<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO. 333-57437
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CITYSEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7375 95-4546874
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
CITYSEARCH, INC.
790 E. COLORADO BOULEVARD, SUITE 200
PASADENA, CA 91101
(626) 405-0050
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHARLES CONN
CHIEF EXECUTIVE OFFICER
CITYSEARCH, INC.
790 E. COLORADO BOULEVARD, SUITE 200
PASADENA, CA 91101
(626) 405-0050
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
LARRY W. SONSINI CRAIG E. SHERMAN
JOHN T. SHERIDAN GLEN R. VAN LIGTEN
NAN H. KIM ADAM J. ROSENBERG
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CA 94304 MENLO PARK, CA 94025
(650) 493-9300 (650) 854-4488
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================
PROPOSED MAXIMUM
TITLE OF EACH PROPOSED MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 4,600,000 $13.00 $59,800,000 $17,641(3)
=====================================================================================
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) promulgated under the Securities
Act of 1933, as amended.
(3) $17,641 previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JULY 17, 1998
4,000,000 SHARES
[LOGO OF CITYSEARCH.COM]
COMMON STOCK
All of the shares of Common Stock offered hereby are being offered by
CitySearch, Inc. ("CitySearch" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $11.00 and
$13.00 per share. See "Underwriting" for a discussion of factors to be
considered in determining the initial public offering price. USA Networks,
Inc., an existing stockholder of the Company that owned 12.9% of the Company's
Common Stock on an as-converted basis as of June 30, 1998, has committed to
purchase 1,332,093 shares in this offering, subject to certain limitations. See
"Certain Transactions" and "Principal Stockholders." Application has been made
to have the Common Stock approved for listing on the Nasdaq National Market
under the symbol "CTYS."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total(3)...................................... $ $ $
================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company estimated at
$800,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 600,000 shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $ , the Underwriting Discount will total $
and the Proceeds to Company will total $ . See "Underwriting." USA
Networks has committed to purchase 89,400 shares if the over-allotment
option is exercised in full, subject to certain limitations.
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them, and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing the shares will be made against payment therefor at the office of
NationsBanc Montgomery Securities LLC on or about , 1998.
-----------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Donaldson, Lufkin & Jenrette
, 1998
<PAGE>
[ARTWORK]
The inside cover will contain four images consisting of screen shots from the
Company's city guide web sites. An image of the Company's home page
(www.citysearch.com) primarily containing a map of the U.S. will appear in the
upper left corner. An arrow will point from the area of the map indicating the
location of Toronto, Ontario to an image in the upper right area of the page
containing a screen shot from the home page of the Toronto city guide web site
(www.starcitysearch.com). Another arrow will lead from the area of the U.S.
map indicating the location of Raleigh/Durham/Chapel Hill to an image in the
lower right area of the page containing a screen shot from the home page of
the Raleigh/Durham/Chapel Hill city guide web site (www.citysearch11.com). A
third arrow will lead from the area of the U.S. map indicating the location of
San Francisco to an image in the lower left area of the page containing a
screen shot from the home page of the San Francisco city guide web site
(www.citysearch7.com).
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF THE
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The CitySearch logo is a registered United States trademark of the Company.
"CitySearch" is a registered United States trademark of a third party, and the
Company is the exclusive third party licensee of this trademark in its field
of use. See "Risk Factors--Uncertain Protection of Intellectual Property;
Risks of Third Party Licenses." This Prospectus also contains trademarks and
tradenames of other companies.
2
<PAGE>
The page will be divided by a vertical line roughly two-thirds of the distance
across the page. The left area of the page will contain four screen shots from
the Company's web site. The first screen shot depicts a home page from one of
the Company's city guides. The second screen shot depicts an "arts and
entertainment" topic page indicating a search for "jazz" events in the search
box. The third screen shot depicts an event description created by the Company
describing a jazz event. The fourth screen shot depicts the Web site of a
business customer that hosts jazz events. The right column of the page will
describe the content available on each of the four pages, e.g., "The home page
indicates the content areas within the site, and contains the branding of
CitySearch and its local market media partners."
<PAGE>
The page will contain three boxes. The first box will contain the names and/or
logos of the Company's licensees, including washingtonpost.com, Los Angeles
Times, the Toronto Star, The Melbourne Age, Big Colour Pages, The Sydney
Morning Herald, The Dallas Morning News, Schibsted ASA, Scandinavia Online and
The Baltimore Sun. The second box will contain names and/or logos of the
Company's marketing partners, including American Express, Earthlink, Internet
Travel Network, Guess?, WebTV Networks, Inc. etc. The third box will contain
names and/or logos of the Company's local market media partners organized by
the city in which the service is available, including KGO-TV, WTVD, other
television stations and radio stations owned by CBS, Citadel Communications
Corp., Clear Channel, and others who consent to use of their trademarks.
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. The discussion in this Prospectus includes forward-looking
statements. The outcome of the events described in such forward-looking
statements is subject to risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Factors that may cause or contribute to such differences include those
discussed in sections entitled "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus. Except as otherwise
specified, all information in this Prospectus reflects (i) a two-for-three
reverse stock split of the Company's outstanding Common Stock which will occur
prior to the completion of the offering (the "Reverse Stock Split"), (ii) the
conversion of each outstanding share of Preferred Stock into Common Stock upon
completion of this offering and (iii) no exercise of the Underwriters' over-
allotment option.
THE COMPANY
CitySearch produces and delivers comprehensive local city guides on the World
Wide Web (the "Web"), providing up-to-date information regarding arts and
entertainment events, community activities, recreation, businesses, shopping,
professional services and news/sports/weather to consumers in metropolitan
areas. Each local city guide consists primarily of original content developed
and designed specifically for the Web by the Company and its partners. The
Company designs and produces custom-built Web sites and related services for
local and regional businesses, aggregates them in a local city guide
environment and provides these businesses the ability to regularly update and
expand their sites. The CitySearch sites offer local and regional businesses
the opportunity to reach and interact with targeted consumers. The Company
builds its city sites with the involvement of local government, community and
volunteer associations, business and professional groups, educational
institutions and local media companies. In addition, content generated by
consumers through e-mail and bulletin boards, available in most sites, enhances
the sense of community in CitySearch sites.
CitySearch and its partners create comprehensive locally focused content that
can be accessed using targeted, sophisticated searches across all content
residing on a CitySearch site. In contrast, many search engines and
navigational guides access pre-existing content from third-party Web sites that
may be incomplete or out of date. In its owned and operated markets, CitySearch
offers a broad array of updated, local content that is relevant to consumers.
In certain other markets, CitySearch provides local media companies with the
necessary technology and business expertise to design, launch and operate a co-
branded CitySearch site. The Company's city guides have received numerous
awards and recognition for design, functionality and content, including PC
Magazine's Editor's Choice, USA Today/Intelliquest's survey leader and
recognition by the New York Times as best overall online guide to New York
City.
CitySearch launched its initial site in the Raleigh-Durham-Chapel Hill
metropolitan area in May 1996. The Company and its partners have since launched
additional local city guides in Austin, Dallas, Los Angeles, Nashville, New
York City, Portland, Salt Lake City/Utah, the San Francisco Bay Area and
Washington, D.C. in the U.S., and in Melbourne, Sydney and Toronto
internationally. The Company plans to expand its service to additional national
and international markets both by leveraging the standardized roll-out model it
has developed through previous city launches and by partnering with major media
companies in certain cities. The Company has, for instance, partnered with The
Baltimore Sun, The Dallas Morning News, the Los Angeles Times, The San Diego
Union-Tribune, The Washington Post, The Melbourne Age, Schibsted
ASA/Scandinavia Online (Copenhagen, Oslo and Stockholm), The Sydney Morning
Herald and the Toronto Star. These major media partners bring capital, brand
recognition, promotional strength and local knowledge to their CitySearch sites
and allow the Company to build out its national and international network of
sites faster than it could solely through owned and operated sites. The Company
has also reached an agreement with Classified Ventures, L.L.C. ("Classified
Ventures"), a leading provider of online classified advertising products and
services to the newspaper industry that was formed by seven leading newspaper
companies. The Company will license elements of its technology and business
systems and provide services to Classified Ventures. The Company has also
reached an agreement with American Express Travel Related Services Company,
Inc. ("American Express") that provides for marketing of the Company's services
to American Express merchant customers and various other electronic commerce
and marketing initiatives. The Company's equity investors include USA Networks,
Inc. ("USA Networks") entities affiliated with The Goldman Sachs Group, L.P.,
Washingtonpost.Newsweek Interactive Company, The Times Mirror Company, CPQ
Holdings, Inc. (entity affiliated with Compaq Computer Corporation), Global
Retail Partners, L.P. and its affiliates, American Express, Intel Corporation,
AT&T Ventures, T. Rowe Price Threshold Fund III, L.P. and Schibsted ASA.
The Company was organized under the laws of Delaware in September 1995. The
Company's principal executive offices are located at 790 E. Colorado Boulevard,
Suite 200, Pasadena, California 91101, and its telephone number at that address
is (626) 405-0050.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... 4,000,000 shares
Common Stock to be outstanding
after this offering............... 20,788,507 shares(1)
Use of proceeds.................... The Company intends to use the net proceeds
of this offering for general corporate
purposes, including working capital and
capital expenditures relating to the
CitySearch site such as enhancements to the
Company's server and networking
infrastructure. See "Use of Proceeds."
Proposed Nasdaq symbol............. CTYS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
SEPTEMBER 20, YEAR ENDED ENDED
1995 (DATE OF DECEMBER 31, JUNE 30,
FORMATION) TO ------------------ ------------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Subscription and
services............. $ -- $ 203 $ 4,913 $ 1,508 $ 5,577
Licensing and royalty. -- -- 1,271 -- 1,221
------- -------- -------- -------- --------
Total revenues...... -- 203 6,184 1,508 6,798
Loss from operations... (313) (14,112) (36,741) (18,122) (16,742)
Net loss............... (308) (13,897) (36,526) (18,018) (16,482)
Historical basic and
diluted net loss per
share(2).............. $ (0.06) $ (2.37) $ (5.80) $ (2.87) $ (2.50)
Pro forma basic and
diluted net loss per
share(2).............. $ (0.05) $ (1.65) $ (2.94) $ (1.56) $ (1.02)
Shares used to compute
historical basic and
diluted net loss per
share(2).............. 5,263 5,857 6,301 6,282 6,582
Shares used to compute
pro forma basic and
diluted net loss per
share(2).............. 5,640 8,431 12,430 11,515 16,139
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED (3)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $15,512 $59,352
Working capital....................................... 10,731 54,571
Total assets.......................................... 22,490 66,330
Long-term obligations, less current portion........... 2,319 2,319
Redeemable Convertible Preferred Stock................ 77,840 --
Stockholders' equity (deficit)........................ (63,741) 57,939
</TABLE>
- --------
(1) Based on shares outstanding as of June 30, 1998. Does not include (i)
2,608,514 shares of Common Stock issuable upon exercise of options
outstanding at June 30, 1998 at a weighted average price of $5.20 per share
under the Company's 1996 Stock Option Plan, (ii) 624,234 shares of Common
Stock available for future grant or issuance under the Company's 1996 Stock
Option Plan, 1998 Director Option Plan and 1998 Employee Stock Purchase
Plan and (iii) 62,077 shares of Common Stock issuable upon exercise of an
outstanding warrant at an exercise price of $13.29 per share held by
NationsBanc Montgomery Securities LLC. See "Capitalization," "Management--
Employee Benefit Plans," "Underwriting" and Note 7 of Notes to Consolidated
Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute historical and
pro forma basic and diluted net loss per share.
(3) Adjusted to reflect (i) the sale and issuance of the 4,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share and after deducting the underwriting discount and
estimated offering expenses and (ii) the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the closing of this
offering. See "Capitalization."
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock of the Company. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all forward-looking statements wherever
they appear in this Prospectus. The Company's actual results could differ
materially from the results discussed in this Prospectus. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY
The Company was incorporated in September 1995 and launched its initial
local city guide service in the Raleigh-Durham-Chapel Hill metropolitan area
in May 1996. Accordingly, the Company has an extremely limited operating
history upon which an evaluation of the Company and its prospects can be
based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as the Company's. Such risks include, but are not limited to, an
evolving and unpredictable business model, management of growth, the Company's
ability to anticipate and adapt to a developing market, acceptance by Internet
users and business customers of the Company's local city guide concept and the
ability of the Company to enter into relationships with additional media
partners. To address these risks, the Company must, among other things,
attract and retain an audience of frequent users of its service in its target
markets, maintain its customer base and attract a significant number of new
business customers in its target markets, respond to competitive developments,
continue to form and maintain relationships with media partners, continue to
attract, retain and motivate qualified persons, provide superior customer
service, and continue to develop and upgrade its technologies and
commercialize its services incorporating such technologies. There can be no
assurance that the Company will be successful in addressing such risks, and a
failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ANTICIPATED CONTINUED OPERATING LOSSES
The Company incurred net losses of $308,000, $13.9 million and $36.5 million
for the period from September 20, 1995 (date of formation) to December 31,
1995, and the years ended December 31, 1996 and 1997, respectively, and $16.5
million for the six months ended June 30, 1998. At June 30, 1998, the Company
had an accumulated deficit of $67.2 million. The Company believes that its
future profitability and success will depend in large part on, among other
things, its ability to generate sufficient revenues from sales of business Web
sites to businesses and the licensing of its technology and business systems
to partners setting up CitySearch services in partner-led markets, its ability
to effectively maintain existing relationships with its media partners and its
ability to successfully enter into new strategic relationships for
distribution and increased usage of its offerings. Accordingly, the Company
intends to expend significant financial and management resources on the roll-
out of its service in new owned and operated and partner-led markets, site and
content development, strategic relationships, technology and operating
infrastructure. As a result, the Company expects to incur significant
additional losses and continued negative cash flow from operations for the
foreseeable future. There can be no assurance that the Company's revenues will
increase or even continue at their current levels or that the Company will
achieve or maintain profitability or generate cash from operations in future
periods. In view of the rapidly evolving nature of the Company's business and
its limited operating history, the Company believes that period-to-period
comparisons of its operating results are not meaningful and should not be
relied upon as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
5
<PAGE>
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company requires substantial working capital to fund its business and
expects to use a significant portion of the net proceeds of this offering to
fund its operating losses. Since inception, the Company has experienced
negative cash flow from operations and expects to continue to experience
significant negative cash flow from operations for the foreseeable future. The
Company currently believes that its existing capital resources, combined with
the net proceeds of this offering, will be sufficient to meet its presently
anticipated cash requirements through at least the next 12 months. Thereafter,
the Company may be required to raise additional funds. No assurance can be
given that the Company will not be required to raise additional financing
prior to such time. If additional funds are raised through the issuance of
equity securities, stockholders of the Company may experience significant
dilution. Furthermore, there can be no assurance that additional financing
will be available when needed or that if available, such financing will
include terms favorable to the Company or its stockholders. If such financing
is not available when required or is not available on acceptable terms, the
Company may be unable to develop or enhance its services, take advantage of
business opportunities or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
UNPREDICTABILITY OF FUTURE REVENUES; FLUCTUATIONS IN OPERATING RESULTS
As a result of the Company's limited operating history and the emerging
nature of the local city guide market in which the Company competes, the
Company is unable to accurately forecast its revenues. The Company's current
and future expense levels are based predominantly on its operating plans and
estimates of future revenues and are to a large extent fixed. The Company's
business model, particularly in its owned and operated markets, requires
significant staffing to develop content and to create and maintain
relationships with small and medium size businesses. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues would likely
have an immediate material adverse effect on the Company's business, financial
condition and results of operations. Further, the Company currently intends to
increase its operating expenses to roll out its service in new markets, to
fund increased sales and marketing and customer service operations and to
further develop its technology infrastructure. To the extent such expenses
precede or are not subsequently followed by increased revenues, the Company's
operating results will fluctuate and net anticipated losses in a given quarter
may be greater than expected.
The Company expects to experience significant fluctuations in its future
operating results due to a variety of factors, many of which are outside of
the Company's control. Factors that may adversely affect the Company's
operating results include, but are not limited to, the ability of its partners
to meet roll-out schedules for the Company's city guide service, the timing
and amount of license and royalty payments from the Company's partners, the
Company's ability to retain existing business customers, attract new business
customers at a steady rate and maintain customer satisfaction, the timing and
volume of new business Web site orders and the Company's capacity to meet such
orders, the Company's ability to maintain or increase current rates of sales
productivity, the announcement or introduction of new or enhanced sites and
services by the Company or its competitors, the amount of traffic on the
Company's online sites, the amount of expenditures for online advertising by
businesses, the level of use of online services and consumer acceptance of the
Internet for services such as those offered by the Company, the Company's
ability to upgrade and develop its systems and attract personnel in a timely
and effective manner, the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business and
infrastructure, technical difficulties, system downtime or Internet brownouts,
political or economic events affecting the cities in which the Company
operates and general economic conditions. Unfavorable changes in any of the
above factors could adversely affect the Company's revenues, gross margins and
results of operations in future periods. Accordingly, the Company believes
that period-to-period comparisons of its results of operations should not be
relied upon as an indication of future performance. In addition, the results
of any quarterly period are not indicative of results to be expected for a
full fiscal year. Finally, as a result of the foregoing factors, the Company's
annual or quarterly results of
6
<PAGE>
operations may be below the expectations of public market analysts or
investors, in which case the market price of the Common Stock could be
materially and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NEW AND UNCERTAIN MARKET; UNPROVEN MARKET ACCEPTANCE; RISK OF SIGNIFICANT
BUSINESS CUSTOMER TURNOVER
The markets for the Company's service have only recently begun to develop,
are rapidly evolving and are characterized by a number of entrants that have
introduced or plan to introduce online city guides. As is typical in the case
of a new and rapidly evolving industry, demand and market acceptance for
recently introduced services are subject to a high level of uncertainty and
risk. Because the markets for the Company's services are new and evolving, it
is difficult to predict the size and future growth rate, if any, of these
markets. There can be no assurance that the markets for the Company's services
will develop or that demand for the Company's services will emerge or become
economically sustainable. In particular, the success of the Company's city
guide service will depend on the willingness of local businesses to pay for
custom business Web sites developed by the Company and to retain the service,
which in turn may depend on the popularity of the guides to consumers and on
the actual or perceived revenues attributable to the Company's services. If
such businesses are unwilling to pay for the Company's service or retain the
service, if the markets for the Company's service otherwise fail to develop or
develop more slowly than anticipated, or if business customer turnover rates
are higher than projected by the Company, the Company's business, financial
condition and results of operations will be materially and adversely affected.
In addition, the turnover rate of business customers using the Company's
service has been higher than the Company had anticipated and there can be no
assurance that such turnover rates would be at levels which would not in the
future materially and adversely affect the Company's business, financial
condition and results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS
An important element of the Company's current business strategy is to enter
into agreements with local media companies to establish and support city
guides. The Company has entered into, and intends to enter into, agreements
with media companies to address opportunities. In these "partner-led markets"
markets, the Company develops and designs a city guide for local media
companies and licenses certain intellectual property to such companies in
exchange for certain up-front and continuing license payments and royalty
payments. These royalty payments are based on the amount of revenues generated
by such companies through the partner-led city guides. The Company currently
anticipates that royalty payments from such agreements will constitute a
significant portion of its revenues in future periods. Accordingly, the
Company's success will depend in large part upon the ability of its partners
to timely launch city guides in the Company's partner-led markets and the
extent to which these partners are able to generate revenue through their city
guides. Under the terms of the Company's agreements with its media company
partners, the Company has very limited control over the amount of time and
financial resources that a partner devotes to the launch of a city guide or
over the day-to-day operations and management of the city guide, including the
marketing and sale of business Web sites to potential business customers. For
example, one of the Company's partners did not launch its city guide in
accordance with the Company's initial expectations, thereby delaying revenues
subject to royalty payments payable to the Company. Furthermore, some of the
Company's agreements grant exclusivity in certain territories. There can be no
assurance that the Company's partners that are in the process of developing
new city guides or the Company's future partners will launch their sites in a
timely manner, or at all, or that if launched, such sites will generate
revenues consistent with the Company's expectations or that the exclusivity
provisions in some of the Company's agreements will not prevent the Company
from licensing its intellectual property to other partners. There also can be
no assurance that the Company will successfully enter into partnerships with
media companies in additional cities. Furthermore, due to the Company's
limited experience with partner-led city guides, the Company is unable to
accurately forecast its revenues to be derived from these agreements with such
partners. In addition, certain of the Company's agreements with its media
company partners may be terminated for non-performance or material breach. Any
failure by one of the Company's proposed partner-led city guides to launch in
a timely manner or by one of the Company's existing partner-led city guides to
generate sufficient revenues, or a failure by the Company to enter into or to
renew agreements with media company partners on terms
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favorable to the Company or early termination of certain existing agreements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has recently entered into a license and services agreement with
Classified Ventures, pursuant to which CitySearch will license elements of its
technology and business systems to Classified Ventures and provide services in
automotive and real estate classified advertising categories. The Company
expects to receive significant revenues from licensing and service fees under
this agreement. Under this agreement, the Company is restricted from entering
certain classified advertising markets and from licensing its technology and
business systems to competitors of Classified Ventures. In addition, this
agreement may be terminated effective 2001 by Classified Ventures and there
can be no assurance that it will be renewed on terms favorable to the Company.
The failure of the Company to meet certain milestones under this agreement,
early termination of this agreement or the inability of the Company to compete
with Classified Ventures or to license technology to competitors of Classified
Ventures may have a material adverse effect on the Company's business,
financial condition and results of operations.
In its owned and operated markets, the Company has entered into co-promotion
or distribution agreements with a number of television, radio, print media and
online companies. Some of these agreements are of a short duration and there
can be no assurance that the Company's co-promotion or distribution partners
will not terminate their agreements with the Company or that the Company will
secure additional co-promotion or distribution partners in the future. See
"Business--Strategic Alliances."
DEPENDENCE ON SALES PERSONNEL
The Company currently derives and, for the foreseeable future, intends to
derive a substantial portion of its revenues from sales of business Web sites
to local businesses in markets in which the Company owns and operates city
guides. The Company depends on its direct sales force to sell business Web
sites in these markets. The creation of new revenue from the Company's city
guide service and its roll-out in additional cities requires the services of a
highly trained sales force working directly for the Company. Accordingly, a
shortage in the number of trained salespeople could limit the Company's
ability to sell business Web sites as it rolls out its service in new cities
or to maintain or increase its number of business customers in cities in which
the Company already operates. The Company has in the past and expects in the
future to experience a high rate of turnover in its direct sales force. There
can be no assurance that such turnover will not increase in the future or have
a material adverse effect on the Company's sales, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAIN ACCEPTANCE AND MAINTENANCE OF CITYSEARCH BRAND
The Company believes that establishing and maintaining the CitySearch brand
is critical to its efforts to attract consumers and business customers to its
sites and that the importance of brand recognition will increase due to the
growing number of Internet sites and relatively low barriers to entry to
providing Internet content. Promotion of the CitySearch brand will depend
largely on the success of the Company and its media company partners in
providing high quality Internet content. Under the terms of its agreements
with its media company partners, the Company has very limited control over the
content provided on the partners' sites. If consumers and business customers
do not perceive the content of the Company's or its partners' existing sites
to be of high quality, the Company will be unsuccessful in promoting and
maintaining its brand. Furthermore, not all of the Company's partners promote
the CitySearch brand on their services with a high level of prominence. Other
than links to the Company's city sites, the Company has not entered into a
significant distribution relationship with any major online search or
navigation company. In order to attract and retain consumers and business
customers, and to promote the CitySearch brand in response to competitive
pressures, the Company may find it necessary to increase its budget for
content or otherwise to increase substantially its financial commitment to
creating and maintaining a distinct brand loyalty among consumers and business
customers. If either the Company or its media company partners are unable to
provide high quality content or otherwise fail to promote and maintain the
CitySearch brand, or if the Company incurs excessive expenses in an attempt to
improve its content or promote and maintain its brand, the Company's business,
financial condition and results of operations will be materially and adversely
affected.
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RISKS ASSOCIATED WITH ROLL-OUT OF CITYSEARCH SERVICE
The Company's future success will depend to a significant extent on the
Company's ability, on its own and with partners, to rapidly roll out its local
city guide service in additional cities in the United States and
internationally. As of July 15, 1998, the Company had launched its local city
guide service in 13 metropolitan areas and intends to expand its service in
additional cities in the U.S. and internationally. There can be no assurance
that the Company will be able to launch its service in additional markets in a
cost-effective or timely manner or in accordance with its planned schedule, or
that any newly launched service will achieve market acceptance. Any new
service that is not favorably received by local businesses or consumers could
damage the Company's reputation or the CitySearch brand. Launching the
CitySearch service will also require significant additional expenses and will
strain the Company's management, financial and operational resources. In
particular, the launch of the CitySearch service in additional cities will
require the Company to expand and upgrade its technology infrastructure and
business systems, including its enterprise management system (i.e., an
integrated set of software tools and business processes for sales force
management, Web site production, customer service and billing) and its
business Web site production system. The Company is in the process of
launching a new version of the software underlying its CitySearch service.
There can be no assurance that this new version will function as intended, and
any failure of the Company's software could have a material adverse effect on
the Company's business, financial condition and results of operations.
Moreover, the strain placed on the Company's resources by simultaneous
launches in multiple cities may adversely affect the roll-out schedule or
quality of the service in a particular city. The Company's failure to launch
its service in new markets in a timely and cost effective manner in accordance
with its planned schedule or the lack of market acceptance of new services
would have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The markets for local interactive content and services are highly
competitive. Currently, the Company's primary competitors include Digital
City, Inc., a company wholly owned by America Online, Inc. and Tribune
Company, Microsoft Corporation (Sidewalk) and Zip2 Corporation. The Company
also competes against search engine and other site aggregation companies such
as Excite, Inc. (City.Net), Lycos, Inc. (Lycos City Guide) and Yahoo! Inc.
(Yahoo! Local) which primarily serve to aggregate links to sites providing
local content. In addition, the Company competes against offerings from media
companies, including Cox Interactive Media and Knight-Ridder, Inc., as well as
offerings from several telecommunications and cable companies and Internet
service providers that provide local interactive programming such as SBC
Communications Inc. (At Hand) and U.S. West, Inc. (Dive-In). Many of these
companies have greater financial and marketing resources than the Company and
may have significant competitive advantages through other lines of business
and existing business relationships. There are also numerous niche competitors
which focus on a specific category or geography and compete with specific
content offerings provided by CitySearch. The Company may also compete with
online services and other Web site operators, as well as traditional media
such as television, radio and print, for a share of advertisers' total
advertising budgets. Furthermore, additional major media and other companies
with financial and other resources greater than those of the Company may
introduce new Internet products and services addressing these markets in the
future. There can be no assurance that the Company's competitors will not
develop services that are superior to those of the Company or that achieve
greater market acceptance than the Company's offerings.
The Company believes that the principal competitive factors in its markets
include depth, quality and comprehensiveness of content, ease of use,
distribution, search capability and brand recognition. There can be no
assurance that the Company will be able to successfully compete against its
current or future competitors or that competition will not have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, as a strategic response to changes in the competitive
environment, the Company may make certain pricing, service or marketing
decisions or enter into acquisitions or new ventures that could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH OFFERING NEW SERVICES
The Company plans to introduce new and expanded services in order to
generate additional revenues, attract more consumers and respond to
competition. For example, the Company recently introduced business Web sites
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containing new and enhanced functionality for its business customers. The
Company also may in the future offer services facilitating the purchase of
goods by consumers from the Company's business customers. There can be no
assurance that the Company will be able to offer any new services in a cost-
effective or timely manner or that any such efforts would be successful.
Furthermore, any new service launched by the Company that is not favorably
received by consumers could damage the Company's reputation or its brand name.
Expansion of the Company's services in this manner would also require
significant additional expenses and development and may strain the Company's
management, financial and operational resources. The Company's inability to
generate revenues from such expanded services sufficient to offset their cost
could have a material adverse effect on the Company's business, financial
condition and results of operations.
MANAGEMENT GROWTH; RISKS ASSOCIATED WITH EXPANSION
The Company's business has grown rapidly in recent periods. The growth of
the Company's business and expansion of its business customer base have placed
a significant strain on the Company's management and operations. The Company's
expansion has resulted, and is expected in the future to result, in growth in
the number of its employees, in the establishment of offices in disparate
regions of the country and in increased responsibility for both existing and
new management personnel. In addition, this growth has and will put additional
pressure on the Company's existing operational, financial and management
information systems. The Company's success depends to a significant extent on
the ability of its executive officers and other members of senior management,
none of whom has any prior executive management experience in public
companies, to operate effectively, both independently and as a group. To
manage its growth, the Company must continue to implement and improve its
operational, financial and management information systems and hire and train
additional qualified personnel, including sales and marketing staff. There can
be no assurance that the Company will be able to manage its recent or any
future expansions successfully, and any failure of the Company to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations. There also can be no assurance that the Company
will be able to sustain the rate of expansion that it has experienced in the
past. See "Management--Executive Officers and Directors."
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Charles Conn, the
Company's co-founder and Chief Executive Officer, and Thomas Layton, the
Company's President and Chief Operating Officer. The loss of the services of
Mr. Conn or Mr. Layton or other members of the Company's management team could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's success will also depend upon the
continued service of the other members of its senior management team and its
technical, marketing and sales personnel. The Company's employees, including
its senior officers, may voluntarily terminate their employment with the
Company at any time, and competition for qualified employees is intense. The
Company's success also depends upon its ability to attract and retain
additional highly qualified management, technical and sales and marketing
personnel. The process of locating and hiring such personnel with the
combination of skills and attributes required to carry out the Company's
strategy is often lengthy. The loss of the services of key personnel or the
inability to attract additional qualified personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON CONTINUED CONTENT DEVELOPMENT
The Company's success depends in part upon its ability to deliver compelling
interactive content such as recreation, business, shopping, professional
services and news/sports/weather in order to attract consumers with
demographic characteristics valuable to the Company's business customers. The
markets for the Company's services are characterized by rapidly changing
technology, emerging industry standards and consumer requirements that are
subject to rapid change and frequent new service introductions. These
characteristics are exacerbated by the emerging nature of the local
interactive content and service market and the expectation that many companies
may introduce new Internet products and services addressing this market in the
near future.
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There can be no assurance that the Company will be successful in developing
new content and services or enhancing its existing local city guide service on
a timely basis, or that such content and services will effectively address
consumer requirements and achieve market acceptance. If the Company, for
technological or other reasons, is unable to develop and enhance its local
interactive content and service in a manner compatible with emerging industry
standards and that allows it to attract, retain and expand a consumer base
possessing demographic characteristics attractive to business customers, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET AND THE WEB
The usage of the Web for services such as those offered by the Company will
depend in significant part on continued rapid growth in the number of
households and commercial, educational and government institutions with access
to the Web, in the level of usage by individuals and in the number and quality
of products and services designed for use on the Web. Because usage of the Web
as a source for information, products and services is a relatively recent
phenomenon, it is difficult to predict whether the number of users drawn to
the Web will continue to increase and whether any significant market for usage
of the Web for such purposes will continue to develop and expand. There can be
no assurance that Internet usage patterns will not decline as the novelty of
the medium recedes or that the quality of products and services offered online
will improve sufficiently to continue to support user interest. Failure of the
Web to stimulate user interest and be accessible to a broad audience at
moderate costs would jeopardize the markets for the Company's local city guide
service.
Moreover, issues regarding the stability of the Internet's infrastructure
remain unresolved. The rapid rise in the number of Internet users and
increased transmission of audio, video, graphical and other multimedia content
over the Web has placed increasing strains on the Internet's communications
and transmission infrastructures. Continuation of such trends could lead to
significant deterioration in transmission speeds and reliability of the Web
and could reduce the usage of the Web by businesses and individuals. In
addition, to the extent that the Web continues to experience significant
growth in the number of users and level of use without corresponding increases
and improvements in the Internet infrastructure, there can be no assurance
that the Internet will be able to support the demands placed upon it by such
continued growth. Any failure of the Internet to support such increasing
number of users due to inadequate infrastructure or otherwise would seriously
limit the development of the Web as a viable source of local interactive
content and services, which could materially and adversely affect the
acceptance of the Company's services, which would, in turn, materially and
adversely affect the Company's business, financial condition and results of
operations.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based upon the general economic conditions of the United States
and other countries in which its local city guide service is offered. If there
were to be a general economic downturn or a recession in the United States or
any other country in which the Company's service is provided, the Company
expects that business enterprises, including its customers and potential
customers, will substantially and immediately reduce their advertising and
marketing budgets. In the event of such an economic downturn, the Company's
business, financial condition and results of operations could be materially
and adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is to continue to expand its local
city guide service into international markets. The Company anticipates that it
will expend significant financial and management resources to operate overseas
and create localized user interfaces through the launch of additional partner-
led markets. If the revenues generated by these international operations are
insufficient to offset the expense of establishing and maintaining such
operations, the Company's business, financial condition and results of
operations will be materially and adversely affected. To date, the Company has
limited experience in developing localized versions of its online sites and
marketing and distributing its products and services internationally.
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There can be no assurance that the Company or its partners will be able to
successfully market or sell its services in these international markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in conducting
business on an international level, such as unexpected changes in regulatory
requirements, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, currency rate fluctuations
and potentially adverse tax consequences. There can be no assurance that one
or more of the foregoing factors will not have a material adverse effect on
the Company's current and future international operations and, consequently,
on its business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS
The satisfactory performance, reliability and availability of the Company's
city guides and its network infrastructure are critical to attracting Web
users and maintaining relationships with business customers and consumers.
System interruptions that result in the unavailability of the Company's sites
or slower response times for consumers would reduce the number of business Web
sites and advertisements purchased and reduce the attractiveness of the
Company's local city guides to business customers and consumers. The Company
has experienced system interruptions in the past and believes that such
interruptions will continue to occur from time to time in the future.
Additionally, any substantial increase in traffic on the Company's local city
services will require the Company to expand and adapt its network
infrastructure. The Company's inability to add additional software and
hardware to accommodate increased traffic on its local city guides may cause
unanticipated system disruptions and result in slower response times. In
addition, the Company currently depends on a limited number of suppliers for
certain key technologies used to roll out and manage the CitySearch service.
There can be no assurance that the Company will be able to expand its network
infrastructure on a timely basis to meet increased demand or that key
technology suppliers will continue to provide the Company with products and
services that meet the Company's requirements. Any increase in system
interruptions or slower response times resulting from the foregoing factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's operations are vulnerable to interruption by fire, earthquake,
power loss, telecommunications failure and other events beyond the Company's
control. Substantially all of the Company's server equipment is currently
located in California in areas that are susceptible to earthquakes. The
Company's business interruption insurance may not be sufficient to compensate
the Company for losses that may occur, and any losses or damages incurred by
the Company could have a material adverse effect on its business, financial
condition and results of operations. See "Business--Technology" and "--
Facilities."
LIABILITY FOR ONLINE CONTENT
The Company may face potential liability for defamation, negligence,
copyright, patent or trademark infringement and other claims based on the
nature and content of the materials that appear on the Company's or its
partners' online sites. Such claims have been brought, and sometimes
successfully pressed, against online services. Although the Company carries
general liability insurance, the Company's insurance may not cover claims of
these types or may not be adequate to indemnify the Company for any liability
that may be imposed. Any imposition of liability, particularly liability that
is not covered by insurance or is in excess of insurance coverage, could have
a material adverse effect on the Company's reputation and its business,
financial condition and results of operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF THIRD PARTY LICENSES
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success,
and relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with the Company's employees,
customers, partners and others to protect its proprietary rights. The Company
pursues the registration of certain of its key trademarks and service
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marks in the United States and internationally. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which the Company's products and services are made available
online. The Company has licensed in the past, and expects that it may license
in the future, certain of its proprietary rights, such as trademarks or
copyrighted material, to third parties. In addition, the Company has licensed
in the past, and expects that it may license in the future, certain content,
including trademarks and copyrighted material, from third parties. While the
Company attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of the Company's proprietary
rights or reputation, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against the Company. The Company licenses
the trademark "CitySearch" from a third party, and there can be no assurance
that the Company will be able to continue to license the trademark on terms
acceptable to the Company. The Company may be subject to legal proceedings and
claims from time to time in the ordinary course of its business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by the Company and its licensees. Such
claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources which could result in a
material adverse effect on the Company's business, financial condition and
results of operations.
RISK ASSOCIATED WITH REGULATORY MATTERS
The Company is subject to regulations applicable to businesses generally and
laws or regulations directly applicable to access to online commerce. Although
there are currently few laws and regulations directly applicable to the
Internet and commercial online services, it is possible that a number of laws
and regulations may be adopted with respect to the Internet or commercial
online services covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of
products and services. Furthermore, the growth and development of the market
for online commerce may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or commercial online services, which could, in turn,
decrease the demand for the Company's products and services and increase the
Company's cost of doing business, or otherwise have a material adverse effect
on the Company's business, financial condition and results of operations.
Moreover, the applicability to the Internet and commercial online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. For example, tax authorities in a number of states
are currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject the Company to
additional state sales and income taxes. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and commercial online services
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
As part of its business strategy, the Company may make acquisitions of, or
significant investments in, complementary companies, products or technologies,
although the Company has no present understandings, commitments or agreements
with respect to any acquisition or investment. Any such future acquisitions
would be accompanied by the risks commonly encountered in acquisitions of
companies. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the acquired companies, the
potential disruption of the Company's ongoing business, the diversion of
resources from the Company's existing businesses, sites and technologies, the
inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of the acquired technology
into the Company's products
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and services, additional expense associated with amortization of acquired
intangible assets, the maintenance of uniform standards, controls, procedures
and policies and the impairment of relationships with employees and customers
as a result of any integration of new management personnel. There can be no
assurance that the Company would be successful in overcoming these risks or
any other problems encountered with such acquisitions, and the Company's
inability to overcome such risks could have a material adverse effect on its
business, financial condition and results of operations.
SECURITY RISKS
Although the Company has not in the past experienced attempts by programmers
or "hackers" to penetrate the Company's network security, there can be no
assurance that such actions will not occur in the future. If successful, such
actions could have a material adverse effect on the Company's business,
financial condition and results of operations. A party who is able to
penetrate the Company's network security could misappropriate proprietary
information or cause interruptions in the Company's Web site. The Company may
be required to expend significant capital and resources to protect against the
threat of such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet generally, particularly
as a means of conducting commercial transactions. Security breaches or the
inadvertent transmission of computer viruses could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that contractual provisions attempting to limit the Company's liability in
such areas will be successful or enforceable, or that other parties will
accept such contractual provisions as part of the Company's agreements, any of
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH DOMAIN NAMES
The Company currently holds various Web domain names relating to its brand,
including the "citysearch.com" domain name. The acquisition and maintenance of
domain names generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the exclusive registrar for the
".com," ".net" and ".org" generic top-level domains. The regulation of domain
names in the United States and in foreign countries is subject to change.
Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding
domain names. As a result, there can be no assurance that the Company will be
able to acquire or maintain relevant domain names in all countries in which it
conducts business. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. The Company, therefore, may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of its trademarks and other proprietary rights. Any such
inability could have a material adverse effect on the Company's business,
financial condition and results of operations.
YEAR 2000 RISK
Many older computer systems and software products currently in use are coded
to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, in less than two years, computer
systems and/or software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements. Significant uncertainty exists in
the software industry concerning the potential effects associated with such
compliance. Although the Company licenses to its partners software products
that are designed to be Year 2000 compliant, there can be no assurance that
the Company's software products contain all necessary date changes. In
addition, although the Company licenses software from third parties that it
believes are Year 2000 compliant, there can be no assurance that such software
will be compliant. Any Year 2000 compliance problems could result in a
material adverse affect on the Company's business, financial condition and
results of operations.
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CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT STOCKHOLDERS
As of June 30, 1998, the directors, executive officers and stockholders
owning 5% of the Company's Common Stock and their respective affiliates in the
aggregate beneficially own approximately 61.8% of the outstanding Common Stock
(on an as-converted basis and including shares issuable upon exercise of stock
options to purchase shares of Common Stock which are exercisable within 60
days of June 30, 1998). In addition, USA Networks, Inc., formerly HSN, Inc.
("USA Networks"), which beneficially owns approximately 12.9% of the
outstanding Common Stock as of June 30, 1998 (on an as-converted basis), has
committed to purchase 1,332,093 shares in this offering (plus an additional
89,400 shares if the Underwriters' over-allotment option is exercised in
full), subject to certain limitations. Furthermore, USA Networks has the right
to elect a member of the Board of Directors until November 12, 2007, subject
to certain limitations. Pursuant to a voting agreement, certain holders of the
Company's Preferred Stock and Common Stock are required to vote all of the
Company's voting securities owned by them to elect to the Board of Directors a
designee of the holders of a majority of the shares of Series C Preferred
Stock outstanding immediately prior to the closing of this offering. As of
June 30, 1998, entities affiliated with Goldman, Sachs & Co. own approximately
79.6% of the outstanding Series C Preferred Stock. As a result, these
directors, executive officers and stockholders owning 5% of the Company's
Common Stock and their respective affiliates will possess significant
influence over the Company, giving them the ability, among other things, to
elect a majority of the Company's Board of Directors and approve significant
corporate transactions. Such share ownership and control may also have the
effect of delaying or preventing a change in control of the Company, impeding
a merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company which could have a
material adverse effect on the market price of the Company's Common Stock. See
"Management--Board Composition" and "Certain Transactions."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price for the Common
Stock to be sold by the Company has been established by negotiations among the
Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after
completion of the offering. See "Underwriting" for factors to be considered in
determining such offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to quarter-to-quarter
variations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, and other
events or factors. For example, a shortfall in revenues or net income, or an
increase in losses from levels expected by securities analysts, could have an
immediate and significant adverse effect on the market price of the Company's
Common Stock. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that have often dramatically affected
the market prices of many high technology companies, particularly those
companies doing business on the Internet. These fluctuations have often been
unrelated or disproportionate to the operating performance of the companies.
Such fluctuations, as well as general economic and market conditions, may
adversely affect the market price for the Common Stock.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER AND CONTRACTUAL PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws, which will become effective upon the closing of this offering, may
have the effect of delaying, deferring or preventing a change of control of
the Company. These provisions will provide, among other things, that the Board
of Directors is divided into three classes to serve staggered three-year
terms, that stockholders may not take actions by written consent, that certain
provisions of the Company's Restated Certificate of Incorporation and Bylaws
may be amended only by the affirmative vote of 66 2/3% of the Common Stock and
that the stockholders may not call special meetings. After completion of this
offering, the Company will also be authorized to issue up to 2,000,000 shares
of Preferred Stock. The Board of Directors is authorized, subject to
limitations prescribed by Delaware law, to provide for the issuance of
additional shares of Preferred Stock in one or more series, to establish from
time to
15
<PAGE>
time the number of shares to be included in each such series, to fix the
powers, designations, preferences and rights of the shares of each wholly
unissued series and designate any qualifications, limitations or restrictions
thereon and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company and may adversely affect the
voting and other rights of the holders of Common Stock, which could have an
adverse impact on the market price of the Common Stock. In addition, the
Company will be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law ("DGCL"), which will prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. Such provisions may have the effect of preventing
changes in the management or control of the Company. The Sixth Amended and
Restated Stockholders' Agreement by and among the Company and certain
stockholders of the Company dated May 26, 1998 (the "Stockholders' Agreement")
provides that the Company may not (i) adopt a rights agreement (or other
similar device) with an ownership threshold that would limit USA Networks'
ability to own or purchase securities of the Company or (ii) amend its bylaws,
certificate of incorporation or fail to take an action under Section 203 of
the DGCL, in each case which would limit USA Networks' ability to own or
purchase securities of the Company. See "Certain Transactions," "Description
of Capital--Antitakeover Effects of Provisions of Certificate of Incorporation
and Bylaws" and "--Effect of Delaware Antitakeover Statute."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after this
offering or the anticipation of such sales could have a material adverse
effect on then-prevailing market prices. Upon completion of the offering, the
Company will have 20,788,507 shares of Common Stock outstanding, assuming no
exercise of currently outstanding options or warrants. Of these shares, the
4,000,000 shares sold in this offering (plus any additional shares sold upon
exercise of the Underwriters' over-allotment option) will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), unless they are held by "affiliates" of the Company as
that term is used under the Securities Act and the regulations promulgated
thereunder ("Affiliates"). The remaining 16,788,507 shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 of the Securities Act (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
under the Securities Act. As a result of contractual restrictions and the
provisions of Rules 144 and 701, additional shares will be available for sale
in the public market as follows: (i) approximately 498,574 Restricted Shares
will be eligible for immediate sale on the effective date of this offering;
(ii) approximately 4,334 Restricted Shares will be eligible for sale 90 days
after the date of this offering; (iii) approximately 4,949,461 Restricted
Shares will be eligible for sale without restriction and 10,601,970 Restricted
Shares will be eligible for sale subject to volume limitations, in each case
180 days after the effective date of this offering and (iv) the remainder of
the Restricted Shares will be eligible for sale from time to time thereafter
upon expiration of their respective holding periods under Rule 144. In
addition, 1,224,944 shares will be issuable upon exercise of vested stock
options and eligible for sale 180 days after the date of this offering upon
the expiration pre-existing contractual lock-up agreements. NationsBanc
Montgomery Securities LLC, on behalf of the Underwriters, may, in its sole
discretion and at any time without notice, release all or any portion of
securities subject to the lock-up agreement with the Underwriters.
Upon the effective date of this offering, the holders of 8,740,795 shares of
Common Stock have the right in certain circumstances to require the Company to
register their shares under the Securities Act for resale to the public. If
such holders, by exercising their demand registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have a material adverse effect on the market price for the Company's
Common Stock. If the Company were required to include in a Company-initiated
registration shares held by such holders and holders of an additional
5,820,956 shares of Common Stock pursuant to the
16
<PAGE>
exercise of their piggyback registration rights, such sales may have a
material adverse affect on the Company's ability to raise new capital. In
addition, the Company expects to file a registration statement on Form S-8
registering a total of approximately 3,232,748 shares of Common Stock subject
to outstanding stock options or reserved for issuance under the Company's 1996
Stock Plan, 1998 Directors Option Plan and 1998 Employee Stock Purchase Plan.
The Form S-8 registration statement is expected to be filed and to become
effective immediately following the effective date of this offering. Shares
registered under such registration statement will be available for sale in the
open market, subject to Rule 144 volume limitations applicable to Affiliates,
unless such shares are subject to vesting restrictions with the Company or the
lock-up agreements described above. See "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
NO SPECIFIC USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale by the Company of the Common Stock offered hereby. The Company
intends to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures relating to the
CitySearch site such as enhancements to the Company's server and networking
infrastructure. A portion of the proceeds also may be used to acquire or
invest in complementary businesses, technologies or service offerings.
Accordingly, management will have significant flexibility in applying the net
proceeds of this offering. The failure of management to apply such funds
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds."
DILUTION
The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. At an assumed initial public
offering price of $12.00 per share, investors purchasing shares of Common
Stock in the offering will incur immediate, substantial dilution in the amount
of $9.21 per share. In addition, investors purchasing shares of Common Stock
in this offering will incur additional dilution to the extent outstanding
options and warrants are exercised. See "Dilution."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 4,000,000 shares of Common
Stock offered hereby are estimated to be $43.8 million ($50.5 million if the
over-allotment option is exercised in full) at an assumed initial public
offering price of $12.00 per share and after deducting the underwriting
discount and estimated offering expenses. The Company intends to use the net
proceeds of this offering for general corporate purposes, including working
capital and capital expenditures relating to the CitySearch site such as
enhancements to the Company's server and networking infrastructure. A portion
of the proceeds also may be used to acquire or invest in complementary
businesses, technologies or service offerings. In the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
technologies or service offerings. However, the Company has no present
understandings, commitments or agreements with respect to any such
acquisition, and the Company is not currently engaged in any negotiations with
respect to any such transaction. Pending use of the net proceeds for the above
purposes, the Company intends to invest such funds in short-term, interest-
bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain any future
earnings for use in its business and does not anticipate paying any cash
dividends for the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis, and (ii) on an as-adjusted basis to reflect
the conversion of all outstanding shares of Preferred Stock into Common Stock
upon the closing of this offering and the receipt of the net proceeds from the
sale of the 4,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share and after deducting the
underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion(1)........... $ 2,319 $ 2,319
Redeemable Convertible Preferred Stock(2)................ 77,840 --
Stockholders' equity(3):
Preferred Stock, $0.01 par value: 2,241,173 shares
authorized, actual; 2,000,000 shares authorized, as
adjusted; 2,080,165 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted.. 3,056 --
Common Stock, $0.01 par value; 75,000,000 shares
authorized, actual; 6,660,886 shares issued and
outstanding, actual; 20,788,507 shares issued and
outstanding, as adjusted............................... 1,635 126,371
Deferred stock compensation.............................. (1,219) (1,219)
Accumulated deficit...................................... (67,213) (67,213)
-------- --------
Total stockholders' equity (deficit)..................... (63,741) 57,939
-------- --------
Total capitalization.................................... $ 16,418 $ 60,258
======== ========
</TABLE>
- --------
(1) See Notes 2 and 5 of Notes to Consolidated Financial Statements.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) Based on shares outstanding as of June 30, 1998. Does not include (i)
2,608,514 shares of Common Stock issuable upon exercise of options
outstanding at June 30, 1998 at a weighted average price of $5.20 per
share under the Company's 1996 Stock Option Plan, (ii) 624,234 shares of
Common Stock available for future grant or issuance under the Company's
1996 Stock Option Plan, 1998 Director Option Plan and 1998 Employee Stock
Purchase Plan and (iii) 62,077 shares of Common Stock issuable upon
exercise of an outstanding warrant at an exercise price of $13.29 per
share held by NationsBanc Montgomery Securities LLC. See "Management--
Employee Benefit Plans," "Underwriting" and Note 7 of Notes to
Consolidated Financial Statements.
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998 was
$14.1 million, or $0.84 per share of Common Stock, assuming the conversion of
all outstanding shares of Preferred Stock into shares of Common Stock. "Pro
forma net tangible book value per share" is determined by dividing the number
of outstanding shares of Common Stock into the net tangible book value of the
Company (total tangible assets less total liabilities). After giving effect to
the application of the estimated net proceeds from the sale by the Company of
the 4,000,000 shares of Common Stock offered hereby (based upon an assumed
initial public offering price of $12.00 per share and after deducting the
underwriting discount and estimated offering expenses), the pro forma net
tangible book value of the Company as of June 30, 1998 would have been $57.9
million, or $2.79 per share. This represents an immediate increase in pro
forma net tangible book value of $1.95 per share to existing stockholders and
an immediate dilution of $9.21 per share to new investors purchasing shares at
the initial public offering price. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................ $ 12.00
Pro forma net tangible book value as of June 30, 1998.......... $0.84
Increase in pro forma net tangible book value attributable to
new investors................................................. 1.95
-----
Pro forma net tangible book value after offering................. 2.79
-------
Dilution to new investors........................................ $ 9.21
=======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1998, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders and by the investors purchasing shares of Common Stock
in this offering, based upon an assumed initial public offering price of
$12.00 per share (before deducting the underwriting discount and estimated
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 16,788,507 80.8% $ 83,590,107 63.5% $ 4.98
New Investors(1).............. 4,000,000 19.2 48,000,000 36.5 12.00
---------- ----- ------------ -----
Total....................... 20,788,507 100.0% $131,590,107 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) If the Underwriters' over-allotment is exercised in full, the number of
shares held by new investors will be increased to 4,600,000, or 21.5% of
the total shares of Common Stock to be outstanding after this offering.
The foregoing computations assume no exercise of any outstanding stock
options or warrants. As of June 30, 1998, there were options outstanding to
purchase a total of 2,608,514 shares of Common Stock at a weighted average
exercise price of $5.20 per share and warrants outstanding to purchase a total
of 62,077 shares of Common Stock at an exercise price of $13.29 per share. In
addition, as of June 30, 1998, 624,234 shares of Common Stock were reserved
for future issuance under the Company's 1996 Stock Option Plan, 1998 Director
Option Plan and 1998 Employee Stock Purchase Plan. To the extent that any
shares available for issuance upon exercise of outstanding stock options or
warrants or reserved for future issuance under the Company's 1996 Stock Option
Plan, 1998 Directors Option Plan or 1998 Employee Stock Purchase Plan are
issued, there will be future dilution to new investors. See "Management--
Employee Benefit Plans," "Underwriting" and Note 7 of Notes to Consolidated
Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period from
September 20, 1995 (date of formation) through December 31, 1995 and for, and
as of the end of, each of the years in the two-year period ended December 31,
1997, are derived from the consolidated financial statements of the Company,
which consolidated financial statements have been audited by Ernst & Young
LLP, independent certified public accountants, and are included elsewhere in
this Prospectus. The consolidated balance sheet data as of December 31, 1995
is derived from audited consolidated financial statements of the Company that
are not included herein. The consolidated statements of operations data for
the six-month periods ended June 30, 1997 and 1998 and the consolidated
balance sheet data at June 30, 1998 are derived from unaudited consolidated
financial statements included elsewhere in this Prospectus. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and contain
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the Company's results of operations for such
periods and financial condition at such dates. The results of operations for
the six months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year or future periods. The selected
consolidated financial data set forth is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 20,
1995 (DATE OF YEAR ENDED SIX MONTHS
FORMATION) TO DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------------ ------------------
1995 1996 1997 1997 1998
------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Subscription and
services............... $ -- $ 203 $ 4,913 $ 1,508 $ 5,577
Licensing and royalty... -- -- 1,271 -- 1,221
------ -------- -------- -------- --------
Total revenues........ -- 203 6,184 1,508 6,798
Costs and expenses:
Cost of revenues........ -- 2,908 10,846 4,457 7,446
Sales and marketing..... 57 6,369 19,014 9,210 9,065
Research and
development............ 152 2,563 7,182 3,220 3,395
General and
administrative......... 104 2,475 5,883 2,743 3,634
------ -------- -------- -------- --------
Total costs and ex-
penses............... 313 14,315 42,925 19,630 23,540
------ -------- -------- -------- --------
Loss from operations..... (313) (14,112) (36,741) (18,122) (16,742)
Interest income, net..... 5 217 223 104 260
------ -------- -------- -------- --------
Loss before provision for
income taxes............ (308) (13,895) (36,518) (18,018) (16,482)
Provision for income
taxes................... -- (2) (8) -- --
------ -------- -------- -------- --------
Net loss................. $ (308) $(13,897) $(36,526) $(18,018) $(16,482)
====== ======== ======== ======== ========
Historical basic and
diluted net loss per
share................... $(0.06) $ (2.37) $ (5.80) $ (2.87) $ (2.50)
====== ======== ======== ======== ========
Pro forma basic and
diluted net loss per
share................... $(0.05) $ (1.65) $ (2.94) $ (1.56) $ (1.02)
====== ======== ======== ======== ========
Shares used to compute
historical basic and
diluted net loss per
share................... 5,263 5,857 6,301 6,282 6,582
====== ======== ======== ======== ========
Shares used to compute
pro forma basic and
diluted net loss per
share................... 5,640 8,431 12,430 11,515 16,139
====== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
----------------------- --------
1995 1996 1997
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $1,413 $ 7,527 $25,227 $15,512
Working capital.............................. 1,323 4,257 19,375 10,731
Total assets................................. 1,490 13,370 31,655 22,490
Long-term obligations, less current portion.. -- 1,451 2,420 2,319
Redeemable Convertible Preferred Stock....... -- 20,309 70,882 77,840
Stockholders' equity (deficit)............... 8,366 (11,943) (47,911) (63,741)
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those set forth under "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
CitySearch produces and delivers comprehensive local city guides on the
World Wide Web (the "Web"), providing up-to-date information regarding arts
and entertainment events, community activities, recreation, businesses,
shopping, professional services and news/sports/weather to consumers in
metropolitan areas. Each local city guide consists primarily of original
content developed and designed specifically for the Web by the Company and its
partners. The Company designs and produces custom-built Web sites and related
services for local and regional businesses, aggregates them in a local city
guide environment and provides these businesses the ability to regularly
update and expand their sites. From the Company's founding and incorporation
in September 1995 through May 1996, the Company's operating activities
consisted primarily of recruiting employees, developing new services and
technology, raising capital, engaging in marketing activities, and negotiating
strategic partnerships. The Company launched its first city guide in Chapel
Hill, North Carolina in May 1996. The Company first commenced selling business
Web sites to local businesses in February 1996 and recognized its initial
revenues in June 1996.
CitySearch has two primary means of providing its local city guides. In its
"owned and operated" markets, the Company systematically produces the majority
of its own content, hires and rapidly deploys a direct sales force to sell
custom-built Web sites as well as related services to local and regional
businesses and launches a presence in approximately six months. In other
markets, the Company partners with a local media company that contracts with
CitySearch to assist in developing, designing and launching a city guide.
These partners license CitySearch's systems and provide royalty payments to
the Company for revenues derived from operations. While the Company's initial
site launches were all on an "owned and operated" basis, the Company is
increasingly launching city guides in conjunction with local newspaper
companies in its partner-led markets. These major media partners bring
capital, brand recognition, promotional strength and local knowledge to their
CitySearch sites and allow the Company to build out its national and
international network of sites faster than it could solely through owned and
operated sites. The Company's current owned and operated sites are Austin,
Nashville, New York City, Portland, Raleigh-Durham-Chapel Hill, Salt Lake
City/Utah and the San Francisco Bay Area, and current partner-led markets
include Dallas, Los Angeles, Washington D.C., Melbourne, Sydney and Toronto.
Additional partner-led markets where roll-out teams have been deployed include
Baltimore, Copenhagen, San Diego and Stockholm.
In its owned and operated markets, the Company derives its revenues
primarily from subscription fees resulting from the creation, hosting and
maintenance of local business Web sites. Business customers typically enter
into 12 month agreements that automatically convert to month to month
contracts upon expiration. The Company recognizes revenue from sales of local
business Web sites on a monthly basis over the term of each contract as
services are rendered. The Company's business customers in its owned and
operated markets increased from approximately 1,300 as of December 31, 1996 to
approximately 8,900 as of June 30, 1998. As of June 30, 1998, the Company
believes that there were approximately 6,800 business customers in its
partner-led markets. The average monthly revenue from new business customers
signed up in its owned and operated markets in December 1996 was approximately
$50 and in June 1998 was approximately $160. To a lesser extent, the Company
derives revenue from banner advertising purchased by national and regional
advertisers and from barter agreements with television, radio and media
alliances. Banner revenue is recognized as earned. With barter agreements, the
Company receives television and radio broadcast advertising in exchange for
Web site design,
22
<PAGE>
hosting and maintenance. Barter revenue and expense are recognized monthly
over the term of each contract. For each barter agreement, revenue and expense
are equal and are recognized at a rate based on the estimated cost of the
specific services provided by the Company.
In partner-led markets, the Company derives revenues from the licensing of
its business and technology systems, from royalties on Web site subscriptions,
banners, sponsorships and other ancillary offerings, from consulting and
technology customization services, and from hosting and back office services,
including Web site production, customer service and billing. Royalty,
consulting and technology customization revenues have not been significant to
date, but are expected to increase as a percentage of revenues as partner-led
markets mature and as more partner-led market sites are launched. Licensing
revenue under license agreements entered into prior to December 31, 1997 is
recognized upon the completion and installation of the Company's business and
technology systems and training of partner personnel in each partner-led
market. Pursuant to SOP 97-2, the Company is recognizing revenues from the
sale of licenses for use of the Company's business and technology systems over
the term of the license agreement or the period over which the relevant
services are delivered beginning with contracts signed in 1998. See Note 1 of
Notes to Consolidated Financial Statements. Royalty revenue is recognized as
earned and is typically a percentage of partner-led market Web site
subscriptions, banners, sponsorships and other ancillary offerings. In the
second quarter of 1998, the Company began to derive revenue from providing
back office services, including business Web site design, hosting, customer
service and billing, to certain of its partners.
The Company has recorded deferred stock compensation of $255,000 for the
year ended December 31, 1997 and $1.1 million for the six months ended June
30, 1998 as a result of stock options granted during 1997 and the first six
months of 1998. Amortization of deferred stock compensation of $10,000 was
recognized in 1997, and $84,000 was recognized in the six months ended June
30, 1998. Amortization of deferred stock compensation is allocated to costs of
revenues or to operating expenses depending on the responsibilities of the
relevant employee. Deferred stock compensation is amortized over the vesting
period of the options, generally four years. As a result, amortization of
deferred stock compensation will adversely impact the Company's operating
results for the next four years.
The Company incurred net losses of $308,000, $13.9 million and $36.5 million
for the period from September 20, 1995 (date of formation) to December 31,
1995, and the years ended December 31, 1996 and 1997, respectively, and $16.5
million for the six months ended June 30, 1998. At June 30, 1998, the Company
had an accumulated deficit of $67.2 million. The net losses and accumulated
deficit resulted from the Company's lack of substantial revenues and the
significant operation, infrastructure and other costs incurred in the
development and initial roll-outs of the Company's services. Given its limited
operating history, the Company believes that an analysis of its cost and
expense categories as a percentage of revenues is not meaningful. As a result
of its aggressive expansion plans, the Company expects to incur significant
additional losses from operations for the foreseeable future. Although the
Company has experienced revenue growth in recent periods, there can be no
assurance that such growth rates are sustainable and, therefore, they should
not be considered indicative of future operating results. There can be no
assurance that the Company will ever achieve significant revenues or
profitability or, if significant revenues and profitability are achieved, that
they could be sustained.
RESULTS OF OPERATIONS
Revenues. The Company's revenues increased from $1.5 million for the six
months ended June 30, 1997 to $6.8 million for the six months ended June 30,
1998, and increased from $203,000 for the year ended December 31, 1996 to $6.2
million for the year ended December 31, 1997. The Company did not recognize
any revenue from September 20, 1995 (date of formation) to December 31, 1995
(the "Inception Period"). The Company has two revenue sources: (i)
subscription and services revenue and (ii) licensing and royalty revenue.
Subscription and services revenue was $1.5 million and $5.6 million for the
six months ended June 30, 1997 and 1998, respectively, and was $203,000 and
$4.9 million for the years ended December 31, 1996 and 1997 respectively.
Subscription and services revenue increased in each period primarily as the
result of increases in business Web site subscription revenue due to increases
in the number of city guides launched, an increased number of business Web
sites in each city guide market, and an increase in the average sales price
for business
23
<PAGE>
Web sites. The increases in subscription and services revenue also resulted
from increases in consulting revenue, barter revenue, and banner revenue.
Licensing and royalty revenue was $0 and $1.2 million for the six months ended
June 30, 1997 and 1998, respectively, and was $0 and $1.3 million for the
years ended December 31, 1996 and 1997, respectively.
Cost of Revenues. Cost of revenues consists primarily of the expenses
associated with the design, layout, photography, customer service and
editorial resources used in the production and maintenance of business Web
sites and editorial content, network infrastructure maintenance and the costs
of consulting services in partner-led markets. Cost of revenues is expensed as
incurred. The Company had no cost of revenues for the Inception Period. Cost
of revenues were $4.5 million and $7.4 million for the six months ended June
30, 1997 and 1998, respectively, and were $2.9 million and $10.8 million for
the years ended years December 31, 1996 and 1997, respectively. The increases
were due primarily to increased personnel and freelance labor required to
produce and maintain the increased number of business Web sites and amount of
editorial content.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of the costs related to compensation of sales and marketing personnel,
advertising, public relations, travel, sales force training and marketing
literature. Sales and marketing expenses were $9.2 million and $9.1 million
for the six months ended June 30, 1997 and 1998, respectively, and were
$57,000, $6.4 million and $19.0 million for the Inception Period and for the
years ended December 31, 1996 and 1997, respectively. These increases were due
primarily to increased headcount and, to a lesser extent, increases in
marketing and advertising programs. The Company expects that sales and
marketing expenses will continue to increase in absolute dollars as the
Company expands its direct sales force, hires additional marketing personnel
and increases expenditures for marketing and promotional activities.
Research and Development Expenses. Research and development expenses include
the costs to develop, test and upgrade the CitySearch online service and the
enterprise management systems. These costs consist primarily of salaries for
product development personnel, contract labor expense, consulting fees,
software licenses, hardware costs and recruiting fees. Research and
development expenses were $3.2 million and $3.4 million for the six months
ended June 30, 1997 and 1998, respectively, and were $152,000, $2.6 million
and $7.2 million for the Inception Period and for the years ended December 31,
1996 and 1997, respectively. The increases in research and development
expenses were primarily attributable to increased staffing levels required to
design, test, deploy and support expanded city guide functionality and back-
office systems. The Company believes that timely deployment of new and
enhanced products and technology are critical to attaining its strategic
objectives and to remain competitive. Accordingly, the Company intends to
continue recruiting and hiring experienced research and development personnel
and make other investments in research and development. As such, the Company
expects that research and development expenditures will increase in absolute
dollars in future periods. The Company has expensed research and development
costs as incurred.
General and Administrative Expenses. General and administrative expenses
consist primarily of administrative and executive personnel costs, fees for
professional services and the costs of in-house infrastructure to support the
operations of the Company. General and administrative expenses were $2.7
million and $3.6 million for the six months ended June 30, 1997 and 1998,
respectively, and were $104,000, $2.5 million and $5.9 million for the
Inception Period and for the years ended December 31, 1996 and 1997,
respectively. These increases were due primarily to increased staffing levels
to manage and support the Company's expanding operations. The Company
anticipates hiring additional personnel and incurring additional costs related
to being a publicly held entity, including directors' and officers' liability
insurance, investor relations programs and professional service fees.
Accordingly, the Company anticipates that general and administrative expenses
will continue to increase in absolute dollars.
Interest Income, Net. Net interest income consists primarily of interest
earned on the Company's cash, cash equivalents and short term investments,
less interest expense on capital lease obligations. The Company had net
interest income of $104,000 and $260,000 for the six months ended June 30,
1997 and 1998, respectively, and $5,000, $217,000 and $223,000 for the
Inception Period and for the years ended December 31, 1996 and 1997,
respectively. The Company invests its cash balances in short-term investment
grade, interest-bearing securities.
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INCOME TAXES
The provision for income, franchise and capital taxes of $800, $1,600 and
$8,330 for the Inception Period and for the years ended December 31, 1996 and
December 31, 1997, respectively, is based solely on minimum state tax
requirements. The Company's effective tax rate differs from the statutory
federal income tax rate, primarily as a result of operating losses not
benefited. Due to the uncertainty surrounding the timing or realizing the
benefits of its favorable tax attributes in future tax returns, the Company
has placed a valuation allowance against its otherwise recognizable deferred
tax assets. At December 31, 1997, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $47.5
million. The federal carryforwards expire principally in the period from 2010
to 2012, and the state carryforwards expire principally in 2003. See Note 4 of
Notes to Consolidated Financial Statements. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. The Company's
ability to utilize net operating loss carryforwards may be limited as a result
of an "ownership change" as defined in the Internal Revenue Code. This
offering, together with prior issuances of Preferred Stock, may constitute an
"ownership change" that could result in limitations on the use of net
operating loss carryforwards in future periods.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain consolidated statement of operations
data for the Company's six most recent quarters. This information has been
derived from the Company's unaudited consolidated financial statements. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual consolidated financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation for the quarters presented. This information should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscription and
services.............. $ 470 $ 1,038 $ 1,478 $ 1,927 $ 2,563 $ 3,014
Licensing and royalty.. -- -- 677 594 528 693
------- ------- ------- ------- ------- -------
Total revenues....... 470 1,038 2,155 2,521 3,091 3,707
Costs and expenses:
Cost of revenues....... 2,040 2,417 3,155 3,234 3,634 3,812
Sales and marketing.... 4,519 4,691 4,506 5,298 4,383 4,682
Research and
development........... 1,713 1,507 1,729 2,233 1,655 1,740
General and
administrative........ 1,363 1,380 1,520 1,620 1,568 2,066
------- ------- ------- ------- ------- -------
Total costs and
expenses............ 9,635 9,995 10,910 12,385 11,240 12,300
------- ------- ------- ------- ------- -------
Loss from operations.... (9,165) (8,957) (8,755) (9,864) (8,149) (8,593)
Interest income, net.... 84 20 -- 119 173 87
------- ------- ------- ------- ------- -------
Provision for income
tax.................... -- -- -- (8) -- --
------- ------- ------- ------- ------- -------
Net loss................ $(9,081) $(8,937) $(8,755) $(9,753) $(7,976) $(8,506)
======= ======= ======= ======= ======= =======
</TABLE>
Subscription and services revenue increased each period primarily as the
result of business Web site subscription revenue growth due to an increased
number of city guides launched, a greater number of business Web sites in each
city guide and an increase in the average sales price for business Web sites.
Licensing and royalty revenue has fluctuated with the timing of license
agreements in partner-led markets.
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Cost of revenues has increased each period as the Company continues to sell
new business Web sites, add editorial content, host and maintain an increasing
number of business Web sites and, to a lesser extent, provide increasing
services in partner-led markets. Sales and marketing expenses fluctuate
primarily due to the timing of advertising and promotional campaigns. During
the three months ended December 31, 1997, the increase in sales and marketing
expense was primarily due to increased advertising expenditures. Research and
development expenses fluctuate primarily due to the periodic use of technology
consultants. During the three months ended December 31, 1997, consultants were
retained to assist with the development of version CS 2.5 of the Company's
online city guide application. General and administrative expenses have
increased due primarily to increased staffing levels to manage and support the
Company's expanding operations. During the three months ended June 30, 1998,
general and administrative expenses increased primarily due to higher
professional fees incurred during the quarter.
The Company's operating results have varied on a quarterly basis during its
short operating history and may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's
control. Factors that may affect the Company's quarterly operating results
include, but are not limited to, the ability of its partners to meet roll-out
schedules for the Company's city guide service, the timing and amount of
license and royalty payments from the Company's partners, the Company's
ability to retain existing business customers, attract new business customers
at a steady rate and maintain customer satisfaction, the timing and volume of
new business Web site orders and the Company's capacity to meet such orders,
the Company's ability to maintain or increase current rates of sales
productivity, the announcement or introduction of new or enhanced sites and
services by the Company or its competitors, the amount of traffic on the
Company's online sites, the amount of expenditures for online advertising by
businesses, the level of use of online services and consumer acceptance of the
Internet for services such as those offered by the Company, the Company's
ability to upgrade and develop its systems and attract personnel in a timely
and effective manner, the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business and
infrastructure, technical difficulties, system downtime or Internet brownouts,
political or economic events affecting the cities in which the Company
operates and general economic conditions. Unfavorable changes in any of the
above factors could adversely affect the Company's revenues, gross margins and
results of operations in future periods. Accordingly, the Company believes
that period-to-period comparisons of its results of operations should not be
relied upon as an indication of future performance. In addition, the results
of any quarterly period are not indicative of results to be expected for a
full fiscal year. Finally, as a result of the foregoing factors, the Company's
annual or quarterly results of operations may be below the expectations of
public market analysts or investors, in which case the market price of the
Common Stock could be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the private placement of equity securities, raising $81.0 million, and
capital equipment leases. At June 30, 1998, the Company had $15.5 million in
cash and cash equivalents. The Company has had significant negative cash flows
from operating activities in each fiscal and quarterly period to date. Net
cash used in operating activities was $15.8 million and $16.1 million for the
six months ended June 30, 1997 and 1998, respectively, and $213,000, $10.5
million and $30.1 million for the Inception Period and for the years ended
December 31, 1996 and 1997, respectively. Cash used in operating activities
from Inception through June 30, 1998 consisted primarily of net operating
losses and increases in accounts receivable, which were partially offset by
increases in deferred revenues, accrued expenses and accounts payable.
Net cash used in investing activities was $1.1 million and $54,000 for the
six months ended June 30, 1997 and 1998, respectively, and was $82,000, $3.5
million and $2.0 million for the Inception Period and for the years ended
December 31, 1996 and 1997, respectively. Net cash used in investing
activities in these periods consisted primarily of capital expenditures for
computer equipment, purchased software, office equipment, and leasehold
improvements. As of December 31, 1997, the Company also had commitments under
non-cancelable operating leases of $5.3 million. Net cash provided by
financing activities was $15.7 million and $6.5 million for the six
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<PAGE>
months ended June 30, 1997 and 1998, respectively, and was $1.7 million, $20.2
million and $49.7 million for the Inception Period and the years ended
December 31, 1996 and 1997, respectively, attributable to the private sale of
Preferred Stock.
The Company believes that net proceeds from this offering, together with
existing cash, cash equivalents and short-term investments, will be sufficient
to meet its working capital and capital expenditures requirements for at least
the next 12 months. Thereafter, the Company may be required to raise
additional funds. No assurance can be given that the Company will not be
required to raise additional financing prior to such time. If additional funds
are raised through the issuance of equity securities, stockholders of the
Company may experience significant dilution. Furthermore, there can be no
assurance that additional financing will be available when needed or that if
available, such financing will include terms favorable to the Company or its
stockholders. If such financing is not available when required or is not
available on acceptable terms, the Company may be unable to develop or enhance
its products and services, take advantage of business opportunities or respond
to competitive pressures, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Risk Factors--Future Capital Needs; Uncertainty of Additional Financing."
RECENT ACCOUNTING PRONOUNCEMENT
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,
which supersedes SOP No. 91-1. The Company adopted SOP No. 97-2 prospectively
for software transactions entered into beginning January 1, 1998. SOP No. 97-2
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair values of
the elements. The fair value of an element must be based on evidence that is
specific to the vendor. If a vendor does not have evidence of the fair value
for all elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. Beginning with contracts signed in 1998 pursuant to SOP 97-2, the
Company is recognizing revenues from the sale of licenses for use of the
Company's business and technology systems over the term of the license
agreement or the period over which the relevant services are delivered. See
Note 1 of Notes to Consolidated Financial Statements.
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BUSINESS
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
OVERVIEW
CitySearch produces and delivers comprehensive local city guides on the
World Wide Web (the "Web"), providing up-to-date information regarding arts
and entertainment events, community activities, recreation, businesses,
shopping, professional services and news/sports/weather to consumers in
metropolitan areas. Each local city guide consists primarily of original
content developed and designed specifically for the Web by the Company and its
partners. The Company designs and produces custom-built Web sites and related
services for local and regional businesses, aggregates the sites in a local
city guide environment and provides these businesses the ability to regularly
update and expand their sites. This service offers local and regional
businesses the opportunity to reach and interact with targeted consumers. The
Company builds its city sites with the involvement of local government,
community and volunteer associations, business and professional groups,
educational institutions and local media companies. In addition, content
generated by consumers through e-mail and bulletin boards, available in most
sites, enhances the sense of community in CitySearch sites.
CitySearch and its partners create comprehensive locally focused content
that can be accessed using targeted, sophisticated searches across all content
residing on a CitySearch site. In contrast, many search engines and
navigational guides access pre-existing content from third-party Web sites
that may be incomplete or out of date. In its owned and operated markets,
CitySearch offers a broad array of updated, local content that is relevant to
consumers. In certain other markets, CitySearch provides local media companies
with the necessary technology and business expertise to design, launch and
operate a co-branded CitySearch site. The Company's city guides have received
numerous awards and recognition for design, functionality and content,
including PC Magazine's Editor's Choice, USA Today/Intelliquest's survey
leader, the 1998 Webby award for best travel site, recognition by The New York
Times as the best overall online guide to New York City, How Magazine's Design
Award and Net Guide's Platinum "Best of the Web" Award.
CitySearch launched its initial site in the Raleigh-Durham-Chapel Hill
metropolitan area in May 1996. The Company and its partners have since
launched additional local city guides in Austin, Dallas, Los Angeles,
Nashville, New York City, Portland, Salt Lake City/Utah, the San Francisco Bay
Area and Washington, D.C. in the U.S., and in Melbourne, Sydney and Toronto
internationally. The Company plans to expand its service to additional
national and international markets both by leveraging the standardized roll-
out model it has developed through previous city launches and by partnering
with major media companies in certain cities. The Company has, for instance,
partnered with The Baltimore Sun, The Dallas Morning News, the Los Angeles
Times, The San Diego Union-Tribune, The Washington Post, The Melbourne Age,
Schibsted ASA/Scandinavia Online (Copenhagen, Oslo and Stockholm), The Sydney
Morning Herald and the Toronto Star. These major media partners bring capital,
brand recognition, promotional strength and local knowledge to their
CitySearch sites and allow the Company to build out its national and
international network of sites faster than it could solely through owned and
operated sites. The Company has also reached an agreement with Classified
Ventures, a leading provider of online classified advertising products and
services to the newspaper industry that was formed by seven leading newspaper
companies. The Company will license elements of its technology and business
systems and provide services to Classified Ventures. The Company has also
reached an agreement with American Express that provides for marketing of the
Company's services to American Express merchant customers and various other
electronic commerce and marketing initiatives. The Company's equity investors
include USA Networks, entities affiliated with The Goldman Sachs Group, L.P.,
Washingtonpost.Newsweek Interactive Company, The Times Mirror Company, CPQ
Holdings, Inc. (entity affiliated with Compaq Computer Corporation), Global
Retail Partners, L.P. and its affiliates, American Express, Intel Corporation,
AT&T Ventures, T. Rowe Price Threshold Fund III, L.P. and Schibsted ASA.
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INDUSTRY BACKGROUND
The Internet and the World Wide Web
The Internet is an increasingly significant global interactive medium for
communications, content and commerce. International Data Corporation ("IDC")
estimates that the number of Web users worldwide will increase from 69 million
at the end of 1997 to 320 million by the year 2002. According to The Media
Audit, in certain of the markets where CitySearch has offerings, including
Austin, Portland, Raleigh-Durham-Chapel Hill, Salt Lake City, San Francisco
and Washington, D.C., more than four in ten adults are online. Growth in
Internet usage has been fueled by a number of factors, including the large and
growing installed base of personal computers in the workplace and home,
advances in the performance and speed of personal computers and modems,
improvements in network infrastructure, easier and cheaper access to the
Internet and increased awareness of the Internet among businesses and
consumers. As Internet accessibility, usage and functionality continue to
grow, the Internet is increasingly being used as a medium for direct
communication among users (e.g., via e-mail and bulletin boards) as well as a
rapidly growing sales and marketing channel.
The Demand for Local, Community-Oriented Information over the Internet
The Company believes that as users spend more time on the Web, they are
increasingly seeking local information relevant to their daily lives. The
Company believes that consumers spend a large majority of their time and money
in their local communities and that, as a result, Web users are increasingly
seeking targeted, relevant information concerning local events, places of
interest, shopping and other information that is pertinent to their local
activities. According to a survey conducted by Find/SVP, over half of U.S.
Internet users accessed some type of online local news and information during
the first three months of 1997. Additionally, businesses are seeking cost-
effective means to target advertising and direct marketing efforts based on
demographic characteristics, specific interests and geographic location.
McCann-Erickson estimates that businesses spent approximately $77 billion in
1997 on traditional, indirect advertising efforts in local markets. With the
Internet, businesses can directly interact with consumers, receive immediate
feedback on their marketing efforts and refine advertising campaigns on a
real-time basis. The Company believes that the Web is becoming a more
effective and efficient means for businesses to reach consumers.
Consumers have limited Web resources available to provide focused and
relevant local information. Similarly, many local businesses lack Web
resources enabling them to effectively advertise to targeted local consumers.
As the Internet has evolved, Web users have used sites devoted to local areas
within navigational guides, such as search engines and directories, and Web
sites provided by newspapers and other traditional media sources. Local
content within large navigational guides is often comprised of hypertext links
to multiple, disparate Web sites that may provide the user with inconsistent
and confusing user interfaces, outdated information and no common database to
enable useful information searches. While Web sites for traditional media,
including newspapers and television stations, effectively provide Web users
with updated news coverage, they often lack the internal resources to
structure easy-to-use, interactive guides for Web users, resulting in Web
sites with limited functionality. In addition, the Company believes these
sites frequently do not provide businesses with useful geographic and topical
context for a business' Web presence. Finally, many traditional media
organizations, while possessing strong brand names in their local markets, do
not have experience in fielding, training and managing a sales and production
force skilled at selling Web sites to local businesses, producing high quality
Web-based advertising or providing necessary customer support.
The Company believes there is a growing demand for online city guides that
provide frequently updated local information organized in an intuitive manner
and targeted at metropolitan consumers. The Company believes that consumers
are seeking a guide that provides extensive information on local events,
business listings and community activities, offers a user-friendly interface
to facilitate rapid information access and allows users to search within a
city-specific site. The Company also believes that as Internet users are
increasingly seeking such information, traditional media sources are also
seeking to partner with companies that are able to provide the appropriate
technology and business processes to develop an online presence. Similarly,
businesses are
29
<PAGE>
seeking content and technology solutions that not only offer Web users a rich
and focused local guide so as to provide a highly effective context for the
marketing of their goods and services, but also provide small and medium sized
businesses a low cost, high quality Web presence. Indicative of this
opportunity, Jupiter Communications estimates that the amount of local
business advertising online will grow from 9% of total online advertising
revenues in 1996 to 37% in 1998 and 54% of the $7.7 billion in online
advertising in 2002. For local businesses seeking a means of establishing a
Web presence, the current alternatives include either building their own Web
site or placing an advertisement with an electronic yellow pages site. Most
custom Web sites are expensive to develop and maintain, and may not attract
high levels of Web site traffic without significant promotion. Placing an
advertisement with an electronic yellow pages typically does not provide an
appropriate context for a local business' site and no assistance on how to
effectively reach consumers. As a result, the Company believes a significant
opportunity exists for a local city guide that meets consumers' demands for
local information and businesses' objectives for targeting, interacting and
selling to these local consumers.
THE CITYSEARCH SOLUTION
CitySearch produces and delivers comprehensive local city guides on the Web,
providing up-to-date information regarding arts and entertainment events,
community activities, recreation, businesses, shopping, professional services
and news/sports/weather to consumers in metropolitan areas. Each local city
guide primarily consists of original content developed and designed
specifically for the Web by the Company and its partners. The Company designs
and produces custom-built Web sites and related services for local and
regional businesses, aggregates them in a local city guide environment and
provides business customers the ability to regularly update and expand their
sites. The CitySearch sites offer local and regional businesses the
opportunity to reach and interact with targeted consumers.
CitySearch typically targets medium to large sized cities with a combination
of high personal computer penetration, high Internet use, strong population
growth, significant high technology employment, a large university population
and a government presence. CitySearch has two primary means of providing its
local city guides. In its "owned and operated" markets, the Company
systematically produces the majority of its own content, hires and rapidly
deploys a direct sales force to sell custom-built Web sites as well as related
services to local businesses and launches a presence in approximately six
months. In other markets, the Company partners with a local media company that
contracts with CitySearch to assist in developing, designing and launching a
city guide. These partners license CitySearch's systems and provide royalty
payments to the Company for revenues derived from operations. As of July 15,
1998, the Company provided local guides in 13 cities, seven of which are owned
and operated and six of which are operated by its local newspaper partners
("partner-led markets"). The Company and its partners are in the process of
rolling out their services in four additional partner-led markets in
Baltimore, Copenhagen, San Diego and Stockholm. Key elements of the Company's
solution include the following:
Leading and Experienced Local Online Service. The Company is a leader in
providing online local guides. CitySearch has launched or initiated a roll-out
of Web-based local city guides with an easy-to-use interface in major national
and international markets, including Austin, Baltimore, Dallas, Los Angeles,
Nashville, New York City, Portland, Raleigh-Durham-Chapel Hill, Salt Lake
City/Utah, San Diego, the San Francisco Bay Area, Washington, D.C.,
Copenhagen, Melbourne, Stockholm, Sydney and Toronto. The Company believes the
success of its approach is evidenced by the over 8,900 local and regional
business Web sites that were online as of June 30, 1998 in its owned and
operated markets, the over 6,800 business Web sites that the Company believes
were online as of June 30, 1998 in its partner-led markets and by its consumer
base penetration and consumer usage. According to Relevant Knowledge,
CitySearch had approximately 810,000 unique adult users in its owned and
operated markets, and the Company believes that approximately 7.4% of the
local market online consumers used the CitySearch service in these markets in
June 1998.
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Differentiated Service Offering. The Company believes its local city guides
differ substantially from competitive offerings. CitySearch develops and
regularly updates its own content, both internally and in conjunction with
local media partners, and offers consumers the opportunity to perform
sophisticated searches since all Web content resides in the CitySearch site
database. Unlike navigational guides that typically access content from third-
party Web sites that may be incomplete or out of date, CitySearch sites
encompass a broad array of updated, community-specific content that is easily
accessed through CitySearch's common interface. The Company's city guides have
received numerous awards and recognition for design, functionality and content
including PC Magazine's Editor's Choice, USA Today/Intelliquest's survey
leader, the 1998 Webby award for best travel site, recognition by the New York
Times as best overall online guide to New York City, How Magazine's Design
Award and Net Guide's Platinum "Best of the Web" award.
Strategic Partnerships. The Company is engaged in a number of strategic
partnerships with media, content and other companies in order to build the
CitySearch brand name and network of city guides. The Company has established
or signed agreements to develop city guides in partnership with The Baltimore
Sun, The Dallas Morning News, Washingtonpost.Newsweek Interactive Company, the
Los Angeles Times, The San Diego Union-Tribune, The Melbourne Age, Schibsted
ASA/Scandinavia Online (Copenhagen, Oslo and Stockholm), The Sydney Morning
Herald and the Toronto Star. Several of the Company's strategic relationships
involve equity investments from the Company's partners, including
Washingtonpost.Newsweek Interactive Company, The Times Mirror Company, owner
of the Los Angeles Times and The Baltimore Sun, Schibsted ASA and Toronto Star
Newspapers Limited. These major media partners also bring capital, brand
recognition, promotional strength and local knowledge to their CitySearch
sites and allow the Company to build out its national and international
network of sites faster than it could solely through owned and operated sites.
In July 1998, the Company reached an agreement with Classified Ventures, a
leading provider of online advertising products and services to the newspaper
industry. According to information provided by Classified Ventures, Classified
Ventures is funded by Central Newspapers Inc., Gannett Co., Inc., Knight
Ridder, The McClatchy Company, The Times Mirror Company, Tribune Company and
The Washington Post Company, and has a network of over 130 affiliated
newspapers in 42 states, including 35 of the nation's top 50 markets.
CitySearch will license elements of its technology and business systems to
Classified Ventures and provide services in automotive and real estate
classified advertising categories. Certain CitySearch owned and operated
services may also participate as Classified Ventures affiliates in their
respective markets.
In CitySearch owned and operated markets, the Company partners with local
media companies to assist it in developing content and expanding its
promotional activities. For example, CitySearch has partnered in Salt Lake
City/Utah with the CBS television station (KUTV) and six radio stations owned
by Citadel Communications Corporation, in San Francisco with the ABC
television station (KGO) and two CBS-owned radio stations and in Raleigh-
Durham-Chapel Hill with the national public radio station (WUNC) and with four
radio stations owned by Capstar Broadcasting Corporation. In addition, the
Company has entered into an agreement with American Express Travel Related
Services Company, Inc. ("American Express") that provides for an equity
investment by American Express in the Company, the distribution of co-branded
marketing materials for the sale of business Web sites to American Express
merchant customers on CitySearch guides, American Express sponsorship and
banner advertising, introduction of electronic commerce products and services
and sponsorship of other promotions. To further supplement the information and
services it provides its consumers, the Company also entered into a
relationship with Ticketmaster Group, Inc. ("Ticketmaster") to develop a
system to enable consumers to purchase tickets to events listed on the
CitySearch service. CitySearch has also reached agreements or arrangements
with Earthlink Network, Inc., The Walt Disney Company's Family.com, Cnet
Snap!, Planet Direct, At Home Network and Internet Travel Network to expand
its distribution efforts.
Differentiated Presence on the Web For Local and Regional Businesses. The
Company creates Web sites for local and regional businesses, aggregates the
Web sites in a local city guide environment and provides businesses the
ability to regularly update and expand their sites. The Company believes its
service offers local and regional businesses the opportunity to reach and
interact with targeted audiences in a cost-effective manner.
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The Company provides business customers with integrated solutions to establish
customized, multi-page Web sites including design, layout, photography,
posting of updated information, hosting and maintenance. Businesses are able
to provide a targeted audience with updated information about their products
and services, including photographs, prices, store location, schedules of live
entertainment, specials or sales and other relevant information. The Company
typically creates a customized, multi-page Web site for its customers with a
minimal up-front fee and monthly fees ranging from $60 to $750 per month. The
Company believes its broad offering of services and prices compares favorably
to other Web advertising options available to businesses. Such options range
from low cost, low quality scanned-in information to free-standing custom-
designed sites that may cost in excess of $10,000 in up-front fees to produce
and that rely on significant promotion to attract traffic. By providing a high
quality Web presence at an affordable price, the Company believes that its
services address the demand of the large number of businesses whose online
needs fall between these market extremes.
Community-Based Approach. CitySearch differentiates itself from most
national developers of local city guides by building many of its owned and
operated sites with involvement from city governments, chambers of commerce,
community associations, schools and others, and by focusing its hiring efforts
within the local community. The Company builds free Web sites for selected
community organizations, provides tools for e-mail to constituents and
community forums and maintains guides to community services and volunteer
organizations, thereby enhancing the sense of community each CitySearch site
provides. The Company believes that its community-based approach builds
consumer interest in the site both directly, since the content it provides is
of interest to many individuals and is not generally covered by competing city
sites, and indirectly, because it builds broad support and "ownership" in the
community. The Company has secured strong community support for its service in
each of its markets, and the launch of many of its owned and operated markets
have been presided over by the mayor or governor.
THE CITYSEARCH STRATEGY
The Company's objective is to be the category leader for comprehensive local
city guides that will attract a new and larger group of consumers to the
Internet and provide an easy-to-use resource for local information that is
relevant to people's daily lives. The Company's strategy is focused on rapidly
rolling out its service in the most attractive, Web-penetrated markets
worldwide, establishing a dominant presence in these markets and using the
CitySearch service as a platform for multiple revenue streams. The following
are key elements of this strategy:
Leverage Systematic City Launch Process. The Company believes it derives a
competitive advantage from its ability to launch its service rapidly.
CitySearch has developed and refined its detailed roll-out process in its 13
city guide launches to date. The Company's roll-out teams are led by
experienced managers who prepare for launch by setting up operations, hiring
and training local management teams, building the initial community
relationships, negotiating promotional arrangements with local media, training
a direct sales force of Internet Business Advisors ("IBAs") and selling
initial sites. The Company's documented roll-out processes typically enable it
to launch its service in approximately six months in owned and operated
markets. In partner-led markets, the Company provides its roll-out expertise,
professional personnel and technical infrastructure to assist its partners in
creating effective sites and initiating rapid and successful launches.
Rapidly Build National and International Network and Brand Awareness. The
Company intends to establish its service as the category leader for local
information on the Web by linking its local city guides together in a national
and international network. As of July 15, 1998, the Company's service operated
in 13 metropolitan areas worldwide, and CitySearch had initiated roll-out for
launches in four additional metropolitan areas. The Company will continue to
aggressively enter targeted markets through either an owned and operated
market presence or by entering into partnerships and strategic alliances with
major newspapers. The Company believes that as the number of its sites and
usage of its service increases, it is creating a readily recognizable brand
name for local content on the Internet. The Company believes that its branded
worldwide network of local guides in Web-penetrated markets will increasingly
attract local, regional and national advertisers that seek to efficiently
target local markets and consumers seeking information about cities where they
live or that they intend to visit.
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Continue Penetration of Established Markets. The Company emphasizes an
aggressive, on-going process of increasing penetration of businesses in its
metropolitan markets and continued community involvement. The Company strives
to retain its business customers through continuing direct contact by Internet
Marketing Advisers ("IMAs") employed by the Company in most cities and by
providing customers with a high level of customer support. IMAs also educate
existing customers about the benefits of upgrading and expanding their Web
presence. The Company continues to emphasize local community involvement in
each city by maintaining Web sites for and communication with selected city
governments, chambers of commerce, community associations, schools, local
charities and others. Through direct and ongoing contact with businesses and
continuing emphasis on the community, the Company believes it creates a local
presence that is difficult for subsequent competitive entrants to displace or
replicate.
Continue to Enter into Strategic Alliances. The Company intends to continue
to differentiate its service by entering into agreements with local radio,
television and other media companies in its future owned and operated markets
and with major newspapers and other media companies in its partner-led
markets. The Company believes major newspapers, in particular, are trusted
sources for local information and possess strong brand names in their
communities. The Company intends to increase its number of local newspaper
partnerships as a primary growth vehicle. The Company believes its
partnerships with local newspapers provide a significant barrier to entry to
competing local city guides that will be difficult to replicate. In addition,
the Company intends to enter into additional strategic relationships, such as
its current relationships with local television and radio stations, Classified
Ventures, American Express and distribution partners.
Develop Platform with Multiple Revenue Streams. The Company believes that
its local city guides provide a platform for multiple revenue streams. In
owned and operated markets, the Company derives recurring revenue fees from
the sale of Web sites to local businesses in the communities CitySearch
serves, as well as banner and sponsorship advertising. Part of the Company's
strategy is to increase average monthly revenue from new customers, in part
through the introduction of new services. Between June 1997 and June 1998,
average monthly revenue from new customers more than doubled. In partner-led
markets, the Company derives licensing and royalty revenues from the licensing
of the Company's technology and business systems, consulting services provided
by CitySearch personnel to develop and establish local sites, and from the
providing back office and hosting services. The Company also offers or intends
to offer electronic commerce functionality and other innovative features
allowing businesses to better serve consumers, including ticketing,
reservations, sales events notifications, electronic coupons, newsletters and
other transactions. The Company believes these types of services offer the
Company the opportunity to further attract both consumers and businesses to
its sites and to derive revenues through increased fees from businesses for
additional services and potentially from online product sales.
THE CITYSEARCH SERVICE FOR CONSUMERS
CitySearch produces and delivers comprehensive local city guides on the Web,
providing up-to-date information regarding arts and entertainment events,
community activities, recreation, businesses, shopping, professional services
and news/sports/weather to consumers in metropolitan areas. Each local city
guide consists primarily of original content developed and designed
specifically for the Web by the Company and its partners. The CitySearch
service is topically organized by categories, such as arts and entertainment,
restaurants and bars, community, shops and services, sports and outdoors,
hotels and tourism, local news and professional services. By using the
CitySearch service, consumers can search shopping areas, obtain maps, contact
community organizations and vendors by e-mail, and engage in bulletin board
discussions with individuals such as local public officials and celebrities.
Some consumers can also access video streams, including recent news and other
information, from local television station partners. CitySearch offers local
and regional businesses the opportunity to reach and interact with targeted
consumers. In addition, content generated by consumers through e-mail and
bulletin boards enhances the sense of community in CitySearch sites.
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The CitySearch service has been launched in markets across the United States
and in selected international markets. The Company plans to continue to expand
its service both in owned and operated markets and by partnering with major
media companies in other markets. These major media partners bring capital,
brand recognition, promotional strength and local knowledge to their city
guides and allow the Company to build out its national and international
network of sites faster than it could solely through owned and operated sites.
The following table lists the Company's owned and operated and partner-led
markets:
<TABLE>
<CAPTION>
MARKETS DATE OF LAUNCH PARTNERS
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OWNED AND OPERATED:
Raleigh-Durham-Chapel May 1996 WUNC (public radio station)
Hill Capstar Broadcasting Corporation (4 radio
stations) WCHL AM
The Independent (weekly arts and entertainment
publication)
San Francisco Bay October 1996 KGO (ABC)
Area CBS Radio (2 radio stations)
Austin February 1997 KTBC (Fox)
Clear Channel Communications, Inc. (4 radio
stations)
Salt Lake City/Utah March 1997 KUTV (CBS)
Citadel Communications Corporation (6 radio
stations)
Nashville May 1997 WZTV (Fox)
Dick Broadcasting (2 radio stations)
Portland June 1997 KATU (ABC)
KKCW FM
New York September 1997(/1/) Time Out New York (weekly arts and entertainment
publication)
PARTNER-LED:
Melbourne July 1997 The Melbourne Age
Big Colour Pages
Sydney September 1997 The Sydney Morning Herald
Big Colour Pages
Toronto September 1997 Toronto Star
Washington, D.C. December 1997 Washingtonpost.Newsweek Interactive Company
Los Angeles(/2/) April 1998 Los Angeles Times
Dallas July 1998 The Dallas Morning News
Baltimore 1998* The Baltimore Sun
Copenhagen 1998* Schibsted ASA/Scandinavia Online
Stockholm 1998* Schibsted ASA/Scandinavia Online
Oslo 1999* Schibsted ASA/Scandinavia Online
San Diego 1999* The San Diego Union-Tribune
</TABLE>
* Estimated launch dates
(1) CitySearch acquired MetroBeat, Inc. in June 1996 and relaunched the
MetroBeat site as a CitySearch site in September 1997.
(2) Includes Pasadena, California, which was launched as a beta test site in
January 1996.
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THE CITYSEARCH SERVICE FOR BUSINESS CUSTOMERS
The Company creates and hosts Web sites for local and regional businesses
and organizations for a monthly fee. CitySearch offers local businesses a wide
range of options in creating Web presences, from a basic Web presence costing
as little as $60 per month to a multi-page site with additional features and
functionality costing up to $750 per month. Most business customers have
entered into a 12 month agreement that automatically converts into a month-to-
month contract. By aggregating a customer's Web site with those of numerous
other businesses in a comprehensive local city guide, CitySearch provides
categorical and geographic context to a customer's Web presence to generate
usage by consumers, as well as significant Internet traffic. Based on internal
studies, the Company believes that CitySearch users are more evenly split
between men and women, better educated, slightly older and have higher annual
incomes than the typical Internet user. The Company believes that these
demographics are attractive to its business customers.
The Company provides an integrated solution for businesses to establish a
Web presence, including design, photography, lay out, posting of updated
information, hosting and maintenance. Businesses are able to provide a
targeted audience with current information about their stores and services
including photographs, prices, store location, schedules of live
entertainment, sales and other relevant information. Unlike traditional media
such as yellow-pages advertising, the Company offers business customers a
certain number of free updates each month. CitySearch's business customers
also receive usage reports, e-mails from interested consumers and access to an
expanded base of potential buyers including tourists and out-of-town users.
The Company has recently introduced a strategy of bundling enhanced features
and functionality, including panoramic images and audio clips. These services,
when bundled with the Company's basic services, are typically priced from $200
to $750 per month, and have accounted for significant increases in the average
selling prices of the Company's offerings. The Company believes its broad
offering of services and prices compares favorably to other Web advertising
options available to businesses. Such options range from low cost, low quality
scanned-in information to free-standing custom-designed sites that may cost in
excess of $10,000 in up-front fees to produce and that rely on significant
promotion to attract traffic. By providing a high quality Web presence at an
affordable price, the Company believes that its services address the demand of
the large number of businesses whose online needs fall between these market
extremes.
The Company's proprietary site design tools and production economies enable
it to build customized multi-page Web sites for customers for a minimal up-
front fee. The production of business Web sites for CitySearch owned and
operated markets and certain partner-led markets is managed centrally in the
Company's headquarters to better control quality and cost and provide rapid
production. Business Web site creation follows a standardized process. First,
IBAs in the field work with customers to design their sites and gather images
and text. Once content is collected, IBAs forward this information to
CitySearch's central production site in Pasadena, where data entry personnel
input the text. Graphic designers then use the Company's proprietary software
to combine the text and scanned images to create custom sites designed to
reflect the nature and style of each business customer. Once the Web site
designers have completed their work, the business Web site is checked for
accuracy and published online after a 14 day customer proofing period. The
entire process, from the receipt of content by the Company to putting a site
online, takes approximately one month to complete. Each step of the sales and
production process is monitored by an enterprise management system to ensure
that the process is consistent and complete. The Company believes the systems
and processes it has developed to produce business Web sites allow it to
create higher quality, more informative sites in a more cost-effective and
timely manner than that of its competitors.
The Company offers or intends to offer electronic commerce functionality and
other innovative features allowing businesses to better serve consumers,
including ticketing, reservations, sales events notifications, electronic
coupons, newsletters and other transactions. These types of services offer the
Company the opportunity to further attract both consumers and businesses to
its sites and to derive revenues through increased fees from businesses for
additional services and potentially from online product sales.
STRATEGIC ALLIANCES
The Company has entered into partnerships and strategic alliances with third
parties in order to (i) rapidly build its national and international network,
(ii) generate licensing revenue in its partner-led markets,
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<PAGE>
(iii) facilitate branding, (iv) gain access to additional content and (v)
drive traffic on the CitySearch network of sites. Management intends to
continue to negotiate further partnerships and alliances.
Newspaper Partnerships. CitySearch has entered into strategic partnerships
with major newspapers and media companies such as The Baltimore Sun, The
Dallas Morning News, the Los Angeles Times, The San Diego Union-Tribune, The
Washington Post, Schibsted ASA/Scandinavia Online (Copenhagen, Oslo and
Stockholm), The Melbourne Age, The Sydney Morning Herald and the Toronto Star.
In these partner-led markets, the partner provides the capital and management,
while CitySearch contributes technology, a business model, consulting
services, and business systems and processes. CitySearch typically receives
up-front license fees, ongoing license fees for delivery of upgrades and
support, and royalties based on revenues that the newspaper partner generates
through the city guide service. In addition, the Company generally receives
additional fees for consulting services in connection with the launch of the
partner's city guides, custom engineering requested by particular partners,
and compensation for business Web site production, customer service, billing
and hosting services. The terms of the partner agreements are typically five
to eight years in length, and contain customary termination rights in the
event of material breach or non-performance. The Company believes these
arrangements allow it to expand its national and international network of
cities in a more rapid and cost-effective manner than a solely owned and
operated network would allow.
In July 1998, the Company reached an agreement with Classified Ventures, a
leading provider of online advertising products and services to the newspaper
industry. According to information provided by Classified Ventures, Classified
Ventures is funded by Central Newspapers, Inc., Gannett Co., Inc., Knight
Ridder, The McClatchy Company, The Times Mirror Company, Tribune Company and
The Washington Post Company, and has a network of over 130 affiliated
newspapers in 42 states, including 35 of the nation's top 50 markets.
CitySearch will license elements of its technology and business systems to
Classified Ventures and provide services in automotive and real estate
classified advertising categories. Certain CitySearch owned and operated
services may also participate as Classified Ventures affiliates in their
respective markets.
Television and Radio Media Alliances. CitySearch has entered into co-
promotion agreements with local television and radio stations in most of its
owned and operated markets. These relationships typically offer content
sharing and co-promotion to both parties. CitySearch works with each partner
to develop a multimedia Web site within the CitySearch site, while the partner
offers promotion and a recognized brand within the market. CitySearch
typically receives significant on-air promotion from these television and
radio stations that increases brand awareness and drives traffic to the
CitySearch site. For example, CitySearch has partnered in Salt Lake City/Utah
with the CBS television station (KUTV) as well as radio stations owned by
Citadel Communications Corporation and, in Raleigh-Durham-Chapel Hill, with
the national public radio station (WUNC) and radio stations owned by Capstar
Broadcasting Corporation. In San Francisco, the Company has agreements with
the ABC television station (KGO) and radio stations owned by CBS.
Marketing Agreements. The Company has entered into both local and national
marketing agreements. For example, the Company recently reached a wide-ranging
agreement with American Express, including an equity investment in the
Company. The agreement provides for distribution of co-branded marketing
materials to American Express merchant customers in the Company's local
markets that will offer merchant customers online presences through the
Company's local city guides. The parties intend to create areas within the
Company's sites to aggregate promotions and discounts offered to consumers by
American Express merchant customers as well as develop additional electronic
commerce products. In addition, American Express will purchase sponsorships
and banner advertising on the Company's sites. The Company has also entered
into an agreement with Ticketmaster to develop a system to enable consumers to
purchase tickets to Ticketmaster events featured on the CitySearch service
along with local market online promotion of various Ticketmaster events. In
addition, the Company enters into a wide variety of national and local
marketing agreements. For example, the Company has reached an agreement with
GUESS? Inc. that involves banner and in-store promotions in all of the
Company's owned and operated markets, and an agreement with Levi Strauss
Associates Inc.'s Dockers Khakis to provide sponsorship, editorial features
and contests relating to two 1998 San Francisco film festivals. The Company
intends to continue to aggressively pursue such marketing agreements in order
to attract additional business customers and increase usage of the service by
consumers.
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Distribution and Vertical Content Alliances. The Company has entered into
agreements with a number of companies to expand its distribution efforts and
user base. For example, the Company has entered into agreements or
arrangements with Earthlink Network, Inc., The Walt Disney Company's
Family.com, Cnet Snap!, Planet Direct, At Home Network and Internet Travel
Network to distribute content across relevant sites.
MARKETING AND SALES
The Company emphasizes marketing activities in its owned and operated
markets aimed at increasing awareness of its local city guides for both
consumers and business customers. The Company seeks to build each site as a
community project. From the outset, the Company approaches city councils,
chambers of commerce, volunteer groups, community associations and clubs,
visitors bureaus, schools and other local groups. The Company begins by
creating an online presence for selected organizations free of charge. This
approach builds consumer interest in the site, both directly, since this
content is of interest to the community and not typically covered by
commercial city sites, and indirectly because it builds goodwill with a broad
group. The Company's roll-out teams are led by experienced professionals who
prepare for launch by negotiating promotional arrangements with local media,
training a direct sales force and selling initial sites. The roll-out team
initiates advertising and public relations campaigns through low-cost
"guerilla" marketing efforts and CitySearch's local media partners in radio,
television and print advertising to both drive business customer sales and
consumer usage. The Company also purchases targeted advertising on Web sites
such as Infoseek, Preview Travel and Yahoo! as well as through traditional
media such as radio, print and outdoor.
Market roll-out is supported by integrated business system software that
guides operations, production, billing and customer service. The roll-out
strategy and software is designed to enable CitySearch to rapidly penetrate
key targeted vendor categories and neighborhoods. These integrated,
enterprise-wide tools facilitate lead management, sales cycle management,
problem tracking resolution, mass mailing fulfillment, and in-bound and out-
bound call handling.
In partner-led markets, the Company's marketing efforts rely substantially
on the partner's existing franchise and resources in the community. Partners
typically market their city guide services through print promotion and
integration into a pre-existing news Web site. The partner's brand is also
used in conjunction with the CitySearch brand to build credibility with local
consumers. The Company provides its partners both with a roll-out team to
launch the service and ongoing support, including assistance with recruiting,
sales strategy and back office operations.
Once a city site has been launched, the Company and its partners rely upon a
direct sales force to accelerate the momentum established by the roll-out
team. As of June 30, 1998, the Company employed approximately 140 IBAs in
seven owned and operated markets selling directly to local businesses and
approximately 15 IMAs in these markets to maintain regular contact with
business customers and facilitate up-selling of Web site functionality. Each
IBA and IMA completes a one week intensive training program at the Company's
headquarters with follow up field training. The Company's proprietary
enterprise management system tracks sales leads and prospect status and allows
sales managers to track performance. IBAs and IMAs participate in ongoing
training sessions in sales techniques and new products.
OPERATIONS
The Company has created a systematic approach to market roll-out that is
designed to enable it to launch its service in owned and operated markets in
approximately six months and to support a local service once launched. In
addition, the Company licenses its roll-out capabilities to media companies in
its partner-led markets. The Company has analyzed and documented the best
practices associated with its early city launches to refine and standardize
its field and home office production processes. CitySearch's software systems
monitor much of the sales and customer care functions. Additionally, the
Company has built custom systems that streamline the site creation and
maintenance process.
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The Company's customer service operation is located in the Company's
Pasadena headquarters. The Company's enterprise management systems enable
customer service staff to view the customer's full profile, billing and
interactive history as they take the call, and to use the software tools to
make changes to the business customer's site in real time.
TECHNOLOGY
The Company has developed and implemented a number of technologies to
support its local service and business operations, including (i) an online
city guide application, (ii) a set of content creation and management tools
and (iii) a suite of integrated enterprise management systems.
CitySearch Online Application
The CitySearch online application provides a user interface intended to
support novice online users while providing easily accessible advanced
features for experienced Web users. The core end-user functionality of the
CitySearch application includes (i) concurrently performed keyword, spatial
and temporal searches; (ii) personalization that permits consumers, for
example, to receive newsletters in areas of interest, and register for special
offers from CitySearch business customers that have chosen to implement a one-
to-one marketing approach; (iii) dynamic map rendering and "nearby"
functionality; (iv) real-time chat; and (v) message boards.
CitySearch has to date employed an object-relational database to support Web
publishing and searching. With version CS 2.5 of its service, which the
Company intends to deploy in all of its markets in 1998, CitySearch will
employ a multi-tiered architecture, separating a standard relational database
from business rules and presentation logic. CS 2.5 is designed to permit city
guide publishers to create and change the appearance and, generally, the
function of the product using any commercially available Web page design tool
or text editor. As a result, the Company believes that CitySearch and its
partners will be able to respond more quickly to changes in the marketplace
and evolving user preferences. In addition, the object-oriented architecture
is designed to provide for rapid development cycles and code reuse. The
Company has made a substantial investment in its product development
infrastructure and intends to continue to release product enhancements that
address changing demands of business customers and consumers.
Content Creation and Management Tools
The Company has created the following applications to support editorial and
advertising content production: (i) SiteWorks, for design of business Web
sites and editorial features; (ii) EditWorks, for editorial content entry;
(iii) User Interface Tree editor, for defining and managing the site
hierarchy; and (iv) MediaWorks, to enable remote content partners, typically
television and radio stations, to submit content directly to the site. These
tools are designed to minimize the technical knowledge that editorial and
advertising content producers need to possess.
Enterprise Management Systems
CitySearch has developed and implemented a suite of integrated enterprise
management systems designed to handle an increasing volume of business
customers. The enterprise management system consists of third party and
internally developed applications covering sales force automation and
telemarketing, production management and tracking systems, customer service,
accounting, billing and commissions systems.
CitySearch has also designed a sophisticated tool to manage the planning,
scheduling, forecasting and tracking of business Web sites, banners and other
services through the various stages of design and production. This tool
enables the Company to manage the large number of business Web sites and
banners developed simultaneously and originating from numerous cities. The
Company believes the systems and processes it has developed to produce
business Web sites allow it to create high quality sites in a more cost-
effective and timely manner.
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COMPETITION
The markets for local interactive content and services are highly
competitive. Currently, the Company's primary competitors include Digital
City, Inc., a company wholly owned by America Online Inc. and Tribune Company,
Microsoft Corporation (Sidewalk) and Zip2 Corporation. The Company also
competes against search engine and other site aggregation companies such as
Excite, Inc. (City.Net), Lycos, Inc. (Lycos City Guide) and Yahoo! Inc.
(Yahoo! Local) which primarily serve to aggregate links to sites providing
local content. In addition, the Company competes against offerings from media
companies, including Cox Interactive Media and Knight-Ridder, Inc., as well as
offerings from several telecommunications and cable companies and Internet
service providers that provide local interactive programming such as SBC
Communications Inc. (At Hand) and U.S. West, Inc. (Dive-In). Many of these
companies have greater financial and marketing resources than the Company and
may have significant competitive advantages through other lines of business
and existing business relationships. There are also numerous niche competitors
which focus on a specific category or geography and compete with specific
content offerings provided by CitySearch. The Company may also compete with
online services and other Web site operators, as well as traditional media
such as television, radio and print, for a share of advertisers' total
advertising budgets. Furthermore, additional major media and other companies
with financial and other resources greater than those of the Company may
introduce new Internet products and services addressing these markets in the
future. There can be no assurance that the Company's competitors will not
develop services that are superior to those of the Company or that achieve
greater market acceptance than the Company's offerings.
The Company believes that the principal competitive factors in its markets
include depth, quality and comprehensiveness of content, ease of use,
distribution, search capability and brand recognition. There can be no
assurance that the Company will be able to successfully compete against its
current or future competitors or that competition will not have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, as a strategic response to changes in the competitive
environment, the Company may make certain pricing, service or marketing
decisions or enter into acquisitions or new ventures that could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PROPRIETARY RIGHTS
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success,
and relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with the Company's employees,
customers, partners and others to protect its proprietary rights. The Company
pursues the registration of certain of its key trademarks and service marks in
the United States and internationally. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which the Company's products and services are made available online. The
Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. In addition, the Company has licensed in the past,
and expects that it may license in the future, certain content, including
trademarks and copyrighted material, from third parties. While the Company
attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially and adversely affect the value of the Company's
proprietary rights or reputation, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against the Company. The Company licenses
the trademark "CitySearch" from a third party, and there can be no assurance
that the Company will be able to continue to license the trademark on terms
acceptable to the Company. The Company may be subject to legal proceedings and
claims from time to time in the ordinary course of its business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by the Company and its licensees. Such
claims, even if not meritorious, could result in the
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expenditure of significant financial and managerial resources which could
result in a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of June 30, 1998, CitySearch employed 555 persons, including 207 persons
in functions related to cost of revenue, 245 persons in sales and marketing,
54 persons in research and development and 49 persons in general and
administrative areas. None of the Company's employees is represented by a
labor union, and CitySearch considers its employee relations to be good.
FACILITIES
The Company's headquarters are located in Pasadena, California, where the
Company currently leases approximately 28,000 square feet under a lease
expiring in 2002. The Company also leases approximately 4,500 square feet in
Austin, 3,900 square feet in Morrisville, North Carolina, 7,900 square feet in
Research Triangle Park, North Carolina, 4,600 square feet in Nashville, 10,000
square feet in New York, 4,700 square feet in Portland, 4,600 square feet in
Salt Lake City and 5,800 square feet in San Francisco under leases which
expire in 2002, 2001, 2003, 2000, 2004, 2002, 2001 and 1999, respectively. The
Company believes that its facilities are adequate in those cities in which the
Company currently does business.
LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Charles Conn............ 36 Chief Executive Officer and Director
Thomas Layton........... 35 President, Chief Operating Officer, Treasurer
and Director
Douglas McPherson....... 36 Chief Legal Officer and Vice President,
Business Development
Bradley Ramberg......... 34 Chief Financial Officer, Vice President,
Finance and Administration and Secretary
Robert Kavner(1)........ 54 Chairman of the Board
Gerald Breslauer(2)..... 69 Director
Barry Diller............ 56 Director
Joseph Gleberman(2)..... 40 Director
William Gross(1)........ 39 Director
Yves Sisteron(2)........ 43 Director
Alan Spoon.............. 47 Director
Thomas Unterman(1)...... 53 Director
</TABLE>
- --------
(1)Member of the Compensation Committee
(2)Member of the Audit Committee
Mr. Conn has served as Chief Executive Officer and a director since he co-
founded the Company in September 1995 and served as President of the Company
from September 1995 to October 1996. From September 1990 to September 1995, he
was a consultant at McKinsey & Company, where he was elected Partner. From
September 1986 to September 1988, Mr. Conn worked with the Boston Consulting
Group in Boston and Tokyo and in 1989 with Canon, Inc. in Japan. Mr. Conn
holds a B.A. from Boston University, a B.A. and M.A. from Oxford University,
where he was a Rhodes Scholar and a M.B.A. from Harvard Business School, where
he was a Baker Scholar.
Mr. Layton has served as President since October 1996, Chief Operating
Officer since November 1995, a director since May 1996 and Treasurer of the
Company since September 1995. He also served as Vice President, Sales and
Marketing from November 1995 to October 1996. From May 1994 to November 1995,
he was with Score Learning Corporation, a leading educational learning center,
where he was promoted from Chief Financial Officer to President and Chief
Operating Officer. From January 1989 to October 1992, Mr. Layton was Vice
President and General Manager of the Western Region for Leasecomm, Inc., a
national equipment leasing company, and was previously with the Boston
Consulting Group. Mr. Layton holds a B.S. from the University of North
Carolina at Chapel Hill and a M.B.A. from Stanford University.
Mr. McPherson has served as Chief Legal Officer and Vice President, Business
Development since he joined the Company in July 1996. From November 1992 to
July 1996, Mr. McPherson was with the law firm of Heller Ehrman White &
McAuliffe, where he specialized in intellectual property law and general
commercial litigation. From September 1991 to September 1992, he served as a
law clerk for a federal district judge. From
41
<PAGE>
June 1986 to June 1988, he served as Assistant to the Vice President at The
Rockefeller Foundation in New York City. He holds a B.A. from the University
of North Carolina at Chapel Hill, a M.A. from the University of California,
Berkeley and a J.D. from Stanford Law School.
Mr. Ramberg has served as the Chief Financial Officer and Vice President,
Finance and Administration since he joined the Company in April 1996 and as
Secretary since February 1998. From January 1994 to April 1996, he was Vice
President of Finance and Operations at the Fresh Gourmet Company, a joint
venture between CPC International Inc. and Prepco. From December 1992 to
January 1994, he was vice president, operations and finance at Pro-Towel, a
start-up consumer products venture. He holds an A.B. from Brown University and
a M.B.A. from Harvard Business School.
Mr. Kavner has served as a director of the Company since December 1995 and
Chairman of the Board of Directors since March 1996. Mr. Kavner has served as
the Chief Executive Officer, President and a director of On Command
Corporation, a provider of hotel in-room entertainment and movies, since
September 1996 and was a consultant in the area of Internet services and
content, interactive entertainment and telecommunications from September 1995
to August 1996. From June 1994 to September 1995, Mr. Kavner was the head of
Creative Artists Agency's business advisory group. From 1984 to 1994, Mr.
Kavner held a number of senior executive positions in AT&T, Inc. Mr. Kavner
has a B.A. from Adelphi University. He also serves as a director of Fleet
Financial Group and Earthlink Networks, Inc.
Mr. Breslauer has served as a director of the Company since December 1995.
Since June 1952, he has been a Partner of Breslauer & Rutman, a financial
management company. Mr. Breslauer holds a B.A. from the University of
California, Los Angeles.
Mr. Diller has served as a director of the Company since December 1997. He
has been a director and Chairman of the Board and Chief Executive Officer of
USA Networks since August 1995. He was Chairman of the Board and Chief
Executive Officer of QVC, Inc. from December 1992 through December 1994. From
1984 to 1992, Mr. Diller served as the Chairmen of the Board and Chief
Executive Officer of Fox, Inc. Prior to joining Fox, Inc., Mr. Diller served
for ten years as Chairman of the Board and Chief Executive Officer of
Paramount Pictures Corporation. Mr. Diller is also a director of The Seagram
Company, Ltd., Ticketmaster Group, Inc. and Golden Books Family Entertainment,
Inc.
Mr. Gleberman has served as a director of the Company since May 1996. He is
a Managing Director in the Principal Investment Area of Goldman, Sachs & Co.
He joined Goldman, Sachs & Co. in 1982. He holds a B.A. and M.A. from Yale
University and a M.B.A. from Stanford University. Mr. Gleberman serves as a
director of Applied Analytical Industries, Inc., Biofield Corp., and Dade
International, Inc.
Mr. Gross has served as a director of CitySearch since he co-founded it in
September 1995. Since March 1996, Mr. Gross has been Chairman of the Board,
Chief Executive Officer and President of bill gross' idealab!, a corporation
which generates ideas for and creates new companies. In 1991, he founded
Knowledge Adventure Inc., a corporation which developed educational software
for children. He served as the Chairman of Knowledge Adventure, Inc. from June
1991 to January 1997. He was a developer at Lotus Development Corporation from
1986 to 1991. Prior to joining Lotus Development Corporation, Mr. Gross
founded, in 1980, GNP Loudspeaker, Inc. to manufacture and sell his patented
designs. In 1995, Mr. Gross was elected to the Board of Trustees of California
Institute of Technology as the first Young Alumni Trustee. Mr. Gross holds a
B.S. from the California Institute of Technology.
Mr. Sisteron has served as a director of the Company since December 1997.
Mr. Sisteron has been a Principal of Global Retail Partners, L.P. since
January 1996 and Manager, U.S. Investments of Carrefour S.A. since 1993. Mr.
Sisteron has a J.D. and an L.L.M. from the Lyon Law School and an L.L.M. in
Comparative Law from New York University School of Law. Mr. Sisteron also
serves as a director of InterWorld Technology Ventures, Inc. and P.F. Chang's
China Bistro, Inc.
42
<PAGE>
Mr. Spoon has served as a director of the Company since December 1997. Mr.
Spoon has been President of The Washington Post Company since September 1993
and Chief Operating Officer and a director since May 1991. Prior to that, Mr.
Spoon held a wide variety of positions at The Washington Post Company,
including President of Newsweek from September 1989 to May 1991. Mr. Spoon has
a B.S. from the Massachusetts Institute of Technology, a M.S. from the M.I.T.
Sloan School of Management and a J.D. from Harvard Law School. He is also a
director of American Management Systems, Inc. and Human Genome Sciences, Inc.
Mr. Unterman has served as a director of the Company since June 1997. Since
March 1998, he has served as an Executive Vice President and Chief Financial
Officer and from August 1995 to March 1998, he served as a Senior Vice
President and Chief Financial Officer of The Times Mirror Company. From
February 1995 to August 1995, Mr. Unterman was a Senior Vice President and
General Counsel, and from September 1992 to February 1995 was a Vice President
and General Counsel, of The Times Mirror Company. He has an A.B. from
Princeton University and a J.D. from the University of Chicago.
BOARD COMPOSITION
The Board of Directors is currently comprised of 10 directors, including
eight non-employee directors. Messrs. Diller and Sisteron were elected
pursuant to rights granted to USA Networks and Global Retail Partners, L.P.
(together with its affiliates, "GRP"), respectively, under the Company's
Restated Certificate of Incorporation. Pursuant to the Company's Restated
Certificate of Incorporation, USA Networks has a right to elect one member of
the Board of Directors until the earlier of (i) November 12, 2007 or (ii) the
date USA Networks owns less than 50% of the capital stock of the Company that
it owned on November 12, 1997. In the event that the Company grants any other
stockholder or stockholders, voting as a separate class, a right to elect more
than one director, USA Networks will be entitled to elect the same number of
directors. The Company's Restated Certificate of Incorporation also provides
that GRP has a right to elect one member of the Board of Directors until the
later of (i) November 20, 1999, (ii) the one-year anniversary of the closing
of this offering or (iii) the date GRP owns less than 100% of the capital
stock of the Company that it owned on November 20, 1997.
Mr. Gleberman was elected to the Board of Directors pursuant to the
Company's Restated Certificate of Incorporation, which provides that the
holders of Series C Preferred Stock, voting together as a separate class, have
a right to elect one member of the Board of Directors. This right terminates
upon the closing of this offering. Certain holders of the Company's Preferred
Stock and Common Stock have entered into a voting agreement (the "Voting
Agreement") pursuant to which such stockholders are required to vote, from and
after the closing of the offering, all of the shares of the Company's voting
securities owned by them to elect to the Board of Directors the designee or
designees (the "Series C Directors") of the holders of a majority of the
shares of Series C Preferred Stock outstanding immediately prior to the
closing of this offering (the "Series C Holders"). The Series C Holders are
entitled to designate one candidate for election to the Board of Directors,
except that if any other stockholder or stockholders, voting as a separate
class, are entitled, by virtue of a right granted by the Company, to elect
more than one director, the number shall be increased to the number of
directors that such other stockholder or stockholders are entitled to elect.
The Company has agreed to use its best efforts to cause the nomination and
election of the Series C Directors in accordance with the Voting Agreement.
The Voting Agreement terminates upon the date the Series C Holders hold less
than 7.5% of the then outstanding Common Stock (on a fully diluted basis). As
of June 30, 1998, the holders of the Series C Preferred hold 10.9% of the
outstanding Common Stock of the Company (on a fully diluted, as-converted
basis). As of June 30, 1998, entities affiliated with Goldman, Sachs & Co.
owned 79.6% of the outstanding Series C Preferred Stock.
The Company's Restated Certificate of Incorporation to be effective upon the
completion of this offering provides that the Board of Directors will be
divided into three classes to serve staggered three-year terms.
The Board of Directors has a Compensation Committee, currently comprised of
Mr. Kavner, Mr. Gross and Mr. Unterman, that makes recommendations to the
Board of Directors concerning salaries and incentive
43
<PAGE>
compensation for officers and employees of the Company. The Board of Directors
also has an Audit Committee, currently comprised of Mr. Breslauer, Mr.
Gleberman and Mr. Sisteron, that reviews the results and scope of the annual
audit and other accounting related matters.
DIRECTOR COMPENSATION
The members of the Board of Directors are not compensated for their services
to the Company other than for reimbursement of their expenses incurred in
connection with such services and their eligibility for stock option grants
under the Company's 1996 Stock Option Plan. In March and April 1996, Mr.
Kavner received options to purchase 33,334, 6,667 and 54,454 shares of Common
Stock under the 1996 Stock Option Plan at an exercise price of $0.15, $0.15
and $0.38 per share, respectively. In March 1996, Mr. Breslauer received an
option to purchase 6,667 shares of Common Stock under the 1996 Stock Option
Plan at an exercise price of $0.15 per share. Upon completion of this
offering, directors who are employees of the Company will be eligible to
receive stock options pursuant to the 1996 Stock Option Plan, while non-
employee directors will receive stock options pursuant to the automatic option
grant provisions of the 1998 Director Option Plan. See "--Employee Benefit
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee is an officer or employee
of the Company. No interlocking relationship exists between the Company's
Board of Directors or Compensation Committee and the board of directors or
compensation committee of any other company, nor has such an interlocking
relationship existed in the past.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by or paid for services rendered to the
Company in all capacities during the year ended December 31, 1997 by the
Company's Chief Executive Officer and the one executive officer who earned in
excess of $100,000 in compensation during the year ended December 31, 1997
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITY
------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION OPTIONS (#)
- ---------------------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Charles Conn..................... $ 93,333 $ 40,000 -- 83,334
Chief Executive Officer and Di-
rector
Thomas Layton.................... 86,667 25,000 -- 50,000
President, Chief Operating
Officer, Treasurer and Director
</TABLE>
44
<PAGE>
OPTION GRANTS IN 1997
The following table sets forth certain information regarding option grants
to each of the Named Executive Officers during the year ended December 31,
1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
PERCENT OF TOTAL OF STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERMS(4)
UNDERLYING EMPLOYEES IN PRICE ---------------------
NAME OPTIONS GRANTED (1) 1997(2) PER SHARE(3) EXPIRATION DATE 5% 10%
- ---- ------------------- ---------------- ------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles Conn............ 83,334 12.1% $3.00 10/01/07 $ 157,225 $ 398,439
Thomas Layton........... 50,000 7.3 3.00 10/01/07 94,334 239,061
</TABLE>
- --------
(1) All options were granted under the Company's 1996 Stock Option Plan and
vest one forty-eighth per month at the end of each month commencing
September 1, 1997; provided, however that upon a substantial merger or an
acquisition of the Company, the unvested portion of such options will vest
immediately.
(2) Based on options to purchase 689,010 shares granted to employees,
including the Named Executive Officers, during the year ended December 31,
1997 (excluding options to purchase 56,643 shares of Common Stock which
were granted to employees and subsequently canceled during the fiscal year
ended December 31, 1997).
(3) The exercise price per share of each option was equal to the fair market
value of the underlying Common Stock on the date of grant as determined by
the Board of Directors.
(4) Potential gains are calculated net of the exercise price but before taxes
associated with the exercise. The 5% and 10% assumed annual rates of
compounded stock appreciation are mandated by the rules of the Securities
and Exchange Commission ("Commission") and do not represent the Company's
estimate or projection of the future Common Stock price. Actual gains, if
any, on stock option exercises are dependent on the future financial
performance of the Company, overall market conditions and the option
holder's continued employment through the vesting period.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the number of shares acquired upon the
exercise of stock options during the year ended December 31, 1997 and the
number of shares covered by both exercisable and unexercisable stock options
held by each of the Named Executive Officers at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END(1) AT YEAR-END(2)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles Conn............ -- $ -- 6,944 76,390 $ 62,496 $687,510
Thomas Layton........... -- -- 170,834 45,833 2,012,507 412,497
</TABLE>
- --------
(1) Options shown were granted under the 1996 Stock Option Plan. See "Employee
Benefit Plans" for a description of the material terms of these options.
(2) Based on the assumed initial public offering price of $12.00 per share,
less the exercise price.
EMPLOYMENT AGREEMENTS
On May 9, 1996 and July 2, 1997, respectively, the Company entered into at-
will employment agreements with each of Charles Conn and Thomas Layton, the
Company's Chief Executive Officer and President, respectively. Pursuant to
such employment agreements, in the event that Mr. Conn's or Mr. Layton's, as
the case may be, employment is terminated, he will be entitled to receive
severance payments until the earlier of (i) such time as he is employed by a
recognized company or (ii) six months after termination. Such severance
payments will equal his full salary for the first three months after
termination and half of his salary for the second three months after
termination.
45
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan. The Board of Directors adopted and the stockholders
approved the Company's 1996 Stock Option Plan (the "Stock Plan") and the
reservation of 1,666,667 shares of Common Stock thereunder on March 1, 1996.
On September 18, 1996, the Board of Directors and the stockholders approved an
increase of 333,333 reserved for issuance under the Stock Plan. The Board of
Directors and the stockholders approved a further increase of 666,667 shares
on November 18, 1996 and November 20, 1996, respectively. Subject to approval
by the stockholders, the Company plans to increase the number of shares
reserved for issuance by 1,000,000 shares to an aggregate of 3,666,667 shares
of the Common Stock reserved under the Stock Plan. The Stock Plan, as proposed
to be amended, provides that the aggregate number of shares reserved
thereunder will automatically be increased each year on the first day of the
Company's fiscal year beginning in 1999 by a number of shares equal to the
lesser of (i) 666,667 shares of Common Stock, (ii) 3% of the then outstanding
shares of Common Stock on such date or (iii) a lesser amount determined by the
Board of Directors.
The Stock Plan provides for the granting to employees (including officers
and employee directors) of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and for the
granting to employees (including officers and employee directors) and
consultants (including non-employee directors) of nonstatutory stock options.
Unless terminated sooner, the Stock Plan will terminate automatically in March
2006. The Board of Directors has the authority to amend, suspend or terminate
the Stock Plan, provided that no such action may affect any share of Common
Stock previously issued and sold or any option previously granted under the
Stock Plan.
The Stock Plan may be administered by the Board of Directors or a committee
consisting of members of the Board of Directors. The administrator has the
power to determine the terms of each option granted, including the exercise
price, the number of shares subject to the option and the exercisability
thereof, and the form of consideration payable upon exercise. No employee or
consultant may be granted, in any fiscal year of the Company, options to
purchase more than 500,000 shares (plus 1,000,000 shares in the case of a new
employee's or consultant's initial employment with the Company). Unless
determined otherwise by the administrator, an option granted under the Stock
Plan is not transferable by the optionee other than by will or by the laws of
descent or distribution, and is exercisable during the lifetime of the
optionee only by such optionee. An option granted under the Stock Plan must be
exercised within three months after termination of the optionee's status as an
employee or consultant of the Company (or within 12 months after termination
of such status by death or disability), but in no event later than the
expiration of the option in accordance with its terms. The exercise price of
nonstatutory stock options is determined by the administrator, but with
respect to nonstatutory stock options intended to a qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended, the exercise price must at least be equal to
the fair market value of the Common Stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of the Company's outstanding capital stock, the exercise price
of any incentive stock option must equal at least 110% of the fair market
value on the grant date and the term of the option must not exceed five years.
The term of all other options granted under the Stock Plan may not exceed ten
years.
The shares subject to options granted under the Stock Plan may be fully and
immediately exercisable or may be exercisable cumulatively over time or upon
satisfaction of specified performance criteria, as determined by the
administrator. In most cases, 25% of the shares subject to options granted
under the Stock Plan are exercisable at the end of one year with one forty-
eighth of the shares subject to the option becoming exercisable each month
thereafter.
The Stock Plan provides that in the event of a merger of the Company with or
into another corporation, outstanding stock options will either be assumed by
the acquiring corporation or terminated as of the date of the closing of the
merger, and immediately prior to the consummation of any dissolution or
liquidation of the Company, outstanding stock options will be terminated.
46
<PAGE>
1998 Director Option Plan. Subject to approval by the stockholders, the
Company intends to adopt the 1998 Director Option Plan (the "Director Plan").
The Director Plan provides for the automatic grant of nonstatutory stock
options to non-employee directors. The Director Plan has a term of ten years,
unless terminated sooner by the Board of Directors. A total of 200,000 shares
of Common Stock have initially been reserved for issuance under the Director
Plan. In addition, the Director Plan provides for annual increases on the
first day of the Company's fiscal year beginning in 1999 by a number equal to
the lesser of (i) the number of shares needed to restore the maximum aggregate
number of shares available for sale under the Director Plan to 200,000 shares
or (ii) a lesser number of shares determined by the Board of Directors.
The Director Plan provides that on the date of the closing of this offering
(the "Closing Date"), any Current Outside Director (as defined below) who is
the Chairman of the Board of Directors as of the Closing Date shall
automatically be granted an option to purchase 33,334 shares of Common Stock
and each other Current Outside Director shall automatically be granted an
option to purchase 16,667 shares of Common Stock. Each New Outside Director
(as defined below) shall automatically be granted an option to purchase 13,334
shares of Common Stock on the date which such person first becomes a non-
employee director. In addition, each New Outside Director shall automatically
be granted an option to purchase 3,334 shares on the date of each of the
Company's annual meeting of stockholders, if on such date he or she shall have
served on the Board of Directors for at least six months. Each option granted
under the Director Plan shall have a term of ten years. Twenty-five percent of
the shares subject to the options will vest one year from the date of grant
and one forty-eighth of the optioned stock shall vest each month thereafter,
provided that the individual continues to serve as a director on such dates.
The exercise price of each option shall be 100% of the fair market value per
share of the Common Stock on the date of grant. The term "Current Outside
Director" shall mean any person who is a non-employee director of the Company
on the Closing Date, and the term "New Outside Director" shall mean any person
who joins the Board of Directors after the Closing Date.
In the event of a substantial merger or an acquisition of the Company, each
outstanding option granted to a Current Outside Director shall become fully
vested and exercisable. Each outstanding option may be assumed or an
equivalent option substituted for by the successor corporation. If an option
is assumed or substituted for by the successor corporation, it shall continue
to vest as provided in the Director Plan so long as the optionee continues to
serve as a director of the Company or the successor corporation, as
applicable. If the successor corporation does not assume an outstanding option
or substitute for it an equivalent option, the option will terminate as of the
closing of the merger or asset sale. Options granted under the Director Plan
must be exercised within three months of the end of the optionee's tenure as a
director of the Company, or within 12 months after such director's termination
by death or disability, but in no event later than the expiration of the
option's ten-year term. Options granted under the Director Plan are generally
not transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
1998 Employee Stock Purchase Plan. Subject to approval by stockholders, the
Company plans to adopt the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") and reserve an aggregate of 200,000 shares of Common Stock thereunder.
The number of shares reserved will be increased automatically each year on the
first day of the Company's fiscal year beginning in 1999 by an amount equal to
the lesser of (i) 266,667 shares of Common Stock, (ii) 1.0% of the outstanding
shares of Common Stock on such date or (iii) a lesser amount determined by the
Board of Directors. The Purchase Plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Code. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the
commencement of the Purchase Plan. Each offering period will run for 12 months
and will be divided into consecutive purchase periods of approximately six
months. The initial offering under the Purchase Plan will commence on the date
of this Prospectus and terminate on October 31, 1999. Thereafter, new 12 month
offering periods will commence every six months on each May 1 and November 1.
Unless otherwise determined by the Board of Directors, employees are
eligible to participate in the Purchase Plan only if they are customarily
employed by the Company or a subsidiary of the Company designated by the
47
<PAGE>
Board of Directors for at least 20 hours per week and for at least five months
per calendar year. Amounts deducted and accumulated by the participant are
used to purchase shares of Common Stock at the end of each purchase period.
Employees who participate in an offering may have up to 15% of their
compensation withheld pursuant to the Purchase Plan. The price of Common Stock
purchased under the Purchase Plan will be equal to 85% of the fair market
value of the Common Stock at the commencement date of each offering period or
the relevant purchase date, whichever is lower. In the event the fair market
value at the end of a purchase period is less than the fair market value at
the beginning of the offering period, the participants will be withdrawn from
the current offering period following exercise and automatically re-enrolled
in a new offering period. The new offering period will use the lower fair
market value as of the first date of the new offering period to determine the
purchase price for future purchase periods. Employees may end their
participation in any offering period at any time during any offering period,
and participation ends automatically on termination of employment with the
Company. The maximum number of shares that a participant may purchase during
each purchase period is 3,334 shares during any purchase period. In addition,
no person may purchase shares under the Purchase Plan to the extent such
person would own 5% or more of the total combined value or voting power of all
classes of the capital stock of the Company or any of its subsidiaries, or to
the extent that such person's rights to purchase stock under all employee
stock purchase plans would exceed $25,000 for any calendar year. The Purchase
Plan will terminate ten years from the date of adoption of the Purchase Plan,
unless terminated earlier in accordance with the provisions of the Purchase
Plan.
In the event of a proposed sale of all or substantially all the assets of
the Company, or the merger of the Company with or into another corporation,
each outstanding option will be assumed or an equivalent option substituted by
the successor corporation. In the event the successor corporation does not
assume or substitute for the option, any offering periods then in progress
shall be shortened to a new date prior to the proposed sale or merger. The
Board of Directors has the authority to amend or terminate the Purchase Plan,
provided, that no such action may adversely affect any outstanding rights to
purchase Common Stock.
401(k) Plan. The Company participates in a tax-qualified employee savings
and retirement plan (the "401(k) Plan") which covers all of the Company's
full-time employees who are at least 21 years of age and who have been
employed with the Company for at least three months. Pursuant to the 401(k)
Plan, eligible employees may defer up to 20% of their pre-tax earnings,
subject to the Internal Revenue Service's annual contribution limit. The
401(k) Plan permits additional discretionary matching contributions by the
Company on behalf of all participants in the 401(k) Plan in such a percentage
amount as may be determined annually by the Board of Directors. To date, the
Company has made no such matching contributions. The 401(k) Plan is intended
to qualify under Section 401 of the Internal Revenue of 1986, as amended, so
that contributions by employees or by the Company to the 401(k) Plan, and
income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. The trustee under the 401(k)
Plan, at the direction of each participant, invests the assets of the 401(k)
Plan in any of a number of investment options.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation, which will become
effective upon the closing of this offering, limits the liability of directors
for breach of fiduciary duty as a director to the maximum extent permitted by
the DGCL. The DGCL provides that a corporation's certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director for monetary damages for breach of their fiduciary duties as
directors, except for liability (i) for any breach of their duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided for in Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's Restated Certificate of Incorporation also provides that the Company
is required to indemnify to the fullest extent permitted by law any director,
officer or employee of the Company.
The Company's Bylaws, which will also become effective upon the closing of
this offering, provide that (i) the Company is required to indemnify its
directors and officers to the maximum extent permitted by the
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<PAGE>
DGCL, subject to certain very limited exceptions, (ii) the Company may
indemnify its other employees and agents to the maximum extent permitted by
the DGCL, (iii) the Company is required to advance expenses, as incurred, to
its directors and officers in connection with a legal proceeding, subject to
certain very limited exceptions and (iv) the rights conferred in the Bylaws
are not exclusive.
The Company will enter into indemnification agreements with its officers and
executive directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors
or officers (other than liabilities arising from willful misconduct of a
culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
49
<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENTS OF SECURITIES
On September 22, 1995, the Company issued an aggregate of 4,415,291 shares
of its Common Stock to William Gross, a co-founder and director of the
Company, for services provided to the Company and aggregate proceeds of
$5,000. On December 9, 1995, the Company repurchased 1,333,334 shares of
Common Stock from Mr. Gross for an aggregate price of $1,510. On October 11,
1995 the Company sold an aggregate of 2,822,344 shares of its Common Stock to
Charles Conn, Thomas Layton, Jeffrey Brewer and certain other key employees
(together with shares of Common Stock issued to William Gross, the "Founders'
Stock") for aggregate proceeds of $84,670. Pursuant to the terms of the
applicable subscription agreement, Founders' Stock may not be transferred
without the written consent of the Board of Directors. To date, 1,245,784
shares of Founders' Stock have been transferred by Mr. Gross and certain key
employees with the approval of the Board of Directors. However, Mr. Gross
retains voting power over 1,118,875 of shares transferred by him until the
closing of this offering.
Between May 15, 1996 and July 31, 1996, the Company issued and sold an
aggregate of 3,261,024 shares of Series C Preferred Stock (or 2,113,458 shares
of Common Stock on an as-converted basis and as adjusted for the Reverse Stock
Split) at a per share price of $3.4665. Entities affiliated with Goldman,
Sachs & Co., which entities together hold more than 5% of the capital stock of
the Company, purchased 2,596,278 of these shares (or 1,682,646 shares of
Common Stock on an as-converted basis and as adjusted for the Reverse Stock
Split) for an aggregate purchase price of approximately $9.0 million. Mr.
Gleberman, a director of the Company, is a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co.
Between December 13, 1996 and October 22, 1997, the Company issued and sold
an aggregate of 4,430,313 shares of Series D Preferred Stock (or 2,865,063
shares of Common Stock on an as-converted basis and as adjusted for the
Reverse Stock Split) at a per share price of $6.5251. These sales included the
following: 766,272 shares (or 495,548 shares of Common Stock on an as-
converted basis and as adjusted for the Reverse Stock Split) to were sold to
The Times Mirror Company for an aggregate purchase price of approximately $5.0
million; 475,085 shares (or 307,232 shares of Common Stock on an as-converted
basis and as adjusted for the Reverse Stock Split) were sold to entities
affiliated with Goldman, Sachs & Co. for an aggregate purchase price of
approximately $3.1 million; 459,763 shares (or 297,328 shares of Common Stock
on an as-converted basis and as adjusted for the Reverse Stock Split) were
sold to Washingtonpost.Newsweek Interactive Company, for an aggregate purchase
price of approximately $3.0 million; and 12,674 shares (or 8,196 shares of
Common Stock on an as-converted basis and as adjusted for the Reverse Stock
Split) were sold to Byters for an aggregate purchase price of approximately
$83,000. Mr. Unterman, a director of the Company, is an Executive Vice
President and Chief Financial Officer of The Times Mirror Company. Mr. Spoon,
a director of the Company, is President of The Washington Post Company. Mr.
Breslauer, a director of the Company, is a general partner of Byters.
Between November 11, 1997 and November 26, 1997, the Company issued and sold
an aggregate of 4,714,286 shares of Series E Preferred Stock (or 3,103,875
shares of Common Stock on an as-converted basis and as adjusted for the
Reverse Stock Split) at a per share price of $7.00. USA Networks purchased
2,857,143 of these shares (or 1,881,142 shares of Common Stock on an as-
converted basis and as adjusted for the Reverse Stock Split) for an aggregate
purchase price of approximately $20.0 million. Mr. Diller, a director of the
Company, is Chairman and Chief Executive Officer of USA Networks. In addition,
714,286 shares (or 470,283 shares of Common Stock on an as-converted basis and
as adjusted for the Reverse Stock Split) were sold to Global Retail Partners,
L.P. and its affiliates for an aggregate purchase price of approximately $5.0
million and 306,509 shares (or 201,805 shares of Common Stock on an as-
converted basis and as adjusted for the Reverse Stock Split) were sold to
Washingtonpost.Newsweek Interactive Company for an aggregate purchase price of
approximately $2.1 million. Mr. Sisteron, a director of the Company, is a
Principal of Global Retail Partners, L.P.
On May 26, 1998, the Company issued and sold an aggregate of 1,000,000
shares of Series E Preferred Stock (or 658,399 shares of Common Stock on an
as-converted basis and as adjusted for the Reverse Stock Split)
50
<PAGE>
at a per share price of $7.00. USA Networks purchased 428,571 of these shares
(or 282,171 shares of Common Stock on an as-converted basis and as adjusted
for the Reverse Stock Split) for an aggregate purchase price of approximately
$3.0 million.
Until the closing of this offering, the holders of the Series C Preferred
Stock have a right to elect directors pursuant to the Company's Restated
Certificate of Incorporation and from and after the closing of this offering
pursuant to the Voting Agreement. USA Networks and GRP have a right to elect
directors pursuant to the Company's Restated Certificate of Incorporation. See
"Management--Board Composition."
Pursuant to the Stockholders' Agreement, USA Networks has a right to
purchase that number of shares of this offering (the "IPO Shares") which will
enable USA Networks to own up to 14.9% of the Company (on a fully diluted, as-
converted basis); provided that USA Networks may not purchase more than 50% of
the IPO Shares. As of June 30, 1998, USA Networks owns 11.1% of the Company
(on a fully diluted, as-converted basis). USA Networks has committed to
purchase 1,332,093 shares of Common Stock in this offering (plus an additional
89,400 shares if the Underwriters' over-allotment option is exercised in full)
pursuant to the Stockholders' Agreement. If the actual price of the IPO Shares
is above the range specified in this offering, USA Networks will no longer be
obligated to purchase any IPO Shares. In addition, the Stockholders' Agreement
provides that the Company may not (i) adopt a rights agreement (or other
similar device) with an ownership threshold that would limit USA Networks'
ability to own or purchase securities of the Company or (ii) amend its bylaws,
certificate of incorporation or fail to take an action under Section 203 of
the DGCL which would limit USA Networks' ability to own or purchase securities
of the Company.
In May 1997, the Company entered into a cross-promotional agreement with
Ticketmaster Group, Inc., an affiliate of USA Networks ("Ticketmaster").
Pursuant to the agreement, Ticketmaster agreed to provide banner advertising
promoting the Company's owned and operated city sites on the Ticketmaster Web
site, to provide access to Ticketmaster ticket and information Web pages and
to provide "music-on-hold" and/or direct mail opportunities. CitySearch agreed
to provide promotion of the Ticketmaster name and logo in selected advertising
and marketing materials, to co-produce with Ticketmaster broadcast
advertising, to provide banner advertising promoting Ticketmaster on the
CitySearch Web sites and to promote Ticketmaster events and publications.
In June 1997, the Company entered into a license and services agreement with
the Los Angeles Times, a division of The Times Mirror Company. The agreement
provides for the license of the Company's intellectual property and consulting
services in exchange for an up-front license fee, ongoing royalties based on
the revenues generated by the city guide developed by the parties and fees for
consulting services. The agreement contains customary termination provisions
for material breach or non-performance.
In November 1997, the Company entered into a license and services agreement
with Washingtonpost. Newsweek Interactive Company. The agreement provides for
the license of the Company's intellectual property and consulting services in
exchange for an up-front license fee, ongoing royalties based on the revenues
generated by the city guide developed by the parties and fees for consulting
services. The agreement contains customary termination provisions for material
breach or non-performance.
The Company believes that the terms of each of the transactions described
above, taken as a whole, were no less favorable than the Company could have
obtained from unaffiliated third parties. All future transactions between the
Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors.
The Company has entered into employment agreements with each of Charles Conn
and Thomas Layton, the Company's Chief Executive Officer and President,
respectively. See "Management--Employment Agreement."
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on an as-converted basis and as
adjusted to reflect the sale of the 4,000,000 shares of Common Stock offered
hereby by (i) each person or entity who is known by the Company to own
beneficially 5% or more of the Company's outstanding Common Stock; (ii) each
director of the Company; (iii) each of the Named Executive Officers; and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(2)
NAME AND ADDRESS OF NUMBER OF SHARES ------------------------------
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING
- ------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
William Gross(3).......... 2,356,882 14.0 11.3
USA Networks, Inc. ....... 2,163,313 12.9 16.8(4)
152 West 57th Street,
38th Floor
New York, NY 10019
Barry Diller(5)........... 2,163,313 12.9 16.8(4)
Entities affiliated with 11.9 9.6
The Goldman Sachs Group,
L.P.(6).................. 1,989,878
85 Broad Street
New York, NY 10004
Joseph Gleberman(7)....... 1,989,878 11.9 9.6
Charles Conn(8)........... 1,084,645 6.5 5.2
Thomas Layton(9).......... 639,006 3.8 3.1
Thomas Unterman(10)....... 500,250 3.0 2.4
Alan Spoon(11)............ 499,133 3.0 2.4
Yves Sisteron(12)......... 470,283 2.8 2.3
Robert Kavner(13)......... 149,549 * *
Gerald Breslauer(14)...... 61,067 * *
Executive officers and
directors as a group
(12 persons)(15)......... 10,454,442 61.8 50.0
</TABLE>
- --------
* Less than 1% of the Company's outstanding Common Stock.
(1) Unless otherwise indicated, the address of each of the named individuals
is: c/o CitySearch, Inc., 790 E. Colorado Boulevard, Suite 200, Pasadena,
CA 91101.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated by footnote, and subject to community
property laws where applicable and the terms of the Voting Agreement
relating to the election of the Series C Director, the persons named in
the table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. Percentage of
beneficial ownership is based on 16,788,507 shares of Common Stock
outstanding as of June 30, 1998, and 4,000,000 shares of Common Stock
after completion of this offering. Amounts shown in the above table and
the following notes include shares issuable upon stock options to
purchase shares of Common Stock which are exercisable within 60 days of
June 30, 1998.
(3) Excludes 1,118,875 shares which Mr. Gross transferred previously but as
to which he retains voting power until the closing of this offering.
Includes 393,800 shares held by bill gross' idealab!, as to which Mr.
Gross disclaims beneficial ownership.
(4) Percentage calculation includes the 1,332,093 shares of Common Stock to
be purchased by USA Networks in this offering. See "Certain
Transactions."
(5) Includes 2,163,313 shares held by USA Networks, as to which Mr. Diller
disclaims beneficial ownership.
(6) Represents 1,989,878 shares owned by certain investment partnerships, of
which affiliates of The Goldman Sachs Group, L.P. ("GS Group") are the
general partner, managing general partner or investment manager. Includes
1,248,511 shares held of record by GS Capital Partners II, L.P., 496,332
shares held of record by GS Capital Partners II Offshore, L.P., 46,050
shares held of record by Goldman, Sachs & Co.
52
<PAGE>
Verwaltungs GmbH, 118,573 shares held of record by Stone Street Fund
1996, L.P. and 80,412 shares held of record by Bridge Street Fund 1996.
L.P. GS Group disclaims beneficial ownership of the shares owned by such
investment partnerships to the extent attributable to partnership
interests therein held by persons other than GS Group and its affiliates.
Each of such investment partnerships shares voting and investment power
with certain of its respective affiliates.
(7) Includes 1,989,878 shares held by entities affiliated with the GS Group.
Mr. Gleberman, a director of the Company, is a managing director of
Goldman, Sachs & Co., the general partner of which is GS Group. Mr.
Gleberman disclaims beneficial ownership of the shares owned by the GS
Group, except to the extent of his pecuniary interest therein. See
footnote (6).
(8) Includes 27,430 shares issuable upon exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
June 30, 1998.
(9) Includes 19,791 shares issuable upon exercise of stock options to
purchase shares of Common Stock which are exercisable within 60 days of
June 30, 1998.
(10) Includes 495,548 shares held by The Times Mirror Company, as to which Mr.
Unterman disclaims beneficial ownership, and 4,702 shares held by The
Thomas and Janet Unterman Living Trust dated 12/30/94.
(11) Includes 499,133 shares held by Washingtonpost.Newsweek Interactive
Company, as to which Mr. Spoon disclaims beneficial ownership.
(12) Includes 470,283 shares held by Global Retail Partners, L.P. and its
affiliates, as to which Mr. Sisteron disclaims beneficial ownership.
(13) Includes 72,693 shares issuable upon exercise of stock options to
purchase shares of Common Stock which are exercisable by Mr. Kavner
within 60 days of June 30, 1998.
(14) Includes 54,400 shares held by Byters and 6,667 shares issuable upon
exercise of stock options to purchase shares of Common Stock which are
exercisable within 60 days of June 30, 1998.
(15) See footnotes (2) through (14). Includes 141,227 shares issuable upon
exercise of stock options to purchase shares of Common Stock which are
exercisable within 60 days of June 30, 1998.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of June 30, 1998, assuming the conversion of all outstanding Preferred
Stock into Common Stock, there were 16,788,507 shares of Common Stock held of
record by 265 stockholders and options to purchase 2,608,514 shares of Common
Stock outstanding.
COMMON STOCK
Upon the closing of this offering, the Company will be authorized to issue
75,000,000 shares of Common Stock. Subject to preferences that may apply to
shares of Preferred Stock outstanding from time to time, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
Board of Directors may from time to time determine. Each stockholder is
entitled to one vote for each share of Common Stock held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not provided for in the Company's Restated Certificate of
Incorporation; therefore, the holders of a majority of the shares voted can
elect all of the directors then standing for election. The Common Stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Upon a liquidation, dissolution or winding-up of the Company, the assets
legally available for distribution to stockholders are distributable ratably
among the holders of the Common Stock and any participating Preferred Stock
outstanding at that time after payment of liquidation preferences, if any, on
any outstanding Preferred Stock and payment of other claims of creditors. Each
outstanding share of Common Stock is, and all shares of Common Stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, the Company will be authorized to issue
2,000,000 shares of Preferred Stock. The Board of Directors is authorized,
subject to limitations prescribed by Delaware law, to provide for the issuance
of shares of Preferred Stock in one or more series, to establish from time to
time the number of shares to be included in each such series, to fix the
powers, designations, preferences and rights of the shares of each wholly
unissued series and designate any qualifications, limitations or restrictions
thereon and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without
any further vote or action by the stockholders. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting and other rights of
the holders of Common Stock, which could have an adverse impact on the market
price of the Common Stock. The Company has no current plan to issue any shares
of Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Restated Certificate of Incorporation provides that, effective
upon the closing of this offering, all stockholder actions must be effected at
a duly called meeting and not by consent in writing. Provisions of the
Restated Certificate of Incorporation and Bylaws provide that the stockholders
may amend certain provisions of the Restated Certificate of Incorporation and
the Bylaws only with the affirmative vote of holders of 66 2/3% of the
Company's capital stock. Further, the Bylaws (i) provide that only the Board
of Directors, the Chairman of the Board of Directors or the President may call
special meetings of the stockholders and (ii) establish an advance notice
procedure for stockholder proposals to be brought before an annual meeting of
stockholders of the Company, including proposed nominations of persons for
election to the Board of Directors. In addition, the Restated Certificate of
Incorporation provides that the Board of Directors will be divided into three
classes to serve staggered three-year terms. These provisions of the Restated
Certificate of Incorporation and Bylaws may have the effect of delaying,
deferring or preventing a change of control of the Company. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. The
54
<PAGE>
provisions also are intended to discourage certain tactics that may be used in
proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a
consequence, they also may inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of the Company. The Stockholders' Agreement provides that the
Company may not (i) adopt a rights agreement (or other similar device) with an
ownership threshold that would limit USA Networks' ability to own or purchase
securities of the Company or (ii) amend its bylaws, certificate of
incorporation or fail to take an action under Section 203 of the DGCL, in each
case in a manner which would limit USA Networks' ability to own or purchase
securities of the Company. See "Risk Factors--Anti-takeover Effects of Certain
Charter and Contractual Provisions."
EFFECT OF DELAWARE ANTITAKEOVER STATUTE
The Company is subject to Section 203 of the DGCL (the "Antitakeover Law"),
which regulates corporate acquisitions. The Antitakeover Law prevents certain
Delaware corporations, including those whose securities are listed for trading
on the Nasdaq National Market, from engaging under certain circumstances in a
"business combination" with any "interested stockholder" for three years
following the date that such stockholder became an interested stockholder. For
purposes of the Antitakeover Law, a "business combination" includes, among
other things, a merger or consolidation involving the Company and the
interested stockholder and the sale of more than ten percent of the Company's
assets. In general, the Antitakeover Law defines an "interested stockholder"
as any entity or person beneficially owning 15% or more of the outstanding
voting stock of the Company and any entity or person affiliated with or
controlling or controlled by such entity or person. A Delaware corporation may
"opt out" of the Antitakeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of
at least a majority of the Company's outstanding voting shares. The Company
has not "opted out" of the provisions of the Antitakeover Law.
REGISTRATION RIGHTS
After this offering, the holders of 14,561,751 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of the agreement between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. Additionally, of such
holders, holders of 8,740,795 shares of Common Stock are also entitled to
certain demand registration rights pursuant to which they may require the
Company to file a registration statement under the Securities Act at its
expense with respect to their shares of Common Stock, and the Company is
required to use its best efforts to effect such registration. All of these
registration rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of
shares included in such registration and the right of the Company not to
effect a requested registration within six months following an offering of the
Company's securities, including the offering made hereby.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could materially adversely affect prevailing market prices.
Furthermore, since only a limited number of shares will be available for sale
shortly after the offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after restrictions lapse could
materially adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of the offering, the Company will have 20,788,507 shares of
Common Stock outstanding, assuming no exercise of currently outstanding
options. Of these shares, the 4,000,000 shares sold in this offering (plus any
additional shares sold upon exercise of the Underwriters' over-allotment
option) will be freely transferable without restriction under the Securities
Act, unless they are held by "affiliates" of the Company as that term is used
under the Securities Act and the regulations promulgated thereunder
("Affiliates"). The remaining 16,788,507 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 of the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act. As a result of contractual restrictions and the provisions of Rules 144
and 701, additional shares will be available for sale in the public market as
follows: (i) approximately 498,574 Restricted Shares will be eligible for
immediate sale on the effective date of this offering; (ii) approximately
4,334 Restricted Shares will be eligible for sale 90 days after the effective
date of this offering; (iii) approximately 4,949,461 Restricted Shares will be
eligible for sale without restriction and 10,601,970 Restricted Shares will be
eligible for sale subject to volume limitations, in each case 180 days after
the effective date of this offering and (iv) the remainder of the Restricted
Shares will be eligible for sale from time to time thereafter upon expiration
of their respective holding periods under Rule 144. In addition, 1,224,944
shares will be issuable upon exercise of vested stock options 180 days after
the effective date of this offering upon the expiration of contractual pre-
existing lock-up agreements. NationsBanc Montgomery Securities LLC, on behalf
of the Underwriters, may, in its sole discretion and at any time without
notice, release all or any portion of securities subject to the lock-up
agreement with the Underwriters.
Upon the effective date of this offering, the holders of 8,740,795 shares of
Common Stock have the right in certain circumstances to require the Company to
register their shares under the Securities Act for resale to the public. If
such holders, by exercising their demand registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have a material adverse effect on the market price for the Company's
Common Stock. If the Company were required to include in a Company-initiated
registration shares held by such holders and holders of an additional
5,820,956 shares of Common Stock pursuant to the exercise of their piggyback
registration rights, such sales may have a material adverse affect on the
Company's ability to raise new capital. See "Description of Capital Stock--
Registration Rights."
In addition, the Company expects to file a registration statement on Form S-
8 registering a total of approximately 3,232,748 shares of Common Stock
subject to outstanding stock options or reserved for issuance under the
Company's 1996 Stock Option Plan, 1998 Director Option Plan and 1998 Employee
Stock Purchase Plan. The Form S-8 registration statement is expected to be
filed and to become effective immediately following the date of this offering.
Shares registered under such registration statement will be available for sale
in the open market, subject to Rule 144 value limitations applicable to
Affiliates, unless such shares are subject to vesting restrictions with the
Company or the lock-up agreements described above.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the offering, an Affiliate of the Company or person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares (as defined under Rule 144) for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of the Company's
Common Stock or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which the notice of
56
<PAGE>
the sale is filed with the Commission. Sales pursuant to Rule 144 are subject
to certain requirements relating to the manner of sale, notice, and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not an Affiliate of the Company at
any time during the 90 days immediately preceding the sale, and who has
beneficially owned restricted shares for at least two years is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above.
An employee, officer or director of the Company or a consultant to the
Company who purchased or was awarded shares or options to purchase shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701 of the Securities Act, which permits Affiliates
and non-Affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this offering. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
57
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and
Donaldson, Lufkin & Jenrette Securities Corporation (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent
and that the Underwriters are committed to purchase all of the shares if they
purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities LLC..............................
BancAmerica Robertson Stephens.....................................
Donaldson, Lufkin & Jenrette Securities Corporation................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the offering, the offering
price and concessions and other selling terms may be changed by the
Representatives. No change in such terms shall change the amount of proceeds
to be received by the Company as set forth on the cover page of this
Prospectus. The Common Stock is offered subject to receipt and acceptance by
the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent the Underwriters exercise this option, each of the
Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
All of the Company's officers and directors and certain stockholders have
agreed that, subject to certain exceptions, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
NationsBanc Montgomery Securities LLC, directly or indirectly, sell, offer to
sell or otherwise dispose of any such shares of Common Stock or any right to
acquire such shares. In addition, the Company has agreed that, for a period of
180 days after the date of this Prospectus, it will not, without the prior
written consent of NationsBanc Montgomery Securities LLC, issue, offer, sell,
grant options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable for the
Common Stock or other equity security, other than the grant of options to
purchase Common Stock, or the issuance of
58
<PAGE>
shares of Common Stock under the Company's stock option and stock purchase
plans, the issuance of shares of Common Stock in connection with certain
acquisitions and the issuance of shares of Common Stock pursuant to the
exercise of outstanding options.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, the prospects for future earnings of the Company, the
present state of the Company's development, the general condition of the
securities markets at the time of the offering, the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods and other factors deemed relevant.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities and Exchange
Act of 1934. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing
bids do not exceed a specified maximum. Syndicate covering transactions
involve purchases of shares of Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the shares of Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to make sales in excess of five percent of the number of shares of
Common Stock offered hereby to accounts over which they exercise discretionary
authority.
In consideration of the services rendered by NationsBanc Montgomery
Securities LLC as placement agent for the Company's Series E Preferred Stock
financing, the Company paid to NationsBanc Montgomery Securities LLC a fee
equal to $1,546,182 in November 1997. As additional consideration for such
services, the Company granted to NationsBanc Montgomery Securities LLC a
warrant to purchase 94,286 shares of Series E Preferred Stock (or 62,077
shares of Common Stock on an as-converted basis and as adjusted to reflect the
Reverse Stock Split). The warrant is exercisable at any time at an exercise
price of $8.75 per share of Series E Preferred Stock (or $13.29 per share of
Common Stock on an as-converted basis and as adjusted to reflect the Reverse
Stock Split). Any unexercised portion of the warrant is automatically
convertible into Common Stock immediately prior to the closing of this
offering for that number of shares of Series E Preferred Stock equal to (x)
the value of the unexercised portion as of the date of the closing of this
offering, which value shall equal the difference between the aggregate
exercise price and the aggregate value of the shares of Series E Preferred
Stock issuable upon exercise of the unexercised portion of the warrant, at a
per share price equal to the initial offering price divided by (y) the initial
offering price.
Bayview Investors, Ltd., an entity affiliated with BancAmerica Robertson
Stephens, holds 25,941 shares of Series D Preferred Stock (or 16,776 shares of
Common Stock on an as-converted basis and as adjusted to reflect the Reverse
Stock Split).
Global Retail Partners, L.P. and its affiliates, each an affiliate of
Donaldson, Lufkin & Jenrette Securities Corporation, holds 714,286 shares of
Series E Preferred Stock (or 470,283 shares of Common Stock on an as-converted
basis and as adjusted to reflect the Reverse Stock Split). Under the Company's
Restated Certificate of Incorporation, GRP is entitled to elect one member of
the Board of Directors until the later of (i) November 20, 1999, (ii) the one-
year anniversary of the closing of this offering or (iii) the date GRP owns
less than 100% of the capital stock of the Company that it owned on November
20, 1997. Mr. Sisteron, a director of the Company, is a Principal of Global
Retail Partners, L.P.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Venture Law Group, A Professional Corporation, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the shares of Common Stock offered hereby. An entity affiliated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, holds 13,334 shares of
Common Stock and 55,282 shares of Series A Preferred Stock (or 36,856 shares
of Common Stock on an as-converted basis and as adjusted for the Reverse Stock
Split).
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997 and for the period from September 20, 1995 (date of formation) to
December 31, 1995 and for the years ended December 31, 1996 and 1997, included
in this Prospectus have been audited by Ernst & Young LLP, independent
auditors, as stated in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act with respect to the securities offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete. In each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, and each such statement is qualified in all
respects by such reference. The Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
Web site is http://www.sec.gov.
60
<PAGE>
CITYSEARCH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and at June 30,
1998 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the period from September 20,
1995 (date of formation) to December 31, 1995, the years ended December
31, 1996 and 1997 and the six months ended June 30, 1997 and 1998
(unaudited) ............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from September 20, 1995 (date of formation) to December 31, 1995, the
years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the period from September 20,
1995 (date of formation) to December 31, 1995, the years ended December
31, 1996 and 1997 and the six months ended June 30, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
CITYSEARCH, INC.
We have audited the accompanying consolidated balance sheets of CitySearch,
Inc. as of December 31, 1996 and 1997 and the related statements of
operations, stockholders' equity, and cash flows for the period from September
20, 1995 (date of formation) to December 31, 1995 and for each of the two
years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CitySearch,
Inc. at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for the period from September 20, 1995 (date of
formation) to December 31, 1995 and for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
March 11, 1998, except for Note 10,
as to which the date is July 14, 1998
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 10 to the financial
statements.
/s/ Ernst&Young LLP
Los Angeles, California
July 14, 1998
F-2
<PAGE>
CITYSEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ JUNE 30, JUNE 30,
1996 1997 1998 1998
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 7,527 $ 25,227 $ 15,512
Accounts receivable, net of
allowance for doubtful accounts
of $25 in 1997 and $61 in 1998... 34 100 407
Due from licensees................ -- 193 735
Prepaid expenses and other current
assets........................... 249 119 149
-------- -------- --------
Total current assets............. 7,810 25,639 16,803
Computers, software, equipment and
leasehold improvements:
Computers and software............ 2,074 7,716 8,879
Furniture and equipment........... 391 194 194
Leasehold improvements............ 194 275 275
Enterprise system development in
process.......................... 1,315 -- --
-------- -------- --------
3,974 8,185 9,348
Accumulated depreciation.......... (329) (2,169) (3,661)
-------- -------- --------
3,645 6,016 5,687
Intangible asset, net of
accumulated amortization of $422
in 1996........................... 1,915 -- --
-------- -------- --------
Total assets..................... $ 13,370 $ 31,655 $ 22,490
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................. $ 1,975 $ 2,197 $ 2,480
Accrued payroll and related
liabilities...................... 174 664 1,186
Other accrued liabilities......... 991 760 453
Deferred subscription and license
revenue.......................... 327 1,836 980
Current portion of obligations
under capital leases............. 86 807 973
-------- -------- --------
Total current liabilities........ 3,553 6,264 6,072
Deferred rent...................... 33 189 202
Deferred purchase price of
subsidiary........................ 1,336 891 446
Obligations under capital leases,
net of current portion............ 82 1,340 1,671
Commitments
Redeemable Convertible Preferred
Stock (Series C, D, and E):
Authorized shares -- 12,500 at
December 31, 1997 and June 30,
1998 (pro forma: none)
Issued and outstanding -- 4,706 at
December 31, 1996 and 12,406 at
December 31, 1997 and 13,406 at
June 30, 1998 (pro forma: none)
Liquidation preference -- $20,731
at December 31, 1996 and $73,212
at December 31, 1997 and $80,212
at June 30, 1998 (pro forma:
none)............................ 20,309 70,882 77,840 $ --
Stockholders' equity (deficit):
Convertible Preferred Stock $0.01
par value, (Series A and B):
Authorized shares -- 2,241 at
December 31, 1997 and June 30,
1998
Issued and outstanding -- 1,948
at December 31, 1996 and 2,016
at December 31, 1997 and 2,080
at June 30, 1998 (pro forma:
none)
Liquidation preference -- $2,165
at December 31, 1996 and $2,610
at December 31, 1997 and $3,056
at June 30, 1998 (pro forma:
none)........................... 2,165 2,610 3,056 --
Common Stock $0.01 par value:
Authorized shares -- 75,000 at
December 31, 1997 and June 30,
1998
Issued and outstanding shares --
5,876 at December 31, 1996 and
6,360 at December 31, 1997 and
6,660 at June 30, 1998 (pro
forma: 16,789).................. 97 455 1,635 82,531
Deferred compensation............. -- (245) (1,219) (1,219)
Accumulated deficit............... (14,205) (50,731) (67,213) (67,213)
-------- -------- -------- -------
Total stockholders' equity
(deficit)....................... (11,943) (47,911) (63,741) $14,099
-------- -------- -------- =======
Total liabilities and
stockholders' equity
(deficit).................... $ 13,370 $ 31,655 $ 22,490
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 20, SIX MONTHS
1995 (DATE OF YEAR ENDED ENDED
FORMATION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ ------------------
1995 1996 1997 1997 1998
------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Subscription and
services .............. $ -- $ 203 $ 4,913 $ 1,508 $ 5,577
Licensing and royalty .. -- -- 1,271 -- 1,221
------ -------- -------- -------- --------
-- 203 6,184 1,508 6,798
Cost and expenses:
Cost of revenues........ -- 2,908 10,846 4,457 7,446
Sales and marketing .... 57 6,369 19,014 9,210 9,065
Research and development
....................... 152 2,563 7,182 3,220 3,395
General and
administrative ........ 104 2,475 5,883 2,743 3,634
------ -------- -------- -------- --------
313 14,315 42,925 19,630 23,540
------ -------- -------- -------- --------
Loss from operations..... (313) (14,112) (36,741) (18,122) (16,742)
Interest income.......... 5 229 494 161 371
Interest expense......... -- (12) (271) (57) (111)
------ -------- -------- -------- --------
5 217 223 104 260
------ -------- -------- -------- --------
Loss before provision for
income taxes............ (308) (13,895) (36,518) (18,018) (16,482)
Provision for income
taxes................... -- (2) (8) -- --
------ -------- -------- -------- --------
Net loss................. $ (308) $(13,897) $(36,526) $(18,018) $(16,482)
====== ======== ======== ======== ========
Historical basic and
diluted net loss per
share................... $(0.06) $ (2.37) $ (5.80) $ (2.87) $ (2.50)
====== ======== ======== ======== ========
Pro forma basic and
diluted net loss per
share................... $(0.05) $ (1.65) $ (2.94) $ (1.56) $ (1.02)
====== ======== ======== ======== ========
Shares used to compute
historical basic and
diluted net loss per
share................... 5,263 5,857 6,301 6,282 6,582
====== ======== ======== ======== ========
Shares used to compute
pro forma basic and
diluted net loss per
share................... 5,640 8,431 12,430 11,515 16,139
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
(SERIES A AND B) COMMON STOCK
----------------- -------------- DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
-------- -------- ------ ------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial issuance of
Common Stock, September
20, 1995............... -- $ -- 4,415 $ 5 $ -- $ -- $ 5
Repurchase of Common
Stock.................. -- -- (1,333) (2) -- -- (2)
Issuance of Common
Stock.................. -- -- 2,822 85 -- -- 85
Issuance of Convertible
Preferred Stock........ 1,791 1,620 -- -- -- -- 1,620
Net loss................ -- -- -- -- -- (308) (308)
------- -------- ------ ------ ------- -------- --------
Balance at December
31, 1995............. 1,791 1,620 5,904 88 -- (308) 1,400
Repurchase of Common
Stock.................. -- -- (77) (2) -- -- (2)
Exercise of stock
options................ -- -- 49 11 -- -- 11
Issuance of Series B
Convertible Preferred
Stock.................. 157 545 -- -- -- -- 545
Net loss................ -- -- -- -- -- (13,897) (13,897)
------- -------- ------ ------ ------- -------- --------
Balance at December
31, 1996............. 1,948 2,165 5,876 97 -- (14,205) (11,943)
Exercise of stock
options................ -- -- 484 103 -- -- 103
Issuance of Series B
Convertible Preferred
Stock.................. 68 445 -- -- -- -- 445
Deferred compensation... -- -- -- 255 (255) -- --
Amortization of deferred
compensation........... -- -- -- -- 10 -- 10
Net loss................ -- -- -- -- -- (36,526) (36,526)
------- -------- ------ ------ ------- -------- --------
Balance at December
31, 1997............. 2,016 2,610 6,360 455 (245) (50,731) (47,911)
Exercise of stock
options (unaudited).... -- -- 300 122 -- -- 122
Issuance of Series B
Convertible Preferred
Stock (unaudited)...... 64 446 -- -- -- -- 446
Deferred compensation
(unaudited)............ -- -- -- 1,058 (1,058) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 84 -- 84
Net loss (unaudited).... -- -- -- -- -- (16,482) (16,482)
------- -------- ------ ------ ------- -------- --------
Balance at June 30,
1998 (unaudited)..... 2,080 $ 3,056 6,660 $1,635 $(1,219) $(67,213) $(63,741)
======= ======== ====== ====== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CITYSEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 20, SIX MONTHS
1995 (DATE OF YEAR ENDED ENDED
FORMATION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ ------------------
1995 1996 1997 1997 1998
------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................. $ (308) $(13,897) $(36,526) $(18,018) $(16,482)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Equity interest in loss
from partnership....... -- -- 259 20 --
Write-down of investment
in partnership......... -- -- 321 321 --
Depreciation............ 5 325 1,841 654 1,492
Amortization............ -- 422 1,915 957 --
Change in operating
assets and liabilities,
net of assets acquired
and liabilities
assumed:
Accounts receivable..... -- (34) (67) (49) (306)
Due from licensees...... -- -- (193) (466) (542)
Prepaid expenses and
other current assets... -- (249) 129 71 (31)
Accounts payable........ 90 2,537 317 (643) 284
Accrued payroll and
related liabilities.... -- -- 489 575 523
Other accrued
liabilities............ -- -- (221) (325) (305)
Deferred subscription
and license revenue.... -- 327 1,510 1,069 (856)
Deferred rent........... -- 33 157 48 12
Deferred compensation... -- 84
------ -------- -------- -------- --------
Net cash used in
operating activities.. (213) (10,536) (30,069) (15,786) (16,127)
INVESTING ACTIVITIES
Purchases of software,
equipment and leasehold
improvements............ (82) (3,547) (1,391) (774) (54)
Investment in
partnership............. -- -- (580) (324) --
------ -------- -------- -------- --------
Net cash used in
investing activities.... (82) (3,547) (1,971) (1,098) (54)
FINANCING ACTIVITIES
Payments on capital
leases.................. -- (121) (840) (247) (613)
Exercise of stock
options................. -- 11 103 60 121
Issuance of Common Stock. 90 -- -- -- --
Repurchases of Common
Stock................... (2) (2) -- -- --
Issuance of Preferred
Stock, net.............. 1,620 20,309 50,477 15,881 6,958
------ -------- -------- -------- --------
Net cash provided by
financing activities.... 1,708 20,197 49,740 15,694 6,466
------ -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............. 1,413 6,114 17,700 (1,190) (9,715)
Cash and cash equivalents
at beginning of year.... -- 1,413 7,527 7,527 25,227
------ -------- -------- -------- --------
Cash and cash equivalents
at end of year.......... $1,413 $ 7,527 $ 25,227 $ 6,337 $ 15,512
====== ======== ======== ======== ========
Supplemental disclosure
of cash flow
information:
Cash paid for:
Interest................ $ -- $ 12 $ 271 $ 57 $ 111
Income taxes............ $ 1 $ 2 $ 8 $ -- $ --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1996 and 1997, the Company purchased computers and office equipment
under financing leases totaling $288,000 and $2,820,000, respectively.
On June 19, 1996, the Company acquired its Metrobeat, Inc. in exchange for
an initial payment of Series B Convertible Preferred Stock valued at $544,497.
During the year ended December 31, 1997 and the six months ended June 30,
1998, the Company made its second and third annual installment of Series B
Convertible Preferred Stock valued at $445,495 and $445,494, respectively,
pursuant to the acquisition. The remaining purchase price of $446,000 is
payable in two annual installments, principally of Series B Convertible
Preferred Stock.
During 1997, the Company issued 14,670 shares of Series D Preferred Stock
valued at $95,725 as payment for accrued advertising and recruiting fees.
During the six months ended June 30, 1997 and 1998, the Company purchased
computers and office equipment under financing leases totaling $1,835,000 and
$1,109,000, respectively.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
CitySearch, Inc. (the "Company"), a Delaware corporation, was organized on
September 20, 1995. The Company and its wholly owned subsidiaries Metrobeat,
Inc. ("Metrobeat") and CitySearch Ontario, Inc. ("CitySearch Ontario"),
produce and deliver comprehensive local city guides on the World Wide Web (the
"Web"), providing up-to-date information regarding arts and entertainment
events, community activities, recreation, business, shopping, professional
services and news/sports/weather to consumers in metropolitan areas. Each
local city guide consists primarily of original content developed and designed
specifically for the Web by the Company and its media partners. The Company
designs and produces custom-built Web sites and related services for local
businesses, aggregates them in a local city guide environment and provides
business customers the ability to regularly update and expand their sites.
Customers include restaurants, taverns, movie theaters, museums and retail
stores. The Company currently owns and operates sites in Austin, TX,
Nashville, TN, New York, NY, Portland, OR, Raleigh-Durham-Chapel Hill, NC,
Salt Lake City, UT, Los Angeles, CA, and San Francisco, CA. Through
partnership and licensing agreements, the Company has an internet presence in
Washington D.C., Melbourne and Sydney, Australia, and Toronto, Canada.
The Company has experienced operating losses and negative cash flows from
operations since its formation on September 20, 1995. Since its formation, the
Company has raised significant capital through the sale of Preferred Stock to
outside investors and expects to continue to raise capital in 1998. The
Company has also successfully licensed its product domestically and
internationally generating additional revenue streams. Management anticipates
that its investment in new markets and technology will result in operating
losses in the near term but believes that anticipated revenues, existing cash,
cash equivalents, working capital and new capital contributions will be
sufficient to fund operations over the next year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Metrobeat and CitySearch
Ontario. All significant intercompany amounts have been eliminated.
INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of June 30, 1998 and the statements of
operations and cash flows for the six months ended June 30, 1997, and 1998 and
the statement of changes in shareholders equity (deficit) for the six months
ended June 30, 1998 are unaudited. In the opinion of management, the
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for the fair statement of interim periods. The data
disclosed in these notes to the financial statements for these periods is also
unaudited. The results of operations and cash flows for the interim period are
not necessarily indicative of the results to be expected for any other interim
future period.
ESTIMATES USED IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the
F-7
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
consolidated financial statements and the accompanying notes. Actual results
could differ from those estimates, although management does not believe that
any differences would materially affect the Company's consolidated financial
position or results of operations.
REVENUE RECOGNITION
The Company generates revenue from the sale of subscriptions for business
Web sites and advertising on its owned and operated city guides on the
internet, the sale of licenses for use of the Company's business and
technology systems to its licensees establishing the CitySearch service in
certain markets, the receipt of royalties under its license agreements in
exchange for customer support and certain upgrade rights, and the performance
of consultation and design services.
The Company recognizes subscription revenues over the period the services
are provided. Licensing revenue, under agreements entered into prior to
December 31, 1997, for partner-led markets is recognized upon the completion
of the delivery and installation of the business and technology systems and
training of partner personnel in each partner-led-market. Royalty revenues are
recognized when earned. Revenue from consultation and design services is
recognized as the services are provided. Advertising revenues, which have not
been significant, are recognized as earned and are included in subscription
and service revenues.
Effective January 1, 1998, the Company adopted Statement of Position 97-2
(SOP 97-2), "Software Revenue Recognition," which impacts the manner companies
recognize revenue on sales and licensing of software. The Company, during
1997, accounted for licensing of its software under the provisions of SOP 91-
1. Under the provision of SOP 97-2 revenues from the sale of licenses for use
of the Company's business and technology systems to its partner-led markets
generally will be recognized over the term of the license agreement or the
period over which the relevant services are delivered. The Company's license
agreements have terms ranging from five to nine years. Licensing and royalty
revenues, on a pro forma basis, for the year ended December 31, 1997, and the
six months ended June 30, 1997 and 1998 would have been $253,000, $73,000 and
$304,000, respectively, had SOP 97-2 been effective January 1, 1997. SOP 97-2
is not expected to have a material effect on revenues from royalties,
services, and subscriptions.
Deferred revenues arise upon the prepayment of subscription services and
license agreements.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable and cash
deposits at financial institutions. Concentration of credit risk with respect
to trade receivables is limited due to the large number of customers and their
geographic dispersion. The Company requires no collateral from its customers.
The Company places its cash deposits with high-credit quality financial
institutions. At times, balances in the Company's cash accounts may exceed the
Federal Deposit Insurance Corporation (FDIC) limit.
COMPUTERS, SOFTWARE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Computers, software, equipment and leasehold improvements are stated at cost
and depreciated using the straight-line method over the estimated useful lives
of the assets, which range from three to seven years. Assets
F-8
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
acquired under capitalizable lease arrangements are recorded at the present
value of the minimum lease payments. Amortization of assets capitalized under
capital leases and leasehold improvements are computed using the straight-line
method over the life of the asset or term of the lease, whichever is shorter,
and is included in depreciation expense.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Based on the Company's product development process, technological feasibility
is established upon completion of a working model. Costs incurred by the
Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1996 and 1997, amounted to $1,305,859 and $2,464,641,
respectively. There was no advertising expense for the period from September
20, 1995 (date of formation) to December 31, 1995.
During 1996 and 1997 the Company entered into several barter arrangements
whereby the Company has assisted in the design of a Web site in exchange for
broadcast advertising. The Company valued these barter transactions at $60,000
and $1,158,000 for the years ended December 31, 1996 and 1997, respectively,
based on the estimated cost of the specific services provided by the Company.
Such amounts are included in subscription and services revenue as well as
recognized in sales and marketing expense in the accompanying consolidated
statements of operations. Reciprocal noncash advertising on the Internet is
not valued in the consolidated financial statements and no barter revenue is
recorded for any such agreements.
PRO FORMA AND HISTORICAL NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock outstanding. Common equivalent shares from
convertible Preferred Stock (using the if converted method) have been included
in the computation when dilutive, except that the Convertible Preferred Stock
which will convert into Common Stock in connection with the Company's initial
public offering is included as if converted at the original date of issuance,
for both basic and diluted net loss per share, even though inclusion is
antidilutive, based on the conversion price disclosed in Note 6.
Historical net loss per share is computed as described above except that it
excludes the Convertible Preferred Stock because it is antidilutive for
periods which incurred a net loss.
INTANGIBLE ASSET
The intangible asset is stated at cost and consists of goodwill resulting
from the purchase of Metrobeat in June 1996 (see Note 2).
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), requires that stock awards granted subsequent
to January 1, 1995, be recognized as compensation
F-9
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
expense based on their fair value at the date of grant. Alternatively, a
company may use Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and disclose pro forma results of
operations which would have resulted from recognizing such awards at their
fair value. The Company will continue to account for stock-based compensation
under APB 25 and make the required pro forma disclosures for compensation (see
Note 8). Under APB 25 compensation expense is calculated based on the
difference between the exercise price and the fair market value of the
underlying stock on the date of grant. The amount of compensation expense
calculated under APB 25 is recognized over the vesting period of the options.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' balances to
conform to the current year presentation.
YEAR 2000 -- UNAUDITED
The Company could be adversely affected if its computer systems and those of
its service providers do not properly process and calculate date-related
information and data from and after January 1, 2000. The Company is taking
steps that it believes are reasonably designed to address these issues and to
obtain reasonable assurances that comparable steps are being taken by each of
the Company's service providers. Management believes such efforts and any
remedies will be completed by 1999 and all expenses incurred in assessing and
remedying this issue will be expensed as incurred and are not expected to be
material to the consolidated financial statements.
2. ACQUISITION OF METROBEAT
On June 19, 1996, the Company purchased Metrobeat for approximately
$2,337,300. The Company assumed net liabilities of $456,303 and issued 157,074
shares of Series B Convertible Preferred Stock valued at $544,497. During the
year ended December 31, 1997 and the six months ended June 30, 1998, the
Company made its second and third annual installment of Series B Convertible
Preferred Stock valued at $445,495 and $445,494, respectively. The remaining
purchase price of $445,506 is payable in one annual installment, principally
of Series B Convertible Preferred Stock. The remaining installment has been
recorded as a deferred purchase price liability in the accompanying
consolidated balance sheets. The transaction was accounted for using the
purchase method of accounting. The excess of the purchase price over the net
assets acquired has been allocated to goodwill and was initially to be
amortized over three years. Effective January 1, 1997, the Company reassessed
the future life of the goodwill recorded in connection with the Metrobeat
acquisition and concluded the remaining life was one year. Accordingly, the
unamortized goodwill as of December 31, 1996 was fully amortized to expense in
1997.
3. INVESTMENT IN PARTNERSHIP
On February 17, 1997, CitySearch Ontario entered into a partnership, Toronto
Star CitySearch, with others to launch CitySearch sites in Canada. CitySearch
Ontario contributed the Company's technology through a licensing agreement
valued by the other partners at $390,500 and cash of $319,171 in exchange for
a 20% interest in the partnership. The other partners collectively contributed
cash of $2,811,600 in exchange for the remaining 80% interest. Profits are
shared in accordance with the respective partnership interests. Losses are
allocated to one of the other partners up to a cumulative loss limit, and
thereafter losses of the partnership shall be allocated to CitySearch Ontario
and the other partners at a ratio of 10% and 90%, respectively. CitySearch
Ontario is committed to funding up to 10% of any losses of the partnership.
F-10
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Summarized unaudited financial information of Toronto Star CitySearch as of
and for the year ended December 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
As of December 31, 1997:
Current assets.................................................... $ 1,520
Total liabilities................................................. 2,006
Partners' capital................................................. 758
For the period ended December 31, 1997:
Revenues.......................................................... $ 123
Loss from operations.............................................. (2,658)
Net loss.......................................................... (2,806)
</TABLE>
CitySearch Ontario carries its investment in Toronto Star CitySearch at
zero. CitySearch Ontario's share of partnership losses ($258,937) is included
in costs of revenues and sales and marketing expenses.
4. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Deferred tax expense is determined by the
change in the net asset or liability for deferred taxes.
The provision for income, franchise and capital taxes of $800, $1,600 and
$8,330 is based solely on minimum state tax requirements. The Company's
effective tax rate differs from the statutory federal income tax rate,
primarily as a result of operating losses not benefited.
The tax effect of temporary differences resulted in net deferred income tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss and tax credits...................... $ 5,485 $ 21,239
Various accruals........................................ 58 636
Deferred rent........................................... 14 77
------- --------
5,557 21,952
Less valuation allowance................................ (5,103) (19,650)
------- --------
Net deferred tax assets................................... 454 2,302
Deferred tax liabilities:
Federal benefit for state income taxes.................. (427) (1,499)
Excess of tax depreciation and amortization............. (27) (803)
------- --------
Deferred tax liabilities.................................. (454) (2,302)
------- --------
$ -- $ --
======= ========
</TABLE>
F-11
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Due to the uncertainty surrounding the timing of the realization of the
benefits from its favorable tax attributes in future tax returns, the Company
has placed a valuation allowance against its otherwise recognizable deferred
tax assets. The Company had federal and state operating loss carryforwards of
$47,450,000 at December 31, 1997. The federal carryforwards expire principally
in the period from 2010 to 2012, and the state carryforwards expire
principally in 2003. The Company has generated tax credit carryforwards for
federal and state purposes in the amounts of $329,723 and $107,353,
respectively, at December 31, 1997. Utilization of the above carryforwards is
subject to utilization limitations which may inhibit the Company's ability to
use carryforwards in the future.
The following table reconciles the provision for taxes based on income
before taxes to the statutory federal income tax rate of 35%:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 20,
1995 (DATE OF
FORMATION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1995 1996 1997
-------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at statutory rate..... $(108) $ (4,864) $ (12,781)
Increase related to:
State taxes, net of federal bene-
fit.............................. 1 1 5
Meals and entertainment......... 1 17 30
Amortization of goodwill........ -- 143 670
Foreign operations.............. -- -- 203
Valuation reserve on deferred
taxes.......................... 106 4,705 11,881
----- ----------- ------------
$ -- $ 2 $ 8
===== =========== ============
</TABLE>
F-12
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. COMMITMENTS
LEASES
The Company entered into noncancelable capital lease obligations for
computers and equipment during the year ended December 31, 1997. In addition,
the Company leases its facilities and other office equipment under
noncancelable operating lease agreements expiring through 2004. Certain of the
Company's leases provide for free rent and escalations. The Company is
responsible for other costs such as property taxes, insurance, maintenance and
utilities.
The following is a schedule of future minimum lease payments:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
December 31:
1998.................................................... $1,321 $1,115
1999.................................................... 1,191 1,028
2000.................................................... 1,167 517
2001.................................................... 1,043 4
2002.................................................... 265 --
Thereafter.............................................. 332 --
------ ------
$5,319 2,664
======
Less amount representing interest......................... 517
------
Net present value of net minimum lease payments (including
approximately $807,000 payable currently)................ $2,147
======
</TABLE>
Computers, software and equipment under capital leases had an original cost
basis of $288,419 and $2,819,842 at December 31, 1996 and 1997, respectively.
The net book value of the related computers, software and equipment was
$231,267 and $2,157,717 at December 31, 1996 and 1997, respectively.
Rent expense related to operating leases was $7,800, $291,000 and $1,372,000
for the period from September 20, 1995 (date of formation) to December 31,
1995 and for the years ended December 31, 1996 and 1997, respectively.
F-13
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. CONVERTIBLE PREFERRED STOCK
At December 31, 1997 and June 30, 1998, the Company was authorized to issue
14,741,082 and 15,741,082 shares, respectively of Convertible Preferred Stock
with a par value of $0.01 per share. The Company has designated 1,791,173
shares as Series A Convertible Preferred Stock, 450,000 shares as Series B
Convertible Preferred Stock, 3,261,024 shares as Series C Redeemable
Convertible Preferred Stock, 4,430,313 shares as Series D Redeemable
Convertible Preferred Stock, and 5,808,572 shares as Series E Redeemable
Convertible Preferred Stock.
Convertible Preferred Stock issued and outstanding as of December 31, 1997
and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
ORIGINAL
AMOUNT PER SHARE
SHARES (NET OF ISSUANCE
OUTSTANDING ISSUANCE COST) PRICE DATE FIRST ISSUED
----------- -------------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Series A............. 1,791 $ 1,620 $0.904 October 31, 1995
Series B............. 157 545 3.467 June 19, 1996
Series B............. 68 445 6.525 June 19, 1997
Series B............. 64 445 7.000 June 21, 1998
Series C............. 3,261 11,261 3.467 May 15, 1996
Series D............. 4,431 28,265 6.525 December 13, 1996
Series E............. 4,714 31,356 7.000 November 10, 1997
Series E............. 1,000 6,959 7.000 May 26, 1998
------ -------
15,486 $80,896
====== =======
</TABLE>
Preferred Stock contains a liquidation preference of an amount per share
equal to the price for which such share of Preferred Stock was originally
issued, adjusted for any stock dividends, combinations or splits with respect
to such shares, plus any declared and unpaid dividends on the Preferred Stock.
The Series C Preferred Stock contains a May 2006 mandatory redemption
provision. The Series D and E Preferred Stock contain mandatory redemption
provisions with a minimum of an 80% favorable vote, by the holders, beginning
December 2004.
Each share of Preferred Stock shall be, at the option of the holder,
convertible at any time into the number of shares of Common Stock as
determined by dividing the original issue price by the conversion price, as
defined. At the date of issuance, the conversion price for each series of
Preferred Stock was equal to the original per share issuance price. The
conversion price is subject to adjustment for stock splits and stock
combinations of the Company's outstanding Common Stock. The conversion price
for Series C, D and E Preferred Stock is also adjusted for the forfeiture of
Common Stock options outstanding from the date of issuance to the date of
conversion. The Preferred Stock has an automatic conversion feature which
provides for each share of Preferred Stock to be automatically converted into
shares of Common Stock based on the then effective conversion price
immediately upon the closing of an underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
covering the offer and sale of shares of the Corporation's Common Stock priced
above $7.70 per share, with aggregate net proceeds to the Company of not less
than $20,000,000. At June 30, 1998, on an unaudited pro forma basis, giving
effect to Common Stock option forfeitures through June 30, 1998, each share of
Series A, B, C, D and E Preferred Stock was convertible into approximately
.667, .667, .648, .647 and .658 shares of Common Stock, respectively.
F-14
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. STOCK OPTIONS
The Company has adopted the 1996 Stock Option Plan (the "Plan") which
authorizes members of management to grant non-statutory stock options or
incentive stock options to employees and consultants of the Company and its
subsidiaries. As of December 31, 1997 and June 30, 1998 the maximum number of
shares of Common Stock to be issued under the plan was 2,666,667 and 3,666,667
shares, respectively. All options granted under the Plan have been made at
prices not less than fair market value of the stock at the date of grant.
Options granted under the Plan are exercisable at various dates over their
ten-year life. Options granted under the Plan vest principally 25% after the
first year and ratably over the remaining vesting period.
The following table summarizes certain information related to options for
Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE PER SHARE
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1996.................. --
Granted during 1996....................... 2,147 $ 0.15 to $ 1.13
Forfeited................................. 209 0.15 to 1.13
Exercised................................. 49 0.15 to 1.13
----- ----------------
Outstanding at December 31, 1996............ 1,889 0.15 to 1.13
Granted during 1997....................... 740 1.13 to 4.50
Forfeited................................. 323 0.15 to 3.00
Exercised................................. 484 0.15 to 3.00
----- ----------------
Outstanding at December 31, 1997............ 1,822 0.15 to 4.50
Granted................................... 1,246 4.50 to 12.00
Forfeited................................. 159 0.15 to 8.25
Exercised................................. 300 0.15 to 4.50
----- ----------------
Outstanding at June 30, 1998................ 2,609 0.15 to 12.00
===== ================
</TABLE>
Options granted during the year ended December 31, 1997 and the six months
ended June 30, 1998 resulted in a total compensation amount of $255,000 and
$1,058,000, respectively, and was recorded as deferred compensation in
stockholders equity. The deferred compensation amount will be recognized as
compensation expense over the vesting period. During the year ended December
31, 1997 and the six months ended June 30, 1998, such compensation expense
amounted to $10,000 and $84,000, respectively.
Information with respect to stock options outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
--------- -------
(NUMBER OF SHARES
IN THOUSANDS)
<S> <C> <C>
Weighted average price per share........................... $0.39 $1.29
Exercisable options........................................ 740 661
Options available for future grants........................ 729 313
Weighted average remaining contractual life................ 9.5 years 9 years
</TABLE>
F-15
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
In connection with the Series E Redeemable Convertible Preferred Stock
issuance, the Company granted warrants to a private placement selling agent to
purchase 94,286 shares of Series E Redeemable Convertible Preferred Stock at
an exercise price of $8.75 per share in exchange for services. The warrants
expire upon a closing of an initial public offering or five years from the
grant date, whichever is earlier.
Pro forma information regarding the effect on operations is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using the minimum-
value method, which utilizes a near-zero volatility factor.
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Expected life (years)...................................... 6 years 5 years
Risk-free interest rate.................................... 6.30% 6.30%
Dividend yield............................................. -- --
</TABLE>
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net loss, as reported............................. $ (13,897) $ (36,526)
Pro forma net loss................................ (13,953) (36,608)
Pro forma basic and diluted historical loss per
share............................................ $ (2.38) $ (5.81)
Pro forma basic and diluted loss per share........ (1.66) (2.95)
</TABLE>
The effects of applying Statement 123 in this pro forma disclosure may not
be indicative of future amounts. Additional awards in future years are
anticipated.
8. DEFINED CONTRIBUTION PLAN
In July 1997, the Company established a defined contribution plan for
certain qualified employees as defined in the plan. Participants may
contribute from 1% to 20% of pretax compensation subject to certain
liabilities. The plan does provide for certain discretionary contributions by
the Company as defined in the plan. No Company contributions were made for the
year ended December 31, 1997.
9. RELATED PARTY TRANSACTIONS
Included in revenues for the year ended December 31, 1997 and the six months
ended June 30, 1998 is approximately $1,049,000 and $1,417,000 of revenues,
respectively, generated under the Company's license agreements with
stockholders or other related parties. Included in due from licensees at
December 31, 1997 and June 30, 1998 is $136,000 and $234,000, respectively,
due from stockholders and other related parties.
F-16
<PAGE>
CITYSEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AT JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. PROPOSED INITIAL PUBLIC OFFERING AND OTHER SUBSEQUENT EVENTS
The Company is contemplating filing an amended registration statement with
the Securities and Exchange Commission, relating to an initial public offering
of shares of its unissued Common Stock. If the initial public offering is
consummated under the terms presently anticipated, all of the Preferred Stock
outstanding will automatically convert into Common Stock. At June 30, 1998, on
an unaudited pro forma basis, using a conversion price calculated based on
Common Stock option forfeitures through June 30, 1998, 10,127,621 shares of
Common Stock would be issued upon automatic conversion of Preferred Stock. The
pro forma effect on stockholders' equity, as adjusted for the assumed
conversion of the Preferred Stock, is set forth on the accompanying balance
sheet.
In connection with the Company's initial public offering, the Board of
Directors authorized a two-for-three reverse stock split prior to the
completion of the Company's initial public offering. Accordingly, all common
stock share and per share information has been retroactively restated to give
effect to the two-for-three reverse stock split.
F-17
<PAGE>
The back inside cover will contain a selection of five to fifteen overlapping
screen shots of home pages of the Company's business customers. The screen
shots will represent business customers in a variety of service categories
(e.g., restaurants, professional services, entertainment venues, etc.).
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any infor-
mation or to make any representations other than those contained in this Pro-
spectus in connection with this offering and, if given or made, such informa-
tion or representation must not be relied upon as having been authorized by the
Company or any Underwriter. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus nor any sale made hereun-
der shall, under any circumstances, create any implication that the information
herein is correct as of any time subsequent to the date hereof or that there
has been no change in the affairs of the Company since such date.
--------------------------
TABLE OF CONTENTS
--------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 28
Management................................................................ 41
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 60
Index to Consolidated Financial
Statements............................................................... F-1
</TABLE>
---------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a Prospectus when acting as Underwrit-
ers and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
4,000,000 SHARES
[LOGO OF CITYSEARCH.COM]
COMMON STOCK
---------------
PROSPECTUS
---------------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Donaldson, Lufkin & Jenrette
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable
by the Company in connection with the sale of Common Stock being registered.
All amounts are estimates except the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 17,691
NASD Filing Fee.................................................... 6,480
Nasdaq Listing Fee................................................. 93,000
Printing Fees and Expenses......................................... 150,000
Legal Fees and Expenses............................................ 250,000
Accounting Fees and Expenses....................................... 175,000
Blue Sky Fees and Expenses......................................... 10,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous...................................................... 87,829
--------
Total............................................................ $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant's Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
The Registrant's Bylaws provide for the indemnification of officers,
directors and third parties acting on behalf of the Registrant if such person
acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception of Registrant (September 20, 1995), the Registrant has
issued and sold the following unregistered securities (as adjusted to reflect
the two-for-three reverse stock split anticipated to be consummated
immediately prior to the closing contemplated hereby):
(1) From September 20, 1995 to June 30, 1998, Registrant granted options
to purchase 6,206,040 shares of Common Stock pursuant to its 1996 Stock
Option Plan at exercise prices ranging from $0.15 to $12.00.
(2) From September 20, 1995 to June 30, 1998, Registrant issued and sold
an aggregate of 833,919 shares of Common Stock to its employees, directors
and consultants upon exercise of stock options granted pursuant to its 1996
Stock Option Plan at exercise prices ranging from $0.15 to $4.50 for an
aggregate consideration of $220,990.70.
(3) In September 1995; at Registrant formation, Registrant issued and
sold 4,415,291 shares of Common Stock to William Gross for an aggregate
cash consideration of $5,000 and for services provided to the Company.
II-1
<PAGE>
(4) In October 1995, Registrant issued and sold an aggregate of 2,822,344
shares of its Common Stock for an aggregate cash consideration of $84,670.
These shares were issued to the following key founding employees: Charles
Conn, III; Thomas Layton; Jeffrey Brewer; Kristen Ding; Caskey Dickson;
David Holtz; Tamar Halpern; Brad Haugaard; Taylor Wescoatt; Linda Gross;
Karen DeDea; Lee Husiuk and Michael Radford.
(5) From November 1995 to December 1995, Registrant issued and sold an
aggregate 1,791,173 shares of Series A Preferred Stock for an aggregate
cash consideration of approximately $1.6 million. Shares of Series A
Preferred Stock were issued to the following: David M. Balkin; Robert
McLean; Morris Ventures; Robert W. Shaw, Jr.; Philip E. Berney; WS
Investment Company 95B; William N. Melton; Stuart Cohen; Robert Kavner;
Edwin C. Cohen; Peter R. Bleyleben; Steven Spielberg; Gerald Breslauer;
Barry S. Volpert; Pando Associates, Ltd.; John Wylie; Jeffrey Glynn and
Victoria Jo Edwards, Co-Trustees of the Edwards Family Trust of 1995;
Charles R. Conn, II; Taylor Wescoatt; North American Trust Co., TTEE FBO
L&W Dickson #410280.
(6) In June 1996, Registrant issued an aggregate 157,074 shares of Series
B Preferred Stock at $3.4665 per share as part consideration for the
acquisition of MetroBeat, Inc. Such shares were issued to the following
shareholders of MetroBeat, Inc.: Mark Davies and Joshua White.
(7) From May 1996 to July 1996, Registrant issued and sold an aggregate
3,261,024 shares of Series C Preferred Stock for an aggregate cash
consideration of approximately $11.3 million. Shares of Series C Preferred
Stock were issued to the following: GS Capital Partners II, L.P; GS Capital
Partners II Offshore, L.P.; Goldman, Sachs & Co. Verwaltungs GmbH; The
Goldman Sachs Group, L.P.; AT&T Venture Fund I, L.P.; AT&T Venture Fund II,
L.P.; Steven Spielberg; Edwin C. Cohen; Pamela C. Alexander; Barry S.
Volpert; Alexander Communications, Inc.; Jeffrey G. Edwards; IRA MSTC
Custodian; Morris Ventures; Byters; David White; Robert W. Shaw, Jr.;
Charles R. Conn, II; The Pacific Bank, N.A., Trustee E. Keith Thomson IRA;
Michael Barton; Eric Higgs; Mark Lewyn; Emily Martin; Douglas M. McPherson;
Ted Meisel.
(8) From December 1996 to October 1997, Registrant issued and sold an
aggregate 4,430,313 shares of Series D Preferred Stock for an aggregate
cash consideration of approximately $28.0 million and for services provided
to the Company. Such shares of Series D Preferred Stock were issued to the
following: GS Capital Partners II, L.P.; GS Capital Partners II Offshore,
L.P.; Goldman, Sachs & Co. Verwaltungs GmbH; Stone Street Fund 1996, L.P.;
Bridge Street Fund 1996, L.P.; Edwin C. Cohen; EnCompass Group, Inc.;
Michael Barton; Mark Lewyn; Brian A. Goler; Emily Bloomfield; Bradley
Ramberg; Lamar Rutherford; Kristen Brown; James R. McGovern; AnneMarie
Weibel; Debra J. Wilkens; Francesca Colloredo-Mansfeld; Kathryn Takach;
Byters; Comcast CitySearch, Inc.; Far West Capital Partners, L.P.; Robert
McLean; Morris Ventures; Steven Spielberg; David White; CPQ Holdings, Inc.;
Intel Corporation; Bayview Investors, Ltd.; Toronto Star Newspapers
Limited; AT&T Venture Fund I, L.P.; AT&T Venture Fund II, L.P.; Bill Gross'
idealab!; Alexander Communications, Inc.; The Times Mirror Company; Paul S.
Larsen; ServiceMaster Venture Fund L.L.C.; Digital Ink Company and
Korn/Ferry International.
(9) In June 1997, Registrant issued an aggregate 68,274 shares of Series
B Preferred Stock at $6.5251 per share as additional consideration for the
acquisition of Metro Beat, Inc. Such shares were issued to the following
shareholders of MetroBeat, Inc.: Mark Davies and Joshua White.
(10) In November 1997, Registrant issued and sold an aggregate 4,714,286
shares of Series E Preferred Stock for an aggregate cash consideration of
approximately $33.0 million. Such shares of Series E Preferred Stock were
issued to the following: USA Networks, Inc.; Comcast CitySearch, Inc.; Far
West Capital Partners, LP; Intel Corporation; Endurance Fund; Gary Lauder;
The Thomas and Janet Unterman Living Trust dated 12/30/94; East Peak
Partners; Margaret L. Taylor; David A. Duffield Trust dated 7/14/88; Orchid
& Co.; Digital Ink Company; Global Retail Partners, L.P.; DLJ Diversified
Partners, L.P.; GRP Partners, L.P.; Global Retail Partners Funding, Inc.;
DLJ First ESC L.P. and Schibsted ASA.
II-2
<PAGE>
NationsBanc Montgomery Securities LLC ("NationsBanc") acted as placement
agent. As consideration for such services, Registrant paid NationsBanc
$1,546,182 in cash and issued a warrant to purchase 94,286 shares of Series
E Preferred Stock, which terms and conditions are described in item (11)
below.
(11) In November 1997, as part consideration for services provided as
placement agent, Registrant issued to NationsBanc a warrant to purchase
94,286 shares of Series E Preferred Stock. The warrant is exercisable at
any time at an exercise price equal to $8.75 per share and any unexercised
portion of the warrant is automatically convertible immediately prior to
the closing of this offering.
(12) In May 1998, Registrant issued an sold an aggregate 1,000,000 shares
of Series E Preferred Stock for an aggregate cash consideration of
approximately $7.0 million. Such shares of Series E Preferred Stock were
issued to the following: USA Networks, Inc. and American Express Travel
Related Services, Inc.
(13) In June 1998, Registrant issued an aggregate 63,644 shares of Series
B Preferred Stock at $7.00 per share as additional consideration for the
acquisition of MetroBeat, Inc. Such shares were issued to the following
shareholders of MetroBeat, Inc.: Mark Davies and Joshua White.
The sales of the securities described in Items 15(1) and 15(2) were deemed
to be exempt from registration under the Securities Act in reliance on Rule
701 promulgated under Section 3(b) of the Securities Act as transactions
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under such Rule 701. The sale of the securities described in Items
15(3) through 15(13) were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, as transactions by an issuer not
involving a public offering. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access,
through employment or other relationships, to such information.
II-3
<PAGE>
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* +Agreement and Plan of Reorganization, among Registrant, MS Acquisition
Corporation, MetroBeat, Inc., Mark Davies and Joshua White, dated May
31, 1996.
3.1* Restated Certificate of Incorporation, as currently in effect.
3.2* Restated Certificate of Incorporation, to be filed prior to the
consummation of the offering.
3.3* Restated Certificate of Incorporation, to be filed immediately
following the consummation of the offering.
3.4* Bylaws, as currently in effect.
3.5* Restated Bylaws, to be effective upon the closing of the offering.
4.1* Specimen Common Stock Certificate.
4.2* Sixth Amended and Restated Stockholders' Agreement by and among
Registrant and certain stockholders of the Registrant, dated May 26,
1998.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
as to the legality of the securities being registered.
10.1* Form of Indemnification Agreement for directors and officers.
10.2* 1996 Stock Plan and form of agreement thereunder.
10.3* 1998 Employee Stock Purchase Plan.
10.4* 1998 Director Option Plan.
10.5* +License Agreement between Registrant and Perly, Inc., dated March 9,
1996.
10.6* +Marketing Agreement between Registrant and American Express Travel
Related Services Company, Inc., dated May 26, 1998.
10.7* Employment Agreement between Registrant and Charles Conn, dated May 9,
1996.
10.8* +Partnership Agreement between Metroland Printing, Publishing &
Distributing Ltd. 1217554 Ontario Inc., Registrant and Torstar
Corporation, dated February 17, 1997.
10.9* +License and Services Agreement between Registrant and 1217554 Ontario
Inc., dated February 17, 1997.
10.10* +Noncompetition Agreement between Registrant, 1217554 Ontario Inc.,
Torstar Corporation and Metroland Printing, Publishing & Distributing
Ltd., dated February 17, 1997.
10.11* +Assignment Agreement between Registrant, 1217554 Ontario Inc., and
Toronto Star CitySearch, dated February 17, 1997.
10.12* Lease Agreement by and between Registrant and West End Land Development
Co., L.P., dated November 7, 1996.
10.13* Standard Form of Lease, Aeriel Center Executive Park, between
Pizzagalli Investment Company and Registrant, dated May 8, 1996.
10.14* Standard Office Lease between Registrant and Sage Realty Corporation,
dated May 6, 1997.
10.15* Standard Office Lease between Registrant and H. Naito Corporation,
dated March 6, 1997.
10.16* Standard Office Lease between Registrant and Brazos Austin Centre,
Ltd., dated August 15, 1996.
10.17* Standard Office Lease between Registrant and Judge Building Group,
dated September 10, 1996.
10.18* Standard Office Lease between Registrant and Sobel Building
Development, dated May 31, 1996.
10.19* Standard Office Lease between Registrant and BPG Pasadena, L.L.C.
(later assigned to Spieker Properties), dated September 30, 1996.
10.20* Lease Agreement between Registrant and Secured Properties Investors II,
L.P., dated May 13, 1998.
10.21* Amended and Restated Voting Agreement by and among Registrant and
certain stockholders of Registrant, dated November 12, 1997.
10.22* Employment Agreement between Registrant and Thomas Layton, dated July
2, 1997.
10.23 +License and Services Agreement between Registrant and Classified
Ventures.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule (available in EDGAR format only).
</TABLE>
(b) Schedules
Schedule II--Valuation and Qualifying Accounts
- --------
*Previously filed.
+Confidential treatment requested.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the provisions described in Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, and will be governed by the
final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from
the form of prospectus as filed as part of the registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the time
it was declared effective, and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT ON
FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF PASADENA, STATE OF CALIFORNIA, ON THE 20TH DAY OF
JULY, 1998.
CITYSEARCH, INC.
/s/ Charles Conn
By___________________________________
CHARLES CONN
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles Conn Chief Executive July 20, 1998
- ------------------------------------- Officer and
CHARLES CONN Director (Principal
Executive Officer)
/s/ Bradley Ramberg Chief Financial July 20, 1998
- ------------------------------------- Officer and Vice
BRADLEY RAMBERG President, Finance
and Administration
and Secretary
(Principal Financial
Officer and Principal
Accounting Officer)
* President, Chief July 20, 1998
- ------------------------------------- Operating Officer,
THOMAS LAYTON Treasurer and
Director
* Director July 20, 1998
- -------------------------------------
GERALD BRESLAUER
* Director July 20, 1998
- -------------------------------------
JOSEPH GLEBERMAN
* Director July 20, 1998
- -------------------------------------
WILLIAM GROSS
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director
- ------------------------------------- July 20, 1998
ROBERT KAVNER
* Director July 20, 1998
- -------------------------------------
YVES SISTERON
* Director July 20, 1998
- -------------------------------------
THOMAS UNTERMAN
Director July 20, 1998
*
- -------------------------------------
BARRY DILLER
Director July , 1998
- -------------------------------------
ALAN SPOON
*By: /s/ Charles Conn
___________________________
CHARLES CONN
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
CITYSEARCH, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- ---------- ----------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER THE END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Period from September 20
(date of formation)
through December 31,
1995................... $ -- $ -- $-- $ -- $ --
Year ended December 31,
1996................... -- -- -- -- --
Year ended December 31,
1997................... -- 114,000 -- 89,000(a) 25,000
</TABLE>
- --------
(a) Represents amounts written-off against the allowance for doubtful accounts,
net of recoveries and reversals.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* +Agreement and Plan of Reorganization, among Registrant, MS
Acquisition Corporation, MetroBeat, Inc., Mark Davies and Joshua
White, dated May 31, 1996.
3.1* Restated Certificate of Incorporation, as currently in effect.
3.2* Restated Certificate of Incorporation, to be filed prior to the
consummation of the offering.
3.3* Restated Certificate of Incorporation, to be filed immediately
following the consummation of the offering.
3.4* Bylaws, as currently in effect.
3.5* Restated Bylaws, to be effective upon the closing of the offering.
4.1* Specimen Common Stock Certificate.
4.2* Sixth Amended and Restated Stockholders' Agreement by and among
Registrant and certain stockholders of the Registrant, dated May
26, 1998.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as to the legality of the securities being
registered.
10.1* Form of Indemnification Agreement for directors and officers.
10.2* 1996 Stock Plan and form of agreement thereunder.
10.3* 1998 Employee Stock Purchase Plan.
10.4* 1998 Director Option Plan.
10.5* +License Agreement between Registrant and Perly, Inc., dated March
9, 1996.
10.6* +Marketing Agreement between Registrant and American Express
Travel Related Services Company, Inc., dated May 26, 1998.
10.7* Employment Agreement between Registrant and Charles Conn, dated
May 9, 1996.
10.8* +Partnership Agreement between Metroland Printing, Publishing &
Distributing Ltd. 1217554 Ontario Inc., Registrant and Torstar
Corporation, dated February 17, 1997.
10.9* +License and Services Agreement between Registrant and 1217554
Ontario Inc., dated February 17, 1997.
10.10* +Noncompetition Agreement between Registrant, 1217554 Ontario
Inc., Torstar Corporation and Metroland Printing, Publishing &
Distributing Ltd., dated February 17, 1997.
10.11* +Assignment Agreement between Registrant, 1217554 Ontario Inc.,
and Toronto Star CitySearch, dated February 17, 1997.
10.12* Lease Agreement by and between Registrant and West End Land
Development Co., L.P., dated November 7, 1996.
10.13* Standard Form of Lease, Aeriel Center Executive Park, between
Pizzagalli Investment Company and Registrant, dated May 8, 1996.
10.14* Standard Office Lease between Registrant and Sage Realty
Corporation, dated May 6, 1997.
10.15* Standard Office Lease between Registrant and H. Naito Corporation,
dated March 6, 1997.
10.16* Standard Office Lease between Registrant and Brazos Austin Centre,
Ltd., dated August 15, 1996.
10.17* Standard Office Lease between Registrant and Judge Building Group,
dated September 10, 1996.
10.18* Standard Office Lease between Registrant and Sobel Building
Development, dated May 31, 1996.
10.19* Standard Office Lease between Registrant and BPG Pasadena, L.L.C.
(later assigned to Spieker Properties), dated September 30, 1996.
10.20* Lease Agreement between Registrant and Secured Properties
Investors II, L.P., dated May 13, 1998.
10.21* Amended and Restated Voting Agreement by and among Registrant and
certain stockholders of Registrant, dated November 12, 1997.
10.22* Employment Agreement between Registrant and Thomas Layton, dated
July 2, 1997.
10.23 +License and Services Agreement between Registrant and Classified
Ventures.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
*Previously filed.
+Confidential treatment requested.
<PAGE>
EXHIBIT 10.23
SUBJECT TO CONFIDENTIALITY AGREEMENT
DO NOT DISTRIBUTE
CLASSIFIED VENTURES - CITYSEARCH
LICENSE AND SERVICES AGREEMENT
INTRODUCTION CitySearch, Inc. ("CitySearch") and Classified
Ventures, L.L.C. ("CV") hereby enter into a
multiyear strategic relationship, in which
CitySearch will help CV to develop quickly its
vertical businesses in auto, new homes, apartments
and resale real estate (collectively, the "CV
Businesses"). CV will consider using CitySearch
services if CV expands its classified business into
other categories.
LICENSE AND SERVICES CitySearch grants to CV the following:
(i) A non-transferable (subject to the Assignment
section below), exclusive (as described below)
license to use the CitySearch Technology and
Business Systems, as defined in Exhibit A, solely
for use within the CV Businesses in the CV Territory
(defined to be North America subject to the
exclusions contained in the Competition section
below).
(ii) The right to license the CitySearch Technology
and Business Systems in the additional classified
categories of employment, personals and general
merchandise (the "Additional Categories") [**],
subject to the following: (a) if CV provides written
notice to CitySearch of its intent to license the
CitySearch Technology and Business Systems for use
in connection with one or more of the Additional
Categories, CitySearch agrees to license the
CitySearch Technology and Business Systems for use
in that Additional Category or Categories [**]
according to other terms to be agreed in the future,
none of which shall conflict with the terms
contained in this section (ii), (b) if CitySearch
intends to license the CitySearch Technology and
Business Systems to a third party for national
application after
- -------------
[**] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
July 2, 1999 and before expiration of [**],
CitySearch will provide CV with written notice of
its intent to license. If CV declines within 60
days to license the CitySearch Technology and
Business Systems subject to the terms of this
section (ii) or fails to respond, CitySearch may
license the CitySearch Technology and Business
Systems to any third party. If, on the other hand,
CV responds in writing within 30 days with a
project plan detailing resources committed to
launch one or more of the Additional Categories
and project milestones necessary to launch at
least one of the Additional Categories publicly
online within five months of CV's response to
CitySearch ("Project Plan"), then CitySearch will
license the CitySearch Technology and Business
Systems to CV in the Additional Category or
Categories for which Project Plans exist [**]
according to other terms to be agreed in the
future, none of which shall conflict with the
terms contained in this section (ii). If CV has
not launched at least one of the Additional
Categories within five months, or if CV does not
roll out the Additional Categories to at least 10
of the top 30 markets, ranked by MSA, within one
year, then the [**].
(iii) CitySearch will also provide CV with the
services set forth on Exhibit A attached hereto.
---------
(iv) CitySearch will also assist CV, at CV's
direction, in compilation of data utilized in the CV
billing process.
Subject to execution of customary sublicense
documents, the CitySearch Technology and Business
Systems, and services provided by CitySearch, shall
be available to CV for application in CV affiliate
markets, CV's headquarters and/or other regional
production centers.
EXCLUSIVITY With respect to the CV Businesses in the CV
Territories, CV shall have exclusive access to the
CitySearch Technology and Business Systems,
- -------------
[**] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-2-
<PAGE>
provided that the license granted to CV hereunder
does not violate other CitySearch city guide
agreements, and that CV does not engage in elements
of CitySearch's city guide business in the markets
in which CitySearch or its partners operate. CV
shall make reasonable efforts to utilize CitySearch
as its sole provider of CV's customer service and
site production services in each of the individual
verticals according to the milestones set forth in
Exhibit D. In the event that CV does not utilize
CitySearch as the sole provider in a given vertical,
CitySearch shall not be subject to the non-
competition covenants contained herein with respect
to that vertical. [**]
AFFILIATE STATUS CitySearch will have the option to become CV's
affiliate in [**], and [**]. With respect to
[**], CitySearch agrees to make reasonable
efforts to negotiate a joint offering with [**].
CV will consider making CitySearch its affiliate
in other markets where CV presently does not have
an affiliate. In any market where CitySearch
desires to become a CV affiliate, CitySearch
agrees to sign CV's standard affiliate agreement
and comply with the terms thereof including
promotional requirements as modified for non-
newspaper affiliates. In each such market, CV
agrees to (i) deliver a draft affiliate agreement
containing all material terms for each market on
or before September 1, 1998, (ii) charge
CitySearch [**] (taking into consideration the
market size and other reasonable, objective
criteria that CV applies to a majority of its
affiliates), and (iii) publicly launch online each
such CitySearch affiliate on a timely basis such
that each affiliate is among the [**] of CV
affiliates launched among the CitySearch
affiliate's decile, ranked by MSA (for example,
assuming [**] is the 63rd largest market by MSA,
CV agrees to launch CitySearch's [**]service among
the first five of the
- -------------
[**] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-3-
<PAGE>
ten markets ranked 60-69 by MSA).
FEES CV will pay CitySearch (i) an initial, non-
refundable license fee of [**] payable in two
installments, the first payment of [**] payable
upon execution of the agreement, the second
payment of [**] payable pursuant to the payment
milestones set forth in Exhibit D and (ii) an
annual license fee paid quarterly in arrears,
equal to the greater of [**] of CV's gross
revenues generated in said year during years [**]
of the agreement. In years [**] and [**] of the
agreement, CV shall pay to CitySearch an annual
license fee paid quarterly in arrears, equal to
the greater of [**] of CV's gross revenues
generated in said year. In years [**] and [**], CV
shall pay to CitySearch an annual license fee paid
quarterly in arrears, equal to the greater of [**]
of CV's gross revenues generated in said year. CV
will also pay CitySearch the fees set forth in
Exhibit A and B for services monthly in arrears.
In the event CV acquires CitySearch during the
term of the agreement, all license fees paid or
due by CV to CitySearch shall be taken into
account in determining the value of CitySearch.
AUDIT Either party shall permit the other party and its
agents and accountants, on reasonable notice and at
reasonable times during normal business hours, to
audit, at the auditing party's expense, the books
and records of the other party relating to the
subject matter of this agreement. In the event that
an audit discloses any error in payment, appropriate
adjustments shall be paid immediately. In the
further event that an error is favorable to the
auditing party in an amount equal to or in excess of
fifteen (15) percent of the amount reported, then
the audited party shall reimburse the reasonable
costs of the audit and pay liquidated damages in the
amount of fifty (50) percent of the error.
DEFAULTS & REMEDIES By CitySearch. In the event CV believes CitySearch
-------------
is in default of any of its obligations hereunder
including performance standards or milestones set
forth in the
- -------------
[**] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-4-
<PAGE>
exhibits, and provided CV is not in default of any
of its obligations hereunder, CV shall give
CitySearch specific written notice of the default
and the parties agree to meet and confer (by
telephone or in person) in good faith within 5
business days of receipt of notice. If, at the
conclusion of the meet and confer process, which
shall not be longer than 10 additional business days
or such longer period as the parties mutually agree,
CV continues to believe CitySearch is in default, CV
shall provide written notice of the issues
remaining. Provided CV is not in default of any of
its obligations hereunder, if CitySearch has not
cured the default within 15 business days, or in the
case of a default that is not susceptible of cure
within 15 days, if CitySearch has not taken diligent
steps to commence cure of the default within 15
business days and completed such cure within three
months, CV may request arbitration to be conducted
by a mutually agreed disinterested third party
arbitrator, who shall be authorized to award damages
based on CitySearch's default (excluding
consequential or punitive damages), which damages
may be set-off against future service fees owed to
CitySearch, and which shall not in any event exceed
the total amount of fees paid to CitySearch. This
section describes CV's sole remedy in the event of a
default by CitySearch.
By CV. In the event CitySearch believes CV is in
-----
default of any of its obligations hereunder,
CitySearch shall give CV specific written notice of
the default and the parties agree to meet and confer
(by telephone or in person) in good faith within 15
days of receipt of notice.
TERM Two year [**] (the last day of the last term of
which shall be the "Unwind Commencement Date") which
may be extended at CV's sole option for [**]
additional [**] terms. CV may give written notice to
unwind the agreement no sooner than seven months but
no later than six months before expiration of the
current term. The provisions contained within the
Exclusivity and Competition sections shall terminate
on the
- -------------
[**] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-5-
<PAGE>
Unwind Commencement Date. For the one year period
following the Unwind Commencement Date, the parties
agree to continue all terms of this agreement,
except for the terms contained in the Exclusivity
and Competition sections. Absent notice to unwind,
the agreement shall renew for an additional [**]
term.
COMPETITION CitySearch will not offer, in its own markets or to
its licensees, online classified products in a
searchable database format or under a national brand
in the CV Businesses, except that CitySearch may
develop and market its own classified product [**]
(iii) in its owned and operated markets where there
is a CV affiliate, provided that (a) CitySearch
receives written approval from the CV affiliate in
the respective city and, [**] In markets where
CitySearch operates owned and operated markets and
currently offers products in the CV Businesses under
a national brand or in a searchable database format,
CitySearch agrees to [**]. Provided that CitySearch
complies with the obligations set forth in
subsection (iv) of this Competition section,
subsection (iv) shall not be construed to prevent
CitySearch from selling web sites to individuals or
businesses engaged in real estate or automobile-
related businesses or limit the content thereof.
NON-SOLICITATION During the term of the agreement and for a period of
[**] after the Unwind Commencement Date, (i)
CitySearch shall not solicit CV's affiliates or
customers with respect to the CV Businesses or an
Additional Category or Categories (to the extent CV
has launched an Additional Category or Categories
pursuant to this
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Agreement), and (ii) neither party shall, directly
or indirectly, solicit or hire, except for general
commercial solicitations, any employee or
independent contractor of the other party without
prior written approval.
REPORTING Given the rapidly evolving nature of CV's business,
the parties agree to meet periodically to review
CV's satisfaction with CitySearch's products and
services, and to outline action plans for the next
period. The parties agree to make commercially
reasonable efforts to hold status meetings daily. In
addition, the parties will conduct periodic service
reviews. These reviews shall take place at CV's
request, but no more frequently than monthly. At
each review meeting, the parties shall ensure that
each party is in compliance with the performance
standards and milestones contained in the exhibits
attached to this agreement.
REPRESENTATIVE CV will consider making CitySearch its
RELATIONSHIP representative for selling classified solutions to
(i) affiliates in smaller North American markets;
and (ii) outside of North America.
INVESTMENT Subject to advice from underwriters and auditors,
CitySearch will make reasonable efforts to accept an
equity investment from CV for a period of 90 days or
until CitySearch is a public company, whichever is
shorter.
ASSIGNMENT Either party may assign this agreement to an entity
acquiring all, or substantially all, of the party's
assets, or to an entity that the party wholly owns.
CONFIDENTIALITY The parties agree to execute the mutual
confidentiality agreement attached as Exhibit C
simultaneously with this agreement.
OWNERSHIP OF INTELLECTUAL Except as otherwise provided in this agreement or
PROPERTY the attachments, CitySearch and CV will retain
ownership to the intellectual property provided by
one to the other.
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Any and all non-public information CitySearch
obtains about the customers of CV affiliates, in the
course of serving such affiliates in the CV
Businesses, shall be considered the property of
CV. Other information about the CV Businesses will
be governed by the mutual confidentiality
agreement. With regard to software developed by
CitySearch at CV's request and wholly paid for by
CV, CV shall own the software, and grants to
CitySearch a perpetual, royalty-free license to use
the software in applications [**]
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This license and services agreement constitutes a contractual commitment that is
legally binding upon the parties, their successors, and assigns.
ACCEPTED AND AGREED:
CITYSEARCH, INC. CLASSIFIED VENTURES, L.L.C.
By: /s/ Charles R. Conn By: /s/ Timothy Landon
--------------------------- ---------------------------
Its: CEO Its: Chief Executive Officer
-------------------------- ---------------------------
7/17/98 July 16, 1998
Date:_________________________ Date:__________________________
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EXHIBIT A
---------
CITYSEARCH TECHNOLOGY AND BUSINESS SYSTEMS
CitySearch will license the following to CV for use in the CV Businesses:
. TECHNOLOGY SYSTEMS
Throughout the term of the agreement, CitySearch will license and/or provide
licenses to Classified Ventures for technology in the following areas: [**]
("Technology Systems"). While CitySearch may change technologies to meet future
requirements, these technologies are expected to include [**] CitySearch will
provide CV [**] seats (one machine on which the software application is
installed) for use at its headquarters facilities, and up to [**] seats per
application for each affiliate. Affiliates may add seats at CitySearch's
incremental cost plus [**], subject to a maximum of [**] per seat. On at least a
quarterly basis, CitySearch shall present to a designated Classified Ventures
contact any new products or enhancements to Technology Systems for Classified
Ventures to incorporate in its own product offerings. CitySearch shall also
consult with Classified Ventures on its development plans with respect to the
Technology Systems.
In addition, CitySearch shall present to CV any other software products released
within the previous quarter that may have application to the CV Businesses.
Payment terms for products falling outside the scope of the Technology Systems
will be negotiated separately.
. BUSINESS SYSTEMS
In the course of launching 7 owned and operated markets and 8 partner markets,
CitySearch has developed a substantial set of intellectual property for
launching and operating local online information businesses, particularly city
guide-related businesses. This intellectual property includes [**] CitySearch
will leverage this material in the creation of rollout programs for CV, so that
the time required to develop business processes for the CV Businesses can be
substantially shortened.
STAFFING AND SERVICES
In order to provide CV with Affiliate Rollout and Back Office services,
CitySearch will provide CV with [**] staffing on a consulting basis. Many such
individuals have been identified and are named herein; others are to be
determined. CitySearch retains the right to replace any individual at any time
and for any reason, except that CitySearch shall use commercially reasonable
efforts to ensure continuity of service where possible.
In addition to providing staff for Affiliate Rollout and Back Office services,
CV has indicated an interest in retaining CitySearch staff for other purposes,
including temporary general management roles and product
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development. Unless such appointments become the subject of a separate
agreement, rates and conditions will be governed by this agreement.
. Overall Direction
Stephanie Meisel currently will provide day-to-day direction for CitySearch's
efforts under this agreement, and will be based, as appropriate, in Chicago.
Stephanie will be dedicated 100% to this project. Ted Meisel, Vice President,
Products & Technologies Group, John Pleasants, General Manager, Rollout, and Jim
McGovern, Vice President Operations, will provide overall direction for the
effort.
. Enable Affiliate Rollout/Operations; Affiliate Training
CitySearch employees will assist CV employees in the development and planning of
the affiliate rollout process, including the affiliate training program for
cars.com and newhomenetwork.com. The milestones associated with this activity
are attached as Exhibit D.
Initially, CitySearch plans to staff this activity with the following
individuals.
. Paul Lafontaine
. Missy Farrell
. Doug Miller (rollout Program Manager)
. Colleen Hickey (rollout Sales Trainer)
. Rob Barron (rollout Operations Trainer)
. Enable Back Office [**] Operations
CitySearch employees will work with Classified Ventures' employees to
establish back office operations for each of the CV Businesses per Exhibit D.
Based on requirements analysis recently completed for cars.com by a CitySearch
team, CitySearch staff will develop and implement a plan to quickly establish
back office operations for cars.com in [**]. Building on that work, CitySearch
staff will work with CV staff to analyze the back office requirements for
newhomesnetwork and to establish operations in [**]. Back Office Operations
for resale real estate and apartments will follow. Other employees will assist
in building Classified Ventures' customer service operations and assist with
Classified Ventures' wholesale billing services.
The following staff from CitySearch will participate in the requirements
analysis and implementation phase:
. Karen Lu (Director of Market Operations)
. Angie Putman (Director, Home Office Operations)
. Hans Dreyer (Director, Customer Service)
. Jeff Grammatke (Professional Services Associate)
. Christopher Adorna (Classified Ventures Back Office Manager)
. Chris Swartley (Operations Associate)
. John Foley (Operations Manager)
. Corrinne Tosaki (Project Manager)
. 2 designers and 2 customer service reps. (plus others, ramping up as
appropriate)
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In addition to staff, CitySearch may need to obtain capital equipment to serve
CV. For example, CitySearch will need to purchase [**]. CitySearch will seek
written approval from CV for all such expenditures in excess of $5,000; CV
agrees not to unreasonably withhold approval beyond deadlines necessary to meet
milestones described elsewhere in this agreement.
. Rollout Team ([**] units)
CitySearch will staff a minimum of [**] rollout units, expected to consist of 3
members each, for the initial contract term. The rollout units will train
affiliates in [**] and best practices. These teams will be deployed as directed
by Classified Ventures. The deployment of these teams would be staged so that
divergent processes are not developed from the beginning. At CV's request,
CitySearch will provide additional teams subject to a minimum commitment of
[**]. At CV's request, CitySearch will extend the service of existing teams
beyond the initial contract term, subject to a minimum extension of [**].
It has been CitySearch's experience that the heavy travel demands of the
rollout process require special policies in order to attract and retain team
members, including policies regarding travel and expenses, time off the road,
and others. For example, it may be necessary to staff a rollout team with [**]
members in order to rotate the demands of travel and rollout commitments. CV
agrees to reimburse CitySearch pursuant to policies equal to the greater of 1)
CitySearch's rollout team policies as modified from time to time, and 2) CV's
rollout team policies to be established.
In addition, the roll out teams will require administrative support (for
example, to forward mail to team members based at CV's offices, and to assist
with travel arrangements). CV agrees to either (i) provide such support, or
(ii) reimburse CitySearch for its reasonable costs incurred in providing such
support.
. Classified Ventures [**] Service
CitySearch will produce [**]. Initially, CitySearch will build a team to provide
these services to cars.com and newhomenetwork.com (see Exhibit D). CitySearch
also expects to provide these services to apartments.com and resale real estate
as noted in Exhibit D.
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THE OMITTED PORTIONS.
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EXHIBIT B
---------
CITYSEARCH BILLING RATES
Rates are calculated as follows:
1. Establish average salary per employee category
2. Multiply salary by related costs
. [**] for benefits and taxes
. [**] for recruiting and training
. [**] to adjust for cost of stock options (estimated as average increment
required to bring compensation to market)
. [**] for administration and management
3. Add overhead per employee
. $[**]/hr for technical staff
. $[**]/hr all other
4. Add [**] to total for CitySearch margin
Rates are subject to change in the event that CitySearch's costs change.
Individuals who are assigned to Classified Ventures for at least one month will
be billed at a maximum of 8 hours per day. Weekend hours will also be charged
at a maximum of 8 hours per day. Individuals who are assigned to Classified
Ventures for less than one month will be billed at actual hours worked, both
business and weekend days.
<TABLE>
<CAPTION>
------------------------------------------------------------------
ROLE HOURLY
RATE
------------------------------------------------------------------
<S> <C>
CV Rollout Team Positions (subject to change
based on pilot team experience)
------------------------------------------------------------------
Program Manager $[**]
------------------------------------------------------------------
Operations Trainer $[**]
------------------------------------------------------------------
Sales Trainer $[**]
------------------------------------------------------------------
Marketing Advisor $[**]
------------------------------------------------------------------
Field Producer $[**]
------------------------------------------------------------------
------------------------------------------------------------------
Other CitySearch Positions*
------------------------------------------------------------------
Functional Vice President (e.g., marketing, sales) $[**]
------------------------------------------------------------------
General Manager $[**]
------------------------------------------------------------------
Functional Director $[**]
------------------------------------------------------------------
Functional Manager $[**]
------------------------------------------------------------------
Functional Supervisor $[**]
------------------------------------------------------------------
Functional Associate $[**]
------------------------------------------------------------------
Customer Service Representative $[**]
------------------------------------------------------------------
Infosite Designer $[**]
------------------------------------------------------------------
Data Entry Clerk $[**]
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
CitySearch Professional Services Support*
------------------------------------------------------------------
Senior Software Engineer $[**]
------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
------------------------------------------------------------------
ROLE HOURLY
RATE
------------------------------------------------------------------
<S> <C>
Software Engineer $[**]
------------------------------------------------------------------
Senior Project Manager/Director/Producer $[**]
------------------------------------------------------------------
Project Coordinator/Manager/Producer $[**]
------------------------------------------------------------------
Senior Graphic/Interface Designer $[**]
------------------------------------------------------------------
Graphic/Interface Designer $[**]
------------------------------------------------------------------
QA Engineer $[**]
------------------------------------------------------------------
Technical Support Analyst $[**]
------------------------------------------------------------------
</TABLE>
CV agrees to reimburse CitySearch for reasonable travel expenses incurred by
CitySearch staff, subject to customary documentation.
*If needed; other positions quoted as requested.
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
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EXHIBIT C
---------
MUTUAL CONFIDENTIALITY AGREEMENT
In connection with license and services agreement dated July 16, 1998 (the
"Engagement") between Classified Ventures, L.L.C. ("CV") and CitySearch, Inc.
(the "Company"), the Company and CV expect to make available to one another
certain nonpublic information concerning their respective business, financial
condition, operations, assets and liabilities. As a condition to such
information being furnished to each party and, when appropriate and in
accordance with the terms of this agreement, its directors, officers, employees,
agents or advisors (including, without limitation, attorneys, accountants,
consultants, bankers and financial advisors) (collectively, "Representatives"),
each party agrees to treat any nonpublic information concerning the other party
(whether prepared by the disclosing party, its advisors or otherwise and
irrespective of the form of communication) which is furnished hereunder to a
party or to its Representatives now or in the future by or on behalf of the
disclosing party (herein collectively referred to as the "Engagement Material")
in accordance with the provisions of this agreement, and to take or abstain from
taking certain other actions hereinafter set forth.
(1) ENGAGEMENT MATERIAL. The term "Engagement Material" also shall be
-------------------
deemed to include all notes, analyses, compilations, studies, interpretations or
other documents prepared by each party or its Representatives which contain,
reflect or are based upon, in whole or in part, the information furnished to
such party or its Representatives pursuant hereto which is not available to the
general public. The term "Engagement Material" does not include information
which (i) is or becomes generally available to the public other than as a result
of a breach of this Agreement by the receiving party or its Representatives,
(ii) was within the receiving party's possession prior to its being furnished to
the receiving party by or on behalf of the disclosing party, provided that the
source of such information was not known by the receiving party to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to the disclosing party, (iii) is or becomes
available to the receiving party on a non-confidential basis from a source other
than the disclosing party or any of its Representatives, provided that such
source was not known by the receiving party to be bound by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
confidentiality to the disclosing party or any other party with respect to such
information, (iv) is independently developed by the recipient without use of
Engagement Material, (v) is disclosed under requirements of law provided the
disclosing party complies with Section 5 hereof, or (vi) is disclosed by the
recipient or its Representatives with the discloser's prior written approval.
(2) PURPOSE OF DISCLOSURE OF ENGAGEMENT MATERIAL. It is understood and
--------------------------------------------
agreed to by each party that any exchange of information under this agreement
shall be solely for the purpose of the Engagement between the parties.
Competitively sensitive information such as information concerning product
development or marketing plans, product prices or pricing plans, cost data,
customers or similar information the disclosure of which has been determined to
be reasonably necessary to the Engagement, shall be limited only to those
employees and Representatives who are directly involved in the Engagement.
(3) USE OF ENGAGEMENT MATERIAL. Each party hereby agrees that it and its
--------------------------
Representatives shall use the other's Engagement Material solely for the purpose
of the Engagement, and that the disclosing party's Engagement Material will be
kept confidential and each party and its Representatives will not disclose or
use for purposes other than the Engagement; provided, however, that (i) the
receiving party may make any disclosure of such information to which the
disclosing party gives its prior written consent and (ii) any of such
information may be disclosed to the receiving party's Representatives who need
to know such information for the sole purpose of accomplishing the Engagement.
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(4) NON-DISCLOSURE. In addition and subject to Section 5, each party
--------------
agrees that, without the prior written consent of the other party, its
Representatives will not disclose to any other person the license fees, term,
royalties, or exclusivity or competition provisions of the Engagement.
(5) REQUIRED DISCLOSURE. In the event that a party or its Representatives
-------------------
are requested or required (by oral questions, interrogatories, requests for
information or documents in legal filings or proceedings, subpoena, civil
investigative demand or other similar process) to disclose any of the other
party's Engagement Material, the party requested or required to make the
disclosure shall provide the other party with prompt notice of any such request
or requirement so that the other party may seek a protective order or other
appropriate remedy and/or waive compliance with the provisions of this
agreement. If, in the absence of a protective order or other remedy or the
receipt of a waiver by such other party, the party requested or required to make
the disclosure or any of its Representatives are nonetheless, in the opinion of
counsel, legally compelled to disclose the other party's Engagement Material,
the party requested or required to make the disclosure or its Representative
may, without liability hereunder, disclose only that portion of the other
party's Engagement Material which such counsel advises is legally required to be
disclosed, provided that the party requested or required to make the disclosure
exercises its reasonable efforts to preserve the confidentiality of the other
party's Engagement Material, including, without limitation, by cooperating with
the other party to obtain an appropriate protective order or other reliable
assurance that confidential treatment will be accorded the other party's
Engagement Material.
(6) TERMINATION OF ENGAGEMENT. Upon termination of the Engagement for any
-------------------------
reason, each receiving party will promptly cease use of the Engagement Materials
and deliver to the disclosing party or destroy (with such destruction to be
certified in writing by the receiving party) all written Engagement Material
(and all copies thereof and extracts therefrom) furnished to the receiving party
or its Representatives by or on behalf of the disclosing party pursuant hereto
other than those materials modified for, or created expressly for, CV.
Notwithstanding the return or destruction of the Engagement Material, each party
and its Representatives will continue to be bound by its obligations of
confidentiality, non-use and other obligations hereunder.
(7) NO REPRESENTATION OF ACCURACY. Each party understands and
-----------------------------
acknowledges that neither party nor any of its Representatives makes any
representation or warranty, express or implied, as to the accuracy or
completeness of the Engagement Material made available by it or to it. Each
party agrees that neither the disclosing party nor any of its Representatives
shall have any liability to the receiving party or to any of its Representatives
relating to or resulting from the use of or reliance upon such disclosing
party's Engagement Material or any errors therein or omissions therefrom. Only
those representations or warranties which are made in a final definitive
agreement regarding the Transaction, when, as and if executed, and subject to
such limitations and restrictions as may be specified therein, will have any
legal effect.
(8) MISCELLANEOUS. Each party agrees to be responsible for any breach of
-------------
this agreement by any of its Representatives. No failure or delay by either
party or any of its Representatives in exercising any right, power or privileges
under this agreement shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege hereunder. In case any provision of this agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of the agreement shall not in any way be affected or
impaired thereby.
(10) INJUNCTIVE RELIEF. It is further understood and agreed that money
-----------------
damages would not be a sufficient remedy for any breach of this agreement by
either party or any of its Representatives and that the non-breaching party
shall be entitled to equitable relief, including injunction and specific
performance, as a remedy for any such breach. Such remedies shall not be deemed
to be the exclusive remedies for a breach of this agreement but shall be in
addition to all other remedies available at law or equity. In the event of
litigation relating to this agreement, if a court of competent jurisdiction
determines that either party or any of its
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Representatives have breached this agreement, then the breaching party shall be
liable and pay to the non-breaching party the reasonable legal fees incurred in
connection with such litigation, including an appeal therefrom.
(11) NO LICENSE. Nothing in this agreement is intended to grant any rights
----------
to either party under any patent or copyright of the other party, nor shall this
agreement grant any party any rights in or to the Engagement Material of the
other party except as expressly set forth herein.
(12) TERM. The obligations of each receiving party hereunder shall survive
----
for two (2) years from the date of termination of the Engagement.
(13) GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to agreements
made and to be performed within such State.
ACCEPTED AND AGREED:
CITYSEARCH, INC. CLASSIFIED VENTURES, L.L.C.
By:_________________________________ By:_________________________________
Its:________________________________ Its:________________________________
Date: ______________________________ Date: ______________________________
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EXHIBIT D: MILESTONES
---------------------
[**] CitySearch and CV have agreed to condition a portion of the license fees to
be paid from CV to CitySearch upon the achievement of certain milestones,
spelled out in Exhibit D1. Even after CitySearch has met the criteria for a
given milestone, it is the parties' expectation that CV's needs will continue to
evolve, requiring CitySearch to be responsive to those needs. Nothing in the
Milestones process is intended to convey that CitySearch's obligations end upon
completion of Milestones. Rather, it is the parties' intention that the formal
process established herein will create a disciplined mechanism to foster a
strong working relationship between CitySearch and CV.
This introduction is intended to provide definitions governing the Milestones
payment schedule.
COMPLETION OF MILESTONES
CitySearch and CV expect the operating plans for the CV Businesses to undergo
frequent change for the foreseeable future. In order to meet CV's need for
rapid implementation and accountability, and CitySearch's need for clear
definition and milestones within its control, each milestone will be controlled
by some variation of the following process:
1. CitySearch and CV develop objectives and plans for meeting the milestone by
a specified date. CitySearch will take the lead in developing such plans
when requested to do so by CV.
2. CV reviews the plans by a specified date and approves them or provides
specific, written feedback.
3. Steps 1 and 2 are repeated if necessary, but it is the parties' intention
that up to one iteration shall be the norm, given the tight time frames.
4. CitySearch implements the agreed-upon plans, and applies for the Milestone
payment.
5. CV shall honor the payment as long as CitySearch has implemented the plan
agreed upon for certification of the milestones.
CV agrees that for the purposes of Milestone Payments, CitySearch will have met
a given milestone once it has achieved implementation of the plan(s) agreed to
by the dates specified, unless (i) CV and CitySearch agree on a modified plan in
writing, or (ii) some other criteria is described in writing. In the case of a
modified plan, the milestone will be considered complete when CitySearch has
reached substantially the same achievements (e.g., hired the 15 people called
for in the original hiring plan, even though the revised plan calls for 20
people with somewhat different skills).
APPROVALS
Where approvals are required for operating plans or standards, CV and CitySearch
expect that the General Manager or Acting General Manager of a given vertical
shall review and sign the document in a timely manner. The GM's signature shall
indicate CV's agreement to the plans and standards contained therein for the
purpose of milestone criteria. In addition, the CEO and/or COO may agree in
place of any of the vertical General Managers.
SINGLE POINT OF CONTACT
For each vertical, CV shall designate a single point of contact to facilitate
the resolution of open issues in an expeditious manner. Where appropriate, CV
shall also designate individuals to assist CitySearch in the development of
plans and completion of particular tasks and activities as called for by project
workplans.
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EXHIBIT D1
PAYMENT SCHEDULE FOR BUSINESS AND TECHNOLOGY SYSTEMS
<TABLE>
<CAPTION>
TARGET
MILESTONE START DATE COMPLETION
KEY MILESTONES PAYMENT DATE CITYSEARCH OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Staff and Train HQ [**] 7/6/98 [**] [**]
support team
- ------------------------------------------------------------------------------------------------------------------------------------
2 Cars Rollout program [**] 6/15/98 [**] [**]
complete and revised
- ------------------------------------------------------------------------------------------------------------------------------------
3 Cars Rollout teams [**] 6/29/98 [**] [**]
deployed
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
KEY MILESTONES CV OBLIGATIONS CRITERIA FOR MILESTONE COMPLETE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Staff and Train HQ [**] . Hiring and training of team as
support team defined by Support Team Plan
. Milestone will be considered
complete even if Director of Affiliate
Rollout is not yet hired
- ------------------------------------------------------------------------------------------------------------------------------------
2 Cars Rollout program [**] . All Program Modules revised and
complete and revised approved as specified in Rollout
Lesson Learned
. As long as CitySearch has made
good faith efforts and have demonstrated an
acceptable level of effectiveness,
this milestone shall be considered
complete no later than [**]
- ------------------------------------------------------------------------------------------------------------------------------------
3 Cars Rollout teams [**] . Team members recruited and trained
deployed as agreed to in the Plan, but not to
exceed 8 people for purposes of this
Milestone
. Once an individual commences
rollout, he/she can no longer be
deemed inadequate for rollout purposes
. Target date contingent on
CitySearch's ability to use existing
resources; redefinition of skills
would significantly affect completion
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________________________
* Individuals must have an acceptable level of knowledge and skill to
adequately roll out a vertical. Acceptable level of knowledge shall be
defined as the ability to deliver a given set of rollout Modules and to
field Frequently-asked questions as defined by the vertical.
- -------------
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<PAGE>
<TABLE>
<CAPTION>
TARGET
MILESTONE START DATE COMPLETION
KEY MILESTONES PAYMENT DATE CITYSEARCH OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4 Cars Back-Office [**] 6/29/98 [**] [**]
infrastructure enabled
- ------------------------------------------------------------------------------------------------------------------------------------
5 Cars Back-office [**] 6/8/98 [**] [**]
infrastructure complete
- ------------------------------------------------------------------------------------------------------------------------------------
6 Homes rollout program [**] 7/9/98 [**] [**]
complete and revised
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
KEY MILESTONES CV OBLIGATIONS CRITERIA FOR MILESTONE COMPLETE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4 Cars Back-Office [**] . CS has implemented Staffing
infrastructure enabled Plan and has demonstrated
ability to produce sites and serve
customer in accordance with
approved PRGs and OM
- ------------------------------------------------------------------------------------------------------------------------------------
5 Cars Back-office [**] Implementation of BOSP-Cars, including,
infrastructure complete but not limited to:
. Customer service information
tracked in CS Support Trak
. Packets processed using
modified CS PTB system
. Basic reports avaliable on a timely
basis
. System accessible from Chicago
and Pasadena, subject to order
and delivery of WAN connection
. Requests for significant
deviations from 5/22/96
Requirements document will not
be considered in evaluating the
completion of this milestone
- ------------------------------------------------------------------------------------------------------------------------------------
6 Homes rollout program [**] . All Program Modules revised and
complete and revised approved as specified in Rollout
Lessons Learned
. As long as CitySearch has made
good faith efforts and has
demonstrated an acceptable
level of effectiveness, this
milestone shall be considered
complete no later than [**]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TARGET
MILESTONE START DATE COMPLETION
KEY MILESTONES PAYMENT DATE CITYSEARCH OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7 Homes Rollout teams [**] 6/29/98 [**] [**]
deployed - [**]
- -----------------------------------------------------------------------------------------------------------------------------------
8 Homes back-office [**] 7/9/98 [**]
infrastructure functional [**]
- -----------------------------------------------------------------------------------------------------------------------------------
9 Homes back-office [**] 7/9/98 [**] [**]
infrastructure integrated
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CRITERIA FOR MILESTONE COMPLETE
KEY MILESTONES CV OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7 Homes Rollout teams [**] . Team members recruited and trained
deployed as agreed to in the Plan, but not to
exceed 8 people for purposes of this
Milestone
. Once an individual commences
rollout, he/she can no longer be
deemed inadequate for rollout purposes
. Target date within the range
subject to (a) CitySearch's ability to
use existing resources; redefinition
of skills would significantly affect
completion date; (b) team size
remaining small (i.e., 2 or fewer
members would push toward beginning of
range)
- -----------------------------------------------------------------------------------------------------------------------------------
8 Homes back-office [**] . CS has implemented Staffing Plan
infrastructure functional and has demonstrated ability to
produce sites and serve customers in
accordance with approved PRGs and OM
. Target date is contingent on
requirements analysis, PRGs, and OM
findings consistent with current view
that implementation of Homes back
office will be similar to and no more
difficult than that for cars.com
.
- -----------------------------------------------------------------------------------------------------------------------------------
9 Homes back-office [**] Implementation of BOSP-Homes,
infrastructure integrated including, but not limited to:
. Customer service information
tracked in CS SupportTrak
. Packets processed using modified CS
PTB system
. Basic reports available on a timely
basis
. System accessible from Chicago and
Pasadena
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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-21-
<PAGE>
<TABLE>
<CAPTION>
TARGET
MILESTONE START DATE COMPLETION
KEY MILESTONES PAYMENT DATE CITYSEARCH OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 Apartments rollout [**] No sooner TBD [**]
program complete than
[**] and
currently
planned to
be [**]
- -----------------------------------------------------------------------------------------------------------------------------------
11 Apts.com Rollout teams [**] No sooner [**] [**]
deployed, if CV elects to than [**],
utilize CitySearch based on
assistance for Workplan
Apartments.com (See 10 Program
above)
- -----------------------------------------------------------------------------------------------------------------------------------
12 Apartments back-office [**] No sooner TBD [**]
infrastructure than [**]
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CRITERIA FOR MILESTONE COMPLETE
KEY MILESTONES CV OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10 Apartment rollout [**] Either:
program complete . All Program Modules revised and approved
as specified in Rollout Lessons Learned
no later than date to be determined in
workplan when developed
[**]
- --------------------------------------------------------------------------------------------------------------------------------
11 Apts.com Rollout teams [**] . Fulfillment of Apartments Rollout
deployed, if CV elects to Organization Plan within 8 weeks of
utilize CitySearch submission, no later than [**]
assistance for . Once an individual commences
Apartments.com (See 10 rollout, he/she can no longer be
above) deemed inadequate for rollout purposes
[**]
- -------------------------------------------------------------------------------------------------------------------------------
12 Apartments back-office [**] . CS has implemented Staffing Plan
infrastructure and has demonstrated ability to
produce sites and serve customers in
accordance with approved PRGs and OM
. Implementation of BOSP-Apts
. System accessible from Chicago and
Pasadena
[**]
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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-22-
<PAGE>
<TABLE>
<CAPTION>
TARGET
MILESTONE START DATE COMPLETION
KEY MILESTONES PAYMENT DATE CITYSEARCH OBLIGATIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[**]
- ----------------------------------------------------------------------------------------------------------------------------
13 Resale RE rollout program [**] No sooner TBD [**]
complete than
[**]
- ----------------------------------------------------------------------------------------------------------------------------
14 Resale RE RO teams [**] No sooner [**]
deployed than TBD
[**]
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CRITERIA FOR MILESTONE COMPLETE
KEY MILESTONES CV OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[**] [**]
- ---------------------------------------------------------------------------------------------------------------------------------
13 Resale RE rollout program [**] If CV has communicated intent to
complete engage CitySearch in this program:
. All Program Modules revised and
approved as specified in Rollout
Lessons Learned
. In any event, no later than [**],
assuming CitySearch has made good
faith efforts
[**]
- ---------------------------------------------------------------------------------------------------------------------------------
14 Resale RE RO teams [**] If CV has communicated intent to
deployed engage CitySearch in this program:
. Team members recruited and trained
as agreed to in the plan
[**]
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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-23-
<PAGE>
<TABLE>
<CAPTION>
TARGET
MILESTONE START DATE COMPLETION
KEY MILESTONES PAYMENT DATE CITYSEARCH OBLIGATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15 Resale RE back-office [**] 30 days [**]
infrastructure integrated after notice, 6 weeks after
but not start date
before
[**]
- -----------------------------------------------------------------------------------------------------------------------------------
16 Implementation [**] 6/15/98 [**]
Completed TBD
- -----------------------------------------------------------------------------------------------------------------------------------
Total [**] .
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CRITERIA FOR MILESTONE COMPLETE
KEY MILESTONES CV OBLIGATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[**]
- ---------------------------------------------------------------------------------------------------------------------------------
15 Resale RE back-office [**] Either
. CS has implemented Staffing Plan
and has demonstrated ability to
produce sites and serve customers in
accordance with approved PRGs and OM
[**]
- ---------------------------------------------------------------------------------------------------------------------------------
16 Implementation Completed [**] . Completion of previous milestones
that have not been waived, but no
later than [**] assuming CS has
demonstrated good faith to achieve all
milestones
- ---------------------------------------------------------------------------------------------------------------------------------
Total [**] .
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
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-24-
