Seller acknowledges that the Warrants and the Shares to be received by it in connection with the transactions provided for herein (collectively, "the Securities") are being issued in transactions exempt from registration under the Securities Act of 1933 ("1933 Act") and applicable state securities laws. Sellers are acquiring the Securities for investment purposes only and not with a view to the resale thereof until such time as such resale has been registered or an exemption from registration is available under the 1933 Act and applicable state securities laws. Each Seller is an accredited investor, as that term is defined in Regulation D under the 1933 Act. Each Seller has had access to such information, books and records of Cobalt and has asked questions of and received satisfactory responses from Cobalt management to the extent such Seller has deemed necessary in order to evaluate fully an investment in the Securities. Each Seller acknowledges and agrees that to the extent it becomes a shareholder of Cobalt, either as a result of the exercise or conversion of Warrants or as a result of its receipt of Shares, such Seller shall, as a condition to Cobalt's obligation to issue such capital stock to Seller, became a party to the Cobalt Shareholders Agreement in the form attached as Exhibit H hereto, or in such form as exists at the time of issuance of such capital stock. SECTION 5. REPRESENTATIONS AND WARRANTIES OF COBALT Cobalt hereby represents and warrants to the Sellers that as of the date hereof and the Closing Date: 16 5.1 ORGANIZATION AND STANDING Cobalt is a corporation duly organized and validly existing under the laws of the state of Washington, having full corporate power and authority to perform its obligations under this Agreement and the Related Documents. Cobalt is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which such qualification is required, other than such jurisdictions where the failure to so qualify would not have a material adverse effect on the business of Cobalt, taken as a whole. 5.2 AUTHORITY AND BINDING EFFECT Cobalt has the full corporate power and authority to execute, deliver and perform this Agreement and the Related Documents, and has taken all actions necessary to secure all approvals required in connection therewith. The execution, delivery and performance of this Agreement and the Related Documents by Cobalt has been duly authorized by all necessary corporate action. The execution and delivery of this Agreement and the Related Documents, and the consummation of the transactions provided for herein and therein, will not violate the Articles of Incorporation or Bylaws of Cobalt. This Agreement and the Related Documents constitute legal, valid and binding obligations of Cobalt, enforceable against it in accordance with their terms, except as may be limited by bankruptcy or insolvency laws or other similar laws or equitable principles affecting rights of creditors generally. Upon issuance of the Shares to Sellers in accordance with this Agreement, the Shares will be duly and validly issued, fully paid and non-assessable. 5.3 VALIDITY OF CONTEMPLATED TRANSACTIONS Neither the execution and delivery of this Agreement and the Related Documents by Cobalt nor the consummation of the transactions provided for herein and therein by Cobalt will contravene or violate any Regulation or Order which is applicable to Cobalt, or will result in a Default under any Contract to which Cobalt is a party or by which it is otherwise bound, or require Cobalt to notify or obtain any Permits from any federal, state, local or other court or governmental agency or body or from any other regulatory authority. 5.4 INVESTMENT INTENT The Units are being acquired by Cobalt for investment purposes only, for its own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof. Cobalt does not have any agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Units. Cobalt is an "accredited investor" as that term is defined in Regulation D under the 1933 Act. 17 5.5 ACCESS TO INFORMATION AND INSPECTION Cobalt believes it has received all of the information it considers necessary or appropriate in deciding whether to purchase the Units. Cobalt has had an opportunity to ask questions and receive answers from Company and the Sellers regarding the terms and conditions of its purchase of the Units, to obtain further information about Company, the Business and the Assets and to verify the accuracy of the information supplied or to which it had access. Cobalt also has had the opportunity to inspect the tangible personal property of Company included in the Assets and accepts such tangible personal property "As Is." 5.6 RESTRICTED SECURITIES Cobalt understands that the purchase of the Units has not been registered under the 1933 Act, that the Units are being acquired in a transaction not involving a public offering and the Units may not be resold without registration under the 1933 Act or an exemption therefrom. 5.7 BROKERS' AND FINDERS' FEES No broker, agent, person or firm acting on behalf of Cobalt is, or will be, entitled to any commission or brokers' or finders' fee from any of the parties hereto, or from any Affiliate of any of the parties hereto, in connection with any of the transactions contemplated hereby. 5.8 ADDITIONAL INFORMATION No information furnished by Cobalt to Sellers or Company in connection with this Agreement is false or misleading in any material respect. In connection with such information and this Agreement and the Related Documents, Cobalt has made no untrue statement of a material fact or omitted to state or will omit to state a material fact necessary in order to make the statements made or information delivered, in the light of the circumstances under which they were made or not made, not misleading. 5.9 FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES Cobalt has delivered to Sellers unaudited (i) balance sheet as of December 31, 1998 and 1997, (ii) statements of income and cash flow for the 12-month periods ended December 31, 1998 and 1997, and (iii) all related notes and schedules (such financial statements are collectively referred to herein as the "Cobalt Financial Statements"). The Cobalt Financial Statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis with prior periods and fairly present the financial position and results of the operations of Cobalt at the dates and for the periods covered and include all adjustments 18 that are necessary for a fair presentation of the information shown. Cobalt has no material obligations or liabilities except for those reflected in the balance sheet as of December 31, 1998 or those that have arisen since December 31, 1998. 5.10 NO BREACH Neither Cobalt nor any representative of Cobalt during the course of their due diligence has identified any fact that would constitute a breach of the representations and warranties of any Seller under this Agreement. SECTION 6. TAX MATTERS 6.1 ACCESS TO RECORDS FOLLOWING CLOSING Cobalt and Sellers agree that so long as any books, records and files retained by Sellers relating to Company or the Business, or the books, records and files delivered to the control of Cobalt pursuant to this Agreement, to the extent such books, records and files relate to the operations of Company or the Business prior to the Closing Date, remain in existence and available, each party (at its expense) shall have the right upon prior notice to inspect and make copies of the same at any time during business hours for any proper purpose. Company and Sellers shall not destroy or allow the destruction of any such books, records and files without the prior written consent of Cobalt. Cobalt shall not destroy or allow the destruction of any such books, records and files without the prior written consent of Sellers. 6.2 PAYMENT OF TAXES Sellers shall timely file all required Returns of the Group and timely pay all Taxes of the Group (including all Taxes of the Group that are imposed on Cobalt as a transferee of the Units or Assets), regardless of when such taxes are due, to the extent such Taxes are allocable to any period ending on or before the Closing Date. Cobalt shall pay all transfer taxes that are statutorily imposed on Cobalt as a result of the transactions contemplated by this Agreement. Sellers shall pay all transfer taxes that are statutorily imposed on Sellers as a result of the transactions contemplated by this Agreement. 6.3 PARTNERSHIP TERMINATION; SECTION 754 ELECTION Sellers agree to treat the Company as a partnership for federal income tax purposes and treat the partnership as terminating on the Closing Date. Sellers shall timely file the Company's federal partnership income tax returns for its taxable year ending on the Closing Date. Sellers shall include with such tax return an election under Treasury Regulation Section 1.754-1(b) to adjust the basis of partnership property under Code Sections 734(b) and 743(b) for the partnership's taxable year. 19 6.4 TAX TREATMENT AS ASSET ACQUISITION Cobalt and Sellers agree to treat the Acquisition, for federal income tax purposes, as a sale of the Assets by Sellers to Cobalt. The purchase price paid by Cobalt shall be allocated among the Assets in accordance with the Schedule to be attached as Exhibit F hereto, which shall be in a form mutually agreeable to the parties prior to Closing. Cobalt and Sellers shall file all Returns in a manner consistent with such allocation, and shall use their best efforts to sustain such allocation in any subsequent tax audit or tax dispute. SECTION 7. FURTHER ASSURANCES; SURVIVAL 7.1 FURTHER ASSURANCES Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to 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 regulations to consummate and make effective the transactions provided for in this Agreement as expeditiously as practicable. 7.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, the representations, warranties, covenants, agreements and indemnities made by each party in this Agreement shall survive until the second anniversary of the Closing Date; provided, however, that the representations and warranties contained in Section 4.7 and the covenants contained in Sections 6.1 through 6.4 hereof shall survive until the lapse of the relevant statute of limitations period. SECTION 8. INDEMNIFICATION 8.1 SELLERS' INDEMNITY Sellers shall severally indemnify, defend and hold harmless Cobalt and its directors, officers, employees, agents and Affiliates ("Cobalt Indemnified Parties") from and against any and all Losses suffered or incurred by Cobalt Indemnified Parties as a result of any of the following: (a) Any inaccuracy in or breach of any representation or warranty made in Section 4 other than representations and warranties made in Section 4 with respect to state, county or local sales, use, income or excise taxes in respect of which the parties have agreed the Sellers shall have no indemnification obligation hereunder; 20 (b) Any breach of any covenant made by Sellers in this Agreement other than the covenants made in Section 6 with respect to state, county or local sales, use or excise taxes in respect of which the parties have agreed the Sellers shall have no indemnification obligation hereunder; and (c) The Excluded Liability. 8.2 COBALT'S INDEMNITY Cobalt shall indemnify, defend and hold harmless Sellers and their respective directors, officers, employees, agents and Affiliates ("Seller Indemnified Parties") from any and all Losses suffered or incurred by Seller Indemnified Parties as a result of any of the following: (a) Any inaccuracy in or breach of any representation or warranty made in Section 5; (b) Any breach of any covenant made by Cobalt in this Agreement; and (c) The ownership of the Assets and the operation of the Business, including but not limited to the performance or failure to perform any Contract of the Company included in the Assets as of the Closing Date, from and after the Closing Date. 8.3 CLAIMS (a) Any notice of a claim for indemnification shall specify the facts alleged to constitute a breach and the representations, warranties and covenants alleged to have been breached and shall be accompanied by an estimate of the amount of Losses due to such breach. (b) If any party entitled to indemnification hereunder (the "INDEMNITEE") is subject to any action, suit, proceeding or demand at any time instituted against or made upon it for which it may seek indemnification hereunder (a "CLAIM") from a party hereto (the "INDEMNITOR"), the Indemnitee shall notify the Indemnitor of such Claim as soon as reasonably practicable after becoming aware of such Claim (specifying in reasonable detail the nature and amount of the Claim); PROVIDED that failure to give such notice shall not relieve the Indemnitor of its obligations hereunder except to the extent the Indemnitor shall have been prejudiced by such failure. Upon receipt of such notice, the Indemnitor shall be entitled to participate in and, at the Indemnitee's option, assume the defense of such Claim with counsel reasonably satisfactory to the Indemnitee, and in the case of such an assumption the Indemnitor shall have the authority to negotiate, compromise and settle such Claim for the Indemnitee; PROVIDED, HOWEVER, that (i) the Indemnitor shall conduct such settlement or defense at all times in good faith and in a reasonable manner and (ii) the Indemnitor shall promptly reimburse the Indemnitee for all out-of-pocket expenses incurred as a result of the assumption by the 21 Indemnitor of control of such settlement or defense. Neither Indemnitor nor Indemnitee shall enter into any settlement without the prior written consent of the other party, which consent shall not be unreasonably withheld. (c) The Indemnitee shall retain the right to employ its own counsel at its own expense to participate in the defense of any Claim, the defense of which has been assumed by the Indemnitor. The Indemnitee shall cooperate in all respects in the defense of the Claim, including refraining from taking any position adverse to the Indemnitor. (d) For any Losses, other than Losses arising from the Excluded Liability, the Indemnitor shall have no indemnity obligation pursuant to this Section 8 until the Losses of the Indemnitee exceed $300,000 in the aggregate from all matters as to which such party would be entitled to indemnification pursuant to Section 8, at which point the indemnity obligation of the Indemnitor shall cover all Losses in excess of such threshold amount. With respect to the Excluded Liability, the Indemnitors shall fully and completely indemnify the Indemnitees for all Losses from the first dollar. In determining the amount of claims against an Indemnitor pursuant to this Section 8, other than with respect to the Excluded Liability, the tax effect (federal, state, local or foreign) to the Indemnitee by reason of such claims (or the events giving rise to such claims) and the receipt of such indemnification payment shall be included in the calculation of the amount to be paid by the Indemnitor. (e) The maximum indemnity obligation of any Seller under this Agreement shall not exceed the aggregate purchase price received by such Seller as set forth in Section 2.1 and the Schedule of Sellers. 8.4 RIGHT OF OFFSET Subject to the notice requirements and other limitations provided in this Section 8, Cobalt shall have the right to offset any Losses it incurs, once such Losses are finally determined to be subject to indemnification hereunder either by agreement of the parties or in a final, binding and non-appealable decision of a court of competent jurisdiction, against any amounts payable to Sellers pursuant to this Agreement and the 90-Day Notes or 270-Day Notes. 8.5 GUARANTEES; ESCROW Each of Brian Allen and Shirley Atherton hereby unconditionally, absolutely and irrevocably guarantee to the Cobalt Indemnified Parties to promptly pay or perform, or cause Compu-Time, Inc. and Parts Finder Locating Systems, Inc., respectively, to pay or perform, such corporation's respective obligations under Section 8 of this Agreement. The foregoing several guarantees are continuing guarantees and shall remain in full force and effect until the obligations of the corporation in which respect of which the guarantee is given have been fully 22 and irrevocably paid, performed, satisfied, terminated or otherwise extinguished as provided in this Agreement. Each Guarantor represents that the obligations set forth in this Section 8.5 are valid and binding upon such Guarantor as stated and that the guarantees shall inure and be binding upon, and enforceable against, such Guarantor's successors-in-interest and assignees. The Guarantors hereby waive promptness and diligence, notice of any actions taken by the Sellers or Cobalt under this Agreement and all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of their obligations as Guarantors hereunder, the omission of or delay in which, but for the provisions hereof, might constitute grounds for relieving the Guarantor of his or her obligations hereunder. Locators, Inc. agrees with respect to its indemnification obligations set forth under Section 8 of this Agreement, that $3 million in value (based on the $8.00 per share conversion price) of the Shares received by Locators, Inc. at Closing shall be placed into an escrow account pursuant to the terms of an escrow agreement on terms and conditions satisfactory to both Locators, Inc. and Cobalt ("Escrow Agreement") to be executed and delivered by Locators, Inc. and Cobalt at Closing (the "Escrow Fund"). The Escrow Fund shall be held by the escrow agent designated in the Escrow Agreement as security for the indemnity obligations of Locator, Inc. until the second anniversary of the Closing Date. 8.6 KNOWLEDGE PRIOR TO CLOSING Any party to whom an indemnification obligation is owed by reason of this Section 8 shall be deemed to have waived any indemnification obligation based upon such inaccuracy or breach if the Indemnitee had knowledge of such inaccuracy or breach before the Closing Date. SECTION 9. MISCELLANEOUS 9.1 ASSIGNMENT; SUCCESSORS AND ASSIGNS This Agreement may not be assigned prior to the Closing by any party hereto without the prior written consent of the other parties. Subject to the foregoing, all of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 9.2 NOTICES Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given only if delivered personally to the address set forth below (to the attention of the person identified below) or sent by telegram, by registered or certified mail, postage prepaid, or by overnight courier service, or by facsimile with written facsimile transmission confirmation as follows: 23 If to Cobalt to: With a copy to: The Cobalt Group, Inc. Stoel Rives LLP 2030 First Avenue 3600 One Union Square Seattle, WA 98121 600 University Street Attention: Geoffrey T. Barker, Seattle, WA 98101 Co-Chief Executive Officer Attention: Ronald J. Lone Facsimile No.: (206) 269-6350 Facsimile No.: (206) 386-7500 If to the Sellers to: With a copy to: Parts Finder Locating Systems, Inc. Bruce G. Berning 14718 S.W. Scarlett Drive Tonkon Torp LLP Tigard, OR 97224 888 SW Fifth Avenue, Suite 1600 Facsimile No.: (503) 590-6193 Portland, OR 97204 Facsimile No.: (503) 972-3712 With a copy to: Locators, Inc. Allen B. Bush 8305 S.E. Monterey, Suite 104 13825 SW 33rd Place Portland, OR 97266 Beaverton, OR 97008 Facsimile No.: (503) 653-9536 Facsimile No.: (503) 646-1391 With a copy to: Compu-Time, Inc. Thomas G. Guilbert 8305 S.E. Monterey, Suite 110 2370 S.W. Montgomery Drive Portland, OR 97266 Portland, OR 97201 Facsimile No.: (503) 659-3753 Facsimile No.: (503) 228-0811 If to Company to: With a copy to: PartsVoice LLC Stephen B. Hill 8305 S.E. Monterey, Suite 104 Bullivant Houser Bailey Portland, OR 97266 888 S.W. Fifth Avenue, Suite 300 Facsimile No.: (503) 653-9536 Portland, OR 97204 Facsimile No.: (503) 295-0915 or to such other address as the addressee may have specified in a notice duly given to the sender and to counsel as provided herein. Such notice, request, demand, waiver, consent, approval or other communication will be deemed to have been given as of the date so delivered 24 or telegraphed or, if mailed, three (3) business days after the date so mailed or, if sent by overnight courier service or facsimile, one (1) business day after the date so sent. 9.3 GOVERNING LAW; JURISDICTION; VENUE This Agreement shall be governed by and interpreted in accordance with the laws of the State of Oregon without reference to its choice of law principles. Each party hereby irrevocably consents to the jurisdiction and venue of the courts of the State of Oregon, Multnomah County, the United States District Court for the District of Oregon at Portland, and all applicable appellate courts, in connection with any action to interpret or enforce, or otherwise arising out of or relating to, this Agreement. 9.4 ENTIRE AGREEMENT This Agreement, together with the Exhibits hereto and all other documents referred to herein and therein, sets forth the entire agreement of the parties hereto with respect to the transactions contemplated hereby. This Agreement may not be amended except by an instrument in writing signed by the parties hereto, and no claimed amendment, modification, termination or waiver shall be binding unless in writing and signed by the party against whom or which such claimed amendment, modification, termination or waiver is sought to be enforced. 9.5 SECTION HEADINGS All section headings are for convenience only and shall in no way modify or restrict any of the terms or provisions hereof. 9.6 COOPERATION Subject to the provisions hereof, the parties hereto shall use their best efforts to take, or cause to be taken, such action to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law to consummate and make effective the transactions contemplated by this Agreement. 9.7 ATTORNEYS' FEES Should any party employ an attorney or attorneys to enforce any of the provisions of this Agreement or to protect its interest or enforce its rights in any manner arising under this Agreement or to recover damages for the breach hereof, and if a suit, action or other proceeding of any nature whatsoever (including any contested matter or adversary proceeding under the U.S. Bankruptcy Code) is instituted in connection with any controversy arising out 25 of this Agreement or to interpret or enforce any rights hereunder, the prevailing party shall be entitled to recover mediation and arbitration expenses, if any, and its attorneys', paralegals', accountants' and other experts' fees, and all other fees, costs and expenses actually incurred in connection therewith, as determined by the judge at trial or on appeal or review, in addition to all other amounts provided by law. 9.8 COUNTERPARTS This Agreement may be executed in counterparts, each of which is an original and all of which together shall be deemed to be one and the same instrument. This Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered by all the parties. 9.9 INTERPRETATION, KNOWLEDGE This Agreement and each of the terms and provisions hereof are deemed to have been explicitly negotiated among the parties and the language in all parts of this Agreement shall in all cases be construed according to its fair meaning and not strictly for or against any party. To the extent a statement or representation contained in this Agreement is qualified to the "knowledge" of Sellers, or using words of similar import, "knowledge" shall mean: as to Parts Finder Locating Systems, Inc., the actual knowledge of Shirley Atherton; as to Locators, Inc., the actual knowledge of Alex DeLucia; and as to Compu-Time, Inc., the actual knowledge of Brian Allen. 9.10 PAYMENT OF EXPENSES The Sellers and Cobalt shall be responsible for and pay any and all legal, accounting, broker, investment banking and other fees and expenses which they (and Company in the case of the Sellers) incur in connection with preparation and performance of this Agreement, the transactions provided for herein and in the Exhibits hereto. 26 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. THE SELLERS: COBALT: Locators, Inc. The Cobalt Group, Inc. By By --------------------------------- -------------------------------- Its Its ------------------------- ------------------------ Compu-Time, Inc. By --------------------------------- Its ------------------------- Parts Finder Locating Systems, Inc. By --------------------------------- Its ------------------------- With respect to the obligations and agreements set forth in Section 8.5 hereof only: THE GUARANTORS: - ----------------------------------- Brian Allen - ----------------------------------- Shirley Atherton 27 EXHIBIT INDEX Exhibit A-1 90-Day Notes Exhibit A-2 270-Day Notes Exhibit B Warrants Exhibit C-1 DeLucia Consulting Agreement Exhibit C-2 Allen Employment Agreement Exhibit D-1 Agreement for Management of Security Exhibit D-2 Pledge and Security Agreement Exhibit E Disclosure Schedule Exhibit F Allocation Schedule Exhibits G-1 through G-3 Opinions of Counsel Exhibit H Second Amendment to Amended and Restated Shareholders Agreement Exhibit I Registration Rights Agreement Exhibit J Amended and Restated Articles of Incorporation of Cobalt SCHEDULE OF SELLERS
Principal Principal Unit Amount of Amount of Units Ownership 90-Day 270-Day Seller Conveyed Percentage Cash Portion Notes Notes Warrants Shares ------ -------- ---------- ------------ ----- ----- -------- ------ Locators, Inc. 56 56% $1,680,000 $3,720,000 $8,400,000 83,000 375,000 Compu-Time, Inc. 20 20% 600,000 1,400,000 3,000,000 35,000 125,000 Parts Finder Locating Systems, 24 24% 720,000 2,880,000 3,600,000 42,000 0 Inc. --------- -------- ---------- ----------- ----------- ------- --------- Totals 100 100% $3,000,000 $8,000,000 $15,000,000 160,000 500,000
EX-10.16 21 EXHIBIT 10.16 Exhibit 10.16 AGREEMENT FOR MANAGEMENT OF SECURITY This Agreement for Management of Security ("AGREEMENT") is made and entered into this 30th day of April, 1999, by and among The Cobalt Group, a Washington corporation ("COBALT"), and Compu-Time, Inc., an Oregon corporation, Parts Finder Locating Systems, Inc., an Oregon corporation, and Locators, Inc., an Oregon corporation (COLLECTIVELY, "SELLERS"). RECITALS: A. Pursuant to the terms of a Purchase Agreement dated as of the date hereof ("PURCHASE AGREEMENT"), Cobalt has purchased from Sellers all of the membership interest units ("UNITS") of PartsVoice LLC, an Oregon limited liability company ("PARTSVOICE"). As payment of the purchase price for the Units, Pledgor has executed and delivered to Secured Party $3,000,000 in cash, three Promissory Notes in the aggregate principal amount of $12,000,000 due 90 days from the date hereof (THE "90-DAY NOTES"), three Promissory Notes in the aggregate principal amount of $15,000,000 due 270 days from the date hereof (THE "270-DAY NOTES", AND TOGETHER WITH THE 90-DAY NOTES, THE "NOTES") and warrants to purchase 160,000 shares of Cobalt Common Stock. To secure payment of the Notes, Cobalt has executed and delivered to the Sellers a Pledge and Security Agreement of even date herewith (THE "PLEDGE AGREEMENT"). B. In recognition of Cobalt's ownership of PartsVoice and Sellers' security interests therein, and in accordance with the terms of the Purchase Agreement, the parties have agreed that Sellers shall continue to operate and manage PartsVoice on and subject to the terms and conditions set forth below. AGREEMENT: 1. MANAGEMENT OF PARTSVOICE. Until the Notes are paid in full, Sellers shall have the exclusive right, power and authority, and shall have the duty, to operate and manage the business and affairs of PartsVoice. Sellers shall exercise such right, power and authority, and shall discharge such duty, in good faith in a manner consistent with historical practice and in accordance with the Operating Agreement of PartsVoice (a copy of which is attached hereto and by this reference incorporated herein ("OPERATING AGREEMENT")). Except as provided in Section 3 below, the right, power and authority granted to Sellers and the duty of Sellers hereunder shall include, but not be limited to: the purchase, sale, lease, mortgage or other transfer of the assets of PartsVoice; the incurrence of debt and making of contracts, leases and 1 other accommodations with customers and third parties; the employment of personnel and payment of salaries and benefits related thereto; the expenditure of funds and the undertaking of any and all other good faith actions related to the operation and management of PartsVoice. 2. MANAGER. Until the Notes are paid in full, the right, power and authority granted to Sellers and the duty of Sellers hereunder to operate and manage the business and affairs of PartsVoice shall continue to be exercised by Alex DeLucia ("DELUCIA"), as Manager of PartsVoice, as provided in the Operating Agreement ("MANAGER"). In the event of the death, disability, resignation or removal of DeLucia, the Manager shall be Brian Allen. The Manager shall be compensated as provided in the Operating Agreement. Cobalt shall not consent, approve or take any other action to remove or replace the Manager without the prior written consent of Sellers. 3. LIMITATIONS ON MANAGEMENT. Notwithstanding Section 1 of this Agreement, until an Event of Default as defined in the Pledge Agreement, Sellers and the Manager shall not authorize, approve or take any of the following actions without the prior written consent of Cobalt: (a) The sale, lease, exchange, mortgage or other transfer or disposition of any asset or related assets of PartsVoice having either a book or fair market value, individually or in the aggregate, in excess of $50,000. (b) The reorganization, consolidation, merger, dissolution or liquidation of PartsVoice. (c) An amendment to the articles of organization of PartsVoice or the Operating Agreement. (d) The incurrence of indebtedness by PartsVoice in an amount in excess of $50,000. (e) A material change in the nature of the business of PartsVoice. (f) A material change in the employment of personnel or the engagement of consultants and payment of salaries, benefits or other compensation related thereto, including entering into a contract for such services with a term exceeding 1 year or with payment obligations exceeding $100,000, or any significant change in the payment of salaries, benefits or other compensation of senior management of PartsVoice. (g) Any other action not in the ordinary course of PartsVoice's business. 2 4. DISTRIBUTIONS. Until the Notes are paid in full, no distribution of cash or other assets of any kind of PartsVoice shall be made to Cobalt; provided, however, that distributions of cash may be made by PartsVoice to Sellers on behalf of Cobalt to pay monthly accrued but unpaid interest owed to Sellers under the Notes to the extent of Net Cash Flow from the operations of PartsVoice. For purposes of determining distributions permitted hereunder, Net Cash Flow is defined as the amount of cash available at the end of any month in excess of $100,000. Nothing in this section, and no distribution made or permitted hereunder, shall in any way relieve Cobalt of its obligation to pay the balance of the amounts due under the Notes. 5. VOTING. Notwithstanding the articles of organization of PartsVoice and the Operating Agreement, all voting rights and other rights with respect to the Units shall be governed by the terms of the Pledge Agreements. 6. TERMINATION. Upon payment of the Notes in full, this Agreement shall terminate. 7. BINDING AGREEMENT. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their respective successors and assigns. 8. ENTIRE AGREEMENT AND AMENDMENT. This Agreement, together with the Purchase Agreement and the other related agreement and documents included as Exhibits thereto constitute the complete and final agreement of the parties with regard to the transactions contemplated hereby and thereby and all previous and contemporaneous understandings and agreements not stated herein or therein are hereby waived and abandoned by the parties. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by all the parties hereto. 9. WAIVER. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 10. APPLICABLE LAW. The law applicable to this Agreement shall be the law of the State of Oregon. 11. ATTORNEY FEES. If a suit, action or other proceeding of any nature whatsoever (including any contested matter or adversary proceeding under the U.S. Bankruptcy Code) is instituted in connection with any controversy arising out of this Agreement or to interpret or enforce any rights hereunder, the prevailing party shall be entitled to recover its reasonable attorneys', paralegals', accountants' and other experts' fees, and all other fees, costs and 3 expenses actually incurred in connection therewith, as determined by the judge at trial or on appeal or review, in addition to all other amounts provided by law. 12. COUNTERPARTS. This Agreement maybe executed in any number of counterparts, each of which shall constitute an original of this Agreement. COBALT: THE COBALT GROUP, INC. By: ------------------------------ Its: ------------------------------ SELLERS: COMPU-TIME, INC. By: ------------------------------ Its: ------------------------------ PARTS FINDER LOCATING SYSTEMS, INC. By: ------------------------------ Its: ------------------------------ LOCATORS, INC. By: ------------------------------ Its: ------------------------------ 4 EX-10.17 22 EXHIBIT 10.17 Exhibit 10.17 PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement ("AGREEMENT") is made and entered into this 30th day of April, 1999, by and among The Cobalt Group, a Washington corporation ("PLEDGOR"), and Compu-Time, Inc., Parts Finder Locating Systems, Inc. and Locators, Inc., an Oregon corporation ("SECURED PARTY"). RECITALS: A. Pursuant to the terms of a Purchase Agreement dated as of the date hereof ("PURCHASE AGREEMENT"), Pledgor has purchased from Secured Party all of the membership interest units ("UNITS") of PartsVoice LLC, an Oregon limited liability company ("PARTSVOICE"). As payment of the purchase price for the Units, Pledgor has executed and delivered to Secured Party $3,000,000 in cash, three promissory notes in the aggregate principal amount of $12,000,000 of even date herewith due in 90 days (THE "90-DAY NOTES"), and three promissory notes in the aggregate principal amount of $15,000,000 of even date herewith due in 270 days (THE "270-DAY NOTES", AND TOGETHER WITH THE 90-DAY NOTES, THE "NOTES"). B. To secure payment of the Notes and performance of other obligations described herein, Pledgor has agreed to pledge the Units, and grant a security interest in the Units, to Secured Party on the terms set forth below. AGREEMENT: 1. SECURITY INTEREST AND OBLIGATIONS SECURED. Pledgor hereby assigns and pledges the Units to Secured Party, and grants a security interest in the Units to Secured Party, to secure the full, complete and timely payment of the Notes and the performance of Cobalt's obligations under this Agreement and the Management Agreement (as defined in Section 5). 2. CERTIFICATE AND ASSIGNMENT. Upon execution of this Agreement, Pledgor shall deliver to Secured Party a certificate representing all of the Units ("CERTIFICATE"), together with an executed assignment separate from certificate assigning all of the Units to Secured Party, in the form of Exhibit A attached hereto ("ASSIGNMENT"). Upon payment in full of the Notes, Secured Party shall promptly return the Certificate and the Assignment to Pledgor. 3. FINANCING STATEMENTS. Upon execution of this Agreement, Pledgor shall execute and deliver to Secured Party such financing statements for filing as deemed necessary or appropriate by Secured Party. Upon payment in full of the Notes and the performance of all other obligations secured hereunder, Secured Party shall terminate any financing statements filed by Secured Party hereunder. 4. REPRESENTATIONS AND WARRANTIES OF PLEDGOR. Pledgor represents and warrants to Secured Party that: (a) Pledgor is the sole legal and equitable owner of the Units, free and clear of any pledges, security interests, liens, encumbrances, restrictions on transfer, options, or agreements to sell the Units, except for the pledge and security interest granted hereunder. (b) Pledgor has full power and authority to execute, deliver and perform this Agreement, and to pledge and grant a security interest in the Units as provided herein. (c) The execution, delivery and performance of this Agreement by Pledgor has been duly and properly authorized and will not result in any violation of Pledgor's articles of incorporation or bylaws or any agreement, license, instrument, judgment, decree or order applicable to Pledgor. 5. COVENANTS OF PLEDGOR WITH RESPECT TO UNITS. Pledgor agrees that: (a) Prior to payment in full of the Notes, Pledgor shall not transfer (whether by sale, gift, or otherwise) any interest in the Units unless such transfer is (i) expressly subject to the terms of this Agreement and the Agreement for Management of Security of even date herewith among Pledgor, Compu-Time, Inc., Parts Finder Locating Systems, Inc., and Locators, Inc. ("MANAGEMENT AGREEMENT"), and (ii) made with the prior written consent of Secured Party in Secured Party's sole and absolute discretion. Prior to payment in full of the 90-Day Notes, Pledgor shall not pledge or grant a security interest in the Units, nor create, incur or allow any other lien, encumbrance or restriction on transfer with respect to the Units, without the prior written consent of Secured Party in Secured Party's sole and absolute discretion. Following payment in full of the 90-Day Notes, Pledgor shall not pledge or grant a security interest in the Units, nor create, incur or allow any other lien, encumbrance or restriction on transfer with respect to the Units, unless such pledge, security interest, lien, encumbrance or restriction is expressly subordinate and subject to the terms of this Agreement and the Management Agreement and made with the prior written consent of Secured Party which will not be unreasonably withheld. (b) Pledgor shall procure, execute, and deliver from time to time any assignments, financing statements, continuation statements and other writings reasonably necessary to perfect, maintain, and protect Secured Party's security interest in the Units and its priority therein. (c) Prior to payment in full of Notes, Pledgor shall not, without the prior written consent of Secured Party in Secured Party's sole and absolute discretion, (i) amend or restate the articles of organization or operating agreement of PartsVoice, (ii) effect any reorganization, consolidation, merger, dissolution or liquidation of PartsVoice (iii) sell, lease, exchange, mortgage or effect any other transfer or disposition of assets of PartsVoice other than in the ordinary course of business, (iv) effect the incurrence by PartsVoice of any indebtedness other than in the ordinary course of business, (v) effect any material change in the nature of the business of PartsVoice, or (vi) effect any withdrawal or distribution of cash or assets of any kind of PartsVoice, except as provided in this Agreement or the Management Agreement. (d) Prior to payment in full of the Notes, Pledgor shall not effect the admission of any additional members of PartsVoice without the prior written consent of Secured Party in Secured Party's sole and absolute discretion. 6. AUTHORIZED ACTION BY SECURED PARTY; PROXY. Subject to Section 7(a) hereof, Pledgor irrevocably appoints Secured Party as attorney-in-fact and grants Secured Party a proxy to do any act that Pledgor is obligated by this Agreement to do and to exercise such rights and powers as Pledgor might exercise with respect to the Units pursuant to this Agreement. With respect to voting the Units as provided in Section 7(b), this Section 6 constitutes an irrevocable appointment of a proxy, coupled with an interest, which shall continue until the Notes are paid in full. 7. VOTING OF UNITS. (a) Unless and until an Event of Default (as hereinafter defined) has occurred and is continuing, neither party shall exercise any voting rights pertaining to the Units; provided, however, that Pledgor may vote for, consent to, authorize or approve actions or transactions which provide for or result in the payment in full of the Notes. (b) If an Event of Default has occurred and is continuing, Secured Party shall, at its option and election evidenced by a notice to Pledgor, and whether or not Secured Party exercises any other rights or remedies available to it under this Agreement, have the right to exercise all voting rights with respect to the Units. 8. EVENTS OF DEFAULT. Any one or more of the following events constitutes an event of default ("EVENT OF DEFAULT"): (a) Occurrence and continuation of an Event of Default (as therein defined) under the Notes; (b) A breach or failure by Pledgor to perform any of the terms of this Agreement, which breach or failure has not been cured within twenty (20) days after written notice has been given of such breach or failure, including, without limitation, the covenants contained in Section 5 of this Agreement; (c) If any representation or warranty in this Agreement shall prove to have been false when made; or (d) A breach or failure by Pledgor to perform any of the terms of the Management Agreement, which breach or failure has not been cured within twenty (20) days after written notice has been given of such breach or failure. 9. REMEDIES UPON DEFAULT. Upon the occurrence of any Event of Default, Secured Party may, in Secured Party's sole discretion and with or without further notice to Pledgor and in addition to all rights and remedies at law or in equity or otherwise: (a) Transfer any or all of the Units into the Secured Party's name. (b) Exercise Secured Party's proxy rights with respect to all or a portion of the Units. In such event, Pledgor agrees to deliver promptly to Secured Party evidence of the grant of such proxy in any form reasonably requested by Secured Party. (c) Continue the management of PartsVoice pursuant to the terms of Management Agreement. (d) Sell or otherwise dispose of the Units in accordance with Section 10 below. Upon the occurrence of an Event of Default that has been caused by a material breach or material failure of Pledgor to perform its obligations under this Agreement or the Management Agreement, Secured Party may, in addition to the foregoing rights and remedies, declare in writing the entire amount of the principal and interest due under the Notes immediately due and payable. Pledgor shall be liable for Secured Party's reasonable costs and expenses, including attorney fees, incurred or paid in exercising any remedy under this Agreement or in the enforcement hereof, in either such case after an Event of Default has occurred and while it is continuing, which costs and expenses shall become part of the indebtedness secured hereby and shall be paid to Secured Party immediately upon demand. 10. SALE UPON DEFAULT. Pledgor and Secured Party acknowledge and agree that the Units are restricted, unregistered securities that are difficult to value and for which no public market exists. The parties further agree that the Units are not subject to sale in a "recognized market" as that term is described in ORS 79.5040. Pledgor and Secured Party wish to agree to reasonable standards for conducting a commercially reasonable sale of the Units. Without limiting rights and remedies otherwise available to Pledgor, the parties agree that compliance with the following steps shall satisfy requirements of a commercially reasonable sale: (a) The sale may be either a public or a private sale, at Secured Party's reasonable discretion, and it may be for all or any portion of the Units. (b) Secured Party shall set a date for public sale of the Units, or a date after which a private sale may occur, which date shall be not less than thirty (30) days after the date notice of the sale is given to Pledgor, and shall send written notification to Pledgor in advance regarding the date and the time of the public sale, or the date after which a private sale may occur. (c) Any public sale shall take place at a site in Portland, Oregon and time during normal business hours selected by Secured Party in its reasonable discretion. (d) As soon as practicable after request therefor by Secured Party, and in any event within twenty (20) days, Pledgor shall provide Secured Party with information relating to Pledgor requested by Secured Party for compliance with state or federal securities laws. (e) At any sale of any of the Units, Secured Party may restrict the prospective bidders or purchasers to persons or entities who, by certain representations made by them, would render registration of the sale under state or federal securities laws unnecessary. Upon any sale of the Units as provided above, the sale proceeds shall be applied as follows: first, to the payment of all costs and expenses incurred in connection with the holding, preparing for sale and sale of the Units, including but not limited to attorneys' fees and legal expenses incurred by Secured Party in connection therewith; second, to payment of all amounts due under the Notes; and third, any surplus thereafter remaining shall be paid to Pledgor or whoever may be lawfully entitled thereto. 11. REMEDIES CUMULATIVE. The rights and remedies of Secured Party herein shall be cumulative and in addition to, and not exclusive of, any rights or remedies provided by law. 12. NOTICES. Notices, requests, demands and other communications required under this Agreement shall be in writing and considered validly served when delivered by first-class mail, facsimile, telex or telecopy to the address or telephone number specified below: TO PLEDGOR: The Cobalt Group, Inc. Attn: Geoffrey T. Barker 1525 First Avenue, Third Floor Seattle, WA 98101 Fax (206) __________ With a copy to: Stoel Rives LLP Attn: Ronald J. Lone 3600 One Union Square 600 University Street Seattle, WA 98101 Fax (206) 386-7500 TO PLEDGEE: Compu-Time, Inc. 8305 S.E. Monterey, Suite 110 Portland, OR 97266 Fax (503) 659-3753 Parts Finder Locating Systems, Inc. 14718 S.W. Scarlett Drive Tigard, OR 97224 Fax (503) 538-9103 Locators, Inc. 8305 S.E. Monterey, Suite 104 Portland, OR 97266 Fax (503) 653-9536 With a copy to: Bullivant Houser Bailey Professional Corporation Attention: Stephen B. Hill, Esq. 888 S.W. Fifth Avenue 300 Pioneer Tower Portland, Oregon 97204-20898 Fax (503) 295-0915 Any party may alter its address by giving written notice of such change to the other parties hereto. 13. SECURED PARTY REPRESENTATIONS. The Manager of PartsVoice, as defined in Section 2 of the Management Agreement, shall serve as the sole and exclusive agent of Secured Party for purposes of any decision or action required or permitted to be taken by Secured Party hereunder unless any of the entities collectively known as the Secured Party shall have given notice to Pledgor to the contrary and, prior to the actual receipt of such notice by Pledgor, Pledgor shall be entitled to rely on the authority of the Manager as such. 14. BINDING AGREEMENT AND ASSIGNMENT. This Agreement shall be binding upon the respective successors and assigns of the parties hereto. 15. ENTIRE AGREEMENT AND AMENDMENT. This Agreement, together with the Purchase Agreement and the other related agreements and documents included as Exhibits thereto constitute the complete and final agreement of the parties with regard to the transactions contemplated hereby and thereby and all previous and contemporaneous understandings and agreements not stated herein or therein are hereby waived and abandoned by the parties. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by all the parties hereto. 16. WAIVER. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 17. APPLICABLE LAW. The law applicable to this Agreement shall be the law of the State of Oregon. 18. ATTORNEY FEES. If a suit, action or other proceeding of any nature whatsoever (including any contested matter or adversary proceeding under the U.S. Bankruptcy Code) is instituted in connection with any controversy arising out of this Agreement or to interpret or enforce any rights hereunder, the prevailing party shall be entitled to recover its reasonable attorneys', paralegals', accountants' and other experts' fees, and all other fees, costs and expenses actually incurred in connection therewith, as determined by the judge at trial or on appeal or review, in addition to all other amounts provided by law. 19. COUNTERPARTS. This Agreement maybe executed in any number of counterparts, each of which shall constitute an original of this Agreement. PLEDGOR: The Cobalt Group, Inc. By: ------------------------------------ Its: ------------------------------------ SECURED PARTY: Compu-Time, Inc. By: ------------------------------------ Its: ------------------------------------ Parts Finder Locating Systems, Inc. By: ------------------------------------ Its: ------------------------------------ Locators, Inc. By: ------------------------------------ Its: ------------------------------------ EXHIBIT A (Form of Assignment Separate From Certificate) EX-10.18 23 EXHIBIT 10.18 Exhibit 10.18 WARRANT SHARES AND SERIES C PREFERRED SHARES REGISTRATION AGREEMENT This Registration Agreement ("Agreement") is entered into as of April 30, 1999 by and among The Cobalt Group, Inc., a Washington corporation ("Cobalt"), and Locators, Inc., an Oregon corporation, Parts Finder Locating Systems, Inc., an Oregon corporation, and Compu-Time, Inc., an Oregon corporation (collectively, the "Holders"). RECITALS A. Cobalt has issued to the Holders warrants ("Warrants") to purchase shares of Cobalt common stock, $0.01 par value ("Common Stock") and shares of Cobalt Series C Preferred Stock, $0.01 par value ("Series C Preferred") pursuant to the terms of a Purchase Agreement to which Cobalt and Holders are parties, dated as of April 30, 1999 (the "Purchase Agreement"). B. Cobalt has agreed to take steps to permit the Holders to resell the Common Stock to be received by the Holders on conversion of Series C Preferred and on exercise or conversion of Warrants without restriction under the Securities Act of 1933, as amended (the "Securities Act"). AGREEMENT 1. SPECIAL DEFINITIONS. (a) "Register," "registration," and "registered" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement by the U.S. Securities and Exchange Commission (the "SEC"). (b) "Registrable Shares" means the shares of Common Stock issued or issuable upon conversion of the Series C Preferred and upon exercise or conversion of the Warrants. (c) "Registrable Securities" means (i) any Series A Preferred Stock issued pursuant to the Purchase Agreement between Cobalt, The Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P., and Mark Koulogeorge dated February 28, 1997 (the "Series A Purchase Agreement"); (ii) any Series B Preferred Stock issued pursuant to the Purchase Agreement between Cobalt and Warburg, Pincus Equity Partners, L.P. dated October 7, 1998 (the "Series B Purchase Agreement") and any Series B Preferred Stock issued to the Reynolds and Reynolds Company, (iii) any Common Stock issued upon the conversion of any Series A Preferred Stock issued pursuant to the Series A Purchase Agreement; (iv) any Common Stock issued upon the conversion of any Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and any Common Stock issued upon the conversion of any Series B Preferred Stock issued to the Reynolds and Reynolds Company, and (v) any Common Stock issued or issuable with respect to the securities referred to in clauses (i), (ii), (iii) and (iv) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. 2. RESALE REGISTRATION. After its initial public offering, Cobalt shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms (a "Short Form Registration Statement"). If a Short Form Registration Statement is available for use by Cobalt, the holders of a majority of the Registrable Shares that have not previously been registered for resale pursuant to this Section 2 may make a written request (a "Resale Registration Request") that Cobalt register under the Securities Act the Registrable Shares that are the subject of the Resale Registration Request on such form (a "Resale Demand Registration"). Promptly after receipt of such Resale Registration Request, which shall specify the number of Registrable Shares to be registered and the intended method of disposition thereof, Cobalt shall as expeditiously as possible prepare and file a Short Form Registration Statement with respect to such Registrable Shares. Cobalt agrees to use its best efforts to cause such Resale Demand Registration to become effective as expeditiously as reasonably possible and thereafter to keep it continuously effective for a period of 180 days from the date on which the SEC declares the Resale Demand Registration effective or such shorter period as will terminate when all the Registrable Shares covered by the Resale Demand Registration have been sold. 3. PIGGYBACK REGISTRATIONS. (a) Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a registration on Form S-8 or S-4) and the registration form to be used may be used for the registration of Registrable Shares (a "Piggyback Registration"), the Company will give prompt written notice to all holders of Registrable Shares of its intention to effect such a registration, which notice shall specify whether such offer will be underwritten and shall include all jurisdictions in which the Company intends to attempt to qualify such securities under applicable blue sky or state securities laws, and will include in such registration all Registrable Shares with respect to which the Company has received written requests for inclusion therein within ten days after the receipt of the Company's notice. (b) The Registration Expenses of the holders of Registrable Shares will be paid by the Company in all Piggyback Registrations. (c) If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, including the proposed price for the securities, the Company will include in such 2 registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Shares and Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Shares and Registrable Securities on the basis of the number of shares owned by each such holder, and (iii) third, other securities requested to be included in such registration. (d) If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, including the proposed price for the securities, the Company will include in such registration (i) first, the securities requested to be included therein by the holders requesting such registration, (ii) second, the Registrable Shares and Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Shares and Registrable Securities on the basis of the number of shares owned by each such holder, and (iii) third, other securities requested to be included in such registration. (e) If the Company has previously filed a registration statement with respect to Registrable Shares pursuant to paragraph 2 or pursuant to this paragraph 3, and if such previous registration has not been withdrawn or abandoned, the Company will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or S-4 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least ninety days has elapsed from the effective date of such previous registration. 4. OBLIGATIONS OF COBALT. When required by this Agreement to register Registrable Shares, Cobalt shall, as promptly as reasonably possible: (a) Prepare and file with the SEC a registration statement covering such Registrable Shares and use its best efforts to cause such registration statement to become effective, and, keep such registration statement continuously effective for up to 180 days or such shorter period as will terminate when all the Registrable Shares covered by the registration statement have been sold. (b) Prepare and file with the SEC any amendments and supplements to the registration statement and the prospectus used in connection with it needed to comply with the Securities Act with respect to the sale of all Registrable Shares covered by such registration statement. 3 (c) Give the Holders the number of copies of preliminary and final prospectuses, in conformity with the requirements of the Securities Act, and other documents that they reasonably request to facilitate the sale of their Registrable Shares. (d) Use its best efforts to register and qualify the Registrable Shares covered by such registration statement under securities or Blue Sky laws of such jurisdictions that the Holders request, PROVIDED that Cobalt shall not be required in connection therewith to qualify to do business or to file a general consent to service of process in any such jurisdictions. (e) Notify each holder of Registrable Shares covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 5. HOLDERS' INFORMATION. Cobalt is obligated to take actions to register Registrable Shares under this Agreement only if the Holders requesting registration give Cobalt on a timely basis all information regarding themselves, their Registrable Shares, and their intended method of disposition of such securities as shall be reasonably required to effect the registration of their Registrable Shares. 6. EXPENSES OF REGISTRATION. Cobalt shall pay all expenses other than underwriting discounts, commissions and fees and disbursements of legal counsel for the selling Holders relating to Registrable Shares incurred in connection with registrations, filings or qualifications pursuant to this Agreement, including (without limitation) all registration, filing and qualification fees, printing and accounting fees, and fees and disbursements of counsel for Cobalt. 7. INDEMNIFICATION. If any Registrable Shares are included in a registration statement under this Agreement: (a) To the extent permitted by law, Cobalt will indemnify and hold harmless each Holder and each person, if any, who controls such Holder within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages or liabilities to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based on any of the following statements, omissions, or violations (each a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary or final prospectus contained therein or any amendments or supplements thereto, 4 (ii) any omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by Cobalt of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; PROVIDED, HOWEVER, that this indemnity shall not inure to the benefit of any Holder, or controlling person with respect to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Cobalt, nor with respect to any loss, claim, damage, liability or action that arises out of or is based on a Violation that occurs in reliance on written information given to Cobalt expressly for use in connection with such registration by any such Holder, or controlling person. (b) To the extent permitted by law, each Holder whose Registrable Shares are included in a registration pursuant hereto will indemnify and hold harmless Cobalt, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls Cobalt within the meaning of the Securities Act (a "Cobalt Indemnitee"), against any losses, claims, damages or liabilities to which such Cobalt Indemnitee may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based on any Violation that occurs in reliance on written information given by such Holder or its agents expressly for use in connection with such registration; PROVIDED, HOWEVER, that (i) this indemnity shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder and (ii) the obligations of such Holder shall be limited to an amount equal to the gross proceeds to such Holder. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action (including any governmental action), the indemnified party will give the indemnifying party written notice thereof. The indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly notified, to assume the defense thereof. An indemnified party shall have the right to retain its own counsel, reasonably satisfactory to the indemnifying party, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party would be inappropriate due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to give written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 6, but the failure to give such notice shall not relieve it of any liability that it may otherwise have to any indemnified party. (d) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable 5 by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) The obligations of the parties under this Section 6 shall survive the completion of any offering of Registrable Shares. 8. RULE 144. With a view to making available the benefits of certain rules and regulations of the SEC that may permit the sale of the Registrable Shares to the public without registration or pursuant to a Short Form Registration Statement, after its initial public offering, Cobalt agrees to use its best efforts to: (a) Make and keep public information regarding Cobalt available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after the effective date that Cobalt becomes subject to the reporting requirements of the Securities Act or the Exchange Act; and (b) File with the SEC in a timely manner all reports and other documents required of Cobalt under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements. 9. LOCK-UP AGREEMENT. If requested by Cobalt and an underwriter managing an underwritten offering of Cobalt's securities, each Holder that is an officer, director, consultant or is otherwise an affiliate of Cobalt or any subsidiary entity agrees that it shall not sell or otherwise transfer or dispose of any Registrable Shares held by such Holder without the prior written consent of Cobalt or such underwriter for a period of time not to exceed one hundred eighty (180) days following the effective date of a registration statement of Cobalt filed under the Securities Act (the "Lock-up Period"), provided, however, that all other officers, directors and similarly situated affiliates also agree to such a restriction. 6 10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. 11. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. 12. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof. This Agreement may not be amended, waived, discharged or terminated, except by a written instrument signed by Cobalt and the holders of at least a majority of the Registrable Shares. 13. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally or by registered mail or overnight courier service to the party concerned addressed as follows: If to Cobalt to: With a copy to: The Cobalt Group, Inc. Stoel Rives LLP 2030 First Avenue 3600 One Union Square Seattle, WA 98121 600 University Street Attention: Geoffrey T. Barker, Seattle, WA 98101 Co-Chief Executive Officer Attention: Ronald J. Lone Facsimile No.: (206) 269-6350 Facsimile No.: (206) 386-7500 If to the Holders to: With a copy to: Parts Finder Locating Systems, Inc. Bruce G. Berning 14718 S.W. Scarlett Drive Tonkon Torp LLP Tigard, OR 97224 888 SW Fifth Avenue, Suite 1600 Facsimile No.: (503) 590-6193 Portland, OR 97204 Facsimile No.: (503) 972-3712 7 With a copy to: Locators, Inc. Allen B. Bush 8305 S.E. Monterey, Suite 104 13825 SW 33rd Place Portland, OR 97266 Beaverton, OR 97008 Facsimile No.: (503) 653-9536 Facsimile No.: (503) 646-1391 With a copy to: Compu-Time, Inc. Thomas G. Guilbert 8305 S.E. Monterey, Suite 110 2370 S.W. Montgomery Drive Portland, OR 97266 Portland, OR 97201 Facsimile No.: (503) 659-3753 Facsimile No.: (503) 228-0811 or to any other address as may from time to time be notified in writing by any party to the other parties hereto. Any notice or other communication shall be deemed to have been given on the day delivered, if delivered by hand; one business day following the day deposited with an overnight courier service; or within four business days of mailing. 14. DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any Holder upon any breach or default of Cobalt under this Agreement shall impair any such right, power or remedy of such Holder, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement, or any waiver on the part of any Holder of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 15. RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 8 THE HOLDERS: COBALT: Locators, Inc. The Cobalt Group, Inc. By By ---------------------------- --------------------------------- Its Its ---------------------- --------------------------- Compu-Time, Inc. By ---------------------------- Its ---------------------- Parts Finder Locating Systems, Inc. By ---------------------------- Its ---------------------- 9 EX-10.19 24 EXHIBIT 10.19 Exhibit 10.19 PROMISSORY NOTE $1,400,000 April 30, 1999 FOR VALUE RECEIVED, The Cobalt Group, Inc., a Washington corporation ("Cobalt"), promises to pay to the order of Compu-Time, Inc. ("Seller"), at Seller's office at 8305 S.E. Monterey, Suite 110, Portland, OR 97266, or at such other address as the holder hereof may from time to time designate in writing, the principal sum of One Million Four Hundred Thousand Dollars ($1,400,000) together with interest from the date of this Promissory Note (this "Note") until July 30, 1999 ("Maturity") on the principal balance from time to time remaining unpaid hereon at the rate of eight and seventy-five one hundredths percent (8.75%) per annum. Prior to Maturity, interest on this Note will be payable in arrears on the first business day of each calendar month with respect to the prior calendar month, except that the first such payment will be payable on June 1, 1999 with respect to the period from the date of this Note through May 31, 1999. There are no scheduled payments of principal on this Note prior to Maturity. All then unpaid principal and interest hereon shall be due and payable on Maturity. This Note evidences a part of the purchase price for Cobalt's purchase from Seller of the membership interest of Seller in PartsVoice LLC, an Oregon limited liability company ("PartsVoice") represented by membership certificate number __ of PartsVoice (the "Membership Certificate") pursuant to the Purchase Agreement dated as April 19, 1999 to which Cobalt and Seller are parties (the "Purchase Agreement"). This Note is secured by a pledge of the Membership Certificate pursuant to the Pledge and Security Agreement dated of even date herewith between Cobalt and Seller (the "Pledge Agreement"). Cobalt shall have the right to prepay any or all of the outstanding balance of this Note at any time and from time to time without penalty or premium of any kind. Until this Note is paid, Cobalt shall be required, within two (2) business days of its receipt of the net proceeds of a Qualified Public Offering, to pay in full to Seller all remaining amounts due under this Note (a "Mandatory Prepayment"), subject to the consent of the underwriters. As used herein, "Qualified Public Offering" shall mean a public offering of equity securities of Cobalt with net proceeds to Cobalt of at least $25 million. Each of the following shall constitute an Event of Default ("Event of Default") hereunder and under the Pledge Agreement: (a) Failure of Cobalt to make any payment or Mandatory Prepayment of principal or interest upon this Note when due, and such failure or refusal shall continue for a period of ten (10) days after written notice is given to Cobalt by Seller specifying such failure; provided, however, that no written notice is required to be given to Cobalt by Seller if Seller has already given Cobalt written notice on two separate occasions of the failure to make payment in the prior twelve (12)months; or (b) Failure of Cobalt to observe or perform any other covenant or condition contained in this Note and such default shall continue for thirty (30) days after notice is given to Cobalt specifying the nature of the failure; or (c) Filing by Cobalt of a voluntary petition in bankruptcy or filing by Cobalt of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or the seeking, consenting to, or acquiescing by Cobalt in the appointment of any trustee, receiver, custodian, conservator or liquidator for Cobalt, or the making by Cobalt of any general assignment for the benefit of creditors; or (d) Filing of a petition against Cobalt seeking any reorganization, arrangement, composition, readjustment, liquidation, or similar relief under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debts, or the appointment of any trustee, receiver, custodian, conservator or liquidator of Cobalt, unless such petition shall be dismissed within sixty (60) days after such filing, but in any event prior to the entry of an order, judgment or decree approving such petition; or (e) The institution of any proceeding for the dissolution of Cobalt voluntarily, involuntarily, or by operation of law; or (f) The occurrence and continuation of an Event of Default (as therein defined) under the Pledge Agreement; or (g) Failure of Cobalt to observe or perform any obligation of Cobalt under the Purchase Agreement or the Agreement for Management of Security of even date herewith among Cobalt, Compu-Time, Inc., Parts Finder Locating Systems, Inc., and Locators, Inc. (the "Management Agreement") when such observance or performance is due, and such failure shall continue beyond the applicable cure period set forth in such Agreement, or if the default cannot be cured within such applicable cure period, Cobalt fails within such time to commence and pursue curative action with reasonable diligence or fails at any time after expiration of such applicable cure period to continue with reasonable diligence all necessary curative actions. Upon the occurrence of any of the foregoing Events of Default, Seller shall have the option in writing to declare the entire amount of principal and interest due under this Note 2 immediately due and payable, and Seller may exercise any of its rights under this Note and the Pledge Agreement. After acceleration or Maturity, Cobalt shall pay interest on the outstanding principal balance of this Note at the rate of thirteen and seventy-five one hundredths percent (13.75%) per annum provided that such interest rate shall not exceed the maximum interest rate permitted by law. All payments of the principal and interest on this Note shall be first applied against interest and made in coin or currency of the United States of America which at the time shall be the legal tender for the payment of public and private debts. If this Note is placed in the hands of an attorney for collection, Cobalt agrees to pay any reasonable attorneys' fees and costs incurred by Seller in connection therewith, and in the event suit or action is instituted to enforce or interpret this Note, the prevailing party shall be entitled to recover all expenses reasonably incurred at, before or after trial and on appeal, whether or not taxable as costs, or in connection with post-judgment collection efforts, including, without limitation, reasonable attorneys' fees, witness fees (expert and otherwise), deposition costs, copying charges and other expenses. This Note shall be governed and construed in accordance with the laws of the State of Oregon applicable to contracts made and to be performed therein (excluding choice-of-law principles). Cobalt hereby irrevocably submits to the jurisdiction of any state or federal court sitting in Oregon in any action or proceeding brought to enforce or otherwise arising out of or relating to this Note, and hereby waives any objection to venue in any such court and any claim that such forum is an inconvenient forum. This Note is given in a commercial transaction solely for business purposes. Cobalt and all sureties, endorsers, guarantors and other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally (i) waive demand, notice of demand, presentment for payment, notice of nonpayment, notice of default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices, and further waive diligence in collecting this Note or in enforcing any of the security for this Note; (ii) agree to any substitution, subordination, exchange or release of any security for this Note or the release of any party primarily or secondarily liable for the payment of this Note; (iii) agree that Seller shall not be required to first institute suit or exhaust its remedies hereon against Cobalt or others liable or to become liable for the payment of this Note or to enforce its rights against any security for the payment of this Note; and (iv) consent to any extension of time for the payment of this Note, or any installment hereof, made by agreement by Seller with any person now or hereafter liable for the payment of this Note, even if Cobalt is not a party to such agreement. All agreements between Cobalt and Seller, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason 3 of demand or acceleration of the Maturity of this Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Seller exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Seller in excess of the maximum amount permissible under applicable law, the interest payable to Seller shall be reduced to the maximum amount permissible under applicable law; and if from any circumstance shall Seller ever receive anything of value deemed interest by applicable law in excess of the maximum amount permissible under applicable law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid balance of principal hereof, such excess shall be refunded to Cobalt. All interest paid or agreed to be paid to Seller shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under applicable law. Seller expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under applicable law. UNDER OREGON LAW (ORS 41.580), AFTER OCTOBER 8, 1989, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY A LENDING PARTY CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES, OR SECURED SOLELY BY THE BORROWER'S RESIDENCE, MUST BE IN WRITING, SET FORTH THE CONSIDERATION GIVEN AND BE SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE LENDING PARTY TO BE ENFORCEABLE. THE COBALT GROUP, INC. ------------------------------------- By: Its: 4 Schedule to Exhibit 10.19 Other similar Notes of the Company dated April 30, 1999: Holder Principal Amount Parts Finder Locating Systems, Inc. $2,880,000 Locators, Inc. $3,720,000 5 EX-10.20 25 EXHIBIT 10.20 Exhibit 10.20 PROMISSORY NOTE $3,000,000 April 30, 1999 FOR VALUE RECEIVED, The Cobalt Group, Inc., a Washington corporation ("Cobalt"), promises to pay to the order of Compu-Time, Inc. ("Seller"), at Seller's office at 8305 S.E. Monterey, Suite 110, Portland, OR 97266, or at such other address as the holder hereof may from time to time designate in writing, the principal sum of Three Million Dollars ($3,000,000) together with interest from the date of this Promissory Note (this "Note") until January 25, 2000 ("Maturity") on the principal balance from time to time remaining unpaid hereon at the rate of eight and seventy-five one hundredths percent (8.75%) per annum. Prior to Maturity, interest on this Note will be payable in arrears on the first business day of each calendar month with respect to the prior calendar month, except that the first such payment will be payable on June 1, 1999 with respect to the period from the date of this Note through May 31, 1999. There are no scheduled payments of principal on this Note prior to Maturity. All then unpaid principal and interest hereon shall be due and payable on Maturity. This Note evidences a part of the purchase price for Cobalt's purchase from Seller of the membership interest of Seller in PartsVoice LLC, an Oregon limited liability company ("Parts Voice") represented by membership certificate number __ of Parts Voice (the "Membership Certificate") pursuant to the Purchase Agreement dated April 19, 1999 to which Cobalt and Seller are parties (the "Purchase Agreement"). This Note is secured by a pledge of the Membership Certificate pursuant to the Pledge and Security Agreement dated of even date herewith between Cobalt and Seller (the "Pledge Agreement"). Cobalt shall have the right to prepay any or all of the outstanding balance of this Note at any time and from time to time without penalty or premium of any kind. Until this Note is paid, Cobalt shall be required, within two (2) business days of its receipt of the net proceeds of a Qualified Public Offering, to pay in full to Seller all remaining amounts due under this Note (a "Mandatory Prepayment"), subject to the consent of the underwriters. As used herein, "Qualified Public Offering" shall mean a public offering of equity securities of Cobalt with net proceeds to Cobalt of at least $25 million. Each of the following shall constitute an Event of Default ("Event of Default") hereunder and under the Pledge Agreement: (a) Failure of Cobalt to make any payment or Mandatory Prepayment of principal or interest upon this Note when due, and such failure or refusal shall continue for a period of ten (10) days after written notice is given to Cobalt by Seller specifying such failure; provided, however, that no written notice is required to be given to Cobalt by Seller if Seller has already given Cobalt written notice on two separate occasions of the failure to make payment in the prior twelve (12) months; or (b) Failure of Cobalt to observe or perform any other covenant or condition contained in this Note and such default shall continue for thirty (30) days after notice is given to Cobalt specifying the nature of the failure; or (c) Filing by Cobalt of a voluntary petition in bankruptcy or filing by Cobalt of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or the seeking, consenting to, or acquiescing by Cobalt in the appointment of any trustee, receiver, custodian, conservator or liquidator for Cobalt, or the making by Cobalt of any general assignment for the benefit of creditors; or (d) Filing of a petition against Cobalt seeking any reorganization, arrangement, composition, readjustment, liquidation, or similar relief under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debts, or the appointment of any trustee, receiver, custodian, conservator or liquidator of Cobalt, unless such petition shall be dismissed within sixty (60) days after such filing, but in any event prior to the entry of an order, judgment or decree approving such petition; or (e) The institution of any proceeding for the dissolution of Cobalt voluntarily, involuntarily, or by operation of law; or (f) The occurrence and continuation of an Event of Default (as therein defined) under the Pledge Agreement; or (g) Failure of Cobalt to observe or perform any obligation of Cobalt under the Purchase Agreement or the Agreement for Management of Security of even date herewith among Cobalt, Compu-Time, Inc., Parts Finder Locating Systems, Inc. and Locators, Inc. (the "Management Agreement") when such observance or performance is due, and such failure shall continue beyond the applicable cure period set forth in such Agreement, or if the default cannot be cured within such applicable cure period, Cobalt fails within such time to commence and pursue curative action with reasonable diligence or fails at any time after expiration of such applicable cure period to continue with reasonable diligence all necessary curative actions. Upon the occurrence of any of the foregoing Events of Default, Seller shall have the option in writing to declare the entire amount of principal and interest due under this Note immediately due and payable, and Seller may exercise any of its rights under this Note and the Pledge Agreement. After acceleration or Maturity, Cobalt shall pay interest on the outstanding principal balance of this Note at the rate of thirteen and seventy-five one hundredths percent (13.75%) per 2 annum, provided that such interest rate shall not exceed the maximum interest rate permitted by law. All payments of the principal and interest on this Note shall be first applied against interest and made in coin or currency of the United States of America which at the time shall be the legal tender for the payment of public and private debts. If this Note is placed in the hands of an attorney for collection, Cobalt agrees to pay any reasonable attorneys' fees and costs incurred by Seller in connection therewith, and in the event suit or action is instituted to enforce or interpret this Note, the prevailing party shall be entitled to recover all expenses reasonably incurred at, before or after trial and on appeal, whether or not taxable as costs, or in connection with post-judgment collection efforts, including, without limitation, reasonable attorneys' fees, witness fees (expert and otherwise), deposition costs, copying charges and other expenses. This Note shall be governed and construed in accordance with the laws of the State of Oregon applicable to contracts made and to be performed therein (excluding choice-of-law principles). Cobalt hereby irrevocably submits to the jurisdiction of any state or federal court sitting in Oregon in any action or proceeding brought to enforce or otherwise arising out of or relating to this Note, and hereby waives any objection to venue in any such court and any claim that such forum is an inconvenient forum. This Note is given in a commercial transaction solely for business purposes. Cobalt and all sureties, endorsers, guarantors and other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally (i) waive demand, notice of demand, presentment for payment, notice of nonpayment, notice of default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices, and further waive diligence in collecting this Note or in enforcing any of the security for this Note; (ii) agree to any substitution, subordination, exchange or release of any security for this Note or the release of any party primarily or secondarily liable for the payment of this Note; (iii) agree that Seller shall not be required to first institute suit or exhaust its remedies hereon against Cobalt or others liable or to become liable for the payment of this Note or to enforce its rights against any security for the payment of this Note; and (iv) consent to any extension of time for the payment of this Note, or any installment hereof, made by agreement by Seller with any person now or hereafter liable for the payment of this Note, even if Cobalt is not a party to such agreement. All agreements between Cobalt and Seller, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand or acceleration of the Maturity of this Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Seller exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Seller in excess of the maximum amount permissible under applicable law, the interest payable 3 to Seller shall be reduced to the maximum amount permissible under applicable law; and if from any circumstance shall Seller ever receive anything of value deemed interest by applicable law in excess of the maximum amount permissible under applicable law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid balance of principal hereof, such excess shall be refunded to Cobalt. All interest paid or agreed to be paid to Seller shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under applicable law. Seller expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under applicable law. UNDER OREGON LAW (ORS 41.580), AFTER OCTOBER 8, 1989, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY A LENDING PARTY CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES, OR SECURED SOLELY BY THE BORROWER'S RESIDENCE, MUST BE IN WRITING, SET FORTH THE CONSIDERATION GIVEN AND BE SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE LENDING PARTY TO BE ENFORCEABLE. THE COBALT GROUP, INC. --------------------------------- By: Its: 4 Schedule to Exhibit 10.20 Other similar Notes of the Company dated April 30, 1999: Holder Principal Amount Parts Finder Locating Systems, Inc. $3,600,000 Locators, Inc. $8,400,000 5 EX-10.21 26 EXHIBIT 10.21 Exhibit 10.21 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS. THE COBALT GROUP, INC. COMMON STOCK PURCHASE WARRANT This certifies that, for good and valuable consideration received, PARTS FINDER LOCATING SYSTEMS, INC., or registered assigns, is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time on or after the date hereof and at or prior to 11:59 pm., Pacific time, on April 30, 2004 (the "Expiration Time"), but not thereafter, to acquire from THE COBALT GROUP, INC., a Washington corporation (the "Company"), in whole or from time to time in part, up to Forty-Two Thousand (42,000) fully paid and nonassessable shares of Common Stock of the Company ("Warrant Stock") at a purchase price per share of $6.00 (the "Exercise Price"). Such number of shares, type of security and Exercise Price are subject to adjustment as provided herein, and all references to "Warrant Stock" and "Exercise Price" herein shall be deemed to include any such adjustment. 1. EXERCISE OF WARRANT The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time and from time to time at or prior to the Expiration Time by the surrender of this Warrant and the Notice of Exercise form attached hereto, duly executed, to the principal executive office of the Company at 2030 First Avenue, Suite 300, Seattle WA 98121 (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the Exercise Price for the shares thereby purchased (by cash or by check or bank draft payable to the order of the Company); whereupon the holder of this Warrant shall be entitled to receive from the Company a stock certificate in proper form representing the number of shares of Warrant Stock so purchased. 1- 2. CONVERSION OF WARRANT The registered holder hereof shall have the right to convert this Warrant, in whole or in part, at any time and from time to time at or prior to the Expiration Time, by the surrender of this Warrant and the Notice of Conversion form attached hereto duly executed to the office of the Company at the address set forth in Section 1 hereof (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), into shares of Warrant Stock as provided in this Section 2. Upon exercise of this conversion right, the holder hereof shall be entitled to receive that number of shares of Warrant Stock of the Company equal to the quotient obtained by dividing [(A - B)(X)] by (A), where: A = the Fair Market Value (as defined below) of one share of Warrant Stock on the date of conversion of this Warrant. B = the Exercise Price for one share of Warrant Stock under this Warrant. X = the number of shares of Warrant Stock as to which this Warrant is being converted. If the above calculation results in a negative number, then no shares of Warrant Stock shall be issued or issuable upon conversion of this Warrant. "Fair Market Value" of a share of Warrant Stock shall mean: (a) if the conversion right is being exercised in connection with a transaction specified in Section 10 hereof, the value of the consideration (determined, in the case of noncash consideration, in good faith by the Board of Directors of the Company) to be received pursuant to such transaction by the holder of one share of Warrant Stock; (b) if the conversion right is being exercised after the occurrence of an initial public offering of common stock of the Company, the average of the high and low trading prices of a share of common stock as reported by the NASDAQ National Market (or equivalent recognized source of quotations) for the previous 20 trading days; or (c) in all other cases, the fair value as determined in good faith by the Company's Board of Directors. 2- Upon conversion of this Warrant in accordance with this Section 2, the registered holder hereof shall be entitled to receive a certificate for the number of shares of Warrant Stock determined in accordance with the foregoing. 3. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP Certificates for shares purchased hereunder or issuable upon conversion hereof shall be delivered to the holder hereof within a reasonable time after the date on which this Warrant shall have been exercised or converted in accordance with the terms hereof. The Company hereby represents and warrants that all shares of Warrant Stock which may be issued upon the exercise or conversion of this Warrant will, upon such exercise or conversion, be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issuance thereof (other than liens or charges created by or imposed upon the holder of the Warrant Stock). The Company agrees that the shares so issued shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised or converted in accordance with the terms hereof. No fractional shares or scrip representing fractional shares shall be issued upon the exercise or conversion of this Warrant. With respect to any fraction of a share called for upon the exercise or conversion of this Warrant, an amount equal to such fraction multiplied by the then current price at which each share may be purchased hereunder shall be paid in cash or check to the holder of this Warrant. 4. CHARGES, TAXES AND EXPENSES Issuance of certificates for shares of Warrant Stock upon the exercise or conversion of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; PROVIDED, however, that in the event certificates for shares of Warrant Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise or conversion shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof. 5. NO RIGHTS AS SHAREHOLDERS This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise or conversion hereof. 3- 6. SHAREHOLDERS AGREEMENT Upon exercise or conversion hereof, the holder of this Warrant agrees to become a party to the Shareholders Agreement of the Company that is in force and effect on the date of such exercise or conversion. 7. EXCHANGE AND REGISTRY OF WARRANT This Warrant is exchangeable, upon the surrender hereof by the registered holder at the above-mentioned office or agency of the Company, for a new Warrant of like tenor and dated as of such exchange. The Company shall maintain at the above-mentioned office or agency a registry showing the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer, exercise or conversion, in accordance with its terms, at such office or agency of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 8. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 9. SATURDAYS, SUNDAYS AND HOLIDAYS If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 10. MERGER, SALE OF ASSETS, ETC. If at any time the Company proposes to or sell or convey all or substantially all of its assets to any other entity, or consolidate with or into any other corporation or entity, or effect any reorganization or recapitalization, or, in a transaction in which the shareholders of the Company immediately before the transaction will own immediately after the transaction less than a majority of the outstanding voting securities of the corporation or entity (or its parent) succeeding to the business of the Company, then the Company shall give the holder of this Warrant 10 days' prior written notice of the proposed effective date of such transaction. 4- 11. RECLASSIFICATION, CONVERSION, ETC. If the Company at any time shall, by reclassification of securities or otherwise, change the Warrant Stock into the same or a different number of securities of any class or classes, this Warrant shall thereafter entitle the holder to acquire such number and kind of securities as would have been issuable in respect of the Warrant Stock (or other securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change) as the result of such change if this Warrant had been exercised in full for cash immediately prior to such change. The Exercise Price hereunder shall be adjusted if and to the extent necessary to reflect such change. If the Warrant Stock or other securities issuable upon exercise or conversion hereof are subdivided or combined into a greater or smaller number of shares of such security, the number of shares issuable hereunder shall be proportionately increased or decreased, as the case may be, and the Exercise Price shall be proportionately reduced or increased, as the case may be, in both cases according to the ratio which the total number of shares of such security to be outstanding immediately after such event bears to the total number of shares of such security outstanding immediately prior to such event. The Company shall give the holder prompt written notice of any change in the type of securities issuable hereunder, any adjustment of the Exercise Price for the securities issuable hereunder, and any increase or decrease in the number of shares issuable hereunder. 12. TRANSFERABILITY In the event this Warrant, or any rights hereunder, are transferred by the holder hereof, holder shall give written notice of the transfer and the identity of the transferee(s) to the Company at or prior to such transfer. 13. REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants to the holder hereof that: (a) during the period this Warrant is outstanding, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise or conversion of this Warrant; (b) the issuance of this Warrant shall constitute full authority to the Company's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the shares of Warrant Stock issuable upon exercise or conversion of this Warrant; 5- (c) the Company has all requisite legal and corporate power to execute and deliver this Warrant, to sell and issue the Warrant Stock hereunder and to carry out and perform its obligations under the terms of this Warrant; (d) all corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Warrant by the Company, the authorization, sale, issuance and delivery of the Warrant Stock and the performance of the Company's obligations hereunder has been taken; and (e) the Warrant Stock, when issued in compliance with the provisions of this Warrant and the Articles, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances, and will be issued in compliance with all applicable federal and state securities laws. 14. COOPERATION The Company will not, by amendment of its Articles or through any reorganization. recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of the Warrant against impairment. 15. GOVERNING LAW This Warrant shall be governed by and construed in accordance with the laws of the State of Oregon. 6- IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officers. Dated: April ___, 1999 THE COBALT GROUP, INC. By ------------------------------------- Title ----------------------------- ACCEPTED: April ____, 1999 [________________________] By ----------------------------- ----------------------------- 7- NOTICE OF EXERCISE To: The Cobalt Group, Inc. (1) The undersigned hereby elects to purchase ___________ shares of Common Stock of The Cobalt Group, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: -------------------------- (Name) ------------------------- (Address) (3) The undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. - --------------------------------- ---------------------------------- (Date) (Signature) 8- NOTICE OF CONVERSION To: The Cobalt Group, Inc. (1) The undersigned hereby elects to convert the attached Warrant into such number of shares of Common Stock of The Cobalt Group, Inc. as is determined pursuant to such Warrant, which conversion shall be effected pursuant to the terms of the attached Warrant. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: -------------------------- (Name) ------------------------- (Address) (3) The undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. - --------------------------------- ---------------------------------- (Date) (Signature) 9- ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to - ------------------------------------------------------------------------------- (Please Print) whose address is ______________________________________________________________ (Please Print) Dated: __________________________________________ Holder's Signature:______________________________ Holder's Address:________________________________ _________________________________________________ Guaranteed Signature:__________________________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 10- Schedule to Exhibit 10.21 Other similar Warrants of the Company dated April 30, 1999: Holder Shares of Common Stock Compu-Time, Inc. 35,000 Locators, Inc. 83,000 11- EX-21.1 27 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES of the Registrant, PartsVoice, LLL EX-23.2 28 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated March 29, 1999, except as to Note 14, which is as of May 27, 1999, relating to the financial statements and financial statement schedule of The Cobalt Group, Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Seattle, Washington May 27, 1999 EX-23.3 29 EXHIBIT 23.3 Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated May 12, 1999, relating to the financial statements of PartsVoice, which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Seattle, Washington May 27, 1999 EX-27.1 30 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMARY FINANCIAL INFORMATION EXTRACTED FROM THE COBALT GROUP, INC. DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,756 983 1,250 (85) 0 8,119 1,453 (410) 10,062 2,585 0 31,162 0 13 (144) 10,062 0 6,245 0 1,199 9,636 185 93 (8,117) 0 (8,117) 0 0 0 (8,117) (2.95) (2.95) Notes receivable from shareholders Operating expenses
EX-16.B-1 31 EXHIBIT 16.B.1 Exhibit 16.b.1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of The Cobalt Group, Inc: Our audits of the financial statements referred to in our report dated March 29, 1999, except as to Note 14, which is as of May 27, 1999, appearing in this Registration Statement on Form S-1 also included an audit of the financial statement schedule listed in Item 16(b) of this Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. /s/ PricewaterhouseCoopers LLP Seattle, Washington March 29, 1999 EX-16.B-2 32 EXHIBIT 16.B.2 Exhibit 16.b.2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BALANCE AT ADDITIONS BEGINNING CHARGED TO BALANCE AT OF YEAR EXPENSE DEDUCTIONS* END OF YEAR ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE 1998 40,000 185,000 140,000 85,000 1997 - 54,000 14,000 40,000 1996 - VALUATION ALLOWANCE ON DEFERRED TAX ASSETS 1998 812,000 1,067,000 - 1,879,000 1997 - 812,000 - 812,000 1996 - - - -
*Deductions represent amounts written off against the allowance, net of recoveries. -----END PRIVACY-ENHANCED MESSAGE-----