<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
LYCOS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3277338
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
400-2 TOTTEN POND ROAD, WALTHAM, MASSACHUSETTS 02451
(781) 370-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT J. DAVIS
LYCOS, INC.
400-2 TOTTEN POND ROAD
WALTHAM, MASSACHUSETTS 02451
(781) 370-2700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
MICHAEL J. RICCIO, JR., ESQ. KENNETH L. GUERNSEY, ESQ.
HUTCHINS, WHEELER & DITTMAR CYDNEY S. POSNER, ESQ.
A PROFESSIONAL CORPORATION JODIE M. BOURDET, ESQ.
101 FEDERAL STREET COOLEY GODWARD LLP
BOSTON, MASSACHUSETTS 02110 ONE MARITIME PLAZA, 20TH FLOOR
(617) 951-6600 SAN FRANCISCO, CALIFORNIA 94111
(415) 693-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share ............ 6,300,000 $3.18 $20,008,000 $5,563
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee, based
upon the book value of the Wired Ventures, Inc. capital stock in accordance
with Rule 457(f)(2) under the Securities Act of 1933.
----------------
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 shall become
effective on such date as the Commission, acting pursuant to Section 8(a) may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
WIRED VENTURES, INC.
660 THIRD STREET, FOURTH FLOOR
SAN FRANCISCO, CALIFORNIA 94107
Dear Stockholder:
As you may be aware, Wired Ventures, Inc. has entered into an agreement with
Lycos, Inc. providing for the acquisition of Ventures by Lycos. As required by
the merger agreement, Ventures' board of directors has called a special meeting
of stockholders of Ventures to be held at 9:00 a.m. local time on January ,
1999. The meeting will be held at the offices of Cooley Godward LLP, One
Maritime Plaza, 20th Floor, San Francisco, California 94111.
At the meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the merger agreement. Under the merger agreement, Ventures
will become a wholly-owned subsidiary of Lycos. Upon completion of the merger,
the outstanding shares of Ventures capital stock will be converted into shares
of Lycos common stock and, in some cases, the right to receive cash, as
described more fully in the accompanying proxy statement/prospectus.
After careful consideration, the board of directors has approved the merger
agreement and the merger and has concluded that they are fair to, and in the
best interests of, Ventures and its stockholders. Your board of directors
recommends that you vote in favor of the merger agreement and the merger.
In the materials accompanying this letter, you will find a notice of special
meeting of stockholders, a proxy statement/prospectus relating to the proposal
to be voted upon at the meeting, a proxy card and a return envelope. The proxy
statement/prospectus more fully describes the proposed transactions. Please
review this document carefully prior to voting on the proposal.
All stockholders are cordially invited to attend the meeting in person. If
you attend the meeting, you may vote in person if you wish even if you have
previously returned your completed proxy card. Whether or not you plan to
attend the meeting, it is important that your shares be represented and voted.
Therefore, please complete, sign, date and return your proxy card in the
enclosed envelope. Approval of the merger agreement and the merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Ventures capital stock (assuming conversion of all Ventures preferred stock)
and a majority of the outstanding Ventures Series C preferred stock.
Please note, however, that if your shares are held of record by the trustee
of the voting trust that was formed in March 1998, you will not receive a proxy
card or be able to vote your shares at the meeting. The voting trustee will
vote your shares. You are still cordially invited to attend the meeting.
Due to the existence of the voting trust and voting agreements that have been
executed by the trust and other Ventures stockholders, we are assured of
receiving the requisite vote of stockholders at the special meeting.
Regardless, YOUR VOTE IS IMPORTANT TO US and we urge you to complete and return
your proxy to us.
On behalf of the board of directors, I thank you for your support and ask you
to vote in favor of the merger agreement and the merger.
Sincerely,
/s/ Beth Vanderslice
Beth Vanderslice
President
YOUR VOTE IS IMPORTANT.
PLEASE RETURN YOUR PROXY CARD PROMPTLY.
<PAGE>
WIRED VENTURES, INC.
660 THIRD STREET, FOURTH FLOOR
SAN FRANCISCO, CALIFORNIA 94107
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY , 1999
TO THE STOCKHOLDERS OF WIRED VENTURES, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Wired
Ventures, Inc., a Delaware corporation, will be held at 9:00 a.m. local time on
, January , 1999. The meeting will be held at the offices of Cooley
Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, California 94111.
The purpose of the meeting will be to approve the following proposal:
. approve and adopt the Agreement and Plan of Merger and Reorganization,
dated as of November 25, 1998, among Ventures, Lycos, Inc., BF
Acquisition Corp. and H. William Jesse, Jr., Louis Rossetto and Paul J.
Salem, as Stockholder Representatives, and
. approve the merger of BF Acquisition Corp., a wholly-owned subsidiary of
Lycos, with and into Ventures, through which Ventures will become a
wholly-owned subsidiary of Lycos and the outstanding shares of Ventures
capital stock will be converted into shares of Lycos common stock and
other rights.
Information on the above proposal is contained in the attached proxy
statement/prospectus. Stockholders of record at the close of business on
, 1998 are entitled to notice of, and to vote at, the meeting and any
adjournments or postponements of the meeting. Approval of the proposal
described above will require the affirmative vote of the holders of a majority
of the Ventures capital stock (assuming conversion of all Ventures preferred
stock) and a majority of the Ventures Series C preferred stock outstanding on
the record date.
By Order of the Board of Directors
/s/ Janelle Mitchell
Janelle Mitchell
Secretary
San Francisco, California
, 1998
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE
YOUR REPRESENTATION AT THE MEETING. A POSTAGE-PAID RETURN ENVELOPE IS ENCLOSED
FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN
PERSON IF YOU ATTEND THE MEETING.
PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY THE TRUSTEE
OF THE VOTING TRUST THAT WAS FORMED IN MARCH 1998, YOU WILL NOT RECEIVE A PROXY
CARD OR BE ABLE TO VOTE YOUR SHARES AT THE MEETING. THE VOTING TRUSTEE WILL
VOTE YOUR SHARES. YOU ARE STILL CORDIALLY INVITED TO ATTEND THE MEETING.
<PAGE>
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF
WIRED VENTURES, INC.
This document serves two purposes. One purpose is to be a proxy statement,
which the Ventures board of directors is furnishing to you to provide you with
the information you will need in order to give your informed vote on the merger
agreement with Lycos and the merger. In the merger, Ventures will become a
wholly-owned subsidiary of Lycos, and Ventures stockholders will receive, in
exchange for their shares of Ventures capital stock, shares of Lycos common
stock and, in some cases, the right to receive cash.
The merger cannot be completed unless the Ventures stockholders approve it.
The Ventures board of directors has scheduled a special meeting for Ventures
stockholders to vote on the merger as follows:
January , 1999
9:00 am
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
The Ventures board of directors wishes to obtain your executed proxy, voting
in favor of the merger agreement and the merger, prior to the meeting.
PROSPECTUS OF
LYCOS, INC.
COMMON STOCK
The other purpose of this document is to be a prospectus furnished by Lycos.
Lycos' common stock is listed on the Nasdaq National Market under the symbol
"LCOS." On November 23, 1998, the closing sale price of Lycos' common stock was
$65 1/16 per share, as reported on the Nasdaq National Market.
Please see "WHERE YOU CAN FIND MORE INFORMATION" on page iii for additional
information about Lycos on file with the United States Securities and Exchange
Commission.
This proxy statement/prospectus and the accompanying notice of special
meeting and proxy are being mailed to stockholders of Ventures on or about
, 1998.
THE MERGER AGREEMENT IS A COMPLEX AGREEMENT. THE NUMBER OF
SHARES OF LYCOS COMMON STOCK AND ANY OTHER RIGHTS TO WHICH
YOU WILL BE ENTITLED IN THE MERGER WILL BE DETERMINED BY A
SERIES OF FORMULAS THAT ARE DESCRIBED GENERALLY IN
"SUMMARY--THE MERGER--WHAT VENTURES STOCKHOLDERS WILL
RECEIVE" ON PAGES 2-3 AND MORE SPECIFICALLY IN "THE MERGER--
MERGER CONSIDERATION" BEGINNING ON PAGE 28.
PLEASE READ ALL OF THIS PROXY STATEMENT/PROSPECTUS
CAREFULLY, INCLUDING THE MATTERS REFERRED TO BEGINNING ON
PAGE 8 UNDER THE HEADING "RISK FACTORS," BEFORE VOTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE
LYCOS COMMON STOCK TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is , 1998.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY +
+BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROXY +
+STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT +
+SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR +
+SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION........................................ iii
SUMMARY.................................................................... 1
The Companies............................................................ 1
Ventures Reasons for the Merger.......................................... 1
Recommendation to Ventures Stockholders.................................. 2
Lycos Reasons for the Merger............................................. 2
The Merger............................................................... 2
RISK FACTORS............................................................... 8
Risks Relating to the Merger............................................. 8
Risks Relating to Lycos.................................................. 9
Risks Relating to Ventures............................................... 21
SELECTED HISTORICAL FINANCIAL DATA......................................... 22
SELECTED PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA............. 24
COMPARATIVE PER SHARE DATA................................................. 25
PRICE RANGE OF COMMON STOCK................................................ 26
DIVIDEND POLICIES.......................................................... 26
THE SPECIAL MEETING........................................................ 27
Date, Time and Place..................................................... 27
Purpose.................................................................. 27
Record Date and Outstanding Shares....................................... 27
Vote Required............................................................ 27
Proxies.................................................................. 27
Recommendation of Ventures Board of Directors............................ 27
THE MERGER................................................................. 28
General.................................................................. 28
Effective Time of the Merger............................................. 28
Merger Consideration..................................................... 28
Rights of Dissenting Stockholders........................................ 32
Conversion and Exchange of Share Certificates............................ 33
Background of the Merger................................................. 34
Ventures Reasons for the Merger.......................................... 36
Lycos Reasons for the Merger............................................. 38
Opinion of Lazard Freres & Co. LLC....................................... 38
Other Interests of Officers and Directors in the Merger.................. 41
Accounting Treatment..................................................... 42
Material Federal Income Tax Consequences................................. 42
Regulatory Approvals..................................................... 45
THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION........................ 46
Representations and Warranties........................................... 46
Covenants................................................................ 46
Indemnification and Escrow............................................... 47
Conditions to Consummation of the Merger................................. 47
Termination and Amendment................................................ 48
Fees and Expenses........................................................ 48
Directors and Officers................................................... 48
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
VOTING AGREEMENTS ........................................................ 49
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF LYCOS AND VENTURES............ 50
Authorized Capital...................................................... 50
Directors and Classes of Directors; Removal of Directors................ 50
Special Meeting of Stockholders......................................... 50
Amendment of By-Laws.................................................... 51
Section 203 of Delaware Law............................................. 51
Antitakeover Provisions................................................. 51
Application of California Law........................................... 51
BUSINESS OF LYCOS......................................................... 52
BUSINESS OF VENTURES...................................................... 53
Overview................................................................ 53
Online Properties....................................................... 53
Strategic Alliances..................................................... 54
Advertising and Other Sales............................................. 55
Marketing............................................................... 56
Competition............................................................. 56
Intellectual Property................................................... 56
Employees............................................................... 57
Facilities.............................................................. 57
VENTURES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 58
Overview................................................................ 58
Results of Operations for the Fiscal Years ended December 31, 1995, 1996
and 1997............................................................... 58
Results of Operations for the Nine Months ended September 30, 1997 and
1998................................................................... 59
Gain on Sale of Magazine, Books and Television Businesses............... 60
Liquidity and Capital Resources......................................... 60
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS............... 62
DESCRIPTION OF LYCOS CAPITAL STOCK........................................ 68
Common Stock............................................................ 68
Preferred Stock......................................................... 68
Certain Certificate of Incorporation, By-Laws and Statutory Provisions
Affecting Stockholders................................................. 68
Transfer Agent and Registrar............................................ 69
SECURITY OWNERSHIP OF VENTURES............................................ 70
LEGAL MATTERS............................................................. 72
EXPERTS................................................................... 72
FINANCIAL STATEMENTS OF VENTURES.......................................... F-1
ANNEXES
Annex I--Agreement and Plan of Merger and Reorganization................ A-1
Annex II--Forms of Voting Agreement..................................... B-1
Annex III--Form of Escrow Agreement..................................... C-1
Annex IV--Opinion of Lazard Freres & Co. LLC............................ D-1
Annex V--Section 262 of Delaware General Corporate Law.................. E-1
</TABLE>
ii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Lycos files annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information Lycos files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Lycos'
SEC filings are also available to the public from commercial document retrieval
services and at the Website maintained by the SEC at www.sec.gov. Lycos has
filed a registration statement to register with the SEC the Lycos common stock
to be issued to Ventures stockholders in the merger. This proxy
statement/prospectus is part of that registration statement. As allowed by SEC
rules, this proxy statement/prospectus does not contain all of the information
you can find in the registration statement or the exhibits to the registration
statement.
Some of the important business and financial information that you may want to
consider in deciding how to vote is not included in this proxy
statement/prospectus, but rather is "incorporated by reference" to documents
that have been filed by Lycos with the SEC. The information that is
incorporated by reference consists of:
. Lycos' Annual Report on Form 10-K, for the fiscal year ended July 31,
1998, filed on October 29, 1998;
. Lycos' Current Reports on Form 8-K filed on August 11, 1998; August 13,
1998 and October 20, 1998 and on Form 8-K/A filed on October 27, 1998;
and
. All documents filed by Lycos under the Securities Exchange Act of 1934
(e.g., Forms 10-Q and 8-K) after the date of this proxy
statement/prospectus and prior to the special meeting.
If there is any contrary information in a previously filed document that is
incorporated by reference, then you should rely on the information in this
proxy statement/prospectus.
All information contained or incorporated by reference in this proxy
statement/prospectus relating to Lycos and its subsidiaries has been supplied
by Lycos, and all information relating to Ventures and its subsidiaries has
been supplied by Ventures.
If you are a stockholder, you can obtain any of the documents incorporated by
reference through Lycos or the SEC. Documents incorporated by reference are
available from Lycos without charge, excluding all exhibits. You may obtain
documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing to the following address or by telephone:
Lycos, Inc.
Attention: Investor Relations
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(718) 370-2700
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM LYCOS, PLEASE DO SO BY
, 1998 TO ENSURE THAT YOU RECEIVE THEM BEFORE THE SPECIAL MEETING.
YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER AGREEMENT AND THE MERGER.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THE PROXY STATEMENT/PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN , 1998. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION.
iii
<PAGE>
SUMMARY
This summary highlights some important information from this proxy
statement/prospectus, but may not contain all of the information that is
important to you. To understand the merger agreement and the merger fully, you
should carefully read this entire proxy statement/prospectus and the documents
attached to, or "incorporated by reference" in, this proxy
statement/prospectus. See "WHERE YOU CAN FIND MORE INFORMATION" on page iii.
THE COMPANIES
WIRED VENTURES, INC.
660 Third Street, Fourth Floor
San Francisco, California 94107
(415) 276-8400
Ventures' business is conducted through its wholly-owned subsidiary, Wired
Digital, Inc. Wired Digital maintains a suite of branded World Wide Web sites
featuring original content and search and navigation services. These sites
include HotBot (www.hotbot.com), Wired News (www.wired.com), HotWired
(www.hotwired.com) and Suck.com (www.suck.com). Until June 1998, Ventures also
published Wired magazine through a separate, wholly-owned subsidiary. In June
1998, Ventures sold Wired magazine and certain other businesses to Advance
Magazine Publishers Inc.
LYCOS, INC.
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(781) 370-2700
Lycos, "Your Personal Internet Guide," is a "New Generation Online Service"
that offers a network of globally branded media properties and aggregated
content distributed primarily through the Web. Under the "Lycos Network" brand,
Lycos provides guides to online content, aggregated third-party content, Web
search and directory services and community and personalization features. Lycos
seeks to draw a large number of viewers to its Websites by providing a one-stop
destination for identifying, selecting and accessing resources, services,
content and information on the Web.
VENTURES REASONS FOR THE MERGER
In reaching its conclusion to approve the merger agreement and the merger and
to recommend their approval to Ventures' stockholders, Ventures' board of
directors considered a number of factors concerning its strategy, the
historical performance and future prospects of Ventures and Lycos and other
matters, including:
. The fact that, by receiving immediately tradeable shares of Lycos common
stock as consideration in the merger, Ventures stockholders would have
the opportunity either (1) to obtain liquidity by selling their Lycos
shares in the public market or (2) to participate as Lycos stockholders
in the potential long-term benefits that the board believed could result
from the merger.
. Ventures' prospects as an independent company for achieving the scale and
level of Website traffic necessary to remain competitive with the top
tier of Internet companies in attracting advertising revenues.
. The fact that the merger would provide Ventures, as part of the Lycos
Network, with access to the expanded Lycos Network's diversified
resources, infrastructure, services and technologies, offering Ventures
an expanded opportunity for increasing traffic to its properties,
generating advertising revenue and developing technology.
1
<PAGE>
RECOMMENDATION TO VENTURES STOCKHOLDERS
The Ventures board of directors has approved the merger agreement and the
merger and has determined that they are fair to, and in the best interests of,
Ventures and its stockholders. After careful consideration, the Ventures board
of directors recommends that you vote in favor of approval and adoption of the
merger agreement and approval of the merger. See "THE SPECIAL MEETING--
Recommendation of Ventures Board of Directors" on page 27.
LYCOS REASONS FOR THE MERGER
In assessing the transaction, Lycos considered its strategic positioning and
plans, the past performance and future potential of Ventures and Ventures'
lines of business and services. Lycos authorized the merger for a number of
reasons including:
. The addition of Ventures' navigation and content Websites will complement
and expand Lycos' Internet offerings.
. The acquisition presents significant opportunities to increase Lycos'
existing sales and advertising revenues by increasing weekly page
impressions and therefore increasing capacity for advertising.
Additionally, the Ventures user base may utilize other Lycos properties,
providing additional revenue.
. The combination of the properties of Lycos and Ventures will strengthen
Lycos' long-term growth strategy of establishing a network presence of
premiere Websites.
THE MERGER
The merger agreement is attached as Annex I to this proxy
statement/prospectus. We encourage you to read the merger agreement as it is
the legal document that governs the merger.
WHAT VENTURES STOCKHOLDERS WILL RECEIVE
As a result of the merger, Lycos will pay Ventures stockholders a combination
of shares of Lycos common stock and, in some cases, cash in exchange for their
shares of Ventures capital stock.
Aggregate Merger Consideration. Ventures stockholders will receive, in the
aggregate, the following consideration for their shares in the merger:
(1) Lycos common stock valued at $95.0 million, including common stock
valued at $12 million issuable to holders of Ventures common stock received
upon the exercise of options prior to the closing.
(2) Lycos common stock or cash with a value equal to the amount of cash
and cash equivalents shown on Ventures' balance sheet at closing, net of
exclusions for specified compensation and other identified expenses. This
amount is referred to as the "Ventures Cash Balance." There will also be
certain adjustments for borrowings, working capital shortfalls and similar
items. Ventures estimates that the net amount of the Ventures Cash Balance
will be in the range of $28 million to $33 million, depending on the date
of closing and other factors. Lycos has the option to pay up to the amount
of the Ventures Cash Balance in cash or stock, subject to certain
limitations related to tax and regulatory matters.
(3) Up to $4.5 million in cash plus interest from Lycos, contingent upon
receipt by Ventures after the closing of distributions from an escrow fund
established in connection with Ventures' sale of its magazine, books and
television businesses to Advance Magazine Publishers Inc. in June 1998. The
amount of the Advance escrow fund distributed will depend on the amount of
the fund used to satisfy claims by Advance. Lycos will distribute cash,
when and if such distributions are received by Lycos, equal to such Advance
distributions in June 1999.
(4) Up to $5.0 million in cash, contingent upon receipt by Lycos after
closing of specified federal and state income tax benefits related to
Ventures' pre-merger business. If and to the extent any such
2
<PAGE>
refunds are received, Lycos will distribute cash equal to such refunds over
the two-year period following the closing of the merger.
The parties will determine the precise number of shares of Lycos common stock
to be issued for any dollar value by dividing that dollar value by the "average
closing stock price." This price is determined by calculating the average
closing price for Lycos common stock over a period of 20 trading days ending
three trading days prior to the closing of the merger. Under the merger
agreement, however, this price is subject to a collar; that is, for purposes of
calculating the number of Lycos shares to be issued, the average closing stock
price may not be higher than $42.86 or lower than $20.64 even if, in fact, the
actual average closing price of Lycos common stock does exceed $42.86 or fall
below $20.64. This provision is designed to set a minimum on the number of
Lycos shares that Ventures stockholders will receive and a maximum on the
number of shares that Lycos will have to issue.
Merger Consideration Per Share. Stockholders will receive different amounts
per share of Ventures stock held, depending on the class or series. The amount
allocable to each share of a class or series is determined by a complex formula
described in detail under the caption "THE MERGER--Merger Consideration"
beginning on page 28. Among the many variables in determining the per share
consideration are:
. The number of shares of a class or series outstanding;
. The average closing stock price;
. The amount of the Ventures Cash Balance and whether Lycos elects to pay
that amount in cash, stock or a combination of both;
. The amount, if any, of the Advance escrow that is distributed;
. The amount, if any, of tax refunds obtained; and
. The date of the closing of the merger.
We have included below two tables designed to illustrate the amount of Lycos
stock and cash that a holder of Ventures capital stock would receive, per 1,000
shares, in the merger, given certain assumptions. For the purposes of the
tables, we have assumed the following:
. That the number of Ventures shares outstanding at the time the merger
becomes effective will be as follows:
l 11,096,197 shares of Ventures common stock;
l 15,249,794 shares of Ventures Series A preferred stock (which includes
warrants to purchase 50,000 shares of Ventures Series A preferred
stock);
l 625,000 shares of Ventures Series B preferred stock; and
l 3,762,760 shares of Ventures Series C preferred stock.
. That the actual average closing stock price is one of five different
prices: $15.00 (below the lower collar limit), $20.64 (the lower collar
limit), $31.75 (the mid-point between the lower collar limit and the
upper collar limit), $42.86 (the upper collar limit) and $50.00 (above
the upper collar limit).
. That the Ventures Cash Balance is $30 million.
. That the Ventures Cash Balance is paid entirely in Lycos shares or
entirely in cash, not in a combination of shares and cash.
. That the closing will occur on January 31, 1999.
3
<PAGE>
We have not included any amounts in the table related to the Advance escrow
or the tax refund.
NUMBER OF SHARES OF LYCOS COMMON STOCK
(ASSUMES VENTURES CASH BALANCE PAID IN FULL IN LYCOS COMMON STOCK)
<TABLE>
<CAPTION>
VENTURES CAPITAL
STOCK LYCOS AVERAGE CLOSING STOCK PRICE
(PER 1,000 ----------------------------------------------------------------
SHARES) $15.00 $20.64 $31.75 $42.86 $50.00
---------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Common.................. 55 shares 55 shares 36 shares 26 shares 26 shares
Series A................ 179 shares 179 shares 116 shares 86 shares 86 shares
Series B................ 969 shares 969 shares 629 shares 466 shares 466 shares
Series C................ 563 shares 563 shares 366 shares 271 shares 271 shares
NUMBER OF SHARES OF LYCOS COMMON STOCK AND CASH
(ASSUMES VENTURES CASH BALANCE PAID IN FULL IN CASH)
<CAPTION>
VENTURES CAPITAL LYCOS AVERAGE CLOSING STOCK PRICE
STOCK (PER 1,000 ----------------------------------------------------------------
SHARES) $15.00 $20.64 $31.75 $42.86 $50.00
---------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Common.................. 55 shares 55 shares 36 shares 26 shares 26 shares
Series A................ 104 shares + 104 shares + 67 shares + 50 shares + 50 shares +
$1,550.18 $1,550.18 $1,550.18 $1,550.18 $1,550.18
Series B................ 969 shares 969 shares 630 shares 467 shares 467 shares
Series C................ 481 shares + 481 shares + 313 shares + 232 shares + 232 shares +
$1,690.25 $1,690.25 $1,690.25 $1,690.25 $1,690.25
</TABLE>
Under the merger agreement, the relative proportions of cash and stock are
subject to certain limitations relating to tax and regulatory matters.
Specifically, under applicable tax requirements, no more than 20% of the total
consideration to be paid in the transaction, valued as of the trading day
immediately prior to the effective time, may be paid in cash. Total
consideration paid in the transaction includes cash paid in respect of the
Advance escrow, the tax refund, fractional shares and dissenting shares.
Similarly, under the merger agreement, no more than 19.9% of the merger
consideration may be paid in stock. The foregoing tables do not take into
account the effect of such limitations.
THESE TABLES ARE INCLUDED FOR ILLUSTRATIVE PURPOSES ONLY. THE ACTUAL AVERAGE
CLOSING STOCK PRICE AND THE AMOUNT OF THE VENTURES CASH BALANCE, AS WELL AS
MANY OF THE OTHER VARIABLES, WILL NOT BE KNOWN UNTIL JUST PRIOR TO THE MERGER.
THE CLOSING PRICE FOR LYCOS COMMON STOCK ON NOVEMBER 23, 1998 WAS $65 1/16. YOU
SHOULD CHECK CURRENT MARKET PRICES FOR LYCOS COMMON STOCK.
Lycos will pay any amounts payable in connection with the Advance escrow and
tax refund in cash. These amounts would be paid during the two years following
the closing of the merger and would be divided as follows:
. 78.8% to the holders of Ventures Series A preferred stock; and
. 21.2% to the holders of Ventures Series C preferred stock.
We cannot assure you that Ventures stockholders will receive payments in
respect of the Advance escrow or tax refund. For additional information, see
"THE MERGER--Merger Consideration" beginning on page 28.
Ventures stockholders will not receive fractional shares. Instead they will
receive a check in payment for any fractional shares based on the average
closing stock price.
INDEMNIFICATION BY VENTURES AND ESCROW OF SHARES
At the closing, Lycos will deposit 10% of the shares paid as part of the
merger consideration (excluding Lycos shares that may be issued in exchange for
the Ventures Cash Balance) in an escrow fund to compensate
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Lycos for losses incurred as a result of breaches by Ventures of
representations, warranties and covenants in the merger agreement, as well as
post-closing adjustments related to cash, working capital shortfalls and
related matters. Of the shares held in this escrow fund:
. Holders of Ventures common stock will be deemed to have contributed 10%
of the total deposit;
. Holders of Ventures Series A preferred stock will be deemed to have
contributed 78.8% of the remaining 90%, or 70.92% of the total deposit;
and
. Holders of Ventures Series C preferred stock will be deemed to have
contributed 21.2% of the remaining 90%, or 19.08% of the total deposit.
The complete terms of the escrow arrangement can be found in the escrow
agreement attached to this proxy statement/prospectus as Annex III. See "THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION--Indemnification and Escrow" on
page 47.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of Ventures who do not vote in favor of the merger and who
otherwise comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to appraisal rights under Delaware law. Such
rights entitle the stockholder to require Ventures to purchase the dissenting
shares for cash at their fair market value, excluding any appreciation or
depreciation as a result of the merger. Fair market value may be more or less
than the value of Lycos stock to be paid to other Ventures stockholders
according to the merger agreement. Lycos is not required to close the merger if
stockholders entitled to more than 5% of the total merger consideration
exercise these dissenters' rights. Dissenting Ventures stockholders must
precisely follow specific procedures to exercise this right, or the right may
be lost. These procedures are described in this proxy statement/prospectus, and
the relevant provisions of Delaware law are attached as Annex V. See "THE
MERGER--Rights of Dissenting Stockholders" beginning on page 32.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The merger will be treated as a tax-free reorganization for federal income
tax purposes. Ventures stockholders will not recognize gain or loss in the
merger, except for taxes on cash received in the merger. The merger agreement
does not require the parties to obtain a ruling from the IRS as to the tax
consequences of the merger. As a condition to the closing of the merger, each
of Lycos and Ventures must receive opinions from its legal counsel that the
merger will be a tax-free reorganization for federal income tax purposes. See
"THE MERGER--Material Federal Income Tax Consequences" beginning on page 42.
OPINION OF LAZARD FRERES & CO. LLC
Lazard Freres has delivered to the Ventures board of directors an opinion
dated October 5, 1998 relating to the merger consideration. The opinion states
that, as of the date of the opinion, the total consideration that Lycos would
pay to the Ventures stockholders in the merger was fair in the aggregate to the
holders of Ventures capital stock considered as a whole, from a financial point
of view. The full text of the opinion of Lazard Freres is attached as Annex IV
to this proxy statement/prospectus. See "THE MERGER--Opinion of Lazard Freres &
Co., LLC" beginning on page 38.
OTHER INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the Ventures board's recommendation that you vote for the
merger, you should be aware that certain of the officers and directors of
Ventures have interests in the merger that are different from, or in addition
to, their rights as Ventures stockholders.
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. First, prior to the closing of the merger, Ventures (1) will offer the
employees and consultants of Wired Digital the right to cancel their
existing stock options in exchange for new stock options with a lower
exercise price and (2) will grant new stock options to purchase
approximately 9,360,000 shares of Ventures common stock. Because these
options will terminate when the merger becomes effective, we expect that
almost all of the outstanding options will be exercised prior to the
closing. The grant and exercise of these options will significantly
increase the number of shares of Ventures common stock outstanding
immediately prior to the merger and, therefore, significantly decrease
the merger proceeds payable on each share of Ventures common stock. Two
executive officers of Wired Digital, one of whom is also a director and
executive officer of Ventures, will receive a substantial portion of
these options.
. Second, one executive officer of Ventures will receive a cash bonus upon
the closing of the merger.
. Third, six employees will be entering into employment agreements with
Lycos at the closing. Two executive officers of Wired Digital, one of
whom is also an executive officer and director of Ventures, will enter
into such agreements. In addition, the payment of certain compensation to
such executive officer and director under her employment agreement with
Ventures will be accelerated as a result of the merger.
. Fourth, two co-founders of Ventures, both of whom are directors of
Ventures, are parties to separation agreements with Ventures. Under such
agreements, if the merger occurs, these co-founders will be entitled to
payment of any remaining severance benefits in a lump sum, instead of on
a monthly installment basis. In addition, if the merger occurs, these
founders will have their Ventures options canceled for a lump sum cash
payment.
For a detailed description of these matters, see "THE MERGER--Other Interests
of Officers and Directors in the Merger" beginning on page 41.
EFFECT OF THE MERGER ON VENTURES
Upon completion of the merger, Ventures will become a subsidiary of Lycos.
Individuals who owned stock in Ventures before the merger will own stock in
Lycos after the merger. Former Ventures stockholders will hold between
approximately 5.2% and 12.9% of Lycos' common stock after the merger, based on
42,645,090 shares of Lycos common stock outstanding on October 31, 1998. The
5.2% figure assumes that Lycos will purchase the Ventures Cash Balance for cash
and that the Lycos average closing stock price is $42.86 (the upper collar
limit). The 12.9% figure assumes that Lycos will purchase all of the Ventures
Cash Balance for shares of Lycos common stock and that the average closing
price is $20.64 (the lower collar limit). Other variables, such as the amount
of cash actually purchased by Lycos could broaden the range stated above.
VOTE REQUIRED
In order to complete the merger, the approval of the merger agreement and the
merger must be obtained from the following persons:
. the holders of a majority of the outstanding Ventures capital stock
(assuming conversion of all outstanding Ventures preferred stock); and
. the holders of a majority of the outstanding Ventures Series C preferred
stock.
Affiliates of Ventures who hold a majority of the Ventures capital stock and
the Ventures Series C preferred stock have executed voting agreements with
Lycos. Under these agreements, these persons agree to vote all of their
Ventures capital stock in favor of the merger agreement and the merger. They
also irrevocably appoint representatives of Lycos as proxies to vote their
Ventures capital stock in favor of the merger agreement and the merger. Because
the vote of these stockholders is sufficient to approve the merger, the
approval of the merger is assured. See "VOTING AGREEMENTS" on page 49.
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<PAGE>
CONDITIONS TO THE MERGER
The completion of the merger depends upon meeting a number of conditions,
including:
. the representations and warranties of the parties in the merger agreement
must be accurate in all material respects;
. the parties must perform their obligations under the merger agreement in
all material respects;
. holders of a majority of the outstanding Ventures capital stock (assuming
conversion of all Ventures preferred stock) and Ventures Series C
preferred stock must approve the merger;
. Ventures stockholders entitled to no more than 5% of the merger
consideration have demanded appraisal rights; and
. there must not be any injunction or other binding order preventing the
occurrence of the merger.
The conditions may be waived by the company entitled to assert them. See "THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION -- Conditions to Consummation
of the Merger" beginning on page 47.
TERMINATION OF THE MERGER AGREEMENT
Either company may terminate the merger agreement without completing the
merger if, among other things, the merger is not completed on or before March
4, 1999. In addition, the merger agreement can be terminated by the mutual
consent of Ventures and Lycos. See "THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION--Termination and Amendment" on page 48.
GOVERNMENTAL AND REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
prohibits us from completing the merger until after we have furnished certain
information and materials to the Antitrust Division of the Department of
Justice and the Federal Trade Commission and a required waiting period has
ended. The required information was furnished and the waiting period ended on
November 21, 1998. However, the Department of Justice and the Federal Trade
Commission continue to have the authority to challenge the merger on antitrust
grounds before or after the merger is completed. See "THE MERGER--Regulatory
Approvals" on page 45.
ACCOUNTING TREATMENT
Lycos intends to treat the merger as a purchase for accounting and financial
reporting purposes, which means that Lycos will treat Ventures as a separate
entity for periods prior to the closing and, thereafter, as a wholly-owned
subsidiary of Lycos. See "RISK FACTORS--Risks Relating to the Merger--Purchase
Accounting/Amortization of Goodwill May Delay Profitability" on page 8.
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<PAGE>
RISK FACTORS
We have made forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and of Section 21E of the Securities Exchange Act of
1934 in this document. Forward-looking statements include information
concerning the possible or assumed future results of operations of the combined
company as well as statements preceded by, followed by, or that include words
such as "believes," "expects," "anticipates" or similar expressions. Certain
important factors, in addition to those discussed under the caption "Risk
Factors" and elsewhere in this document and in the documents that Lycos has
incorporated by reference, could affect the future results of the combined
company and could cause those results to differ materially from those expressed
in our forward-looking statements. In addition, we do not have any intention or
obligation to update forward-looking statements after we distribute this
document, even if new information, future events or other circumstances have
made them incorrect or misleading.
RISKS RELATING TO THE MERGER
Integration of Operations Uncertain. Ventures and Lycos have entered into the
merger agreement with the expectation that the merger will result in benefits
to both companies through the integration of the companies' operations. The
integration of operations will require, among other things, that we integrate
Ventures' Web properties into the Lycos Network and possibly combine the
companies' technical staffs and sales and marketing operations. The
difficulties of such integration may be increased by the geographical
separation of the two companies and their employees. This integration will
require the dedication of management resources that may temporarily distract
management's attention from the day-to-day business of the combined companies.
We cannot assure you that this integration will be achieved quickly or
efficiently. If Lycos and Ventures fail to integrate the two companies quickly
and efficiently, the combined company's business and results of operations
could be impaired.
Merger May Result in Potential Dilution to Stockholders. The issuance of
Lycos common stock in the merger will reduce Lycos' net income per share. This
dilution could reduce the market price of Lycos common stock unless and until
the combined company achieves revenue growth or cost savings and other business
economies sufficient to offset the effect of such issuance. We cannot guarantee
you that we will achieve revenue growth, cost savings or other business
economies or that you will achieve greater returns as a Lycos stockholder than
as a Ventures stockholder.
Collar Provision May Reduce Value of Merger Proceeds. The total purchase
price to be paid in the merger is fixed in terms of dollars. The majority of
the purchase price will be paid in shares of Lycos common stock. For purposes
of determining the number of shares to be issued in the merger, the Lycos
common stock will be valued based on the average closing price of Lycos common
stock during the 20-day period ending three trading days prior to the merger.
However, if such average price is less than $20.64, the shares will be deemed
to be valued at $20.64 per share, regardless of the actual average price. If
the average Lycos common stock price is so limited, the number of shares of
Lycos common stock issuable in the transaction would be limited and the value
of your merger proceeds would be decreased. For example, if your portion of the
merger proceeds were $100.00 according to the merger agreement, but the actual
Lycos stock price were $10.00, you would receive the number of shares obtained
by dividing $100.00 by $20.64, or 4.845 shares. These shares would be worth
only $48.45 on the open market.
Purchase Accounting/Amortization of Goodwill May Delay Profitability. The
merger will be accounted for under the "purchase" method of accounting, meaning
that the purchase price for Ventures must be allocated to the acquired assets
and assumed liabilities of Ventures. Any amount allocated to goodwill,
preliminarily estimated at $101.7 million, must be amortized ratably over five
years. Additionally, an in-process research and development charge,
preliminarily estimated to be between $1 million and $5 million, will be
recorded in the quarter the merger is consummated. As a result, the combined
company's profitability is expected to be delayed beyond the time frame in
which Lycos or Ventures, as independent entities, may have otherwise achieved
profitability.
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Shares of Lycos Common Stock Eligible for Sale May Reduce Lycos' Stock Price.
In connection with the merger, we estimate that between 2.2 million and 5.5
million newly-issued shares of Lycos common stock will be issued to current
Ventures stockholders. The immediate availability of this substantial number of
additional shares of Lycos common stock for sale in the market could decrease
the per share market price of Lycos common stock.
RISKS RELATING TO LYCOS
Limited Operating History. Lycos was founded in June 1995. Accordingly, Lycos
has a limited operating history for you to use in evaluating Lycos and its
prospects. Lycos generated revenues of $22.3 million for the fiscal year ended
July 31, 1997 and revenues of $56.1 million for the fiscal year ended July 31,
1998. Due to Lycos' limited operating history, you should not take Lycos'
recent revenue growth as indicative of the rate of growth, if any, that you can
expect in the future. You should consider the risks, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies operating in new and rapidly evolving markets. Lycos may
not successfully address such risks. As they apply to Lycos, such risks,
expenses and difficulties include but are not limited to:
. the ability to continue to develop and extend the "Lycos" brand;
. the ability to maintain premier positions on high traffic Web access
points through relationships such as Lycos' arrangements with Netscape
Communications Corporation and Microsoft Corporation or to enter into
additional distribution relationships and strategic alliances;
. the ability to maintain and increase levels of traffic on Lycos'
Websites;
. the ability to continue to develop or acquire content, features and
functionality for Lycos' services;
. the development of equal or superior services or products by competitors;
. the failure of the market to adopt the Web as an advertising or
commercial medium;
. the reduction in market prices for Web-based advertising as a result of
competition or otherwise;
. the ability to effectively generate commerce-related revenues through
sponsored services and placements in Lycos services; and
. the success in attracting, retaining and motivating qualified personnel.
Anticipation of Continued Losses. Lycos has incurred significant losses since
its inception. As of July 31, 1998, Lycos had an accumulated deficit of $108.7
million. Although Lycos was profitable in the six months ended January 31,
1998, Lycos reported a loss of $3.13 per share for the year ended July 31,
1998, representing a $0.12 loss per share before amortization and one-time
acquisition related charges. Lycos may not sustain revenue growth or return to
profitability in the future. Lycos may continue to incur losses in the future.
Limited Ability to Reduce Short-Term Expenses. As a result of Lycos' limited
operating history, Lycos does not have historical financial data for any
significant period of time to use in planning operating expenses. Lycos bases
its expense levels in part on its expectations as to future revenues and in
part on fixed expenses. Because Lycos' expense levels are based upon
anticipated advertising, electronic commerce and licensing revenues, which are
difficult to forecast, Lycos may not be able to quickly reduce its spending to
compensate for any unexpected revenue shortfall. Accordingly, if Lycos has
lower revenues than expected for any given fiscal quarter, such shortfall would
affect that quarter's financial results. In addition, Lycos intends to
significantly increase its operating expenses to:
. fund greater levels of research and development;
. enhance Lycos' services;
. increase Lycos' sales and marketing operations;
. develop new distribution channels;
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<PAGE>
. broaden Lycos' customer support capabilities;
. acquire businesses or technologies;
. maintain brand identity; and
. pursue strategic alliances.
In the future, leading Websites, browser providers and other distribution
channels may require Lycos to pay them for providing access to Lycos' products
and services, such as Lycos pays under its agreements with Netscape and
Microsoft described in "RISK FACTORS--Risks Relating to Lycos--Dependence on
Third-Party Relationships" beginning on page 11. To the extent that such
expenses precede or are not subsequently followed by increased revenues, such
expenses could impair Lycos' profitability.
Potential Fluctuations in Operating Results. Lycos' operating results may
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside of Lycos' control. These factors include but are not
limited to:
. general economic conditions;
. specific economic conditions in the Internet industry;
. usage of the Internet;
. the level of traffic to Lycos' Websites;
. demand for Internet advertising and electronic commerce;
. the addition or loss of advertisers or electronic commerce sponsors;
. seasonal trends in advertising sales;
. the advertising budgeting cycles of individual advertisers;
. capital expenditures and other costs relating to the expansion of
operations;
. incurrence of costs relating to acquisitions like Tripod, WiseWire;
GuestWorld and WhoWhere?;
. the introduction of new products or services by Lycos or its competitors;
. the mix of the services sold;
. the channels through which Lycos sells services; and
. pricing changes.
As a strategic response to a changing competitive environment, Lycos may
choose to make certain pricing, service or marketing decisions or acquisitions
that could adversely impact its operations, and, therefore, its profitability.
Due to the nascent nature of the Internet industry, Lycos believes that period-
to-period comparisons of its operating results are not meaningful and that you
should not rely upon them as an indication of Lycos' future performance. Lycos
also has experienced, and expects to continue to experience, seasonality in its
business. Historically, there has been lower user traffic on Lycos' Websites
and the Websites of its partners during the summer and the year-end vacation
and holiday periods, when usage of the Web and Lycos' services typically
declines. Due to all of the foregoing factors and others that Lycos cannot
predict, it is possible that in some future quarter, Lycos' operating results
may be below the expectations of analysts and investors. Such an event could
reduce the price of Lycos' common stock.
Volatility of Stock Price. The price of Lycos' common stock has been and may
continue to be subject to wide fluctuations in response to a number of events
and factors. These events and factors include but are not limited to:
. quarterly variations in results of operations;
. announcements of new technological innovations or new products and media
properties by Lycos or its competitors;
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. changes in financial estimates and recommendations by securities
analysts;
. the operating and stock price performance of other companies that
investors may deem comparable to Lycos; and
. news relating to trends in Lycos' markets.
Also, the stock market in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has
been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the price of Lycos'
common stock, regardless of Lycos' operating performance. Additionally,
fluctuations in the market price of Lycos' common stock could result in
stockholder lawsuits, which potentially could impair Lycos' business.
Reliance on Advertising Revenues. Lycos earns a significant portion of its
revenues by selling advertisements on its Web pages. For the fiscal year ended
July 31, 1998, advertising revenues represented approximately 75% of Lycos'
total revenues. Lycos' strategy is to continue to develop advertising and other
methods of generating revenues through the use of its products and services.
Lycos' ability to increase its advertising revenues will depend, among other
things, on the acceptance by advertisers of the Internet as an attractive and
sustainable medium and on the development of the Internet as an attractive
platform for electronic commerce. Lycos must develop a large base of users of
Lycos' products and services possessing demographic characteristics attractive
to advertisers. Lycos may be required to expand its advertising sales force.
In addition, there is fluid and intense competition based on price in the
sale of advertising on the Internet, which makes it difficult to project future
levels of advertising revenues. It is also difficult to predict which pricing
models will be adopted by the industry or advertisers. For example, advertising
rates based on the number of "click throughs" (or user requests for additional
information made by clicking on the advertisement) from Lycos' network to
advertisers' pages, instead of rates based solely on the number of impressions
(or times an advertisement is displayed), could decrease Lycos' revenues. In
addition, users may purchase "filter" software programs that limit or remove
advertising from the Web user's desktop. The widespread adoption of such
software by users could negatively impact the use of advertising on the Web.
Accordingly, Lycos may not be successful in generating significant future
advertising revenues.
Risks Related to Sponsorship Arrangements. In addition to traditional banner
advertising, third parties provide sponsored services and placements on Lycos'
Websites under sponsorship arrangements with Lycos. In connection with these
arrangements, Lycos provides minimum levels of user impressions or "click
throughs" and may receive sponsorship fees as well as a portion of transaction
revenues received by such third-party sponsors from users originated through
Lycos' Websites. These sponsorship arrangements expose Lycos to potentially
significant financial risks, including the risk that Lycos may fail to deliver
required minimum levels of user impressions or click throughs. If Lycos fails
to deliver such minimum levels, typically either the parties decrease the fees
payable to Lycos or Lycos provides "make good" periods when services are
provided for free. Additionally, third-party sponsors may not renew the
sponsorship agreements at the end of their terms. Certain of these arrangements
also require Lycos to integrate sponsors' content with Lycos' services. Lycos
must dedicate resources and significant programming and design efforts to
accomplish such integration. Lycos may not be able to attract additional
sponsors or renew existing sponsorship arrangements when they expire. In
addition, Lycos has granted exclusivity provisions to certain of its sponsors,
and may in the future grant additional exclusivity provisions. Such exclusivity
provisions may prevent Lycos, for the duration of such exclusivity
arrangements, from accepting advertising or sponsorship arrangements within a
particular subject matter in Lycos' Websites or across Lycos' entire service.
Dependence on Third-Party Relationships. Lycos depends on a number of third-
party relationships, including those described below, to create traffic on its
Websites and consequently to generate revenues. Lycos' contracts with
advertisers and sponsors generally guarantee a minimum number of pageviews. If
Lycos is unable to generate traffic on its Websites, then it may not provide
advertisers with the minimum number of
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required pageviews. If such minimums are not met, Lycos may receive reduced
payments or have to provide advertisers with additional impressions for no fee.
If Lycos is unable to maintain its relationships with third-parties to create
traffic on Lycos' Websites or is otherwise unable to offset a reduction in
traffic, advertising revenues would be impaired.
Browser Services Such as Netscape and Microsoft. Lycos depends on
arrangements relating to the positioning of Lycos' products and services on Web
browsers, such as those offered by Netscape and Microsoft, to create traffic on
Lycos' Websites and consequently generate revenues. The termination of Lycos'
position on a Web browser provider would significantly reduce traffic on Lycos'
Websites, which would impair Lycos' revenues. Additionally, if a Web browser
grants an exclusive arrangement for positioning on its Web browser to a
competitor of Lycos, then Lycos' business may be impaired.
For the fiscal year ended July 31, 1998, a material portion of the traffic to
Lycos' Websites was derived through the Netscape and Microsoft browsers. On May
19, 1998, Lycos renewed its one-year premier provider agreement with Netscape
pursuant to which Netscape designated Lycos as a premier provider of search and
navigation services accessible from the "Net Search" button on the Netscape
browser through May 31, 1999. Netscape has committed 15% of its search
exposures during the one-year term of this agreement to Lycos' search services.
In September 1998, Lycos signed a one-year agreement with Microsoft pursuant
to which Microsoft designated Lycos as a premier provider of search services on
the Microsoft start page and from the search buttons imbedded in the Internet
Explorer browser. Because Netscape and Microsoft provide only exposures from
their own services (as compared to a number of users who "click through" to
Lycos' Websites), the Netscape agreement and the Microsoft agreement may not
provide Lycos' Websites with significant amounts of traffic.
Although each of the Microsoft agreement and the Netscape agreement may only
be terminated under certain limited circumstances, if Lycos is unable to
continue as a premier provider for either Microsoft or Netscape, Lycos'
Websites could lose a material portion of their traffic, traffic on competing
services could substantially increase, and Lycos' Websites could otherwise
become less attractive to advertisers, which would harm Lycos' revenues. A
traffic reduction could, in turn, result in advertisers on Lycos' Websites,
including sponsors and partners, terminating their contracts with Lycos. Lycos'
contracts with advertisers typically have short terms and are terminable on
relatively short notice. A traffic reduction could result in a reduction of the
number of impressions purchased, a reduction in the amount advertisers or
sponsors are willing to pay to appear on the Lycos Network or an increase in
the amount of make-goods Lycos is required to supply. All of these factors
could materially diminish Lycos' advertising revenues.
Netscape has entered into a two-year agreement with Excite, Inc. Netscape has
committed 50% of its search exposures during the first year of the agreement to
Excite's search services and Netscape's own branded search service (which will
be powered by Excite). Netscape has committed 75% of its search exposures
during the second year of the agreement to Netscape's branded search service
and Excite's search services. This agreement will limit the number of Netscape
search exposures available to other providers of search services, including
Lycos, in the future.
Other Third-Party Relationships. Lycos depends on Website operators that
provide links to its Websites or otherwise use its services to create traffic
on these Websites. For certain elements of Lycos' properties, Lycos licenses
technology and related databases from third parties, including telephone
directories, e-mail, chat, street mapping and other similar services. Lycos
believes that certain of its third party relationships are important to its
ability to attract traffic and advertisers. Any errors, failures or delays
experienced in connection with these third party technologies and information
services could alienate Lycos' users and adversely affect Lycos' brand and its
business. Although Lycos views these relationships as important, most of Lycos'
arrangements do not include minimum commitments to use Lycos' services or to
provide access or links to Lycos' products or services in the future, are not
exclusive and generally have a term of only one to three years. In addition,
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Lycos' partners may not regard their relationship with Lycos as important to
their own respective businesses and operations. Such partners may reassess
their commitment to Lycos' products or services at any time in the future, or
may develop their own competitive products or services. Lycos' existing
relationships may not result in sustained business partnerships, successful
product or service offerings or the generation of significant revenues for
Lycos. The failure of one or more of Lycos' partnering relationships to achieve
or maintain market acceptance or commercial success, or the termination of one
or more successful partnering relationships, could have a material adverse
effect on Lycos' business.
Complexity of Operating Advertising Management System. The process of
managing advertising within large, high-traffic Websites such as Lycos' is an
increasingly important and complex task. Lycos licenses an advertising
management system from a third party. To the extent that Lycos encounters
system failures or material difficulties in the operation of this system, Lycos
could be unable to deliver banner advertisements and sponsorships through its
Websites. Any extended failure of, or other material difficulties with, Lycos'
advertising management system may expose Lycos to "make good" obligations to
provide free advertising to its customers. These "make good" obligations would
reduce revenues by displacing advertising inventory.
Risks Relating to Liquidity of Lycos' Customers. The Internet as a commercial
endeavor has been in existence for a short period of time. The costs of
establishing a Website are low, and new online service providers, content
providers and advertisers are launched regularly. Many of Lycos' advertisers
and electronic commerce sponsors were funded with venture capital and other
forms of financing before they proved to be successful. Those companies that
are unable to prove themselves successful before they have spent their initial
funding may find it difficult or impossible to secure additional funding and,
therefore, difficult to pay amounts due to Lycos. Lycos' profitability could be
decreased if any of Lycos' advertisers or electronic commerce sponsors fail to
pay amounts due on a timely basis.
Intense Competition in Lycos' Market. The market for Internet products and
services is highly competitive. In addition, the market for Internet
advertising and electronic commerce arrangements is intensely competitive.
Lycos expects that competition will continue to intensify. Although Lycos
believes that the Internet market will provide opportunities for more than one
supplier of products and services similar to those of Lycos, it is possible
that a single supplier may dominate one or more market segments. Lycos believes
that the principal competitive factors in this market include, but are not
limited to:
. name recognition;
. distribution arrangements;
. performance;
. ease of use;
. a variety of value-added services;
. functionality and features; and
. quality of support.
Lycos competes with online services and other Website operators as well as
traditional off-line media, such as print and television, for a share of
advertisers' total advertising budgets.
Many of Lycos' existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than Lycos. Lycos' competitors may offer Internet products and
services that are superior to those of Lycos. Products and services of Lycos'
competitors achieve greater market acceptance than Lycos' offerings. Moreover,
a number of Lycos' current advertising customers and partners have established
relationships with certain of Lycos' competitors, and future advertising
customers and partners may establish similar relationships. Competitors'
consolidations, such as the recently announced agreement between America Online
and Netscape, integration and strategic relationships could have a material
adverse effect on Lycos' business. Lycos may not be able to compete
successfully against its current or future competitors.
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Direct Competition with Providers of Similar Services. A number of companies
offer competitive products in Lycos' target markets. The primary competitors of
Lycos' products and services are other companies providing online services,
including America Online (including CompuServe), Compaq Computer Corporation's
AltaVista, Excite, Inc. (including WebCrawler), Netscape's NetCenter,
Microsoft's MSN, NBC's Snap!, Infoseek Corporation, Prodigy Services, Inc. and
Yahoo! Inc.
Competition from Integration of Services. A number of companies offering
Internet products and services, including direct competitors of Lycos, recently
have begun to integrate multiple features within their products and services,
including search and retrieval features. For example, the Web browsers offered
by Netscape and Microsoft, which are the two most widely-used browsers and
substantial sources of traffic for Lycos, may incorporate and promote
information search and retrieval capabilities in future releases or upgrades.
This integration of search and retrieval capabilities could make it more
difficult for Internet viewers to find and to use Lycos' products and services.
Companies integrate Internet products and services in several ways including
the following:
. Companies may develop competing products. For example, Microsoft and
Netscape have each announced an intention to introduce Websites offering
services similar to those currently offered by Lycos in combination with
Internet navigation features. Specifically, Microsoft has introduced its
own Internet search and navigation product offering under the name
"Start."
. Companies may acquire competitors of Lycos such as the recently announced
acquisition of Netscape by America Online.
. Companies may enter into joint ventures and/or licensing arrangements
involving competitors of Lycos. For example, Microsoft recently licensed
products and services from Inktomi Corporation, a direct competitor of
Lycos. Microsoft will feature and promote Inktomi services in the
Microsoft Network and other Microsoft online properties. Lycos expects
that such search services may be tightly integrated into the Microsoft
operating system, the Internet Explorer browser, and other software
applications. Microsoft may also promote such services within the
Microsoft Network or through other Microsoft-affiliated end-user services
such as MSNBC or WebTV Networks, Inc.
Point of Entry Competition. Many large media companies have announced that
they are contemplating developing Internet navigation services and are
attempting to become "gateway" sites through which users may enter the Web. In
the event these companies develop such "portal" sites, Lycos could lose a
substantial portion of its user traffic. Furthermore, Netscape has recently
announced its intention to launch its own "portal" Website, which will offer
services similar to those currently offered by Lycos and which is expected to
compete with Lycos' services. Additionally, entities that sponsor or maintain
high-traffic Websites or that provide an initial point of entry for Internet
viewers, such as the Regional Bell Operating Companies or Internet Service
Providers, often referred to as "ISPs," such as Microsoft and America Online,
Inc., currently offer and can be expected to consider further development,
acquisition or licensing of Internet search and navigation functions that
compete with Lycos. These competitors could also take actions that make it more
difficult for viewers to find and use Lycos' products and services.
Other Competition. Lycos competes with metasearch services that allow a user
to search the databases of several catalogs and directories simultaneously.
Lycos also competes indirectly with database vendors that offer information
search and retrieval capabilities with their core database products. Tripod and
Angelfire.com compete with other community-based Websites, including GeoCities,
Inc.
Developing Market; Unproven Acceptance of Lycos' Products and Services;
Uncertain Adoption of the Internet as an Advertising Medium. The market for
Lycos' products and services has only recently begun to develop and is rapidly
evolving. An increasing number of market entrants have introduced or developed
products and services for use on the Internet. Lycos' market depends on the
increased use of the Internet for information publication and distribution and
for commerce. Additionally, this market depends on the development of the
Internet as an advertising medium. Lycos' future operating results will depend
upon:
. the growth of the Internet advertising and commerce markets;
. the successful implementation of Lycos' advertising program; and
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. Lycos' ability to establish electronic commerce and licensing
relationships and other strategic alliances.
Lycos cannot assure you:
. that the Internet advertising or commerce market will develop as an
attractive and sustainable medium;
. that Lycos will achieve or sustain market acceptance of its products and
services; or
. that Lycos will be able to execute its business plan successfully.
As is typical in the case of a new and rapidly evolving industry, demand and
market acceptance for recently introduced products and services are very
uncertain. The industry is young and has few proven products. Moreover,
critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use and access, quality of service and
acceptance of advertising and electronic commerce) remain unresolved. Such
issues may impact the growth of the Internet, the placement of advertisements
on the Internet or the growth of the Internet as a means of electronic
commerce. Lycos' business would likely be impaired if:
. commercial use of the Internet does not grow;
. the Internet does not develop as an attractive medium for advertising;
. electronic commerce does not develop; or
. the Internet infrastructure does not effectively support growth that may
occur.
Because the market for Lycos' products and services is new and evolving, it
is difficult to predict the size of this market and the growth rate, if any.
Lycos cannot assure you that the market for Lycos' products and services will
develop or that there will be a demand for Lycos' products or services. Lycos'
business may not be profitable if:
. the market fails to develop;
. the market develops more slowly than expected;
. the market becomes saturated with competitors; or
. Lycos' products and services do not achieve or sustain market acceptance.
Dependence on the Internet. The use of Lycos' products and services depends
in large part upon the development by others of an infrastructure for providing
Internet access and services. Because global commerce and online exchange of
information on the Internet and other similar open wide-area networks are new
and evolving, it is difficult to predict whether the Internet will prove to be
a profitable marketplace. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including lack of acceptable security
technologies. Additionally, the Internet may not develop the necessary
infrastructure, such as a reliable network backbone, or timely develop and
commercialize performance improvements, including high speed modems.
In addition, the Internet infrastructure may not continue to be able to
support the demands placed upon it by significant growth in the number of users
and the level of use. The performance or reliability of the Web may be reduced
by this continued growth. In addition, the Internet could lose its commercial
viability due to delays in the development or adoption of new standards and
protocols (for example, the next generation Internet Protocol) to handle
increased levels of Internet activity. Lycos cannot assure you that the
infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace will be developed. Even if such infrastructure
and services are developed, the Internet may not become a viable commercial
marketplace for products and services such as those offered by Lycos. In
particular, the Internet has only recently become a medium for advertising and
electronic commerce. If the necessary infrastructure or complementary services
or facilities are not developed, or if the Internet does not become a popular
commercial marketplace or a platform for advertising and electronic commerce,
Lycos may not be profitable.
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Risk of Capacity Constraints and System Failure. A key element of Lycos'
strategy is to generate a high volume of traffic to its products and services.
Lycos makes such products and services available free of charge to users of the
Internet. Accordingly, the performance of Lycos' products and services is
critical to Lycos' reputation, its ability to attract advertisers to Lycos'
Websites and the market acceptance of these products and services. Any system
failure that causes interruptions in the availability, or increases response
time, of Lycos' products and services could result in less traffic to Lycos'
Websites. If such interruptions or increases are sustained or repeated, they
could reduce the attractiveness of Lycos' products and services to advertisers
and partners. An increase in the volume of searches conducted through Lycos'
products and services could strain the capacity of the software or hardware
used by Lycos or the capacity of Lycos' network infrastructure. This strain
could lead to slower response time or system failures. Any failure to expand
the capacity of Lycos' hardware or network infrastructure on a timely basis or
on commercially reasonable terms could diminish Lycos' business. In addition,
as the number of Web pages and users increases, Lycos' products and services
may not be able to increase proportionately.
Lycos is dependent upon Web browsers and Internet and online service
providers for access to its products and services. Users have experienced
difficulties due to browser and provider system failures unrelated to Lycos'
systems, products and services. Lycos is also dependent on hardware suppliers
for prompt delivery, installation and service of servers and other equipment
and services used to provide its products and services. Substantially all of
Lycos' hardware operations are located at its computer facility in Pittsburgh,
Pennsylvania and the Santa Clara, California and Waltham, Massachusetts sites
of Exodus Communications. Lycos also outsources a portion of its hardware
operations to third parties. A system failure at any of these locations may
harm the performance of Lycos' products and services. This system is vulnerable
to damage from fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events. Despite the implementation of network
security measures by Lycos, its servers are also vulnerable to computer
viruses, break-ins and similar disruptive problems. Computer viruses, break-ins
or other problems caused by third parties could lead to interruptions, delays
or halts in service to users of Lycos' products and services. The occurrence of
any of these risks could harm Lycos' business.
Need to Keep Pace With Technological Change and New Products. The market for
Internet products and services is characterized by rapidly changing technology,
evolving industry standards and customer demands, and frequent new product
introductions and enhancements. These market characteristics are exacerbated by
the emerging nature of this market and the fact that many companies are
expected to introduce new competitive Internet products in the near future. To
be successful, Lycos must continually improve the performance, features and
reliability of the Lycos search and navigation services. In addition, a key
element of Lycos' business strategy is the development, introduction and
integration of new products that capitalize on the increasing use of the
Internet. Lycos cannot assure you that it will be successful in developing or
integrating such products or services or that such products and services will
meet with market acceptance. In addition, new product releases by Lycos may
contain undetected errors that require significant design modifications,
resulting in a loss of customer confidence in Lycos' products and services and,
consequently, viewer support, which will diminish the use of Lycos' products
and services.
Risks Associated with Brand Development. Lycos believes that establishing and
maintaining the "Lycos Network" brand is crucial to the continued expansion and
attraction of its Internet audience. Lycos believes that the importance of
brand recognition will increase in the future due to the growing number of
Internet sites. Promotion and enhancement of the "Lycos Network" brand will
depend largely on Lycos' ability to provide consistently high-quality products
and services. The "Lycos Network" brand could be impaired if:
. Lycos does not provide consistently high-quality products and services;
. consumers do not believe that Lycos' products and services are of high
quality;
. consumers do not use new products and services which Lycos introduces; or
. Lycos' new business ventures are not favorably received by consumers.
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Any of the above would decrease the attractiveness of Lycos' the
attractiveness audiences to advertisers.
Risks Associated with Potential Acquisitions and Investments. Lycos has
completed acquisitions of companies, technologies or assets that complement
Lycos' business. Prior acquisitions include the Tripod, WiseWire, GuestWorld
and WhoWhere? acquisitions. Lycos plans to pursue additional acquisitions in
the future. Lycos may not be able to identify additional suitable acquisition
candidates available for sale at reasonable prices or to complete any desired
acquisitions. Additionally, Lycos may not be able to successfully integrate any
or all of the businesses it acquires (including Tripod, WiseWire, GuestWorld
and WhoWhere?) into Lycos' operations. In order to pay for future acquisitions,
Lycos may have to:
. issue equity securities, which would decrease the ownership interest of
all Lycos stockholders;
. incur additional debt;
. write-off in-process research and development or software acquisition and
development costs; and/or
. amortize goodwill and other intangible assets.
For example, for the fiscal year ended July 31, 1998, Lycos recorded in-
process research and development expense of approximately $91.2 million and
amortization of intangible assets of approximately $2.1 million in connection
with the acquisitions of Tripod, WiseWire and GuestWorld. Additionally, in the
first quarter of fiscal 1999, Lycos recorded in-process research and
development expense of $15.4 million related to the acquisition of WhoWhere?
and amortization of intangible assets of approximately $6.8 million in
connection with the acquisitions of Tripod, WiseWire, GuestWorld and WhoWhere?.
Acquisitions involve numerous additional risks, including difficulties in the
assimilation of the operations, services, products and personnel of the
acquired company. Acquisitions also divert management's attention from other
business concerns. Lycos also encounters risks by entering markets in which it
has little or no experience. Problems with an acquired business could impair
the performance of Lycos. Lycos has made investments in companies involved in
the development of technologies or services that are complementary or related
to Lycos' operations. Lycos may make such investments in the future. Lycos
invested in companies that are in an early stage of development and may be
expected to incur substantial losses. Lycos cannot assure you that any
investments in such companies will result in any return, nor can there be any
assurance as to the timing of any such return. Lycos may lose its entire
investment.
Risks Associated with International Expansion. International sales, primarily
from licensing Lycos' products and services, accounted for less than 10% of
Lycos' revenues for the fiscal year ended July 31, 1998. As part of its
business strategy, Lycos plans to expand its products and services into
international markets. In May 1997, Lycos formed Lycos Bertelsmann GmbH & Co.
KG with Bertelsmann AG to offer Lycos search services in Europe. In March 1998,
Lycos entered into a joint venture with Sumitomo Corp. and Internet Initiative
Japan, Inc. to offer search services in Japan. Lycos believes that this
expansion is important to its ability to continue to grow and to market its
products and services. In marketing its products and services internationally,
however, Lycos will face new competitors. In addition, international markets
will require Lycos to create localized versions of its products and services.
Lycos cannot assure you that it will be successful in creating localized
versions of its products and services or marketing or distributing its products
abroad. Even if Lycos is successful, its international revenues may not offset
the expense of establishing and maintaining international operations. To date,
Lycos has limited experience in marketing and distributing its products
internationally. Additional difficulties and risks inherent in doing business
on an international level include but are not limited to:
. compliance with regulatory requirements and changes in those
requirements;
. export restrictions;
. export controls relating to technology, tariffs and other trade barriers;
. protection of intellectual property rights;
. difficulties in staffing and managing international operations;
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. longer payment cycles;
. problems in collecting accounts receivable;
. political instability;
. fluctuations in currency exchange rates; and
. potentially adverse tax consequences.
One or more of such factors may impair any international operations
established by Lycos and, consequently, on Lycos' business.
Dependence On Intellectual Property and Proprietary Rights. Lycos' success
depends significantly upon its proprietary technology. Lycos currently relies
on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. Lycos generally enters into confidentiality agreements with
its employees, consultants and partners. Lycos has registered and applied for
registration of certain service marks and trademarks, and will continue to
evaluate the registration of additional service marks and trademarks, as
appropriate. In addition, Carnegie Mellon University has licensed a patent
issued in the United States relating to Lycos' search and indexing technology
to Lycos on a perpetual basis. Other parties may challenge such patent. If such
challenges are brought, the patent may be invalidated. Also, Lycos cannot
assure you that it will develop proprietary products or technologies that are
patentable, that any issued patent will provide Lycos with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have a material adverse effect on Lycos' ability to do
business. Despite Lycos' efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of Lycos' products or services
or to obtain and use information that Lycos regards as proprietary. The laws of
some foreign countries do not protect proprietary rights to as great an extent
as do the laws of the United States. Lycos does not currently have any patents
or patent applications pending in any foreign country. Lycos' means of
protecting its proprietary rights may not be adequate. Additionally, Lycos'
competitors may independently develop similar technology, duplicate Lycos'
products or design around intellectual property rights of Lycos.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property rights. Lycos may become involved in claims and
counterclaims with third parties regarding infringement with respect to current
or future products or trademarks or other proprietary rights. Any such claims
or counterclaims could impair Lycos' business because they could:
. be time-consuming;
. result in costly litigation;
. divert management's attention;
. cause product release delays; or
. require Lycos to redesign its products or require Lycos to enter into
royalty or licensing agreements.
Any required royalty or licensing agreements may not be available on terms
acceptable to Lycos, or at all.
Impact of Potential Government Regulation and Legal Uncertainties. Lycos is
not currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally. There are currently few laws or
regulations directly applicable to access to, or commerce on, the Web. However,
due to the increasing popularity and use of the Web, it is possible that a
number of laws and regulations may be adopted with respect to issues such as
user privacy, pricing and characteristics and quality of products and services.
The adoption of laws or regulations may decrease the growth of the Web. Such
decrease could in turn decrease the demand for Lycos' services and products or
increase Lycos' cost of doing business.
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Due to the global nature of the Web, it is possible that, although
transmission of Lycos' services originate from its operations centers in New
Jersey, Pennsylvania, California and Massachusetts, the governments of other
states and foreign countries might attempt to regulate Lycos' transmissions or
to prosecute Lycos for violations of their laws. Violations of local laws may
be alleged or charged by state or foreign governments. Lycos might
unintentionally violate such laws and such laws may be modified, or new laws
enacted, in the future. It is also possible that states or foreign countries
may seek to impose sales taxes on out of state companies that engage in
commerce over the Internet. In the event that states or foreign countries
succeed in imposing sales or other taxes on Internet commerce, the growth of
the use of the Internet for commerce could slow substantially.
Liability for Information Retrieved from the Internet. Because material may
be downloaded by the online or Internet services operated or facilitated by
Lycos or the Internet access providers with which Lycos has relationships, and
be subsequently distributed to others, it is possible that claims will be made
against Lycos on the basis of defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such
materials. Such claims could be based on Lycos providing access to obscene,
lascivious or indecent information. Although Lycos carries general liability
insurance, Lycos' insurance may not cover potential claims of this type, or may
not be adequate to indemnify Lycos for all types of liability that may be
imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could impair Lycos' business.
Management of Growth; Need to Establish Infrastructure; Additional Personnel.
Rapid execution is necessary for Lycos to successfully offer its products and
services and implement its business plan in a rapidly evolving market. Such
execution requires an effective planning and management process. Lycos' rapid
growth strains its managerial and operational resources. To manage its growth,
Lycos must continue to implement and improve its operational and financial
systems. Additionally, Lycos must expand, train and manage its employee base.
Further, Lycos will be required to manage multiple relationships with various
customers and other third parties. Lycos cannot assure you that it has made
adequate allowances for the costs and risks associated with this expansion and
transition. Lycos' systems, procedures or controls may not be adequate to
support Lycos' operations. Lycos' management may not achieve the rapid
execution necessary to offer successfully Lycos' products and services and to
implement its business plan. Lycos' future operating results will also depend
on many factors, including its ability to expand its advertising sales and
business development organizations and to expand its support organization along
with the growth of its business. If Lycos is unable to manage growth
effectively, its business could be materially adversely affected.
Dependence on Key Personnel. Lycos' performance is substantially dependent on
the performance of its executive officers and key employees, all of whom have
worked together for only a short period of time. Lycos does not have in place
key person life insurance policies on any of its employees. The loss of the
services of any of its executive officers or other key employees could impair
on Lycos' business and prospects. Lycos depends upon its ability to attract,
retain and motivate skilled technical and managerial personnel. Lycos' future
success also depends on its continuing ability to identify, hire, train and
retain other highly qualified technical and managerial personnel. Competition
for such personnel is intense, and Lycos may not be able to attract, hire,
assimilate or retain other highly qualified technical and managerial personnel
in the future.
Circumstances Related to Year 2000 Compliance. The codes of many currently
installed computer systems and software products accept only two-digit entries
in the date code field and cannot distinguish 21st century dates from 20th
century dates. Many companies' software and computer systems may need to be
upgraded or replaced so that they will be able to distinguish 21st century
dates from 20th century dates in order to comply with these year 2000
requirements and therefore be year 2000 compliant.
State of Readiness. Lycos is currently evaluating the year 2000 readiness of
the hardware and software products it sells, the information technology systems
it uses and its non-information technology systems, such
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as building security, voice mail and other systems. Lycos currently anticipates
that this evaluation will include the following phases:
. identification of all hardware and software products it sells and
information technology systems and non-information technology systems it
uses;
. assessment of repair or replacement requirements;
. repair or replacement;
. testing;
. implementation; and
. creation of contingency plans in the event of year 2000 failures.
Lycos has completed its assessment of all current versions of the hardware
and software products it sells and believes that they are year 2000 compliant.
However, whether a complete system or device that uses hardware or software
sold by Lycos will process 21st century dates depends on other components that
are supplied by parties other than Lycos. The supplier of Lycos' current
financial and accounting software has informed Lycos that such software is year
2000 compliant. Further, Lycos relies, both domestically and internationally,
upon various service providers that are outside of its control including:
. various vendors;
. governmental agencies;
. utility companies;
. telecommunications service companies;
. delivery service companies; and
. other service providers.
These third parties may suffer a year 2000 business disruption caused by
inability of various systems to process 21st century dates that could hinder
Lycos' ability to conduct its business.
During the first half of 1999, Lycos intends to:
. conduct an internal review of the year 2000 compliance of all prior
versions of the hardware and software it sells; and
. circulate a questionnaire to vendors and customers with whom it has
material relationships to obtain information about their year 2000
compliance.
Lycos will not be able to evaluate whether any remediation efforts will be
required, except as described above, until it receives such information.
Costs. To date, Lycos has not incurred any material expenditures in
connection with identifying or evaluating year 2000 compliance issues. Most of
its expenses thus far relate to the opportunity cost of time spent by Lycos
employees evaluating this software, the current versions of the hardware and
software sold by Lycos and year 2000 compliance matters generally. At this
time, Lycos can not estimate the potential impact of year 2000 issues relating
to its business. Such impact, including the effect of a year 2000 business
disruption, could impair the Company's financial condition.
Contingency Plan. Lycos has not yet developed a year 2000-specific
contingency plan. If Lycos discovers year 2000 compliance issues, then it will
evaluate the need for contingency plans relating to such issues.
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RISKS RELATING TO VENTURES
Ventures' business is subject to most of the risks that are applicable to the
business of Lycos. In particular, the risks listed below that are generally
discussed in the preceding section under the heading "Risks Relating to Lycos"
also apply to Ventures:
. Limited Operating History;
. Anticipation of Continued Losses;
. Limited Ability to Reduce Short-Term Expenses;
. Potential Fluctuations in Operating Results;
. Reliance on Advertising Revenues;
. Risks Related to Sponsorship Arrangements;
. Dependence on Third-Party Relationships;
. Complexity of Operating Advertising Management System;
. Risks relating to Liquidity of Lycos' Customers;
. Intense Competition in Lycos' Market;
. Developing Market; Unproven Acceptance of Lycos' Products and Services;
Uncertain Adoption of the Internet as an Advertising Medium;
. Dependence on the Internet;
. Risks of Capacity Constraints and System Failure;
. Need to Keep Pace with Technological Change and New Products;
. Risks Associated with Brand Development;
. Dependence on Intellectual Property and Proprietary Rights;
. Impact of Potential Government Regulation and Legal Uncertainties;
. Liability for Information Retrieved from the Internet;
. Management of Growth; Need to Establish Infrastructure; Additional
Personnel;
. Dependence on Key Personnel; and
. Circumstances Related to Year 2000 Compliance.
Additionally, Wired Digital's search and navigation site, HotBot, is based, in
significant part, on technology licensed from Inktomi Corporation. As such, the
success of HotBot is dependent, in part, on Wired Digital's relationship with
Inktomi. The license agreement may be terminated by Inktomi under certain
circumstances, including if Wired Digital materially breaches its payment or
other obligations under the agreement. The agreement may also be terminated for
convenience by either party by delivery of a specified number of months' prior
written notice to the other party. However, pursuant to an ancillary agreement
between Lycos and Inktomi, this termination for convenience provision in the
Inktomi agreement will become inapplicable upon the closing of the merger. The
agreement expires on March 31, 2001. If Wired Digital were required to replace
the core technology underlying HotBot, Ventures' business, financial condition
and results of operations could be adversely affected. Similarly, HotBot's
operation is dependent on access to Inktomi's searchable Web database. In the
event Inktomi's database is not working or is otherwise unavailable, HotBot
users are unable to complete Web searches. Any extended failure of, or material
difficulties with, Inktomi's database could result in a decrease in HotBot
pageviews, which could adversely affect Wired Digital's advertising revenues.
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SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of Lycos and Ventures has
been derived from their respective historical financial statements, and should
be read in conjunction with such financial statements and the notes thereto,
included elsewhere or incorporated by reference in this proxy
statement/prospectus. The Lycos selected historical financial data as of and
for the years ended July 31, 1998, 1997 and 1996 and as of July 31, 1995 and
for the period from Inception (June 1, 1995) to July 31, 1995 has been derived
from the financial statements of Lycos, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The Lycos selected
historical financial data as of October 31, 1998 and for the three months ended
October 31, 1998 and 1997 has been derived from the unaudited financial
statements of Lycos, which have been prepared on the same basis as the other
financial statements of Lycos. The Ventures' selected historical financial data
as of and for the years ended December 31, 1997, 1996 and 1995 has been derived
from the financial statements of Ventures, which have also been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The Ventures
selected historical financial information as of September 30, 1998 and for the
nine months ended September 30, 1998 and 1997 has been derived from the
unaudited financial statements of Ventures, which have been prepared on the
same basis as the other financial statements of Ventures. The selected
historical financial data should not be considered to be indicative of future
results and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included or
incorporated by reference elsewhere in this proxy statement/prospectus.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED OCTOBER 31, YEAR ENDED JULY 31, INCEPTION
------------------------ ---------------------------------- (JUNE 1, 1995)
1998 1997 1998 1997 1996 TO JULY 31, 1995
------------- -------- -------- -------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA--LYCOS
Net revenues........... $ 24,784 $ 9,303 $ 56,060 $ 22,273 $ 5,257 $ --
In process research
and development....... 15,400 -- 91,239 -- 452 --
Amortization of
intangible assets..... 6,793 113 2,132 540 360 --
Operating loss......... (26,672) (433) (99,968) (8,749) (5,802) (105)
Net income (loss)...... (14,656)(a) 107 (96,917) (6,619) (5,088) (105)
Net income (loss) per
share:(b)
Basic................ $ (0.35) $ 0.00 $ (3.13) $ (0.24) $ (0.21) $(0.01)
Diluted.............. (0.35) 0.00 (3.13) (0.24) (0.21) (0.01)
Weighted average
shares used in
computing net income
(loss) per share(b)
Basic................ 41,910 28,186 30,933 27,589 23,985 22,026
Diluted.............. 41,910 29,364 30,933 27,589 23,985 22,026
<CAPTION>
JULY 31,
OCTOBER 31, ----------------------------------------------------
1998 1998 1997 1996 1995
----------- -------- -------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA--
LYCOS
Working capital........ $150,224 $146,922 $ 38,129 $ 39,974 $ 329
Total assets........... 396,495 248,758 65,419 53,661 1,317
Long-term portion of
deferred revenue...... 28,396 26,160 5,100 -- --
Long-term portion of
notes payable......... 2,323 -- -- -- --
Total stockholders'
equity................ 312,928 168,687 37,647 44,106 1,145
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------
1998 1997 1997 1996 1995
------------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA--VENTURES
Net revenues........... $ 14,795 $ 8,444 $ 12,405 $ 4,312 $ 1,942
Operating loss......... (13,482) (10,291) (16,297) (41,092)(c) (2,096)
Net income (loss) from
continuing
operations............ 4,114 (10,231) (16,302) (40,250) (1,575)
Income (loss) from
discontinued
operations............ 4,185 (3,852) (2,632) (10,991) (4,930)
Gain on sale of
discontinued
operations............ 49,368 -- -- -- --
Net income (loss)...... 57,667 (14,083) (18,934) (51,241) (6,505)
Net income (loss) per
share:
Basic................ $691.58 $(574.42) $(593.69) $(85,473) $(3,252,500)
Diluted.............. 2.73 (e) (574.42) (593.69) (85,473) (3,252,500)
Weighted average
shares used in
computing net income
(loss) per share:
Basic................ 79 25 32 (d) (d)
Diluted.............. 20,003 (e) 25 32 (d) (d)
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------------
1998 1997 1996 1995
------------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA--
VENTURES
Working capital........ $ 41,042 $(16,221) $(13,290) $ 5,350
Total assets........... 64,003 8,999 9,221 8,643
Long-term
obligations........... 500 -- 1,443 6,397
Redeemable convertible
preferred stock....... 24,090 20,983 3,900 1,366
Total stockholders'
equity (deficit)...... 20,008 (34,597) (15,948) (141)
</TABLE>
- --------
(a) The net loss of Lycos includes a gain on the sale of investments of
approximately $10,120 in the three months ended October 31, 1998.
(b) All periods presented reflect the effect of a two-for-one stock split
distributed by Lycos in August 1998.
(c) The operating loss of Wired Ventures includes a write-off of intangible
assets of approximately $23,708 in the year ended December 31, 1996.
(d) There were six hundred common shares outstanding in 1996 and two common
shares outstanding in 1995 which were used in calculating basic and diluted
historical loss per share.
(e) The calculation of diluted earnings per share assumes the conversion of all
preferred stock into common stock.
23
<PAGE>
SELECTED PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA
The following selected pro forma unaudited combined condensed financial data
of Lycos and Ventures is derived from the pro forma combined condensed
financial statements and should be read in conjunction with such pro forma
statements and the notes thereto, which are included elsewhere in this joint
proxy/prospectus. For pro forma purposes the financial statements of Ventures
for the fiscal years ended December 31 have been restated to reflect a June 30,
1998 year end and have been combined with the financial statements of Lycos for
the year ended July 31, 1998. For the three month period ended October 31, 1998
the financial statements of Lycos have been combined with the financial
statements of Ventures for the three months ended September 30, 1998. The pro
forma data is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been consummated, nor is it necessarily indicative
of future operating results or financial position. See "Pro Forma Unaudited
Combined Condensed Financial Statements" included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
OCTOBER 31, JULY 31,
1998 1998
------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net revenues.......................................... $ 30,813 $ 79,263
In process research and development................... 15,400 92,036
Amortization of intangible assets..................... 12,106 54,746
Operating loss........................................ (34,860) (173,634)
Net loss.............................................. (22,844) (170,582)
Basic and diluted loss per share...................... $ (0.52) $ (4.58)
Shares used in computing basic and diluted loss per
share................................................ 44,127 37,244
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<S> <C>
BALANCE SHEET DATA
Working capital..................................................... $138,705
Total assets........................................................ 513,634
Long-term portion of deferred revenue............................... 28,396
Long-term portion of notes payable.................................. 2,323
Total stockholders' equity.......................................... 411,218
</TABLE>
24
<PAGE>
COMPARATIVE PER SHARE DATA
The following table includes selected historical per share data and the
corresponding unaudited pro forma per share amounts for Lycos common stock and
Ventures capital stock for the periods indicated, giving effect to the merger.
The data presented are based upon the financial statements and related notes of
each of Lycos and Ventures appearing elsewhere in, or incorporated by reference
into, this proxy statement/prospectus and the unaudited pro forma combined
condensed balance sheet and statements of operations, including the related
notes thereto, appearing elsewhere in this proxy statement/prospectus. This
information is only a summary and should be read in conjunction with the
historical and unaudited pro forma combined condensed financial statements and
related notes thereto. The assumptions used in the preparation of this table
appear under "SELECTED PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA"
on page 24. The comparative per share data does not necessarily indicate the
results of the future operations of the combined organization or the actual
results that would have occurred if the merger had occurred at the beginning of
the periods indicated.
LYCOS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
OCTOBER 31, JULY 31,
1998 1998
------------ ----------
<S> <C> <C>
HISTORICAL PER COMMON SHARE DATA:
Basic and diluted loss from continuing operations..... $(0.35) $(3.13)
Book value............................................ 7.47 5.45
PRO FORMA PER COMMON SHARE DATA:(A)
Basic and diluted loss from continuing operations..... $(0.52) $(4.58)
Book value............................................ 9.32 8.64
</TABLE>
VENTURES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
HISTORICAL PER COMMON SHARE DATA:
Income (loss) from continuing operations:
Basic........................................... $12.76 (c) $ (511.16)
Diluted......................................... 0.05 (511.16)
Book value........................................ 253.61 (1,084.82)
PRO FORMA EQUIVALENT PER COMMON SHARE DATA:(B)
Basic and diluted loss from continuing
operations....................................... $(0.03) $ (0.23)
Book value........................................ $ 0.47 $ 0.43
</TABLE>
- --------
(a) See "SELECTED PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA" on
page 24.
(b) Represents pro forma equivalent Ventures amounts calculated by multiplying
the Lycos pro forma per common share data by the ratio of common shares
issued to acquire Ventures (based on a $42.86 Lycos average closing stock
price) to the total pro forma common shares outstanding.
(c) Earnings per common share reflects the accretion of $3,107,000 of dividends
on redeemable convertible preferred stock.
25
<PAGE>
PRICE RANGE OF COMMON STOCK
Shares of Lycos' common stock are listed on the Nasdaq National Market under
the symbol "LCOS." The shares of Lycos common stock issued in connection with
the merger will also be listed on the Nasdaq National Market. The table below
provides, for the calendar quarters indicated, the reported high and low bid
prices of Lycos common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL
YEAR FISCAL QUARTER ENDED HIGH LOW
------ -------------------- ------ ------
<C> <S> <C> <C>
1999 October 31, 1998..................................... $44.50 $20.06
1998 October 31, 1997..................................... 21.00 8.13
January 31, 1998..................................... 21.00 12.63
April 30, 1998....................................... 39.57 17.60
July 31, 1998........................................ 53.63 24.16
1997 October 31, 1996..................................... 6.38 2.88
January 31, 1997..................................... 9.38 4.75
April 30, 1997....................................... 11.37 6.00
July 31, 1997........................................ 9.63 5.60
1996 April 30, 1996 (commencing April 2, 1996)............ 14.63 7.00
July 31, 1996........................................ 9.63 2.94
</TABLE>
On October 5, 1998, the full trading day prior to the public announcement of
the proposed merger, Lycos stock closed at $31 15/16 per share. On November 23,
1998, Lycos stock closed at $65 1/16 per share. As of October 31, 1998, Lycos
had 764 stockholders of record.
Ventures is a privately-owned company, and, therefore, no market value
information on its stock is available. As of October 31, 1998, Ventures had 159
stockholders of record.
Because the market price of Lycos common stock changes, the market value of
the shares to be issued in the merger may increase or decrease at any time. See
"RISK FACTORS--Risks Relating to Lycos--Volatility of Stock Price" beginning on
page 10.
DIVIDEND POLICIES
Neither Lycos nor Ventures has ever declared or paid cash dividends on its
shares of capital stock. Ventures' certificate of incorporation provides for
the accumulation of dividends on its Series C preferred stock, none of which
has been paid to date. Such dividends will be paid as part of the merger
consideration. Lycos currently intends to retain all of its earnings to finance
the development and expansion of its business and therefore does not intend to
declare or pay cash dividends on its common stock in the foreseeable future.
Lycos' board of directors, in its discretion, will determine whether to declare
and pay dividends in the future. Any future declaration and payment of
dividends will depend upon:
. Lycos' results of operations;
. earnings, financial condition;
. contractual limitations;
. cash requirements;
. future prospects;
. applicable law; and
. other factors deemed relevant by Lycos' board of directors.
26
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE
Ventures' board of directors is soliciting the enclosed proxy to be used at a
special meeting of stockholders to be held on January , 1999, at 9:00 a.m.
local time, or at any adjournment or postponement of the meeting. The proxy
will be used for the purposes described in this proxy statement/prospectus and
in the accompanying notice of special meeting. The meeting will be held at the
offices of Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco,
California 94111. Ventures intends to mail this proxy statement/prospectus and
accompanying notice of special meeting and proxy card on or about , 1998
to all stockholders entitled to vote at the meeting. The costs of soliciting
proxies will be borne by Ventures, subject to the provisions of the merger
agreement relating to the payment of expenses.
PURPOSE
The purpose of the meeting is to vote upon a proposal to approve and adopt
the merger agreement and to approve the merger.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Ventures capital stock at the close of business on
, 1998 will be entitled to notice of and to vote at the meeting. At the
close of business on such date, Ventures had outstanding and entitled to vote
96,223 shares of common stock, 15,199,794 shares of Series A preferred stock,
625,000 shares of Series B preferred stock and 3,762,760 shares of Series C
preferred stock. Each record holder of common stock, Series A preferred stock
and Series B preferred stock on such date will be entitled to one vote for each
share held. Each record holder of Series C preferred stock on such date will be
entitled to approximately 1.075 votes for each share held.
VOTE REQUIRED
Approval and adoption of the merger agreement and approval of the merger will
require the affirmative vote of the holders of a majority of the Ventures
capital stock (assuming conversion of all Ventures preferred stock) and a
majority of the Ventures Series C preferred stock outstanding on the record
date. The persons named as proxy holders on the proxy card will vote your
shares as you indicate on the card. If you do not specify on the proxy card how
to vote your shares, the proxy holders will vote your shares in favor of the
merger agreement and the merger. The inspector of election appointed for the
meeting will separately tabulate affirmative and negative votes and
abstentions. Abstentions will have the same effect as negative votes.
Directors and executive officers of Ventures, including for this purpose Beth
Vanderslice and Rick Boyce, together with stockholders of Ventures who own 5%
or more of any class or series of Ventures capital stock, own 78.7% of the
outstanding Ventures capital stock (assuming conversion of all Ventures
preferred stock) and 100% of the Ventures Series C preferred stock.
Due to the existence of the voting trust and voting agreements that have been
executed by the trust and other Ventures stockholders, we are assured of
receiving the requisite vote at the special meeting.
PROXIES
You may revoke your proxy before it is voted by filing a written notice of
revocation or a duly executed proxy bearing a later date with Ventures'
corporate secretary. You may also revoke your proxy by attending the meeting
and voting in person. Attending the meeting will not, by itself, revoke a
proxy.
RECOMMENDATION OF VENTURES BOARD OF DIRECTORS
The Ventures board of directors has approved the merger agreement and the
transactions contemplated by the merger agreement and has determined that the
merger is fair to, and in the best interests of, Ventures and its stockholders.
AFTER CAREFUL CONSIDERATION, THE VENTURES BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL
OF THE MERGER.
27
<PAGE>
THE MERGER
This section contains detailed information regarding the companies' reasons
for the merger, the events leading up to the execution of the merger agreement
and the terms of the merger agreement. The merger agreement and certain of its
exhibits are attached to this proxy statement/prospectus as Annexes I, II and
III.
PLEASE NOTE THAT THE FOLLOWING DESCRIPTION OF THE MERGER IS A SUMMARY ONLY.
YOU SHOULD READ THE FOLLOWING SUMMARY AND THE MERGER AGREEMENT FOR A FULL
UNDERSTANDING OF THE TERMS OF THE MERGER.
GENERAL
At the effective time of the merger, BF Acquisition Corp., a newly formed
Delaware corporation and a wholly-owned subsidiary of Lycos, will be merged
into Ventures. As a result, the separate corporate existence of BF will cease,
and Ventures will continue as the surviving corporation under Delaware law. As
the surviving corporation, Ventures will be a wholly-owned subsidiary of Lycos.
EFFECTIVE TIME OF THE MERGER
The merger will take effect when the certificate of merger has been filed
with the Secretary of State of the State of Delaware in accordance with
Delaware law. This time is referred to as the "effective time."
The merger agreement provides that the merger and the other transactions
contemplated by the merger agreement will be completed within three business
days of the waiver or satisfaction of all of the conditions to the obligations
of Lycos, BF and Ventures to complete the merger. The merger agreement may be
terminated by either Lycos or Ventures if the merger has not occurred on or
before March 4, 1999. See "THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION--Termination and Amendment" on page 48.
MERGER CONSIDERATION
As a result of the merger, at the effective time, the outstanding shares of
Ventures capital stock (other than Ventures dissenting shares) and warrants to
acquire Ventures capital stock will be converted into and exchanged for the
right to receive a portion of the merger consideration, as described below.
Total Merger Consideration. As a result of the merger, Lycos will pay
Ventures stockholders a combination of shares of Lycos common stock and, in
some cases, cash in exchange for their shares of Ventures capital stock.
Ventures stockholders will receive, in the aggregate, the following
consideration for their shares in the merger:
(1) Lycos common stock valued at $95.0 million, including common stock
valued at $12 million issuable to the holders of Ventures common stock
received upon the exercise of options prior to the closing.
(2) Lycos common stock or cash with a value equal to the amount of cash
and cash equivalents shown on Ventures' balance sheet at closing, net of
exclusions for specified compensation and other identified expenses. This
amount is referred to as the "Ventures Cash Balance." There will also be
certain adjustments for borrowings, working capital shortfalls and similar
items. Ventures estimates that the net amount of the Ventures Cash Balance
will be in the range of $28 million to $33 million, depending on the date
of closing and other factors. Lycos has the option to pay up to the amount
of the Ventures Cash Balance in cash or stock, subject to certain
limitations related to tax and regulatory matters.
(3) Up to $4.5 million in cash plus interest from Lycos, contingent upon
receipt by Ventures after the closing of distributions from an escrow fund
established in connection with Ventures' sale of its magazine, books and
television businesses to Advance Magazine Publishers Inc. in June 1998. The
28
<PAGE>
amount of the Advance escrow fund distributed will depend on the amount of
the fund used to satisfy claims by Advance. Lycos will distribute cash,
when and if such distributions are received by Lycos, equal to such Advance
distributions in June 1999.
(4) Up to $5.0 million in cash, contingent upon receipt by Lycos after
closing of specified federal and state income tax benefits related to
Ventures' pre-merger business. If and to the extent any such refunds are
received, Lycos will distribute cash equal to such refunds over the two-
year period following the closing of merger.
The portions of the merger consideration described in paragraphs (1) and (2)
are together referred to as the "Aggregate Share Value." As indicated earlier,
Lycos may elect to pay a portion of the Aggregate Share Value, up to the amount
of the Ventures Cash Balance, in cash instead of in shares of Lycos common
stock.
The parties will determine the precise number of shares of Lycos common stock
to be issued for any dollar value by dividing that dollar value by the "average
closing stock price." This price is determined by calculating the average
closing price for Lycos common stock over a period of 20 trading days ending
three trading days prior to the closing of the merger. Under the merger
agreement, however, this price is subject to a collar; that is, for the
purposes of calculating the number of Lycos shares to be issued, the average
closing stock price may not be higher than $42.86 or lower than $20.64 even if,
in fact, the actual average closing price of Lycos common stock does exceed
$42.86 or fall below $20.64.
Merger Consideration to be Received By Class Or Series. Stockholders of
Ventures will receive different amounts per share of Ventures capital stock
held, depending on the class or series. The amounts allocated to each class and
series were determined by reference to Ventures' certificate of incorporation,
after taking into account the negotiated amount to be allocated to the holders
of common stock. Each holder of a share of a class or series will receive a pro
rata portion of the aggregate amount allocated to that class or series.
Therefore, the amounts received in exchange for a share of any class or series
depend in part on the number of shares of that class or series outstanding at
the effective time of the merger.
Common Stock. The holders of Ventures common stock will receive in the
aggregate that number of shares of Lycos common stock with a value equal to
$12,538,700, based on the average closing stock price. The portion of the
merger consideration to be paid to the holders of Ventures common stock is
referred to as the "Common Amount."
Series A Preferred Stock. The holders of Ventures Series A preferred stock
and warrants to purchase Ventures Series A preferred stock will receive in the
aggregate that number of shares of Lycos common stock (or cash and shares as
described above) with a value equal to 78.8% of the "Residual Share Value." The
Residual Share Value is equal to the Aggregate Share Value, minus the
following:
. the amounts payable to the holders of Ventures common stock
($12,538,700);
. the amounts payable to the holders of Ventures Series B preferred stock
($12,500,000); and
. certain amounts payable to the holders of Series C preferred stock
(estimated to be approximately $28,576,040, assuming a closing date of
January 31, 1999).
For example, if the Aggregate Share Value were $125 million, the Residual
Share Value would be approximately $72,815,250; if the Aggregate Share Value
were $95 million, the Residual Share Value would be approximately $42,815,250.
The holders of Ventures Series A preferred stock will also receive cash equal
to 78.8% of any amounts paid in respect of the Advance escrow and tax refund.
The portion of the merger consideration to be paid to the holders of Series A
preferred stock is referred to as the "Series A Amount."
Series B Preferred Stock. The holders of Ventures Series B preferred stock
will receive in the aggregate that number of shares of Lycos common stock with
a value equal to $20.00 multiplied by the number of shares of Ventures Series B
preferred stock outstanding at the effective time. The portion of the merger
consideration to be paid to the holders of Series B preferred stock is referred
to as the "Series B Amount."
29
<PAGE>
Series C Preferred Stock. The holders of Ventures Series C preferred stock
will receive in the aggregate that number of shares of Lycos common stock (or
cash as described above) with a value equal to:
. 21.2% of the Residual Share Value;
. plus the amount of all dividends accrued for the benefit of the holders
of Ventures Series C preferred stock (will be approximately $3,727,740 at
January 31, 1999);
. plus 26.903553% of the amount to be paid to the holders of the Series B
preferred stock (approximately $3,362,940); and
. plus $5.71 times the number of shares of Series C preferred stock
outstanding at the effective time (approximately $21,485,360).
In addition, the holders of Ventures Series C preferred stock will receive
cash equal to 21.2% of any amounts paid in respect of the Advance escrow and
tax refund. The portion of the merger consideration to be paid to the holders
of Series C preferred stock is referred to as the "Series C Amount."
Stockholders should note that the values to be paid in Lycos common stock
described above could vary if Lycos' average closing stock price is above or
below the collar limits described above. In that event, the number of shares to
be issued does not decrease or increase any further and, as a result, the
"value" of the shares in the market would be correspondingly higher or lower,
as the case may be.
Per Share Merger Consideration. At the effective time of the merger, each
share of Ventures capital stock (except for dissenting shares) will be
automatically converted into Lycos common stock and, if applicable, the right
to receive cash as follows:
. Each share of Ventures common stock will be converted into that fraction
of a share of Lycos common stock equal to the Common Amount divided by
the number of shares of Ventures common stock outstanding at the
effective time (estimated to be approximately 11,096,197 shares after
option exercises).
. Each share of Ventures Series A preferred stock (including shares subject
to warrants) will be converted into that fraction of a share of Lycos
common stock and the right to receive cash equal to the Series A Amount
divided by the number of shares of Ventures Series A preferred stock
outstanding at the effective time (estimated to be approximately
15,249,794 shares, including warrants).
. Each share of Ventures Series B preferred stock will be converted into
that fraction of a share of Lycos common stock equal to the Series B
Amount divided by the number of shares of Ventures Series B preferred
stock outstanding at the effective time (estimated to be approximately
625,000 shares).
. Each share of Ventures Series C preferred stock will be converted into
that fraction of a merger share and the right to receive cash equal to
the Series C Amount divided by the number of shares of Ventures Series C
preferred stock outstanding at the effective time (estimated to be
approximately 3,762,760 shares).
For an illustration of the calculation of the amount each share of Ventures
capital stock will receive in the merger, see "SUMMARY--The Merger--What
Ventures Stockholders Will Receive" beginning on page 2.
Cancellation of Warrants. At the effective time, warrants to purchase 50,000
shares of Series A preferred stock will be canceled and converted into the
right to receive the number of shares of Lycos common stock into which the
shares of Series A preferred stock subject to such warrants would have been
converted if such warrants had been exercised in their entirety immediately
prior to the effective time, rounded down to the nearest whole share of Lycos
common stock, minus the per share exercise of the warrants.
Treatment of Options. The merger agreement provides that all outstanding
options to purchase Ventures common stock will be assumed by Lycos in the
merger, which means that such options would automatically
30
<PAGE>
become exercisable for shares of Lycos common stock on the terms contained in
the merger agreement. As of September 30, 1998, there were options outstanding
to purchase approximately 2,297,430 shares of Ventures common stock. However,
prior to closing, Ventures expects to replace all outstanding stock options
held by current employees and current and former consultants with options that
will terminate if not exercised before the effective time. In addition,
Ventures will grant new options with the same termination provisions. Certain
director options will be cancelled in exchange for cash as described below.
These actions will result in all Ventures outstanding options being exercised
prior to the closing, so that no options are actually assumed by Lycos.
Option Repricing. The exercise price of these options is $1.00 per share.
Prior to the closing of the merger, Ventures will offer its current employees
and current and former consultants the right to cancel their existing stock
options in exchange for new stock options with a lower exercise price. As of
September 30, 1998, these persons held options to purchase approximately
1,639,430 shares of Ventures common stock. The new options will provide the
following:
. A per-share exercise price of $0.13.
. A provision stating that the option will terminate upon the closing of
the merger to the extent not previously exercised.
. A provision preventing the optionee from selling more than 50% of the
Lycos common stock acquired in the merger in exchange for the option
shares for one year following the merger. In addition, if the optionee is
an employee of Lycos following the merger, that one-year "lockup"
provision will be extended to three years following the merger if the
employee leaves Lycos during the first year following the merger, subject
to certain limitations.
Although the options currently held by optionees are subject to customary
vesting restrictions, the repriced options will be fully vested as of the
closing of the merger.
New Option Grants. In addition, prior to completion of the merger, Ventures
intends to grant additional, fully vested stock options to purchase
approximately 9,360,000 shares of Ventures common stock, containing the same
terms as the repriced options described above, to certain employees and
executive officers.
The option repricing and the new option grants will significantly increase
the number of shares of Ventures common stock outstanding immediately prior to
the merger, and therefore significantly decrease the merger proceeds payable on
each share of Ventures common stock.
Cancellation of Founder Options. Options to purchase 354,000 shares of
Ventures common stock held by Louis Rossetto, a co-founder and director of
Ventures, and options to purchase 304,000 shares of Ventures common stock held
by Jane Metcalfe, a co-founder and director of Ventures, will not be repriced
or exercised prior to the closing of the merger. Under the terms of separation
agreements between Ventures and these founders, these options will be canceled
in exchange for $500,000 in cash to each co-founder, to be paid after closing
of the merger.
Fractional Shares. No fractional shares of Lycos common stock will be issued
in connection with the merger. Instead of receiving a fractional share, a
stockholder who would otherwise be entitled to a fractional share will receive
an amount of cash (rounded to the nearest whole cent) equal to the product of
(1) the fraction and (2) the average closing stock price.
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RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of Ventures who do not vote in favor of the merger and who
otherwise comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to appraisal rights under Delaware law. Such
rights entitle the stockholder to require Ventures to purchase the dissenting
shares for cash at their fair market value, excluding any appreciation or
depreciation as a result of the merger. The following is a summary description
of the provisions of the applicable Delaware law. This summary is complete in
all material respects but should be read with the full text of the applicable
law, a copy of which is attached hereto as Annex V. Any holder of Ventures
capital stock intending to exercise statutory appraisal rights is urged to
review Annex V carefully and to consult with legal counsel so as to assure
strict compliance with its provisions.
A VOTE IN FAVOR OF THE MERGER AGREEMENT AND THE MERGER WILL CONSTITUTE A
WAIVER OF YOUR RIGHT TO DEMAND APPRAISAL OF YOUR VENTURES CAPITAL STOCK.
Who May Exercise Statutory Appraisal Rights. Under Section 262 of the
Delaware General Corporation Law, holders of Ventures capital stock who follow
the procedures set forth in such law will be entitled to have their Ventures
capital stock appraised by the Delaware Court of Chancery and to receive
payment in cash of the "fair value" of such shares, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, if any, as determined by such court. Stockholders
considering seeking appraisal should be aware that the fair value of their
Ventures capital stock under Section 262 could be more than, less than or equal
to the merger consideration otherwise to be received by such holder.
Procedure for Exercising Statutory Appraisal Rights. A holder of Ventures
capital stock wishing to exercise statutory appraisal rights must (1) deliver
to Ventures prior to the vote on the merger agreement at the special meeting a
written demand for appraisal of such holder's Ventures capital stock and (2)
not vote in favor of the merger agreement. A holder of Ventures capital stock
wishing to exercise such rights must be the record holder of such shares on the
date the written demand is made and must continue to hold such shares of record
through the effective time. Accordingly, a holder of the Ventures capital stock
who is a record holder on the date that the demand is made but who subsequently
transfers such shares prior to the effective time will lose such holder's right
to appraisal with respect to the shares transferred.
A demand for appraisal should be executed by or on behalf of the holder of
record, as such holder's name appears on the stock certificate. If the shares
of Ventures capital stock in question are held in a fiduciary or representative
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity. If the shares are owned of record by more than
one person, as in a joint tenancy or a tenancy in common, the demand should be
executed by or on behalf of all joint owners. An authorized agent, including
one or more joint owners, may execute a demand for appraisal on behalf of a
holder of record; however, the agent must identify the record owner or owners
and expressly disclose the fact that, in executing the demand, the agent is
agent for such owner or owners. All demands for appraisal must be in writing
and must be sent or delivered to Ventures at 660 Third Street, Fourth Floor,
San Francisco, California 94107, Attention: Janelle Mitchell, Secretary.
Any holder of Ventures capital stock who has demanded an appraisal in
compliance with Section 262 will not, from and after the effective time, be
entitled to vote the Ventures capital stock subject to the demand for any
purpose or be entitled to the payment of future dividends or other distribution
on the Ventures capital stock.
Within ten days after the effective time, Ventures will be required to notify
each stockholder who has complied with the provisions of Section 262 and who
has not voted in favor of the merger agreement and the merger of the date that
the merger became effective. Within 120 days after the effective time, any
stockholder who has complied with the requirements for exercise of statutory
appraisal rights will be entitled, upon written request, to receive from
Ventures a statement setting forth the aggregate number of shares of Ventures
capital
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stock not voted in favor of the merger agreement and with respect to which
demands for appraisal have been received and the aggregate number of holders of
such Ventures capital stock. Such statements must be mailed within ten days
after a written request therefor has been received by Ventures or within ten
days after the expiration of the period for delivery of demands, whichever is
later.
Determination of Fair Value; Venue For Filing Appraisal Petition. Within 120
days after the effective time, Ventures or any stockholder who has complied
with the statutory requirements described above may file a petition in the
Delaware Chancery Court demanding a determination of the fair value of the
Ventures capital stock. Ventures is under no obligation to and does not
currently intend to file a petition with respect to the appraisal of the fair
value of the Ventures capital stock. Accordingly, it will be the obligation of
the stockholders to initiate all necessary action to perfect statutory
appraisal rights with respect to their Ventures capital stock within the time
periods prescribed by Section 262.
If a petition for appraisal is timely filed, stockholders entitled to
statutory appraisal rights may receive notice of the time and place of a
hearing on the petition. After such hearing, the Delaware Court of Chancery
will determine the stockholders entitled to statutory appraisal rights and the
"fair value" of their Ventures capital stock, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid thereon. The Delaware Supreme Court
has stated that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in determining fair value in an
appraisal proceeding. The Delaware Supreme Court has further stated that in
determining fair value in an appraisal proceeding, the court must consider
market value, dividends, earnings prospects, the nature of the enterprise and
any other facts which could be ascertained as of the date of the merger that
throw any light on the future prospects of the merger corporation. In
Weinberger v. UOP, Inc., the Delaware Supreme Court held that the "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered" in determining fair value.
Costs of Appraisal Action. The costs of an appraisal action may be determined
by the Court of Chancery and taxed upon the parties as it deems equitable. The
Chancery Court may also order that all or a portion of the expenses incurred by
any stockholder in connection with appraisal, including, reasonable attorneys'
fees and the fees and expenses of experts utilized in the appraisal proceeding,
be charged pro rata against the value of all of the shares of Ventures capital
stock entitled to appraisal.
Loss of Appraisal Rights. If any stockholder who properly demands appraisal
of his or her Ventures capital stock under Section 262 fails to perfect, or
effectively withdraws or loses his or her right to appraisal, as provided under
Delaware law, such stockholder's shares will be converted into the right to
receive the consideration specified in the merger agreement. A stockholder will
fail to perfect statutory appraisal rights, or effectively lose or withdraw his
or her right to appraisal if, among other things, no petition for appraisal is
filed within 120 days after the effective time or if the stockholder delivers
to Ventures a written withdrawal of his or her demand for appraisal and
acceptance of the merger. Any such attempt to withdraw an appraisal demand more
than 60 days after the effective time will require written approval of
Ventures.
CONVERSION AND EXCHANGE OF SHARE CERTIFICATES
At the effective time, the Ventures stock and warrants issued and outstanding
immediately prior to such time, other than Ventures dissenting shares, will
automatically be converted into the right to receive the merger consideration
from Lycos.
At the effective time, Lycos will (1) authorize its exchange agent, Boston
EquiServe Limited Partnership, to make the merger shares available and (2)
deliver to Boston EquiServe cash in an amount sufficient for payments of any
cash payments to be made for the Ventures Cash Balance and in lieu of
fractional shares. Holders of Ventures stock and warrants who properly complete
and validly execute and surrender letters of transmittal and certificates
representing Ventures stock and warrants to Lycos prior to the effective time
will
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have certificates representing the shares of Lycos common stock and any cash
payment to which they are entitled mailed to them by Boston EquiServe no later
than ten days after the closing date. Holders of Ventures stock and warrants
who properly complete and validly execute and surrender letters of transmittal
and certificates representing Ventures stock and warrants to Lycos after the
effective time will be entitled to receive the shares of Lycos common stock and
any cash payment to which they are entitled following surrender of these
documents. Surrendered Ventures stock and warrants will be canceled.
Until surrendered as provided above, (1) each outstanding certificate that
prior to the merger represented Ventures stock and warrants (other than
certificates for dissenting shares) will for all corporate purposes evidence
only the right to receive the portion of the merger consideration to which such
holder is entitled pursuant to the merger agreement, and (2) each outstanding
certificate evidencing Ventures dissenting shares will evidence only the right
of the holders to pursue such holder's remedies as a dissenting stockholder as
provided by Delaware law.
BACKGROUND OF THE MERGER
As part of its regular review and planning process, Ventures' management and
board of directors regularly review Ventures' strategic direction and explore a
variety of financing alternatives, including public and private offerings of
securities, strategic alliances and business combinations with other companies.
Prior to 1998, Ventures' operations were financed principally through private
placements of equity securities, the latest of which was an approximately $21.5
million equity financing in December 1996, as well as through debt financing.
In mid-1997, Ventures' management and board of directors reviewed the company's
business and financial plans and concluded that significant additional capital
would be required to pay off debt incurred and to fund its operations to the
point at which it operated on a cash flow break-even basis. To address these
funding needs, in September 1997, Ventures engaged Lazard Freres to undertake a
broad marketing process to seek offers for a significant investment in or
strategic alliance with Ventures or, alternatively, for an acquisition of the
company. From October 1997 through March 1998, Lazard Freres initiated contacts
with 33 companies and six private equity investment firms with interests either
in magazine publishing or Internet properties. Management of Ventures also
engaged in a number of discussions with potential strategic partners. For the
most part, those companies either declined to submit offers or expressed
interest only in either Wired Digital or Wired Magazine Group (Ventures'
magazine subsidiary), but not in Ventures as a whole. This process led to
Ventures' sale of its magazine, books and television businesses and related
brands to Advance Magazine Publishers Inc. in June 1998.
Following the sale to Advance, Ventures continued its Internet business
operations, funded in part by the proceeds of that sale. At a meeting in late
May 1998, the Ventures board of directors considered at length Ventures' long-
term strategy and prospects, both as an independent company with the eventual
goal of a successful initial public offering and as part of a larger combined
company created through a merger or acquisition. Following that meeting, the
Ventures' board of directors directed management to conduct exploratory
discussions with investment banks with respect to the possibility of an initial
public offering. At the same time, the Ventures' board of directors directed
Lazard Freres to approach a list of a number of media and Internet companies to
determine their interest in a possible business combination or other strategic
transaction with Ventures. As part of that process, Lazard Freres engaged in
preliminary discussions with 13 companies, including Lycos.
As part of its regular business, Lycos' management and board of directors
regularly review potential strategic acquisitions. On June 24, 1998, Lazard
Freres, on behalf of Ventures, entered into a non-disclosure agreement with
Lycos in connection with Lycos' evaluation of a potential transaction with
Ventures. In early July 1998, members of the management teams of Lycos and
Ventures held their first meeting to discuss the possible benefits of a
strategic alliance or other business combination. Preliminary due diligence
continued over the next several weeks.
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Initial price discussions began in mid-July. At a meeting on July 23, 1998,
the Lycos board of directors discussed a potential transaction with Ventures
and, on July 28, 1998, Lycos submitted a written proposal to Ventures outlining
the terms of a possible acquisition of Ventures. At a meeting on August 6,
1998, in the San Francisco office of Cooley Godward LLP, Ventures' legal
counsel, Ventures management, Lycos management and advisors to the companies
discussed specific terms of the proposed transaction, including
Lycos' requirement that Ventures be precluded in the definitive agreement from
"shopping" Ventures or accepting any other offer to acquire Ventures. This
requirement and the other terms of the Lycos proposal were discussed
extensively with certain members of Ventures' board of directors later that
day. Lycos and Ventures, together with their respective legal counsel and
investment bankers, then began a series of discussions concerning the terms of
the proposed transaction and the definitive agreement, as well as the potential
long-term strategic benefits of the transaction.
On August 18, 1998, the board of directors of Ventures met again by telephone
to review and discuss the terms of the proposed transaction and to consider
alternative strategies. Ventures' legal counsel and investment bankers were
also present. Following extensive discussion of the proposed terms of the
transaction with Lycos, as well as potential alternative strategies, Ventures'
board of directors determined to continue discussions with Lycos, while
continuing to explore other alternatives.
In light of the increased stock market volatility in late August and early
September 1998 and the decline in the market price of Lycos shares during that
period, negotiations between the parties came to a temporary standstill.
Discussions resumed during the week of September 14, with Lycos offering a
reduced price to Ventures, reflecting, Lycos maintained, the reduced market
valuations attributable to Internet companies generally. Negotiations also
resumed with respect to the definitive agreement, with issues centering on,
among other things, the extent of the Ventures stockholders' escrow and
indemnification obligations. In addition, Lycos required that Ventures enter
into a separate "no-shop" agreement.
On September 23, 1998, the Lycos board of directors met to review and discuss
the terms of the proposed transaction. Lycos engaged the firm of Hambrecht &
Quist to serve as a financial advisor in connection with the proposed
acquisition of Ventures.
On September 24, 1998, Ventures' board of directors held a special telephonic
meeting to consider, with its legal counsel and investment bankers present, the
revised terms proposed by Lycos. The Ventures board of directors considered at
length both the Lycos proposal and the prospects for pursuing alternative
strategies, including the prospects for remaining independent and seeking
additional investments in Ventures. After extensive discussion, the Ventures'
board of directors directed Ventures' advisors to continue negotiations, with
the goal of realizing the highest price possible. The board also authorized
Ventures' management to enter into a short-term no-shop agreement with Lycos,
which was signed on September 25, 1998.
Intense negotiations over the terms of the transaction and the definitive
agreement continued over the next two weeks. During this period, Ventures'
legal counsel and investment bankers communicated to Lycos Ventures' concerns
regarding, among other things, the new proposed price and related pricing
terms.
On September 30, 1998, Ventures' board of directors held a regular telephonic
meeting, during which both Ventures' legal counsel and investment bankers were
present. The Ventures' board of directors again discussed the proposed Lycos
transaction, including Ventures' inability to obtain significant concessions
from Lycos on price and related pricing terms. At a meeting on September 30,
1998, the Lycos board of directors heard a report from Hambrecht & Quist
regarding the fairness of the proposed transaction and approved the terms of
the definitive agreement.
On October 2, 1998, Ventures' board of directors held a special telephonic
meeting to consider the proposed merger and the terms and conditions of the
definitive agreement. At the meeting, Lazard Freres presented its financial
analysis of the terms and conditions of the merger and delivered its oral
opinion
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confirmed by a written opinion dated as of October 5, 1998, to the effect that,
as of such date, based upon and subject to the various considerations set forth
therein, the merger consideration was fair in the aggregate to the Ventures
stockholders, taken as a whole, from a financial point of view. Following the
presentation and discussion, the Ventures' board of directors determined that
the merger was in the best interests of Ventures and its stockholders, approved
the terms of the definitive agreement and the merger and resolved to recommend
that the Ventures stockholders approve the definitive agreement and the merger.
Jane Metcalfe and Louis Rossetto, members of the Ventures board of directors,
abstained from the vote.
On October 5, 1998, Lazard Freres reconfirmed its opinion by delivering a
written fairness opinion to the Ventures board of directors dated October 5,
1998, and the definitive agreement was executed. See "--Opinion of Lazard
Freres & Co. LLC" beginning on page 38. A press release announcing the
execution of the merger agreement was issued on October 6, 1998. The Merger
Agreement was subsequently amended on November 25, 1998 and will be submitted
to Ventures board of directors for ratification on December 3, 1998.
VENTURES REASONS FOR THE MERGER
At a telephonic meeting held on October 2, 1998, the board of directors of
Ventures concluded that the merger was in the best interests of Ventures and
its stockholders and determined to recommend that the stockholders of Ventures
approve the merger agreement and the merger. In reaching these conclusions and
recommendations, the board considered a number of factors, including:
. The fact that, by receiving immediately tradeable shares of Lycos common
stock as consideration in the merger, Ventures stockholders would have
the opportunity either (1) to obtain liquidity by selling their Lycos
shares in the public market or (2) to participate as Lycos stockholders
in the potential long-term benefits that the board believed could result
from the merger.
. The uncertainty of Ventures' ability to attract the capital necessary for
the execution of its long-term strategy, including the possibility of
completing an initial public offering, particularly in light of the
unfavorable conditions then prevailing in the stock market generally, the
uncertain prospects for improved conditions and Ventures' own historical
experience with the public equity markets.
. The fact that Ventures did not have the financial resources of many of
its Internet competitors to devote to the marketing of its products,
which could adversely affect its ability to attract advertising customers
over the long term.
. The recognition that the recent trend toward industry consolidation had
(1) led to intensified competition for advertising revenues, raising the
threshold of traffic levels needed to attract top advertisers, and (2)
adversely affected Ventures' leverage in purchasing or licensing rights
to technology or seeking to negotiate strategic alliances with corporate
partners.
. The recent entry into the Internet search market of Microsoft, Netscape,
NBC and several other companies, most of which have significantly greater
resources and more established advertiser and media relationships than
Ventures, and at least two of which use the same underlying Web search
technology as Ventures' HotBot search engine.
. The risk that technological advances being pursued by Ventures might not
be successfully developed or, if developed, might not add sufficient
value to Ventures' products and services to maintain Ventures in the
highest tier of Internet search service providers.
. Ventures' prospects as an independent company for achieving the scale and
level of traffic necessary to remain competitive with the top tier of
Internet companies in attracting advertising revenues.
. The intense competition among Internet companies for talented employees
and the risk of loss of key employees absent a significant strategic
transaction or other development leading to a widespread perception of
improved momentum in Ventures' business.
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. The historical and prospective business of Lycos, including its
competitive position, recent financial and stock performance, financial
condition, experienced management team, long-term strategic plan and
prospects for the future.
. The fact that Lycos had recently completed a number of acquisitions to
diversify its business, increase its traffic level and expand its reach.
. The fact that the merger would provide Ventures, as part of the Lycos
Network, with access to the expanded Lycos Network's diversified
resources, infrastructure, services and technologies, offering Ventures
an expanded opportunity for increasing traffic to its properties,
generating advertising revenue and developing technology.
. The probability that the combined company would sustain traffic levels
competitive with other Internet market leaders.
. The board's belief that, in view of the substantial efforts by Ventures
and Lazard Freres since October 1997 to contact other parties about a
potential transaction with Ventures, it was likely that any party
potentially interested in submitting a proposal to acquire Ventures (and
financially able to do so) had already been afforded the opportunity to
make an offer.
. A review of the possible alternatives to the merger (including the
possibility of continuing to operate Ventures as an independent entity),
the impediments to pursuing those alternatives, the range of possible
values to Ventures' stockholders of such alternatives and the potential
timing of the realization of those values, and the likelihood of
accomplishing those alternatives.
. The presentation of Lazard Freres and its oral opinion, subsequently
confirmed in writing, to the effect that the consideration to be received
by the stockholders of Ventures in the merger was fair in the aggregate
to the stockholders of Ventures, taken as a whole, from a financial point
of view.
The board also considered a variety of potentially negative factors in its
deliberations concerning the merger, including:
. The fact that the merger agreement does not permit Ventures to engage in
discussions or enter into agreements with third parties regarding an
acquisition of or investment in Ventures, even if a third-party proposal
were superior to the merger.
. The fact that Lycos required that holders of shares representing a
majority of the outstanding capital stock and of the Series C preferred
stock enter into agreements to vote in favor of the merger.
. The transaction value of the merger as compared with recent comparable
precedent transactions, although recognizing that the precedent
transactions occurred in periods of less market volatility.
. The risk that the value of Lycos common stock might decline below the
$20.64 floor established in merger agreement, with the result that the
value of the consideration delivered to Ventures' stockholders would, at
the time of the merger, be less than anticipated.
. The risk of management and employee disruption associated with the
merger, including the risk that key personnel might not continue with the
combined company.
. The risk that the merger could adversely affect Ventures' relationships
with certain of its advertising customers and strategic partners.
. The risk that the merger might not be consummated, even if approved by
Ventures' stockholders.
. The risk that the potential benefits of the merger might not be realized.
The board concluded, however, that, on balance, the benefits to Ventures and
its stockholders of the merger outweighed the risks associated with the
foregoing negative factors. The foregoing discussion of the
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information and factors considered by Ventures' board in connection with its
evaluation of the merger is not intended to be exhaustive. In view of the
variety of factors considered by the board, the directors did not find it
practical to, and did not, quantify or otherwise assign relative weights to the
factors considered. The board of directors of Ventures has determined that the
merger is fair to and in the best interests of Ventures and its stockholders,
approved the merger agreement and the merger and recommends that the
stockholders approve and adopt the merger agreement and the merger.
LYCOS REASONS FOR THE MERGER
In assessing the transaction, Lycos considered its strategic positioning and
plans, the past performance and future potential of Ventures and Ventures'
lines of business and services. Lycos authorized the merger for numerous
reasons including:
. The addition of Ventures' navigation and content Websites will complement
and expand Lycos' Internet offerings.
. The acquisition presents significant opportunities to increase Lycos'
existing sales and advertising revenues by increasing weekly page
impressions and therefore increasing available inventory. Additionally,
the Ventures user base may utilize other Lycos properties providing
additional revenue.
. The combination of the properties of Lycos and Ventures will strengthen
Lycos' long-term growth strategy of establishing a network presence of
premiere Websites.
OPINION OF LAZARD FRERES & CO. LLC
On October 2, 1998, Lazard Freres delivered its oral opinion to the board of
directors of Ventures, which was reconfirmed by delivery of its written opinion
dated October 5, 1998, to the effect that, as of October 5, 1998, based upon
and subject to the various considerations set forth in the opinion, the merger
consideration was fair in the aggregate to the stockholders of Ventures, taken
as a whole, from a financial point of view.
A COPY OF THE FULL TEXT OF THE LAZARD FRERES OPINION, WHICH SETS FORTH, AMONG
OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN IN CONNECTION WITH RENDERING
SUCH OPINION, IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX IV. THIS
SUMMARY DISCUSSION OF SUCH OPINION OF LAZARD FRERES IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE ENGAGEMENT OF
LAZARD FRERES AND ITS OPINION ARE FOR THE BENEFIT OF THE BOARD OF DIRECTORS OF
VENTURES, AND ITS OPINION WAS RENDERED TO THE BOARD OF DIRECTORS OF VENTURES IN
CONNECTION WITH ITS CONSIDERATION OF THE MERGER. THE LAZARD FRERES OPINION IS
DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION IN THE AGGREGATE FROM
A FINANCIAL POINT OF VIEW TO THE STOCKHOLDERS OF VENTURES, TAKEN AS A WHOLE,
AND DOES NOT ADDRESS ANY OTHER ASPECTS OF THE MERGER. THE OPINION IS NOT
INTENDED TO, AND DOES NOT CONSTITUTE, A RECOMMENDATION TO ANY STOCKHOLDER OF
VENTURES AS TO HOW SUCH HOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. HOLDERS
OF VENTURES CAPITAL STOCK ARE URGED TO, AND SHOULD, READ THE LAZARD FRERES
OPINION CAREFULLY AND IN ITS ENTIRETY IN CONJUNCTION WITH THIS PROXY
STATEMENT/PROSPECTUS.
In connection with rendering the Lazard Freres opinion to the board of
directors of Ventures, Lazard Freres:
. reviewed the financial terms and conditions of the merger agreement,
which were determined by negotiation between the companies;
. analyzed certain historical business and financial information relating
to Ventures and Lycos;
. reviewed various internal financial forecasts and other financial and
operating data provided to Lazard Freres by Ventures relating to its
business and financial performance;
. reviewed analysts' financial forecasts regarding Lycos with Lycos in
order to elicit Lycos' view of its future financial performance, Lycos
not having provided Lazard Freres with a current forecast following a
request by Lazard Freres;
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. held discussions with certain members of the senior managements of
Ventures and Lycos with respect to the past and current business
operations and financial condition and the prospects of Ventures and
Lycos, the strategic objectives of each, certain possible strategic,
financial and operating benefits that may be realized following the
merger and the Ventures' competitive position;
. reviewed the pro forma impact of the merger on the earnings per share of
Lycos;
. reviewed the historical stock prices and trading volumes of the Lycos
common stock;
. reviewed publicly available commentary of the research analysts following
Lycos and the Internet sector generally;
. participated in discussions with the Ventures board of directors and its
legal and other advisors; and
. considered such other financial studies, analyses and investigations as
Lazard Freres deemed appropriate.
Lazard Freres relied, with the consent of Ventures, upon the accuracy and
completeness of the foregoing information, and did not assume any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of
Ventures or Lycos, or concerning the solvency or fair value of either Ventures
or Lycos. With respect to financial forecasts, Lazard Freres assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates in the case of Ventures and judgments of the management of Ventures
and Lycos as to the future financial performance of Ventures and Lycos,
respectively. Lazard Freres assumed no responsibility for and expressed no view
as to such forecasts or the assumptions on which they were based.
The Lazard Freres opinion was necessarily based on economic, monetary, market
and other conditions as in effect on, and the information made available to it
as of, October 2 and October 5, 1998. In rendering its opinion, Lazard Freres
took into account Ventures' commercial assessment regarding the timing of a
transaction and Ventures' ability to access the capital markets.
In rendering its opinion, Lazard Freres assumed that:
. the merger would be consummated on the terms described in the merger
agreement, without any waiver of any material terms or conditions by
Ventures;
. obtaining the necessary regulatory approvals for the merger would not
have a material adverse effect on Ventures or Lycos;
. the merger consideration will not be reduced as a result of the
adjustment, indemnification or escrow provisions of the merger agreement;
and
. cash equal to the full amount of the estimated tax refund would be paid
to security holders of Ventures.
In addition, Lazard Freres expressed no opinion as to (1) the prices at which
the Lycos common stock may trade following the date of the Lazard Freres
opinion or (2) the manner in which the merger consideration would be allocated
among the different classes of Ventures capital stock or among the different
holders of such securities.
The following is a brief summary of the financial and comparative analyses
performed by Lazard Freres in connection with providing its opinion to the
Ventures board of directors and reviewed with the Ventures board of directors
at its meeting on October 2, 1998.
Discounted Cash Flow Analysis of Ventures and Lycos. Based upon forecasts
provided by the management of Ventures, Lazard Freres estimated the net present
value of the future free cash flows of Ventures. For this analysis, Lazard
Freres used discount rates ranging from 20% to 40% and multiples of estimated
earnings before interest, taxes, depreciation and amortization, referred to as
"EBITDA," in 2001 ranging from 10x to 14x for the business of Ventures. This
analysis indicated a net present equity value reference range of Ventures
ranging from approximately $44 million to $125 million.
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In addition, based upon publicly available analysts' financial forecasts for
Lycos, Lazard Freres estimated the net present value of the future free cash
flows of Lycos. For this analysis, Lazard Freres used discount rates ranging
from 17% to 21% and multiples of estimated EBITDA in 2003 ranging from 11x to
15x. This analysis indicated a net present equity value reference range per
share of Lycos common stock ranging from approximately $27.99 to $42.00.
Comparable Publicly Traded Companies Analysis of Lycos. Lazard Freres
reviewed and compared certain actual and estimated financial, operating and
stock market information of companies in lines of business believed to be
generally comparable to those of Lycos. Lazard Freres noted that, although
there were no public companies with precisely the same mix of business and
financial condition as Lycos, Lazard Freres believed that the most relevant
comparable companies were Yahoo! Inc. and Excite, Inc., referred to as the
"selected comparables." The analysis indicated that the equity value of the
selected comparables as a multiple of estimated 1998 revenues ranged from 13.7x
to 64.0x (with a median of 38.9x), as a multiple of estimated 1999 revenues
ranged from 8.3x to 40.3x (with a median of 24.3x), as a multiple of unique
users ranged from 112.8x to 416.9x (with a median of 264.9x) and as a multiple
of daily pageviews ranged from 42.5x to 94.7x (with a median of 68.6x). Based
upon the foregoing data and other data deemed relevant for the selected
comparables and on publicly available analysts' financial forecasts for Lycos,
Lazard Freres' analysis indicated equity value reference ranges per share of
Lycos common stock of approximately $30.24 to $128.07, $31.01 to $136.29,
$51.01 to $178.63 and $29.56 to $61.47.
Contribution Analysis. Lazard Freres evaluated the potential contribution of
each of Wired Digital and Lycos to the 1997 actual revenues, 1998 estimated
revenues, August 1998 unique visitors and July 1998 average daily pageviews of
the pro forma combined company using Ventures management estimates, publicly
available analysts' financial forecasts for Lycos and publicly available market
data. Earnings contributions were not meaningful due to Wired Digital's losses
during the relevant period. This analysis indicated that Wired Digital
contributed approximately 20%, 14%, 22% and 19% of the pro forma combined
August 1998 unique visitors, July 1998 average daily pageviews, 1997 revenues
and estimated 1998 revenues, in each case as compared to the pro forma equity
ownership of the current Ventures stockholders ranging from approximately 6% to
13%.
Pro Forma Merger Analysis. Lazard Freres considered the effect that the
merger could have on the earnings per share of the combined company, compared
with the projected earnings per share of Lycos on a stand-alone basis. Based
upon forecasts for Ventures provided by the management of Ventures and on
publicly available analysts' financial forecasts for Lycos and upon assumptions
regarding the write-off of goodwill, but assuming the realization of no cost
savings or other synergies, the analysis indicated that the merger would be
dilutive to the projected stand-alone earnings per share in 1999 and 2000.
Other Considerations. Lazard Freres also reviewed public information with
respect to certain other companies in the Internet sector and reviewed the
financial terms, to the extent publicly available, of certain business
combinations involving companies in the Internet sector, but there was no such
company or transaction that Lazard Freres considered comparable to Ventures or
the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above without considering the
analyses as a whole, could create an incomplete or misleading view of the
process underlying the Lazard Freres opinion. No company involved in any
transaction used in the above analysis as a comparison is identical to Lycos.
The analyses were prepared solely for the purpose of Lazard Freres providing
its opinion to the board of directors of Ventures in connection with its
consideration of the merger and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually maybe sold, which
may be significantly more or less favorable than as set forth in these
analyses. Similarly, any estimate of values or forecast of future results
contained in the analyses is not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses.
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In performing its analyses, Lazard Freres made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties
or their respective advisors, none of Ventures, Lazard Freres, or any other
person assumes responsibility if future results or actual values are materially
different from those forecasts or estimates contained in the analyses.
Although, in connection with the delivery of its opinion, Lazard Freres also
analyzed Lycos, the Lazard Freres opinion is not a valuation of Lycos and does
not represent Lazard Freres' view as to what the value of the Lycos common
stock will be prior to or after consummation of the merger. The Lazard Freres
opinion was one of many factors taken into consideration by the board of
directors of Ventures in making its determination to approve the merger
agreement.
Lazard Freres is an internationally recognized investment banking and
advisory firm. Lazard Freres, as part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
leveraged buyouts, and valuations for estate, corporate and other purposes.
Lazard Freres was selected to act as investment banker to the board of
directors of Ventures because of its qualification, expertise and reputation in
investment banking and mergers and acquisitions. In the ordinary course of its
business, Lazard Freres and its affiliates may actively trade in the securities
of Lycos for their own account and for the account of their customers and,
accordingly, may at anytime hold a long or short position in such securities.
As the Ventures board of directors knows, certain managing directors of Lazard
Freres are limited partners of Providence Equity Partners LP, a significant
stockholder of Ventures.
Ventures has agreed to pay a fee to Lazard Freres for its investment banking
services in connection with the merger, including among other things, rendering
the Lazard Freres opinion described above. Ventures has agreed to pay to Lazard
Freres a fee ranging from 1.0% to 1.2% of the aggregate value of the
transaction if the merger is consummated. Ventures also has agreed to reimburse
Lazard Freres for its reasonable out-of-pocket expenses (including reasonable
fees and expenses of its legal counsel). In addition, Ventures has agreed to
indemnify Lazard Freres, its affiliates and certain other persons against
certain liabilities and expenses. In the past, Lazard Freres has provided
investment banking services to Ventures, for which it expects to receive
customary fees.
OTHER INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
Certain executive officers and directors of Ventures and Wired Digital have
interests in the merger that are different from those of the Ventures
stockholders generally. The Ventures board of directors has considered these
interests in approving the merger agreement and the merger. Ventures
stockholders should consider these interests carefully before voting.
Stock Option Repricing and Grants. Beth Vanderslice, an executive officer of
Wired Digital and an executive officer and director of Ventures, currently
holds options to purchase 427,068 shares of Ventures common stock and will be
receiving new options to purchase 2,572,932 shares of Ventures common stock.
Rick Boyce, an executive officer of Wired Digital, currently holds outstanding
options to purchase 100,401 shares of Ventures common stock and will be
receiving new options to purchase 2,899,599 shares of Ventures common stock.
All of Ms. Vanderslice's and Mr. Boyce's options will be repriced or granted on
the terms described in "THE MERGER--Merger Consideration--Treatment of Options"
beginning on page 30.
Employee Bonus. Janelle Mitchell, an executive officer of Ventures, will be
receiving a cash bonus upon the closing of the merger. The amount of such bonus
will be determined prior to the closing by the Ventures board of directors.
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Employment Agreements. Beth Vanderslice, Rick Boyce and four other employees
will enter into one-year employment agreements upon the closing of the merger.
Under these agreements, each employee will receive salary, bonus compensation,
options to purchase Lycos common stock and other employee benefits. These
employment agreements provide that 50% of the Lycos stock acquired by the
employee as a result of the merger may not be resold until the first
anniversary of the merger. However, these agreements also provide that in the
event the employee's employment with Lycos is terminated (1) without good
cause, (2) due to death or disability or (3) by the employee because the
employee's job responsibilities have been materially reduced, this "lockup"
provision will cease to apply. If the employee voluntarily terminates his or
her employment during the first year after the merger for a reason other than
material reduction in job responsibilities, or is terminated during such year
for good cause, then the employee will be obligated to pay Lycos liquidated
damages in the amount and on the terms specified in the employment agreement.
In addition, the payment of certain compensation to Ms. Vanderslice under her
employment agreement with Ventures will be accelerated as a result of the
merger.
Separation Agreements with Co-Founders. Louis Rossetto and Jane Metcalfe, who
are members of the Ventures board of directors and co-founders of Ventures,
have entered into separation agreements with Ventures. These agreements govern
the terms upon which Mr. Rossetto's and Ms. Metcalfe's employment with Ventures
and its subsidiaries were terminated. Mr. Rossetto and Ms. Metcalfe ceased to
be employed by Ventures and its subsidiaries on June 15, 1998 but each is still
a director of Ventures.
These agreements provide that Mr. Rossetto and Ms. Metcalfe are each entitled
to $1,000,000 in cash, paid over a 12-month period beginning with the date
their employment terminated. However, upon the closing of the merger, Mr.
Rossetto and Ms. Metcalfe will be entitled to have any remaining cash amounts
paid to them immediately in a lump sum, instead of on a monthly basis. In
addition, upon closing of the merger, they will be entitled to receive $500,000
each in exchange for cancellation of their Ventures stock options. See "THE
MERGER--Merger Consideration--Treatment of Options" beginning on page 30.
ACCOUNTING TREATMENT
Lycos intends to treat the merger as a purchase for accounting and financial
reporting purposes, which means that Lycos will treat Ventures as a separate
entity for periods prior to the closing and, thereafter, as a wholly-owned
subsidiary of Lycos.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the merger that are generally applicable to holders of Ventures
capital stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended, existing and proposed United States
Treasury Regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to the Ventures
stockholders, as described in this section.
Ventures stockholders should be aware that this discussion does not deal with
all federal income tax consequences that may be relevant to particular
stockholders in light of their particular circumstances. For example, the tax
consequences to stockholders who (1) are dealers in securities, banks or
insurance companies, (2) are subject to the alternative minimum tax provisions
of the Internal Revenue Code, (3) are foreign persons, (4) are tax-exempt
entities, (5) are taxpayers holding stock as part of a conversion, straddle,
hedge or other risk reduction transaction, or (6) acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions, may differ from those described in this tax discussion. In
addition, the following discussion does not address the tax consequences of the
merger under foreign, state or local tax laws. Moreover, this discussion does
not cover the tax consequences of transactions effectuated prior to,
concurrently with or after the merger (whether or not such transactions are in
connection with the merger). The following discussion only applies to Ventures
stockholders who hold shares of Ventures capital stock as capital assets.
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ACCORDINGLY, ALL STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN THEIR
PARTICULAR CIRCUMSTANCES.
Neither Lycos nor Ventures has requested, or will request, a ruling from the
Internal Revenue Service with regard to any of the federal income tax
consequences of the merger. Lycos has received an opinion from Hutchins,
Wheeler & Dittmar, A Professional Corporation, counsel to Lycos, and Ventures
has received an opinion from Cooley Godward LLP, counsel to Ventures, that the
merger will constitute a reorganization pursuant to Section 368(a) of the
Internal Revenue Code (a "Reorganization").
The tax opinions assume and are conditioned upon:
. the truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement, in the tax representations
received from Lycos, BF and Ventures to support the tax opinions and in
all other instruments and documents related to the formation,
organization and operation of Lycos, BF and Ventures examined by and
relied upon by Hutchins Wheeler and Cooley Godward in connection with the
merger;
. that original documents submitted to such counsel are authentic,
documents submitted to such counsel as copies conform to the original
documents, and that all such documents have been (or will be by the
effective time) duly and validly executed and delivered where due
execution and delivery are a prerequisite to the effectiveness of such
documents;
. that all covenants contained in the merger agreement and the tax
representations, described above, are performed without waiver or breach
of any material provision of such covenants; and
. that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
The discussion below has been prepared by Hutchins Wheeler and Cooley
Godward, and in their opinion, to the extent such description relates to
statements of law, it is correct in all material respects. Subject to the
limitations and qualifications referred to in this description and in the tax
opinions, and assuming the merger is treated in accordance with the tax
opinions, the following federal income tax consequences will result:
1. A stockholder of Ventures will recognize gain in an amount not to
exceed the lesser of (1) the amount of cash received by such stockholder in
the merger, including any cash received as part of the merger consideration
and any cash received instead of a fractional share of Lycos common stock,
and (2) such stockholder's total gain in the merger. A stockholder's total
gain in the merger is generally equal to the difference between the sum of
the fair market value of the Lycos common stock and any cash received by
the stockholder in the merger, less such stockholder's basis in his, her or
its Ventures capital stock surrendered in the merger. A stockholder's
recognized gain should be capital gain so long as the payment is neither
essentially equivalent to a dividend within the meaning of Section 302 of
the Internal Revenue Code nor has the effect of a distribution of a
dividend within the meaning of Section 356(a)(2) of the Internal Revenue
Code. If a loss, rather than a gain, results from the application of the
stockholder's cost basis for the Ventures capital stock surrendered against
the total merger consideration received by such stockholder, that loss will
not be recognized.
2. The merger agreement anticipates that holders of Ventures Series A
preferred stock and Ventures Series C preferred stock may receive certain
cash payments after the close of the taxable year in which the merger
occurs. As a result, any taxable gain realized by these stockholders, other
than dissenting stockholders, resulting from the exchange of his, her or
its shares must be reported under the installment method, unless the
stockholder affirmatively elects out of or is otherwise ineligible for
installment method treatment, as discussed below.
3. The aggregate tax basis of the Lycos common stock received by a
Ventures stockholder in the merger, including any fractional share deemed
received as described in paragraph 5 below, generally should be equal to
the aggregate adjusted basis of the Ventures capital stock surrendered in
the merger, less any cash received in the merger plus any gain recognized
by such stockholder in the merger.
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4. The holding period of the Lycos common stock so received in the merger
by each Ventures stockholder will include the period for which the Ventures
capital stock surrendered in the merger was considered to be held.
5. Cash payments received by holders of Ventures capital stock instead of
a fractional share of Lycos common stock will be treated as if such
fractional share had been issued in the merger and then redeemed by Lycos.
A Ventures stockholder receiving such cash will generally recognize gain or
loss upon such payment. Such gain or loss will generally be equal to the
difference, if any, between the amount of cash received and the basis in
such fractional share.
6. A holder of Ventures capital stock who exercises appraisal rights with
respect to a share of Ventures capital stock and receives a cash payment
for such share generally should recognize capital gain or loss. Such gain
or loss will generally be equal to the difference between the stockholder's
basis in such share and the amount of cash received, provided that such
payment is not considered a dividend as discussed above in paragraph 1. A
sale of shares pursuant to an exercise of appraisal rights generally will
not be considered a dividend if, as a result of such exercise, the
stockholder owns no shares of capital stock of Lycos, either actually or
constructively within the meaning of Section 318 of the Internal Revenue
Code, immediately after the merger.
7. Neither Lycos nor Ventures will recognize gain solely as a result of
the merger.
Installment Method. The following discussion of the installment method
applies to the holders of Ventures Series A preferred stock and Ventures Series
C preferred stock only. Generally, under the installment method, a portion of
each payment of the merger consideration is taxable as gain in the year of
receipt and a portion represents a tax-free recovery of the holder's basis in
the Ventures capital stock. The taxable gain for any year is calculated by
multiplying the principal amount of any payment, which does not include Lycos
common stock, received in the year by a "gross profit ratio." The gross profit
ratio is equal to the "adjusted gross profit" divided by the "total selling
price" of the holder's Ventures capital stock. For this purpose, the total
selling price does not include the value of any Lycos common stock received in
the merger. The adjusted gross profit is equal to the selling price less the
sum of (1) the holder's adjusted basis in the Ventures capital stock and (2)
the value of the Lycos common stock received in the merger less the holder's
basis in such Lycos common stock immediately after the merger. As mentioned
above, the total gain to be realized by each stockholder will not exceed the
fair market value of the non-Lycos common stock portion of such stockholder's
portion of the merger consideration. In addition, a portion of any merger
consideration payments that are received after the close of the taxable year in
which the merger occurs will be treated as interest income. Such interest
income will be taxable at ordinary income tax rates when received by such
holders under the Internal Revenue Code's original issue discount rules and
will reduce the amount of gain (or increase the amount of loss) otherwise
recognizable.
The installment method does not apply to holders of Series A preferred stock
and Series C preferred stock who will recognize a loss in the merger or who
elect out of installment method treatment. Such stockholders may elect out of
the installment method by timely filing the appropriate form with his, her or
its tax return for the tax year in which the merger occurs. THIS TAX DISCUSSION
DOES NOT ADDRESS THE TAX TREATMENT TO STOCKHOLDERS WHO ELECT OUT OF OR WHO ARE
INELIGIBLE FOR INSTALLMENT METHOD TREATMENT. STOCKHOLDERS CONSIDERING MAKING
SUCH AN ELECTION OR WHO ARE INELIGIBLE FOR INSTALLMENT METHOD TREATMENT ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE CONSEQUENCES OF SUCH AN
ELECTION OR SUCH INELIGIBILITY.
Tax Consequences of the Escrow. The following discussion of the escrow shares
applies only to holders of Ventures common stock, Series A preferred stock and
Series C preferred stock. Under the merger agreement, 10% of the aggregate
number of shares of Lycos common stock to be received by Ventures stockholders
in the merger, excluding any stock paid for the Ventures Cash Balance, will be
placed in escrow. The return of any escrow shares to Lycos in satisfaction of
an indemnifiable claim should not result in the recognition of gain or loss to
the holders of escrow shares. The return of any escrow shares should be
characterized as an adjustment to the exchange terms of the merger agreement.
Accordingly, the basis of each share of Lycos
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common stock received in the merger would be adjusted. Moreover, if any escrow
shares are returned to Lycos, holders of Series A preferred stock and Series C
preferred stock could be required to redetermine the amount and timing of
interest and any gain recognized under the installment method, discussed above.
The holders of Ventures common stock, Series A preferred stock and Series C
preferred stock and Lycos are urged to consult their respective tax advisors
regarding the tax consequences to them of the transfer of the escrow shares.
Consequences of IRS Challenge. A successful IRS challenge to the
Reorganization status of the merger would result in significant tax
consequences. Ventures stockholders would recognize gain or loss with respect
to each share of Ventures capital stock surrendered in the merger. Such gain or
loss would be equal to the difference between the stockholder's basis in such
share and the sum of the fair market value, as of the effective time, of the
Lycos common stock received in the merger and cash received as part of the
merger consideration, including cash received instead of a fractional share of
Lycos common stock. In such event, a stockholder's aggregate basis in the Lycos
common stock so received would equal its fair market value as of the effective
time and the stockholder's holding period for such stock would begin the day
after the merger is consummated.
Even if the merger qualifies as a Reorganization, a recipient of Lycos common
stock would recognize income to the extent that, for example, any such shares
were determined to have been received in exchange for services, to satisfy
obligations or in consideration for anything other than the Ventures capital
stock surrendered. Generally, such income is taxable as ordinary income upon
receipt. In addition, to the extent that Ventures stockholders were treated as
receiving, directly or indirectly, consideration other than Lycos common stock
in exchange for such stockholder's Ventures capital stock, gain or loss would
have to be recognized.
THIS DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF THE MERGER TO
HOLDERS OF VENTURES WARRANTS AND STOCK OPTIONS. HOLDERS OF SUCH SECURITIES
SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO SUCH TAX CONSEQUENCES.
REGULATORY APPROVALS
Under the Hart-Scott Rodino Antitrust Improvements Act of 1976, referred to
as the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission, certain acquisition transactions may not be completed unless (1)
the parties give notice and furnish certain information to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and (2)
specified waiting period requirements have been satisfied. Lycos and Ventures
each filed the required information on October 22, 1998. The waiting period
under the HSR Act terminated on November 21, 1998. At any time before or after
the effective time, the Federal Trade Commission or the Antitrust Division
could take action under the antitrust laws that it deems necessary or desirable
in the public interest, including seeking to enjoin the merger or seeking the
divesture of Ventures by Lycos, in whole or in part, or the divestiture of
substantial assets of Lycos, Ventures or their respective subsidiaries. State
attorneys general and private parties may also bring legal actions under
federal or state antitrust laws in certain circumstances.
Additionally, in order to complete the merger, the parties must file a
certificate of merger with the Secretary of State of the State of Delaware.
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THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
PLEASE NOTE THAT THE FOLLOWING DESCRIPTION OF THE MERGER AGREEMENT IS A
SUMMARY ONLY. YOU SHOULD READ THE FOLLOWING SUMMARY AND THE MERGER AGREEMENT
ATTACHED AS ANNEX I FOR A FULL UNDERSTANDING OF THE MERGER AGREEMENT. THE
MERGER AGREEMENT IS INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS.
REPRESENTATIONS AND WARRANTIES
PLEASE NOTE THAT THE FOLLOWING DESCRIPTION OF THE REPRESENTATIONS AND
WARRANTIES IS A SUMMARY ONLY. ARTICLES 2 AND 3 OF THE MERGER AGREEMENT ATTACHED
AS ANNEX I CONTAIN THE COMPLETE, DEFINITIVE REPRESENTATIONS AND WARRANTIES.
In the merger agreement, Lycos, BF and Ventures made certain customary and
other representations and warranties relating to, among other things:
. their respective organization and similar corporate matters;
. their respective authorization and enforceability of the merger
agreement;
. their respective capital structures;
. their compliance with law; and
. the absence of material litigation.
In addition, Ventures made additional representations and warranties
regarding, among other things:
. the accuracy of financial information disclosed to Lycos;
. the absence of certain changes or events since August 31, 1998
.certain business statistics regarding Ventures' Website traffic;
.the status of operations of Ventures, including its employees and
principal customers; and
. the status of various assets of Ventures, including properties,
contracts, intellectual property and accounts receivable.
The representations and warranties of the parties will remain in full force
and effect until the first anniversary of the closing date. See "--
Indemnification and Escrow" on page 47.
COVENANTS
PLEASE NOTE THAT THE FOLLOWING DESCRIPTION OF THE COVENANTS IS A SUMMARY
ONLY. ARTICLES 4, 5 AND 6 OF THE MERGER AGREEMENT ATTACHED AS ANNEX I CONTAIN
THE COMPLETE COVENANTS.
Lycos, BF and Ventures have agreed to certain covenants. Ventures has agreed,
among other things, to carry on its business in the ordinary course until the
closing date. Lycos and BF have agreed, among other things, to hold in
confidence all documents and information received about Ventures, to offer
employees of Ventures at-will employment after the closing date, to designate
the Ventures stockholders representatives as agents to take certain actions
concerning the Advance escrow and to distribute cash in the amount of the tax
refund as required under the merger agreement. Lycos, BF and Ventures have
agreed to carry out a specified marketing program that is beyond the scope of
Ventures' ordinary marketing programs.
Ventures also has agreed not to (1) solicit or knowingly encourage submission
of any proposal for any business combination, equity or debt financing,
disposition of any substantial portion of Ventures intellectual property rights
or similar transactions involving Ventures or any of its material subsidiaries
or (2) participate in
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any negotiations with, or disclose any non-public information concerning,
Ventures to any person, entity or group, other than Lycos, with respect to any
of the foregoing.
INDEMNIFICATION AND ESCROW
Under the merger agreement, the former Ventures stockholders will indemnify
and hold Lycos and its affiliates harmless from any and all losses, net of
insurance proceeds actually realized or to be realized by Lycos, arising out
of, based upon or resulting from:
. any inaccuracy in or breach of any representation and warranty of
Ventures that is contained in the merger agreement or any schedule or
certificate delivered pursuant to the merger agreement;
. any breach or failure to perform any of the covenants, agreements or
undertakings of Ventures (to the extent that such covenants, agreements
or undertakings were to be performed or complied with on or prior to the
effective time);
. any losses of Lycos, Ventures or Ventures' subsidiaries to the extent
arising out of Ventures' obligations to provide indemnification in excess
of the amount of the Advance escrow resulting from or relating to the
operation or the sale of the magazine, books and television businesses;
or
. any losses resulting from certain disclosed delayed form filings.
To secure payment of these indemnification obligations, 10% of the shares
delivered as merger consideration, other than shares representing the Ventures
Cash Balance, will be delivered to State Street Bank and Trust Company, as
escrow agent, to be held for a period ending on the first anniversary of the
closing date. Escrow shares may, however, be withheld after this date to
satisfy claims for indemnification that are made prior to that date.
The former Ventures stockholders will have liability for indemnification only
for the aggregate losses to Lycos in excess of a $500,000 deductible. However,
the deductible will not apply to inaccuracies in specified representations or
warranties relating to corporate power and authority to enter into the merger
agreement, execution of the merger agreement, Ventures' ownership of its
subsidiaries, Ventures' tax matters and Ventures' use of brokers in this
transaction. The deductible will also not apply to any losses arising out of
Ventures' obligations to provide indemnification to Advance in excess of the
amount of the Advance escrow or otherwise resulting from or relating to the
operation or the sale of the magazine, books and television businesses, or any
losses resulting from certain disclosed delayed form filings.
Lycos and Ventures, as the surviving corporation, will indemnify and hold
former Ventures stockholders harmless from any and all losses, net of any
insurance proceeds recoverable and net of any tax benefit, actually suffered by
them as a direct result of the failure of a representation or warranty made by
Lycos or BF to have been true in all material respects when made.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of Lycos, BF and Ventures are subject to the satisfaction or
waiver of certain customary and other conditions, including:
. the accuracy of the representations and warranties contained in the
merger agreement in all material respects;
. the performance in all material respects of all obligations under the
merger agreement;
. the receipt of necessary corporate approvals;
. the demand of appraisal rights by holders of Ventures capital stock
entitled to no more than 5% of the merger consideration;
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. the receipt of legal opinions by each of Lycos and Ventures from its
legal counsel that the merger will be a tax-free reorganization for
federal income tax purposes;
. the absence of any injunction or other legal restraint preventing the
occurrence of the merger; and
. the receipt of all required approvals, authorizations and consents
governmental and regulatory authorities.
Each condition may be waived by the company entitled to assert it.
TERMINATION AND AMENDMENT
The merger agreement may be terminated at any time prior to the effective
time by the mutual agreement of Lycos and Ventures or by either party if the
effective time has not occurred by March 4, 1999. However, a party can not
terminate the merger agreement unilaterally for failure to close by March 4,
1999 if the action of that party has been a principal cause of or resulted in
the failure of the merger to occur by such date.
The merger agreement may be amended or modified by written consent of the
party against which enforcement of such amendment or modification is sought.
FEES AND EXPENSES
If the merger is consummated, the parties will pay their own costs and
expenses incidental to the merger and the transactions contemplated by the
merger agreement. However, for purposes of determining the Ventures Cash
Balance, Ventures will receive a credit for all such costs and expenses paid
prior to the closing, up to a maximum credit of $2.5 million. If the merger is
not consummated because Lycos is the cause of the failure to close, then Lycos
must pay its expenses, plus the expenses of Ventures up to $200,000. If the
merger is not consummated because Ventures is the cause of the failure to
close, then Ventures must pay its expenses, plus the expenses of Lycos up to
$200,000.
DIRECTORS AND OFFICERS
The officers of Ventures after the merger will be Edward M. Philip, Thomas E.
Guilfoile and Jeffrey M. Snider. The sole director of Ventures after the merger
will be Edward M. Philip.
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VOTING AGREEMENTS
PLEASE NOTE THAT THE FOLLOWING DESCRIPTION OF THE VOTING AGREEMENTS IS A
SUMMARY ONLY. THE VOTING AGREEMENTS ATTACHED AS ANNEX II CONTAIN THE COMPLETE
TERMS OF THE VOTING AGREEMENTS.
In connection with the execution of the merger agreement, certain directors
and holders of Ventures capital stock, all of whom are affiliates of Ventures,
who together own a majority of the Ventures capital stock and the Ventures
Series C preferred stock each agreed to vote all shares of Ventures capital
stock held by such holders in favor of the merger. The general effect of the
voting agreements is to ensure that stockholder approval of the merger will be
obtained.
Each of the parties to the voting agreements, except the trustee of the
voting trust, has agreed to vote (1) in favor of the merger, the adoption of
the merger agreement and the approval of the terms thereof and (2) against the
following actions (other than the merger and the transactions contemplated by
the merger agreement):
. any business combination involving Ventures or its subsidiaries;
. any sale of a material amount of assets of Ventures or its subsidiaries;
. any change in a majority of the board of directors of Ventures;
. any amendment to Ventures' certificate of incorporation other than a
change necessary or desirable in connection with the merger and
acceptable to Lycos; or
. any other action that requires the approval of Ventures' stockholders
that is intended, or could reasonably be expected, to interfere with the
completion of the merger or the transactions contemplated by the merger
agreement or the voting agreements.
The trustee of the voting trust has agreed to vote (1) in favor of the
merger, the adoption of the merger agreement and the approval of the terms
thereof and (2) against any business combination involving Ventures or its
subsidiaries or any sale of a material amount of assets of Ventures or its
subsidiaries (other than the merger and the transactions contemplated by the
merger agreement).
Each of the parties to the voting agreements has irrevocably granted to, and
appointed, BF and the President and Treasurer of BF, in their respective
capacities as officers of BF, such party's proxy and attorney-in-fact to vote
or act by written consent with respect to its, his or her Ventures capital
stock solely with respect to the matters set forth above.
Each of the parties to the voting agreements has agreed, among other things,
(1) not to solicit, including by way of furnishing information, or respond to
any inquiries or the making of any proposal by any person (other than Lycos or
BF and other than advising such person or entity of the existence of the voting
agreement) with respect to Ventures that constitutes or could reasonably be
expected to lead to an acquisition transaction and (2) not to:
. except pursuant to the terms of the merger agreement, take any action to
sell, transfer or otherwise dispose of any or all of the party's Ventures
capital stock;
. except as contemplated by the voting agreement, grant any proxies or
powers of attorney or enter into a voting agreement with respect to the
Ventures capital stock; or
. take any action that would make any representation or warranty contained
in the voting agreements incorrect or have the effect of preventing or
disabling the party from performing its, his or her obligations under the
voting agreements.
The voting agreements terminate upon the completion of the merger or the
termination of the merger agreement in accordance with its terms.
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COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF LYCOS AND VENTURES
As stockholders of Lycos, your rights will be governed by the Delaware
corporate law and by Lycos' restated certificate of incorporation and amended
and restated by-laws. Following is a summary of certain differences between the
rights of Ventures stockholders and Lycos stockholders. This summary covers
only the primary differences; it is not a complete discussion of the rights of
Lycos and Ventures stockholders.
Ventures and Lycos are both organized under the laws of the state of
Delaware. Any differences, therefore, in the rights of holders of Ventures
capital stock and Lycos common stock generally arise from differences in their
respective certificates of incorporation and by-laws and the application of
California law as described below.
AUTHORIZED CAPITAL
Ventures. The total number of authorized shares of Ventures capital stock is
75,000,000 shares with a par value of $.001 per share, consisting of 45,000,000
shares of common stock and 30,000,000 shares of preferred stock. The Ventures
preferred stock has been designated into four series: 15,300,000 shares of
Series A preferred stock; 700,000 shares of Series B preferred stock; 3,800,000
shares of Series C preferred stock; and 50,000 shares of Series D preferred
stock. Each series of Ventures preferred stock has a number of rights,
preferences and privileges that will be eliminated in the merger. These rights,
preferences and privileges include preferential rights with respect to the
distribution of liquidation proceeds, dividends and voting.
Lycos. The total number of authorized shares of Lycos capital stock is
105,000,000 shares with a par value of $.01 per share, consisting of
100,000,000 shares of common stock and 5,000,000 shares of preferred stock.
DIRECTORS AND CLASSES OF DIRECTORS; REMOVAL OF DIRECTORS
Ventures. The Ventures certificate of incorporation provides that the number
of directors is 11. The Series C preferred stockholders elect six of the 11
directors so long as 100,000 shares of Series C preferred stock are
outstanding. Certain specified investors are entitled to nominate these six
directors. The remaining directors are elected by the common stockholders and
the Series A, Series B and Series C preferred stockholders. The Series A,
Series B and Series C preferred stockholders are entitled to the number of
votes that they would have if they converted their stock to common stock. The
Ventures board of directors is not divided into classes.
One or more directors may be removed from office with cause by a majority
vote of the Ventures stockholders, subject to the rights of preferred
stockholders to elect certain directors. One or more directors may be removed
from office without cause by a 66 2/3% vote of the Ventures stockholders,
subject to the rights of preferred stockholders to elect, and therefore remove,
certain directors.
Lycos. The number of directors of Lycos is set by the Lycos board of
directors. Directors are elected by all of the stockholders entitled to vote.
The Lycos board of directors is divided into three equal classes, consisting as
nearly as possible of equal numbers of directors. At each annual meeting of
stockholders, successors to the class of directors whose term expires at the
annual meeting are elected for a three-year term.
One or more directors may be removed from office with cause by a majority
vote of the Lycos stockholders. Directors may not, however, be removed without
cause.
SPECIAL MEETINGS OF STOCKHOLDERS
Ventures. Special meetings of Ventures stockholders may be called by the
Chief Executive Officer, Chair of the board of directors, by a majority of the
board of directors or by stockholders entitled to cast at least 10% of the
votes at such meeting.
Lycos. Special meetings of Lycos stockholders may only be called by the
President, the Chairman of the board of directors or the board of directors.
Stockholders of Lycos may not call a special meeting of stockholders.
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AMENDMENT OF BY-LAWS
Ventures. The Ventures by-laws may be altered or amended or new by-laws
adopted by the Ventures board of directors or by the affirmative vote of at
least 66 2/3% of the voting power of all then-outstanding shares.
Lycos. The Lycos by-laws may be altered or amended or new by-laws adopted by
the Lycos board of directors or by a majority in interest of the voting power
of all then-outstanding stock, provided, however, that either the approval of
at least 80% of the voting power or the approval of the entire Lycos board of
directors is required to alter, amend, repeal or adopt any provision regarding:
meetings of stockholders; the number, election and term of directors; the
removal of directors; and amendments of the Lycos by-laws.
SECTION 203 OF DELAWARE LAW
Lycos has elected to be subject to the "business combination" statute of the
Delaware General Corporation Law, Section 203. In general, this statute
prohibits a publicly-held Delaware corporation, like Lycos, from engaging in
various "business combination" transactions with any "interested stockholder"
for three years after the date that the person became an "interested
stockholder" unless certain requirements are met. A "business combination"
includes mergers, asset sales and other transactions that result in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within the past three years
did own) 15% or more of the corporation's voting stock. This statute could
prohibit or delay mergers or other takeover or change in control attempts and
may discourage parties from attempting to acquire Lycos.
Ventures is not subject to Section 203 of the Delaware General Corporation
Law because it is a privately-held corporation.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Lycos certificate of incorporation
and by-laws described above may have the effect of delaying Lycos stockholder
actions and the election of new Lycos directors. These and other provisions
could have the effect of making it more difficult for a third party to acquire
a majority of the outstanding Lycos voting stock, discourage a hostile bid, or
delay, prevent or deter a merger, acquisition or tender offer, in which Lycos
stockholders could receive a premium for their shares, or a proxy contest for
control of Lycos. These provisions include:
. the classification of the Lycos board and the provisions regarding
removal of directors;
. the application of Section 203 of the Delaware General Corporate Law to
Lycos; and
. the restriction that only the President, the Chairman of the board of
directors, or the board of directors may call meetings of the Lycos
stockholders.
APPLICATION OF CALIFORNIA LAW
Because a significant number of Ventures' stockholders reside in California
and Ventures' business is conducted primarily in California, certain corporate
matters of Ventures have been governed by California law through Section 2115
of the California General Corporation Law. These matters include:
. The ability of Ventures stockholders to use "cumulative voting" in the
election of directors, and corresponding limitations on the ability of
Ventures stockholders to remove directors;
. Different standards for the indemnification of officers and directors;
and
. Different voting requirements and dissenters' rights in the event of
merger and certain other change of control transactions.
Due to an adjustment in the conversion rate of the Ventures Series C
preferred stock in December 1997, Ventures believes that Section 2115 will
cease to apply to Ventures on January 1, 1999.
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BUSINESS OF LYCOS
Lycos, "Your Personal Internet Guide," is a "New Generation Online Service"
that offers a network of globally branded media properties and aggregated
content distributed primarily through the World Wide Web. Under the "Lycos"
brand, Lycos provides guides to online content, aggregated third-party content,
Web search and directory services and community and personalization features.
Lycos seeks to draw a large number of viewers to its Websites by providing a
one-stop destination for identifying, selecting and accessing resources,
services, content and information on the Web. Lycos' recent acquisitions of
Tripod and Angelfire allow it to offer Internet users the ability to create
personal homepages and join interest-based communities.
Since its inception in June 1995, Lycos has rapidly expanded into a global
Internet resource used daily by millions of people throughout the world. Lycos
is one of the leading online media services in terms of traffic, revenues and
user reach, serving millions of information requests per day. According to
Media Metrix, Lycos' Websites attracted approximately 38.3% of all Web users
during September, 1998. Lycos generates revenues primarily through selling
advertising and sponsorships, electronic commerce and by licensing its products
and technology. Lycos' Websites have become a widely accepted advertising
medium for several prominent companies, including Coca-Cola, Disney, General
Motors, Hilton, IBM, Proctor and Gamble and Visa. Lycos has established
electronic commerce and sponsorship relationships with several companies,
including AT&T, Barnes & Noble, Fleet Bank and Preview Travel. In addition,
Lycos has established strategic licensing and technological alliances with some
of the world's leading corporations, including such companies as Bertelsmann,
Sumitomo, Microsoft and Viacom.
Lycos' ability to easily adapt its technology in a variety of languages has
made its service a popular global Internet destination, easily accessible to
users throughout the world. In order to expand the international distribution
of Lycos' services, in May 1997, Lycos entered into a joint venture with
Bertelsmann AG to launch local versions of the Lycos service throughout Europe,
and, in March 1998, Lycos entered into a joint venture with Sumitomo Corp. and
Internet Initiative Japan, Inc. to offer a localized version of the Lycos
service in Japan. Lycos currently offers localized versions of the Lycos
service in Austria, Belgium, France, Germany, Italy, Japan, Luxembourg, the
Netherlands, Spain, Sweden, Switzerland and the United Kingdom.
See "WHERE YOU CAN FIND MORE INFORMATION" on page iii.
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BUSINESS OF VENTURES
OVERVIEW
Ventures' business is conducted through its wholly-owned subsidiary, Wired
Digital, Inc. Wired Digital maintains a suite of branded Websites featuring
original content and search and navigation services. Until June 1998, Ventures
also published Wired magazine through a separate wholly-owned subsidiary. In
June 1998, Wired magazine and certain other businesses conducted by Ventures
were sold to Advance Magazine Publishers Inc.
ONLINE PROPERTIES
Wired Digital's branded online properties, which are provided to users free
of charge, include the following:
Search and Navigation Services--HotBot. HotBot (www.hotbot.com) is one of the
most popular search and navigation sites on the World Wide Web, hosting over
4.5 million unique users in October 1998, as reported by Relevant Knowledge.
HotBot provides a range of search technologies and services to its users.
HotBot offers one of the largest searchable databases of Websites with an index
of over 110 million documents and offers an extensive set of features to help
users refine and target their searches. Since its launch in June 1996, HotBot
has been recognized as the Web's best search site by PC Magazine, PC Computing,
PC World and SmartMoney magazines and received numerous awards for its site
design and user interface.
The HotBot service enables users to search the Web for information based on a
number of search criteria, including key words, date of posting, language,
presence of certain types of files (e.g., audio, video, graphic image) and type
of domain (e.g., .com, .org). Wired Digital licenses the principal technology
employed by users for HotBot searches. This technology is licensed from Inktomi
Corporation, and the fee charged to Wired Digital is based on a fixed fee per
search query. In addition, Wired Digital has enhanced HotBot's search
functionality through new technology intended to assist consumers in finding
the information they are seeking faster and more efficiently. These
technologies are primarily developed by and licensed from third parties. For
example, HotBot has recently implemented a new search technology that
classifies search results according to popularity of the sites based on the
behavior of previous users. HotBot also features a variety of specialty search
services, covering information sources such as yellow and white pages,
classified advertisements and job listings, Usenet postings and Internet domain
names, offered through strategic alliances with other information providers.
These specialty search services are also available to users through links
featured on HotBot.
HotBot users also may browse through a set of channel guides for information
related to broad subject categories, such as Stay Informed, Manage Your Money,
Make a Purchase and Use Technology. These channels were developed to mimic how
consumers use the Web to stay informed about current events, to manage their
investments, career and education and to learn about technology. Each channel
includes a topical list of preferred sites selected by Wired Digital's
editorial staff as well as a more extensive list of related sites users can
access from each channel guide through hyperlinks.
HotBot also recently introduced HotBot-branded e-mail addresses and home
pages. These free services, like the other features of HotBot, are intended to
attract users, encourage repeat visits to the site and build loyalty to the
HotBot brand. In order to use these services, users must register for
membership by providing information about themselves. Since its inception in
October 1998, approximately 84,000 users have signed up for this service. The
e-mail address and home page services are based on technology provided by
WhoWhere? Inc., which was recently acquired by Lycos. WhoWhere? sells the
advertising for these services and shares a percentage of the resulting
advertising revenues generated by Wired Digital.
News and Editorial Content.
Wired News. Wired News (www.wired.com) is one of the Web's most popular
sources for daily analysis of how technology impacts business, politics and
culture with over 2.0 million unique visitors in October 1998
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as reported by RelevantKnowledge. Content updates to the Wired News site are
published six to eight times every weekday with original content written by
staff reporters and commissioned editors and, to a lesser extent, content from
major news services. Stories are generally categorized into the following
topics: business, culture, technology and politics. Wired News also provides
general news, a daily news overview and a weekly news summary. In addition,
Wired News provides stock market information, including stock quotes, indexes,
graphing capabilities and portfolio management tools. These features are
provided through an arrangement with Ethos Corporation (dba StockPoint). Wired
Digital shares certain advertising revenues with Ethos.
Consumers can access Wired News either directly or by subscribing to a
service that delivers Wired News content via e-mail. Wired Digital has made
arrangements with Internet service providers and other distribution partners to
provide this e-mail delivery service. Generally, these Internet service
providers are compensated based on a varying fixed fee per referral.
HotWired. HotWired (www.hotwired.com) was the first commercial Website to
publish original content focused on technology and culture. HotWired features a
network of original content sites focused on innovative Web technology and
culture. HotWired sites such as RGB Gallery and the recently-launched Animation
Express animation channel, which showcase emerging Web technologies, are
designed to demonstrate to users the power and possibilities of the Web. One of
the largest and most popular sites within HotWired is Webmonkey
(www.hotwired.com/webmonkey). Webmonkey features tips and tricks, appropriate
for both novice and experienced Web users, for learning the language of the Web
as well as information and online resources on how to build Websites.
HotWired has been recognized by the digital community with numerous awards,
including "Best Design" from I.D. Magazine Interactive Media in 1997; "Top
Websites" from TIME in 1996; "Still Cool Site of the Year" from Internet
Community in 1996; "Best Website of the Year" from Digital Hollywood in 1996;
"Website Design of the Year" from SF Focus in 1996; "Best Arts and
Entertainment Site" by NII in 1995; "Best Online Publication" from Computer
Press in 1995; and "Online Magazine of the Year" from Ad Age in 1994.
Suck.com. Suck.com (www.suck.com) features witty humor and clever commentary
on new media. This daily column is colorfully written and offers insights into
the Internet and media industries.
STRATEGIC ALLIANCES
A key element of Wired Digital's business strategy is to enter into alliances
with other Internet service, access and technology providers and other third-
party content providers. These alliances include:
Marketing and Distribution Relationships. Wired Digital has an agreement with
Netscape Corporation pursuant to which HotBot is promoted as a "distinguished
provider" on Netscape's U.S. English-language NetSearch page, which generates
user traffic to HotBot. Wired Digital has entered into similar agreements with
Microsoft for the promotion of both HotBot and Wired Digital's branded content
on certain Microsoft Websites and products. In addition, Wired Digital
maintains numerous similar promotional arrangements with ISPs such as Earthlink
and other Websites and portals to promote its services and content via
promotional links and via content emails delivered directly to subscribers.
Such promotion is typically delivered in exchange for fees based on the number
of referrals or overall site traffic generated by the promotion and sometimes
in exchange for advertising and other cross-promotional activities on the Wired
Digital properties.
In addition, in exchange for online promotion and license fees, Wired Digital
has licensed certain of its branded content and Website design to Nippon
Telegraph & Telephone Corporation and its affiliates in Japan- and to Internet
Technologies China, Inc. in Beijing for the creation of localized Japanese- and
Chinese-language "mirror" sites showcasing Wired Digital's content properties
in Asia.
Key Technology and Content Alliances. HotBot's core Web search and retrieval
technology is provided through a license with Inktomi Corporation in exchange
for fees generally payable on a per-query basis.
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Ancillary specialty search and directory services, such as yellow pages, white
pages, Usenet postings and classified ads, and various subject-specific search
services, including stock market data, music catalogs and comparison shopping
tools, are provided on HotBot and on other Wired Digital properties. These
services are provided through licenses with third-party data and technology
providers, typically in exchange for a per-query fee or fees based on
advertising revenues generated by usage of such specialty services and
sometimes as part of larger promotional arrangements with Wired Digital's
advertising clients. In addition, Wired Digital has forged several technology
development relationships with third parties pursuant to which Wired Digital
licenses and develops applications to better anticipate and refine users'
queries and improve the relevance of search results. An example is the license
and development relationship with Direct Hit Technologies, Inc., whose
technology tracks and applies aggregate user behavior data to help filter
search results.
ADVERTISING AND OTHER SALES
Wired Digital currently derives revenues principally from the sale of
advertisements, and to a lesser extent, from sponsorships of certain programs
or pages. Advertising revenues constituted 96% of Wired Digital's net revenues
in 1997 and 96% of Wired Digital's net revenues in the nine months ended
September 30, 1998. During the nine months ended September 30, 1998, Wired
Digital had over 590 advertisers.
Wired Digital sells a variety of advertising packages to clients, including
advertising banners, promotional hypertext links, sponsorships, and targeted
and direct response advertising units that are featured prominently on the
pages of content delivered on Wired Digital's online properties. Currently,
Wired Digital's advertising revenues are derived from short-term advertising
contracts, averaging one to two months, in which Wired Digital guarantees a
minimum number of impressions for a fixed fee per 1,000 impressions delivered,
commonly referred to as "CPM." Advertising revenues are recognized ratably in
the period in which the advertisement is displayed, provided that no
significant Wired Digital obligations remain and collection of the resulting
receivable is probable. Some of Wired Digital's advertising arrangements,
particularly those with its electronic commerce merchant advertisers, are
structured to compensate Wired Digital partly on a CPM basis and partly on a
cost-per-click basis. On a cost-per-click basis, a merchant advertiser pays
Wired Digital a small fee each time a user accesses the merchant's Website by
"clicking" on a hyperlink or an advertising banner from one of Wired Digital's
properties.
Wired Digital offers advertisers a variety of advertising programs that
enable advertisers to target and meet their particular needs and objectives.
Advertisers can purchase untargeted advertisements that rotate on a random
basis throughout one or more sites. This type of advertisement provides
frequent exposure to advertisers and may appeal to advertisers seeking to build
general brand recognition.
Targeted advertisements are designed to appeal to selected segments of a
consumer market. An advertiser can purchase a program combining banners and
sponsorships across properties targeting different segments of the online
market. For instance, an advertiser can designate that a certain number of
advertising units be placed on a particular site or portion of a site. On
HotBot, an advertiser also can purchase impressions generated from a list of
specific search terms input by the user, known as "key words." Wired Digital is
able to charge premium rates for such targeted advertising.
Sponsorships allow an advertiser to sponsor a particular Wired Digital
program, or particular section or page of a site, for a fixed period of time.
During the sponsorship, the advertiser's name or product will be promoted on
the designated area, usually on an exclusive basis. While sponsorships
typically provide a less targeted approach to online advertising, they afford
the advertiser the opportunity to have its name or products associated more
closely with a particular Wired Digital property or service.
Wired Digital also derives revenues from licensing its content to other
online content and service providers. Wired Digital licenses certain of its
branded news and editorial content to Nippon Telegraph and Telephone and to
Internet Technologies China. Content is generally licensed in exchange for a
fixed distribution fee and a percentage of the revenues generated from the
online distribution networks.
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Wired Digital's direct sales force and advertising operations group consists
of 43 employees as of September 30, 1998, who are located in the Wired
Digital's offices in San Francisco, New York, Chicago and Los Angeles.
MARKETING
Wired Digital's strategy is to generate a high volume of traffic across all
of its online properties by providing high-quality content and services to
users free of charge. Wired Digital relies in part on its high-quality content
and services to generate positive word-of-mouth marketing. Wired Digital also
cross-promotes all of its sites and services by providing textual links and
promotions designed to drive users from one Wired Digital online property to
another. Wired Digital is also building its online brands through a combination
of online and traditional media marketing campaigns as well as through
distribution arrangements that send traffic to Wired Digital's online
properties. For example, Wired Digital recently launched a television marketing
campaign aimed at increasing traffic to its HotBot site, which Wired Digital
expects will ultimately increase traffic to its other online properties through
strategically placed links.
COMPETITION
Wired Digital operates in the dynamic and rapidly expanding market of
Internet content and service providers. The market for Internet services and
products, particularly Internet advertising and Internet search and retrieval
services and products, is intensely competitive. Since there are few barriers
to entry to this market, the competition for advertisers is increasing as the
number of online content and service providers increases. Ventures believes
that the critical factors for Wired Digital's success include:
. Providing high-quality, easy-to-use products and services;
. Maintaining a large base of regular users; and
. Creating strong brand recognition for its products and services.
Wired Digital's primary competitors include the major search and navigation
sites: Lycos, Yahoo!, Excite, Infoseek, NBC's Snap!, Compaq's AltaVista,
Netscape's NetCenter and Microsoft's MSN. These sites have become gateways to
the Internet for many consumers by offering a combination of search tools,
informational content and a range of online utilities, including e-mail, home
page building tools and online shopping. Yahoo!, Snap!, MSN and other search
and navigation service competitors each license the technology from Inktomi
that is the basis of HotBot. Wired Digital also competes with sites that
produce technology information and news such as Cnet's news.com and Ziff-Davis'
ZDNet. Many of Wired Digital's existing competitors, as well as a number of
potential new competitors, have greater financial, sales and marketing
resources, larger customer bases and databases and may have longer, more
established advertiser and media relationships.
Wired Digital also competes with traditional advertising media, such as
print, television and radio, for a share of advertisers' total advertising
budgets. To the extent that the Internet is not an effective advertising
medium, advertisers may be reluctant to devote a significant portion of their
advertising budget to media other than traditional media. In addition, Ventures
expects that larger, traditional media companies will continue to enter into
the Internet medium. These traditional media companies may gain a competitive
advantage by leveraging their traditional media outlets to promote their online
properties.
INTELLECTUAL PROPERTY
Ventures aggressively protects its brand names and marks by seeking trademark
registration for such names and marks and by monitoring and seeking to prevent
unauthorized use of such names and marks. Wired Digital also seeks copyright
protection for its original content. Ventures also enters into confidentiality
agreements or license agreements with its employees, consultants and key
contributors, and generally controls access to and distribution of its
proprietary content and information.
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Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use Ventures' or its subsidiaries' products or technology
without authorization. In addition, effective copyright, trademark and trade
secret protection may be unavailable or limited in certain foreign countries,
and the global natures of the Internet makes it virtually impossible to control
the ultimate destination of the Company's products. Ventures' success depends
significantly upon its ability to prevent unauthorized reproduction or use of
its trade names, products and services. See "RISK FACTORS--Risks Relating to
Lycos--Dependence on Intellectual Property and Proprietary Rights" on page 18
and "--Risks Relating to Ventures" on page 21.
Wired Digital licenses several key Website and search technologies from third
parties, some of which technologies are generally commercially available but
certain of which are licensed pursuant to highly-negotiated or individualized
arrangements. For instance, Wired Digital licenses the core Web search database
and retrieval technology for its HotBot search service from Inktomi Corporation
pursuant to an information services agreement that expires in March 2001 if not
renewed on mutually acceptable terms. The agreement with Inktomi may be
terminated prior to its expiration date by either party if the other party
fails to cure a material breach of its obligations upon the other party's
insolvency or if search volume falls below specified levels. The current
agreement also provides for termination by either party for convenience upon
delivery of a specified number of months' prior written notice to the other
party; however, pursuant to an ancillary agreement with Lycos, this termination
for convenience provision in the Inktomi agreement will become inapplicable
upon the closing of the merger. See "RISK FACTORS--Risks Relating to Ventures"
on page 21.
Although Ventures owns rights in "HotBot," "Webmonkey," "Suck" and several
other of its brands, most of the "Wired"-based trademarks, service marks and
logos used in its business including "Wired News" are licensed from Advance
Magazine Publishers Inc., which purchased Ventures' magazine, books and
television businesses and related brands in June 1998. Under the agreement with
Advance, Ventures has a royalty-free license to use the "Wired"-based marks and
certain other marks in digital media on an exclusive basis and for marketing
purposes in all media on a non-exclusive basis in perpetuity, subject to
adherence to certain quality-control standards. For the duration of the license
agreement with Advance covering Ventures' use of the "Wired" marks, Ventures'
use of its own mark "HotWired" will be similarly restricted by contract to uses
primarily in the digital media domain and subject to certain quality-control
standards. Pursuant to a separate collaboration agreement that continues
through the duration of the trademark license agreement, Ventures and Advance
also have certain mutual obligations to cooperate regarding the use and
protection of the licensed marks and regarding the parties' participation in
conferences and trade shows under the licensed "Wired" marks.
EMPLOYEES
As of September 30, 1998, Ventures and Wired Digital had 154 full-time
employees, including 43 in sales and advertising operations, 22 in
administration and finance, 12 in marketing, 23 in engineering and
infrastructure and 54 in design, editorial and production. From time to time,
the Company also employs independent contractors to support its engineering,
infrastructure, sales, marketing and administrative functions. None of
Ventures' or Wired Digital's employees is represented by a collective
bargaining agreement. Ventures believes that its and Wired Digital's
relationships with their employees are good.
FACILITIES
Ventures' and Wired Digital's executive offices are located in a leased
facility consisting of approximately 40,000 square feet in San Francisco,
California. The lease expires in July 2006 with an additional five-year option
to renew. Ventures believes the space will be adequate through that period and,
if required, suitable space is available nearby. Wired Digital also leases
offices for its sales force in New York, Chicago and Los Angeles.
Certain of Ventures' communications and computer hardware are located at a
leased facility in Santa Clara, California. A system failure at this location
could adversely affect the performance of Wired Digital's services.
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VENTURES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ventures operates its business through its wholly-owned subsidiary, Wired
Digital. In October 1994, Ventures launched HotWired, a collection of Web based
online content sites. HotBot, its search and navigation service, was launched
in June 1996, and Wired News, its online daily news and analysis service, was
launched in November 1996 to capitalize on the Wired brand and existing
network. In May 1997, Ventures renamed its online division Wired Digital to
more effectively leverage the Wired brand. In May 1998, Wired Digital added e-
commerce to its HotBot site with the launch of its online shopping directory.
Wired Digital derives its revenues principally from selling advertising space
on its branded content and search and navigation Websites. These revenues are
derived principally from short-term advertising contracts in which Wired
Digital guarantees a minimum level of impressions (a view of an advertising
banner or other promotional unit by the site user) for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed, provided that no significant obligations remain for Wired Digital.
E-commerce revenues, which were introduced in 1998, generally represent longer
term contracts with online vendors, with fees based on a combination of
guaranteed impression levels and fixed percentages of commerce transactions.
For the nine months ended September 30, 1998, e-commerce revenues represented
14% of total net revenues.
In addition to advertising revenues, the Company derives revenues from
licensing its branded content to other online providers. These licenses are
based primarily on a fixed fee plus a variable component based on the
provider's net revenues. These revenues are recognized ratably over the terms
of the contract. For the year ended December 31, 1997, license revenues
represented 8% of total online revenues. Licensing revenues were 3% of total
online revenues for the nine months ended September 30, 1998.
Ventures has entered into agreements to exchange advertising on Wired
Digital's Web properties for advertisements on the Web sites of other companies
or, to a lesser extent, for equipment. Barter revenues and expenses are
recorded at the fair market value of services provided or received. Revenue
from barter transactions is recognized as income when the advertisements are
delivered on Ventures' Web sites. Barter expense is recognized when Ventures'
advertisements are run on the other company's Web site, which is typically in
the same period when the barter revenue is recognized.
Prior to June 1998, Ventures also published Wired magazine through a separate
wholly-owned subsidiary. In June 1998, Ventures sold its magazine, books and
television businesses and certain brands to Advance Magazine Publishers Inc.
for approximately $90 million. Ventures used the proceeds to pay off short-term
debt and liabilities of approximately $30 million and to partially fund Wired
Digital operations. The results of the discontinued magazine, books and
television operations are reflected as discontinued operations in the
accompanying financial statements. The gain recognized on the sale of the
assets is reflected in the unaudited financial statements for the nine months
ended September 30, 1998.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND
1997
Online Revenues. Online revenues began in 1995 and consist of advertising,
licensing and transaction revenues that are generated from Wired Digital's
network of Websites. Online revenues grew from $1.9 million in 1995 to
$4.3 million in 1996 to $12.4 million in 1997. The increase in revenues is
primarily attributable to an increase in pageviews and thus increased capacity
for advertising during those periods.
Barter revenues and expenses were approximately $335,000, $965,000 and
$1,732,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
58
<PAGE>
Online Direct Costs. Online direct costs consist primarily of personnel costs
associated with developing, producing, designing and delivering content, news
and search services on the Company's online Web properties and licensing fees
for the use of a third-party search technology. Online production and
development costs were $1.9 million in 1995, $7.5 million in 1996 and $10.4
million in 1997. Online production cost increases for these periods are
attributable to the increased staffing of the editorial, design, copy,
production and engineering departments of Wired Digital, undertaken to expand
the Company's online programming, news and search services. Online licensing
fees, paid primarily to an external search technology provider, were based on a
fixed, negotiated percentage of net search revenues during 1996 and 1997.
Licensing fees were $0.9 million in 1996 and $2.4 million in 1997.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of compensation and benefits expenses, commissions paid to sales
representatives, consulting fees and advertising and promotional expenses.
Sales and marketing expenses increased from $0.7 million in 1995 to $6.2
million in 1996 to $8.7 million in 1997. The increase in sales and marketing
expenditures was primarily attributable to increases in the sales and
advertising production staffs to sell the increased capacity for advertising as
well as the expanded efforts by Wired Digital to promote and market its brands,
principally through online marketing branding campaigns.
General and Administrative Expenses. General and administrative expenses
consist of compensation and benefit costs for executive management, finance,
legal, human resources, business development and administrative personnel,
professional fees, facilities costs and other general corporate expenses.
General and administrative expenses were $1.5 million in 1995, $8.1 million in
1996 and $9.6 million in 1997. These increases are primarily attributable to
growth in executive management and administrative support personnel, and
increases in professional fees, financing fees and facilities expenses. The
decrease in general and administrative expenses as a percentage of net revenues
from 1996 to 1997 was primarily attributable to the significant increase in
revenues.
Operating Losses. Operating losses were $2.1 million in 1995, $41.1 million
in 1996 and $16.3 million in 1997. The increase in operating losses, from 1995
to 1996, excluding the one-time write-off of intangible in-process research and
development costs described below is primarily attributable to the overall
increase in payroll, consulting and professional fees and facilities expenses
to accommodate growth in Wired Digital's online business. In addition, Ventures
significantly increased its sales and marketing efforts during these periods to
grow the business. The modest improvement, excluding the one-time write-off,
from 1996 to 1997 was primarily due to significant revenue growth during 1997.
In 1996, Ventures recognized $23.7 million of operating losses attributable
to the write-off of intangible assets, primarily in-process research and
development, surrounding Ventures' purchase of the minority interest in
HotWired Ventures LLC in exchange for Series A Preferred stock.
The loss from discontinued operations reflects the activities of Ventures'
magazine, books and television businesses that were sold in June 1998. The
losses from discontinued operations were $4.9 million, $11.0 million and $2.6
million for the years ended December 31, 1995, 1996 and 1997, respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998.
Prior to June 1998, Ventures also published Wired magazine through a separate
wholly-owned subsidiary. In June 1998, Ventures sold its magazine, books and
television businesses and certain brands to Advance Magazine Publishers Inc.,
resulting in a gain on sale of discontinued operations of $49.4 million,
recognized through September 30, 1998. The gain on sale of discontinued
operations is reflected net of estimated Federal and state income taxes payable
of approximately $32.5 million. The operating results of the discontinued
operations prior to the sale were losses of $3.9 million and $0.7 million
(excluding the impact of a tax benefit of approximately $4.9 million) for the
nine months ended September 30, 1997 and 1998, respectively.
59
<PAGE>
Online Revenues. Online revenues were $8.4 million for the nine months ended
September 30, 1997 and $14.8 million for the nine months ended September 30,
1998. The increase in online revenues was primarily attributable to growth in
Wired Digital pageviews and, therefore, increased advertising capacity and
advertising on Wired Digital properties. In addition, the increase was
attributable to the introduction of HotBot's e-commerce revenues in 1998. E-
commerce revenues represented 14% of total online revenues for the nine-month
period ended September 30, 1998.
Barter revenues and expenses were approximately $1.5 million and $2.6 million
for the nine months ended September 30, 1997 and 1998, respectively.
Online Direct Costs. Online direct costs were $7.4 million for the nine
months ended September 30, 1997 and $7.7 million for the nine months ended
September 30, 1998. Online direct costs as a percentage of revenues, exclusive
of third party license fees paid to a search technology provider, have
decreased from the 1997 period to the 1998 period due to the Company's ability
to leverage its existing cost structure over its Web properties. Search
provider license fees have decreased as a percentage of search online revenues
due to Wired Digital's renegotiation of its agreement to base the license fees
on a fixed cost per search query versus a fixed percentage of total search
online revenues.
Sales and Marketing Expenses. Sales and marketing expenses were $6.4 million
for the nine months ended September 30, 1997 and $7.7 million for the nine
months ended September 30, 1998. The period to period increase in sales and
marketing expenses was primarily attributable to the expansion of Wired
Digital's online and television advertising, public relations and other
promotional expenses, as well as increased sales and advertising production
staff.
General and Administrative Expenses. Total general and administrative
expenses were $4.9 million for the nine months ended September 30, 1997 and
$7.1 million for the nine months ended September 30, 1998. The absolute dollar
increase in general and administrative expenses was primarily due to increased
salaries and related expenses associated with the executive management and the
increase in costs to build an infrastructure to support the expanded business.
During the nine months ended September 30, 1998, Ventures recorded
approximately $5.8 million in restructuring charges associated with the
termination of approximately ten employees.
Operating Losses. Operating losses before discontinued operations were $10.3
million for the nine months ended September 30, 1997 and $13.5 million for the
nine months ended September 30, 1998. The decrease in operating losses,
excluding the restructuring charges, was primarily attributable to sharply
increased online revenues coupled with improvements in gross margin due to
increased efficiencies in the editorial, production and design staffs and
decreased license fees as a percentage of net revenues.
GAIN ON SALE OF MAGAZINE, BOOKS AND TELEVISION BUSINESSES
On June 15, 1998, Ventures sold certain of its magazine, books and television
businesses to Advance Magazine Publishers Inc. and recorded a gain on sale of
discontinued operations of $49.4 million, net of estimated federal and state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 1998, Ventures has financed its operations and
its capital expenditure requirements primarily from private placements of
equity securities and secured debt totaling approximately $67 million. In June
1998, as a result of the sale of the magazine, book and television businesses
to Advance Magazine Publishers Inc., Ventures repaid all existing debt and
partially funded Wired Digital's operations and capital expenditure
requirements with proceeds from the sale.
60
<PAGE>
At September 30, 1998, Ventures had outstanding cash and cash equivalents of
$47.6 million. Ventures invests these amounts in short-term interest-bearing
money market funds.
Operating activities used cash of approximately $23.2 million for the nine
months ended September 30, 1998. The net cash used during this period was
primarily due to cash used by discontinued operations to pay certain
liabilities associated with the sale of the discontinued operations. Investing
activities generated cash of approximately $84.7 million in the nine-month
period ended September 30, 1998, primarily due to the proceeds received from
the sale of Ventures' magazine, book and television businesses. Financing
activities used cash of approximately $14.9 million for the 1998 period
primarily from the repayment of all of Ventures' outstanding debt.
Capital expenditures have been primarily for computer equipment to support
expansion of the Company's operations and management information systems. As of
September 30, 1998, Ventures' principal commitments consisted of obligations
under capital leases of $1.1 million.
Ventures believes that its current cash and cash equivalents will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditure requirements for at least the next twelve months. If existing cash
balances and cash generated from operations are insufficient to satisfy
Ventures' liquidity requirements, Ventures may seek to sell additional equity
or debt securities or to obtain a credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to
Ventures' stockholders. The incurrence of indebtedness would result in
increased fixed obligations of Ventures and could result in operating covenants
that would restrict Ventures' operations. There can be no assurance that
additional funding will be available on favorable terms, if at all.
YEAR 2000
The potential for software failures due to processing errors arising from
calculations using the year 2000 date is a known risk. Ventures recognizes the
need to ensure that its operations, products and services will not be adversely
impacted by Year 2000 software failures. Ventures has partially completed an
assessment of its internal and external (third-party) computer systems. At this
point in its assessment, Ventures is not aware of any Year 2000 problems
relating to systems operated by Ventures or by third parties that would have a
material effect on its business, results of operations or financial condition,
without taking into account Ventures efforts to avoid such problems. There can
be no guarantee, however, that systems on which Ventures relies will be able to
handle all Year 2000 problems. Ventures has not received written confirmation
of Year 2000 compliance from all material third-party vendors.
Although no assurance can be given, based on its assessment to date, Ventures
does not anticipate that costs associated with any Year 2000 problems will be
material.
To the extent that Ventures' assessment is finalized without identifying and
remedying any additional material non-compliant internal or external Year 2000
problems, or the Year 2000 date creates a systemic failure beyond Ventures'
control, such as a prolonged telecommunications or electrical failure or a
prolonged failure of third-party software on which Ventures relies, Ventures
could be prevented from operating its business and permitting users to access
its Websites. In the event of such failure, the primary business risk would
include, but are not limited to, lost advertising revenues, increased operating
costs, lost customers or other business interruptions of a material nature.
As discussed above, Ventures is engaged in an ongoing Year 2000 assessment.
The results of this assessment will be taken into account in determining the
nature and extent of any contingency plan. Currently, Ventures does not have a
Year 2000 contingency plan in place.
61
<PAGE>
PRO FORMA UNAUDITED COMBINED
CONDENSED FINANCIAL STATEMENTS
The following pro forma unaudited combined condensed financial statements
give effect to the merger of Lycos and Ventures, to be accounted for under the
purchase method of accounting. For pro forma purposes the financial statements
of Ventures for the fiscal years ended December 31, 1997, 1996 and 1995 have
been restated to reflect June 30, 1998, 1997 and 1996 year ends and have been
combined with the financial statements of Lycos for the years ended July 31,
1998, 1997 and 1996. For the three months ended October 31, 1998 the financial
statements of Lycos have been combined with the financial statements of
Ventures for the three months ended September 30, 1998. The pro forma unaudited
combined condensed balance sheet presents the combined financial position of
Lycos and Ventures as of October 31, 1998 assuming that the merger had occurred
as of October 31, 1998. The pro forma unaudited combined condensed statements
of operations present the combined financial results of Lycos, WhoWhere? and
Ventures assuming that the proposed mergers had occurred as of August 1, 1997.
Such pro forma information is based on the historical financial statements of
Lycos, WhoWhere? and Ventures and should be read in conjunction with the
historical financial statements and notes thereto of Lycos and Ventures
included elsewhere or incorporated by reference in this proxy
statement/prospectus. The pro forma financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have occurred if the mergers had been
consummated, as of the assumed dates nor are they necessarily indicative of
future operating results or financial position.
62
<PAGE>
LYCOS, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
10/31/98 9/30/98 PRO FORMA PRO FORMA
LYCOS VENTURES ADJUSTMENTS AS ADJUSTED
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents........ $140,771 $47,551 $ (1,056)(b) $139,715
(47,551)(i)
Escrow receivable................ 4,510 (4,510)(j) --
Accounts receivable, less
allowance....................... 15,907 5,992 21,899
License fees receivable.......... 27,099 27,099
Other current assets............. 19,264 2,394 21,658
-------- ------- -------- --------
Total current assets......... 203,041 60,447 (53,117) 210,371
Property and equipment, less
accumulated depreciation........ 6,155 3,429 9,584
Intangible assets, net........... 148,436 106,253 (a) 254,689
Other assets..................... 38,863 127 38,990
-------- ------- -------- --------
Total assets................. $396,495 $64,003 $ 53,136 $513,634
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
Accounts payable and accruals.... $ 19,052 $18,340 $ 37,392
Deferred revenues................ 32,546 509 33,055
Other current liabilities........ 1,219 556 $ (556)(b) 1,219
-------- ------- -------- --------
Total current liabilities.... 52,817 19,405 (556) 71,666
Notes payable--long-term......... 2,323 2,323
Long term portion of deferred
revenues........................ 28,396 28,396
Other non-current liabilities.... 31 500 (500)(b) 31
Redeemable convertible preferred
stock........................... 24,090 (24,090)(c) --
Stockholders' equity............. 312,928 20,008 106,253 (a) 411,218
24,090 (c)
(47,551)(i)
(4,510)(j)
-------- ------- -------- --------
Total liabilities and
stockholders' equity........ $396,495 $64,003 $ 53,136 $513,634
======== ======= ======== ========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements.
63
<PAGE>
LYCOS, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
PRO FORMA
10/31/98 9/30/98 PRO FORMA AS
LYCOS VENTURES ADJUSTMENTS ADJUSTED
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues.......... $ 24,784 $ 6,029 $ 30,813
Cost of revenues........ 5,300 2,854 8,154
---------- --------- --------- ----------
Gross profit........ 19,484 3,175 -- 22,659
Operating expenses
Research and
development.......... 5,307 5,307
In process research
and development...... 15,400 15,400
Sales and marketing... 16,170 3,338 19,508
General and
administrative....... 2,486 2,712 5,198
Amortization of
intangible assets.... 6,793 -- 5,313(a) 12,106
---------- --------- --------- ----------
Total operating
expenses........... 46,156 6,050 5,313 57,519
Operating loss.......... (26,672) (2,875) (5,313) (34,860)
Interest income, net.... 1,896 -- 1,896
Gain on sale of
investments............ 10,120 -- 10,120
---------- --------- --------- ----------
Net loss................ $ (14,656) $ (2,875)(f) $ (5,313) $ (22,844)
========== ========= ========= ==========
Basic and diluted net
loss per share......... $ (0.35) $ (0.52)(d)
========== ==========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 41,910,000 2,216,518 44,126,518 (e)
========== ========= ==========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements.
64
<PAGE>
LYCOS, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
-------------------------------------------------------------
7/31/98 7/31/98 6/30/98 PRO FORMA PRO FORMA
LYCOS WHOWHERE? VENTURES ADJUSTMENTS AS ADJUSTED
---------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 56,060 $ 6,984 $ 16,219 $ -- $ 79,263
Cost of revenues........ 12,513 2,041 10,515 -- 25,069
---------- ------- -------- --------- ----------
Gross profit........ 43,547 4,943 5,704 -- 54,194
Operating expenses
Research and
development.......... 9,478 2,729 -- -- 12,207
In process research
and development...... 91,239 797 -- -- 92,036
Sales and marketing... 35,036 5,497 8,619 -- 49,152
General and
administrative....... 5,631 4,226 9,830 -- 19,687
Amortization of
intangible assets.... 2,132 -- -- 21,251 (a) 54,746
31,363 (g)
---------- ------- -------- --------- ----------
Total operating
expenses........... 143,516 13,249 18,449 52,614 227,828
Operating loss.......... (99,969) (8,306) (12,745) (52,614) (173,634)
Interest income, net.... 3,052 (201) 201 (k) 3,052
---------- ------- -------- --------- ----------
Net loss................ $ (96,917) $(8,507) $(12,745)(f) (52,413) $ (170,582)
========== ======= ======== ========= ==========
Basic and diluted net
loss per share......... $ (3.13) $ (4.58)(d)
========== ==========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 30,932,982 6,311,116 37,244,098 (h)
========== ========= ==========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements.
65
<PAGE>
LYCOS, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(a) The pro forma unaudited combined condensed financial statements reflect
the acquisition of Ventures for approximately $145.8 million, including costs
of acquisition, of which approximately $101.3 million was allocated to
intangible assets. Intangible assets will be amortized over a period of
5 years. The Pro Forma adjustments reflect twelve months of amortization
expense for the year ended July 31, 1998, assuming the transaction had occurred
on August 1, 1997. Based on preliminary estimates, approximately $1 million to
$5 million of the purchase price will be allocated to in process research and
development expense which will be charged to operations during the quarter in
which the merger agreement is consummated. For the purpose of presentation,
$5 million was used as the in-process research and development expense. This
amount has not been reflected in the Pro Forma Unaudited Combined Condensed
Financial Information. The number of common shares of Lycos common stock
assumed issued in the pro forma financial statements is approximately 2.2
million. This amount assumes an average closing stock price of Lycos common
stock of $42.86 per share, which represents the maximum share price subject to
the collar contained in the merger agreement. This amount also assumes that the
Ventures Cash Balance will be paid by Lycos in cash. The actual number of
shares of Lycos common stock to be issued will be determined at the effective
date of the merger based on the average closing stock price as defined by the
merger agreement.
The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of Ventures
at September 30, 1998, and is for illustrative pro forma purposes only. Actual
fair values will be based on financial information as of the acquisition date.
Assuming the transaction had occurred on October 31, 1998, the allocation would
have been as follows (in thousands):
<TABLE>
<CAPTION>
VENTURES
--------
<S> <C>
Assets acquired:
Cash and cash equivalents........................................ $ 47,551
Accounts receivable, net......................................... 5,992
Property and equipment........................................... 3,429
Other assets..................................................... 2,521
In-process research and development.............................. 5,000
Developed technology, goodwill, and other intangible assets...... 101,253
Liabilities assumed:
Accounts payable and accrued expenses............................ (18,340)
Deferred revenues................................................ (509)
Other liabilities................................................ (1,056)
--------
Purchase price................................................... $145,841
========
</TABLE>
The pro forma adjustments reconcile the historical balance sheet of Ventures
at September 30, 1998 to the allocated purchase price assuming the transaction
had occurred on October 31, 1998.
(b) Retirement of capital leases immediately upon closing by Lycos, Inc.
(c) Reflects the conversion of the redeemable convertible preferred stock
into common stock.
(d) The pro forma basic net loss per common share is computed by dividing the
net loss by the weighted average number of common shares outstanding. The
calculation of the weighted average number of shares outstanding assumes that
all shares of Lycos' common stock issued in its acquisitions were outstanding
for the entire period. Pro forma diluted net loss per common share equals basic
net loss per common share.
(e) The pro forma adjustment assumes the conversion of shares of Ventures
common stock upon acquisition of Ventures by Lycos.
66
<PAGE>
(f) Does not include results from discontinued operations nor any tax amounts
recorded or assumed to be recoverable by Ventures.
(g) The Company acquired WhoWhere? Inc. for approximately $158.2 million in
August 1998, including costs of acquisition, of which approximately $141.4
million was allocated to intangible assets. Goodwill and other intangible
assets and developed technology are amortized over a period of 5 years. The
pro forma adjustments reflect twelve months of amortization expense for the
year ended July 31, 1998, assuming the transaction had occurred on August 1,
1997. Of the purchase price, $15.4 million was allocated to in-process research
and development expense which was charged to operations during the quarter
ending October 31, 1998. This amount has not been reflected in the pro forma
statements of operations for the twelve months ended July 31, 1998.
The write-off of purchased in process research and development represents the
amount of the purchase price of the acquisitions allocated to incomplete
research and development projects. This allocation represents the estimated
fair value based on risk adjusted cash flows related to the incomplete
products. The acquired in-process research and development represents
engineering and test activities associated with the introduction of new
enhanced services and information systems. Since these projects had not yet
reached technological feasibility and have no alternative future uses, there
can be no guarantee as to the achievability of the projects or the ascribed
value. Accordingly, these costs were expensed upon acquisition.
The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of WhoWhere?
at July 31, 1998, and is for illustrative pro forma purposes only. Actual fair
values were based on financial information as of the acquisition date (August
13, 1998). Assuming the transaction had occurred on July 31, 1998, the
allocation would have been as follows (in thousands):
<TABLE>
<CAPTION>
WHOWHERE?,
INC.
----------
<S> <C>
Assets acquired:
Cash and cash equivalents...................................... $ 2,004
Accounts receivable, net....................................... 2,472
Property and equipment......................................... 3,129
Other assets................................................... 2,156
In-process research and development............................ 15,400
Developed technology, goodwill and other intangible assets..... 141,413
Liabilities assumed.............................................. (8,392)
--------
Purchase price................................................. $158,182
========
</TABLE>
(h) The pro forma adjustment assumes the conversion of shares of WhoWhere?
Common Stock and Ventures Common stock upon acquisition of WhoWhere? and
Ventures by Lycos.
(i) Assumes Lycos elects to pay for the Ventures Cash Balance with cash as
provided for in the merger agreement.
(j) In accordance with the merger agreement, Lycos will distribute any cash
that may be received from the Ventures' escrow receivable back to Ventures.
(k) Retirement of debt and retirement of capital leases immediately upon
closing by Lycos, Inc.
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<PAGE>
DESCRIPTION OF LYCOS CAPITAL STOCK
The authorized shares of Lycos capital stock consist of 100,000,000 shares of
common stock and 5,000,000 shares of preferred stock.
The following is a summary of certain provisions of the common stock and
preferred stock terms. This summary only summarizes the major terms; it is not
a complete discussion of the terms of the Lycos capital stock.
COMMON STOCK
Lycos common stockholders have one vote per share on matters on which they
may vote. There are no cumulative voting rights. If the Lycos board of
directors declares dividends, then the Lycos common stockholders receive
ratable dividends, subject to the preferential rights of any outstanding Lycos
preferred stock. If Lycos is liquidated or dissolved, then the Lycos common
stockholders will share ratably in Lycos' assets that are distributed to its
stockholders, subject to the preferential rights of any outstanding Lycos
preferred stock. The shares of Lycos common stock outstanding upon the
effective date of this proxy statement/prospectus are, and the shares offered
under this proxy statement/prospectus will be, fully paid and nonassessable
when issued and paid for. The rights, preferences and privileges of Lycos
common stockholders are subject to, and may be adversely affected by, the
rights of holders of shares of any preferred stock that Lycos may issue in the
future. As of October 31, 1998, Lycos had approximately 42,645,090 shares of
issued and outstanding common stock.
PREFERRED STOCK
The Lycos' board of director may issue up to 5,000,000 shares of preferred
stock without further stockholder approval. The Lycos board of directors may
issue one or more series of preferred stock and may fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions of each
series of preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series. Lycos' ability to issue preferred stock provides desirable
flexibility in connection with possible acquisitions and other corporate
purposes. However, if Lycos issues preferred stock, this could delay defer or
prevent a change in control of Lycos or discourage bids for Lycos' common stock
at a premium over the market price of the common stock and may decrease the
market price of the Lycos common stock. Additionally, the issuance of preferred
stock could adversely affect the voting and other rights of the holders of the
Lycos common stock. No shares of Lycos preferred stock are outstanding or will
be outstanding after the merger. Lycos has no present plans to issue any shares
of preferred stock.
CERTAIN CERTIFICATE OF INCORPORATION, BY-LAWS AND STATUTORY PROVISIONS
AFFECTING STOCKHOLDERS
Classified Board and Other Matters. Lycos' board of directors is divided into
three classes. Each class serves for three years, and one class is elected each
year. Under the Delaware General Corporation Law, unless a corporation's
certificate of incorporation provides otherwise, stockholders may remove a
director only for cause if the corporation's board of directors is divided into
classes. Therefore, Lycos stockholders may only remove a director for cause. If
a stockholder wishes to nominate a person for an election of directors or to
bring any other matter before a meeting of stockholders, then such person must
inform Lycos' secretary of this intent within the time periods specified in
Lycos' amended and restated by-laws. Lycos' certificate of incorporation
provides that only the board of directors, the chairman of the board of
directors or the president of Lycos may call special meetings of Lycos
stockholders. The certificate of incorporation also provides that no action
required or permitted to be taken at any annual or special meeting of the Lycos
stockholders may be taken without a meeting, without the consent of all of the
Lycos stockholders entitled to vote on such action is obtained. The affirmative
vote of the holders of at least 80% of the combined voting power of then
outstanding voting stock of the Company, voting together as a single class, is
required to alter, amend or repeal the
68
<PAGE>
provisions described above. The classification of the board of directors and
the limitations on the removal of directors and the filing of vacancies could
make it more difficult for a third party to acquire, or discourage a third
party from acquiring, control of Lycos.
Section 203 of Delaware Law. See "COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF
LYCOS AND VENTURES--Section 203 of Delaware Law" beginning on page 51.
Directors Liability. The certificate of incorporation of Lycos provides that
no director will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for:
. any breach of the director's duty of loyalty to the Company or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct;
. acts or omissions in respect of certain unlawful dividend payments or
stock redemptions or repurchases; or
. any transaction from which such director derives improper personal
benefit.
This provision eliminates the rights of Lycos and its stockholder (through
stockholders' derivative suits on behalf of Lycos) to recover monetary damages
against a director for breach of the fiduciary duty of care as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described above. However Lycos or its stockholders may
seek non-monetary based remedies, such as an injunction or recission, against a
director for breach of his fiduciary duty. The limitations summarized above do
not limit liability under the federal securities laws. Lycos' amended and
restated by-laws provide that Lycos will, to the full extent permitted by the
Delaware General Corporation Law as currently in effect, indemnify and advance
expenses to each of its currently acting and former directors, officer,
employees and agents arising in connection with their acting in such
capacities.
Certain provisions described above may delay stockholder actions with respect
to certain business combinations and the election of new members to the board
of directors. As such, the provisions could have the effect of discouraging
open market purchases of Lycos' common stock because a stockholder who desires
to participate in a business combination or elect a new director may consider
them disadvantages. The existence of these provisions may depress the market
price of the Lycos common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Lycos common stock is Boston
EquiServe Limited Partnership.
69
<PAGE>
SECURITY OWNERSHIP OF VENTURES
The following table sets forth certain information as of October 31, 1998
with respect to the ownership of Ventures capital stock. The persons listed
below include (1) each director of Ventures, (2) each executive officer of
Ventures (including for this purpose two executive officers of Wired Digital),
(3) each stockholder that beneficially owns more than 5% of any class or series
of Ventures' outstanding capital stock and (4) the executive officers and
directors of Ventures (including for this purpose two executive officers of
Wired Digital) as a group. The following information gives effect to the option
grants Ventures expects to make prior to completion of the merger.
<TABLE>
<CAPTION>
NUMBER OF VENTURES SHARES
BENEFICIALLY OWNED BENEFICIAL OWNERSHIP OF
(PERCENTAGE OF SERIES/CLASS LYCOS COMMON STOCK
BENEFICIALLY OWNED) AFTER THE MERGER(5)
-------------------------------------- ---------------------------
SERIES A SERIES B SERIES C PERCENTAGE
COMMON PREFERRED PREFERRED PREFERRED NUMBER OF COMMON
NAME STOCK STOCK STOCK STOCK OF SHARES STOCK(5)
---- ------ --------- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Entities Associated with Providence
Equity Partners(1).................. -- -- -- 3,062,235 709,214 1.7%
901 Fleet Center (81.4%)
50 Kennedy Plaza
Providence, RI 02903
Entities Associated with Tudor
Investments(2)...................... -- 65,986 100,000 700,525 212,194 0.5%
40 Rowes Wharf, Second Floor (4.3%) (16.0%) (18.6%)
Boston, MA 02110
Orca Bay Capital Corporation......... -- 131,930 250,000 -- 123,233 0.3%
999 Third Avenue (8.7%) (40.0%)
Suite 4600
Seattle, WA 98104
Entities Associated with Nippon
Telegraph and Telephone
Corporation......................... -- -- 150,000 -- 69,990 0.2%
c/o NTT Corporation (24.0%)
3-19-2, Nishi-Shinjuku
Shinjuku-ku, Tokyo 163-19 Japan
Kumquat-Gatehall LLC................. -- -- 50,000 -- 23,330 0.1%
4 Gatehall Drive (8.0%)
Parsippany, NJ 07054
Louis Rossetto....................... 1 2,771,524 -- -- 138,299 0.3%
1732 La Vereda (0.0%) (18.2%)
Berkeley, CA 94702
Jane Metcalfe........................ 1 2,677,662 -- -- 133,615 0.3%
1732 La Vereda (0.0%) (17.6%)
Berkeley, CA 94702
Advance Magazine Publishers Inc...... -- 2,043,056 50,000 -- 125,278 0.3%
350 Madison Avenue, 14th Floor (13.4%) (8.0%)
New York, NY 10017
Jackson Living Trust dtd July 15,
1992................................ -- 1,336,368 -- -- 66,685 0.2%
c/o Clopine Hinkle & Associates (8.8%)
6046 Cornerstone Court West,
Suite 2201
San Diego, CA
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF VENTURES SHARES BENEFICIALLY
OWNED BENEFICIAL OWNERSHIP OF
(PERCENTAGE OF SERIES/CLASS BENEFICIALLY LYCOS COMMON STOCK
OWNED) AFTER THE MERGER(5)
--------------------------------------------- ---------------------------
SERIES A SERIES B SERIES C PERCENTAGE
COMMON PREFERRED PREFERRED PREFERRED NUMBER OF COMMON
NAME STOCK STOCK STOCK STOCK OF SHARES STOCK(5)
---- ---------- ---------- --------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas Negroponte...... -- 1,210,239 -- -- 60,391 0.1%
c/o MIT Research (8.0%)
20 Ames Street
Cambridge, MA 02139
H. William Jesse,
Jr.(3).................. -- 827,603 -- -- 41,297 0.1%
c/o Jesse Hansen & Co. (5.4%)
222 Sutter Street
San Francisco, CA 94108
Alex Evans(1)............ -- -- -- 3,062,235 709,214 1.7%
(81.4%)
Robert Forlenza(2)....... -- 65,986 100,000 700,525 212,194 0.5%
(4.3%) (16.0%) (18.6%)
Mark Masiello(1)......... -- -- -- 3,062,235 709,214 1.7%
(81.4%)
Mark Pelson(1)........... -- -- -- 3,062,235 709,214 1.7%
(81.4%)
Paul Salem(1)............ -- -- -- 3,062,235 709,214 1.7%
(81.4%)
Carmen Scarpa(2)......... -- 65,986 100,000 700,525 212,194 0.5%
(4.3%) (16.0%) (18.6%)
Elizabeth
Vanderslice(4).......... 3,000,000 20,057 -- -- 80,201 0.2%
(96.9%) (0.13%)
Lawrence Wilkinson(4).... 71,338 16,255 -- -- 2,694 --
(42.6%) (0.1%) --
Rick Boyce(4)............ 3,000,000 24,598 -- -- 80,427 0.2%
(96.9%) (0.2%) --
All officers and
directors as a group (13
persons) (1)(2)(3)(4)... 6,071,340 6,430,685 100,000 3,762,760 2,254,712 5.3%
(98.4%) (41.2%) (16.0%) (100.0%)
</TABLE>
- --------
(1) Includes shares held by Providence Equity Partners II L.P. and Providence
Equity Partners L.P. Messrs. Evans, Masiello, Pelson and Salem are
associated with Providence Equity Partners.
(2) Includes shares held by Raptor Global Fund, L.P., Raptor Global Fund, Ltd.,
Tudor Arbitrage Partners, L.P. and Tudor BVI Futures, Ltd. Messrs. Forlenza
and Scarpa are associated with Tudor Investments.
(3) Includes shares held by Jesse Capital Management, Inc., a company
controlled by Mr. Jesse and by Pensco Pension Services in an investment for
the benefit of Mr. Jesse.
71
<PAGE>
(4) Reflects shares of Ventures common stock held by Ms. Vanderslice, Mr.
Wilkinson and Mr. Boyce in the form of options. The percentages reflect
application of SEC rules that require us to assume that the option in
question is exercised but that no other options are exercised. Because only
96,223 shares of Ventures common stock are currently outstanding, some of
the percentages obtained by applying these SEC rules are larger than would
be the case if we considered all outstanding options to be exercised.
Ventures expects that all outstanding options will be exercised before the
closing. In that event, Ventures estimates that there will be approximately
11,096,197 shares of Ventures common stock outstanding at the closing, of
which Ms. Vanderslice will own approximately 2,654,867 shares (23.9%), Mr.
Wilkinson will own approximately 63,130 shares (0.6%) and Mr. Boyce will
own approximately 2,654,867 shares (23.9%).
(5) Beneficial Ownership is based on estimates only and assumes at the closing
of the merger that Ventures will have issued and outstanding (a) 11,096,197
shares of common stock, (b) 15,199,794 shares of Series A preferred stock,
(c) 625,000 shares of Series B preferred stock and (d) 3,762,760 shares of
Series C preferred stock. Calculations also assume that Lycos will pay for
the Ventures Cash Balance with cash only and that the average closing price
of Lycos common stock will equal $42.86 (the maximum collar limit).
LEGAL MATTERS
The legality of the shares of Lycos common stock offered by this proxy
statement/prospectus will be passed upon for Lycos by Hutchins, Wheeler &
Dittmar, A Professional Corporation.
Hutchins, Wheeler & Dittmar, A Professional Corporation, counsel for Lycos,
and Cooley Godward LLP, counsel for Ventures, have delivered opinions
concerning material federal income tax consequences of the merger. Certain
attorneys with Cooley Godward LLP own, through an investment partnership,
75,267 shares of Ventures Series A preferred stock. See "THE MERGER--Material
Federal Income Tax Consequences" on page 42.
EXPERTS
The consolidated financial statements of Lycos incorporated by reference into
this proxy statement/ prospectus have been audited by KPMG Peat Marwick LLP,
independent public accountants, as stated in their report appearing in such
incorporated documents. Lycos' financial statements are incorporated in this
proxy statement/prospectus in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Ventures included this proxy
statement/prospectus have been audited by KPMG Peat Marwick LLP, independent
public accountants, as stated in their report appearing elsewhere herein.
Ventures' financial statements are included in this proxy statement/prospectus
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WIRED VENTURES, INC.:
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Minority Interest and Stockholders' Deficit... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wired Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Wired Ventures,
Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31,
1996 and 1997, and the related consolidated statements of operations, minority
interest and stockholders' (deficit) equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wired Ventures,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
San Francisco, California
February 23, 1998, except for
notes 2, 6 and 12 as to which the
dates are June 15, July 22 and
October 2, 1998, respectively
F-2
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 4,936 $ 827 $ 47,551
Escrow receivable from Advance Magazine
Publishers Inc. ........................... -- -- 4,510
Accounts receivable, net of allowance for
returns and doubtful accounts of $123, $254
and $565 in 1996, 1997 and 1998,
respectively............................... 1,427 3,197 5,992
Prepaid expenses and other current assets... 173 289 2,394
Net assets of discontinued operations........ -- 2,079 --
-------- -------- --------
Total current assets...................... 6,536 6,392 60,447
Property and equipment, net.................. 2,502 2,413 3,429
Other assets................................. 183 194 127
-------- -------- --------
$ 9,221 $ 8,999 $ 64,003
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable............................ $ 356 $ 231 $ 436
Accrued expenses............................ 5,926 6,471 17,904
Lease obligations........................... -- -- 556
Deferred revenue............................ 599 1,028 509
Notes payable and line of credit............ 8,550 14,883 --
Net liabilities of discontinued operations.. 4,395 -- --
-------- -------- --------
Total current liabilities................. 19,826 22,613 19,405
Long-term lease obligations.................. -- -- 500
Notes payable................................ 1,443 -- --
-------- -------- --------
Total liabilities......................... 21,269 22,613 19,905
Redeemable convertible preferred stock:
Series C: $0.001 par value; 3,800,000 shares
authorized; 700,048, 3,762,760 and
3,762,760 shares issued and outstanding in
1996, 1997 and 1998, respectively (note
8)......................................... 3,900 20,983 24,090
Stockholders' (deficit) equity:
Preferred stock:
Undesignated preferred stock; $0.001 par
value, 10,200,000 shares authorized as of
1996, 1997 and 1998; -0- issued and
outstanding................................ -- -- --
Series A preferred stock; $0.001 par value;
15,300,000 shares authorized as of 1996,
1997 and 1998; 15,247,380, 15,209,904 and
15,199,794 shares issued and outstanding
in 1996, 1997 and 1998, respectively....... 15 15 15
Series B preferred stock, $0.001 par value;
700,000 shares authorized as of 1996, 1997
and 1998; 625,000 shares issued and
outstanding as of 1996, 1997 and 1998,
respectively............................... 1 1 1
Common stock, $0.001 par value; 45,000,000
shares authorized as of 1996, 1997 and
1998; 2,392, 60,903 and 96,223 shares
issued and outstanding in 1996, 1997 and
1998, respectively......................... -- -- --
Additional paid-in capital.................. 30,870 30,929 30,959
Deferred compensation....................... (533) (376) (361)
Accumulated deficit......................... (46,033) (64,967) (10,407)
Translation adjustment...................... (268) (199) (199)
-------- -------- --------
Total stockholders' (deficit) equity...... (15,948) (34,597) 20,008
-------- -------- --------
$ 9,221 $ 8,999 $ 64,003
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS PERIOD
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------------
1995 1996 1997 1997 1998
------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $ 1,942 $ 4,312 $ 12,405 $ 8,444 $ 14,795
------- -------- -------- -------- --------
Total revenues........ 1,942 4,312 12,405 8,444 14,795
------- -------- -------- -------- --------
Costs and expenses:
Online production and
development............ 1,854 7,463 10,401 7,404 7,738
Sales and marketing..... 704 6,151 8,716 6,425 7,658
General and
administrative......... 1,480 8,082 9,585 4,906 7,115
Write-off of
intangibles............ -- 23,708 -- -- --
Restructuring charges... -- -- -- -- 5,766
------- -------- -------- -------- --------
Total costs and
expenses............. 4,038 45,404 28,702 18,735 28,277
------- -------- -------- -------- --------
Operating loss........ (2,096) (41,092) (16,297) (10,291) (13,482)
Interest income, net...... 99 -- -- 65 --
Minority interest......... 427 846 -- -- --
------- -------- -------- -------- --------
Loss before taxes..... (1,570) (40,246) (16,297) (10,226) (13,482)
Income tax benefit
(expense)................ (5) (4) (5) (5) 17,596
------- -------- -------- -------- --------
Net income (loss) from
continuing
operations........... (1,575) (40,250) (16,302) (10,231) 4,114
------- -------- -------- -------- --------
Income (loss) from
discontinued operations
including tax benefit
(expense) of $4, $5, $4,
and $4 in 1995, 1996,
1997 and the nine months
ended September 30, 1997,
and a tax benefit of
$4,900 in the nine months
ended September 30, 1998,
respectively............. (4,930) (10,991) (2,632) (3,852) 4,185
Gain on sale of
discontinued operations
(net of taxes of
$32,500)................. -- -- -- -- 49,368
------- -------- -------- -------- --------
Net income (loss) .... $(6,505) $(51,241) $(18,934) $(14,083) $ 57,667
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF MINORITY INTEREST AND STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED DEFICIT
STOCK COMMON STOCK ADDITIONAL ACCUMULATED
MINORITY -------------- ------------- PAID-IN DEFERRED PRIOR TO ACCUMULATED TRANSLATION
INTEREST SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECAPITALIZATION DEFICIT ADJUSTMENT
-------- ------ ------ ------ ------ ---------- ------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
DECEMBER 31,
1994............ $ -- 14,331 $14 -- $ -- $ 4,542 -- $(4,709) -- --
Capital
contribution of
HotWired
Ventures LLC.... 1,793 -- -- -- -- 5,105 -- -- -- --
Stock
repurchase...... -- (226) -- -- -- (4) -- -- -- --
Translation
adjustments..... -- -- -- -- -- -- -- -- -- $ 50
Net loss........ (427) -- -- -- -- -- -- (6,505) -- --
------ ------ --- --- ---- ------- ----- ------- -------- -----
BALANCES,
DECEMBER 31,
1995............ 1,366 14,105 14 -- -- 9,643 -- (11,214) -- 50
Net loss
accumulated
prior to
recapitalization.. (846) -- -- -- -- -- -- (5,208) -- --
Recapitalization.. -- -- -- -- -- (16,422) -- 16,422 -- --
Acquisition of
minority
interest in
HotWired
Ventures LLC.... (520) 1,242 1 -- -- 24,852 -- -- -- --
Series B
preferred stock
private
placement....... -- 625 1 -- -- 12,299 -- -- -- --
Issuance of
Series A
preferred
stock........... -- 79 -- -- -- 790 $(790) -- -- --
Amortization of
deferred
compensation
expense......... -- -- -- -- -- -- 257 -- -- --
Stock
repurchase...... -- (176) -- -- -- (296) -- -- -- --
Translation
adjustment...... -- -- -- -- -- -- -- -- -- (318)
Proceeds from
exercise of
employee stock
options......... -- -- -- 2 -- 4 -- -- -- --
Series A
preferred stock
forfeiture...... -- (3) -- -- -- -- -- -- -- --
Net loss
following
recapitalization.. -- -- -- -- -- -- -- -- $(46,033) --
------ ------ --- --- ---- ------- ----- ------- -------- -----
BALANCES,
DECEMBER 31,
1996............ -- 15,872 16 2 -- 30,870 (533) -- (46,033) (268)
Amortization of
deferred
compensation
expense......... -- -- -- -- -- -- 157 -- -- --
Translation
adjustment...... -- -- -- -- -- -- -- -- -- 69
Proceeds from
exercise of
employee stock
options......... -- -- -- 59 -- 59 -- -- -- --
Series A
preferred stock
repurchase...... -- (37) -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (18,934) --
------ ------ --- --- ---- ------- ----- ------- -------- -----
BALANCES,
DECEMBER 31,
1997............ -- 15,835 16 61 -- 30,929 (376) -- (64,967) (199)
Proceeds from
exercise of
employee stock
options
(unaudited)..... -- -- -- 35 -- 30 -- -- -- --
Series A
preferred stock
repurchase
(unaudited)..... -- (10) -- -- -- -- -- -- -- --
Accretion of
Series C
redemption value
(unaudited)..... -- -- -- -- -- -- -- -- (3,107) --
Amortization of
deferred
compensation
expense
(unaudited)..... -- -- -- -- -- -- 15 -- -- --
Net income
(unaudited)..... -- -- -- -- -- -- -- -- 57,667 --
------ ------ --- --- ---- ------- ----- ------- -------- -----
BALANCES,
SEPTEMBER 30,
1998
(UNAUDITED)..... $ -- 15,825 $16 96 $ -- $30,959 $(361) $ -- $(10,407) $(199)
====== ====== === === ==== ======= ===== ======= ======== =====
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
BALANCES,
DECEMBER 31,
1994............ $ (153)
Capital
contribution of
HotWired
Ventures LLC.... 5,105
Stock
repurchase...... (4)
Translation
adjustments..... 50
Net loss........ (6,505)
-------------
BALANCES,
DECEMBER 31,
1995............ (1,507)
Net loss
accumulated
prior to
recapitalization.. (5,208)
Recapitalization.. --
Acquisition of
minority
interest in
HotWired
Ventures LLC.... 24,853
Series B
preferred stock
private
placement....... 12,300
Issuance of
Series A
preferred
stock........... --
Amortization of
deferred
compensation
expense......... 257
Stock
repurchase...... (296)
Translation
adjustment...... (318)
Proceeds from
exercise of
employee stock
options......... 4
Series A
preferred stock
forfeiture...... --
Net loss
following
recapitalization.. (46,033)
-------------
BALANCES,
DECEMBER 31,
1996............ (15,948)
Amortization of
deferred
compensation
expense......... 157
Translation
adjustment...... 69
Proceeds from
exercise of
employee stock
options......... 59
Series A
preferred stock
repurchase...... --
Net loss........ (18,934)
-------------
BALANCES,
DECEMBER 31,
1997............ (34,597)
Proceeds from
exercise of
employee stock
options
(unaudited)..... 30
Series A
preferred stock
repurchase
(unaudited)..... --
Accretion of
Series C
redemption value
(unaudited)..... (3,107)
Amortization of
deferred
compensation
expense
(unaudited)..... 15
Net income
(unaudited)..... 57,667
-------------
BALANCES,
SEPTEMBER 30,
1998
(UNAUDITED)..... $20,008
=============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------------ SEPTEMBER 30,
1995 1996 1997 1998
-------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $ (6,505) $ (51,241) $ (18,934) $ 57,667
Adjustments to reconcile net
loss to net cash used in
operating activities:
Discontinued operations........ 4,930 10,991 2,632 (53,553)
Minority interest.............. (427) (846) -- --
Accretion of note payable...... -- 109 104 --
Depreciation and
amortization.................. 754 420 1,123 1,104
Amortization of deferred
compensation.................. -- 257 157 15
Loss on disposal of property
and equipment................. -- 39 -- --
Equipment acquired in exchange
for advertising............... -- (119) -- (252)
Accrual for closure of Wired
UK operations................. -- 715 -- --
Write-off intangibles.......... -- 23,708 -- --
Changes in operating assets
and liabilities:
Accounts receivable, net...... 1,763 (992) (1,770) (2,795)
Prepaid expenses and other
current assets............... 28 (105) (116) (2,105)
Accounts payable and accrued
expenses..................... (1,922) 5,637 420 2,792
Deferred revenue.............. (2,292) 357 429 (520)
-------- --------- --------- --------
Net cash provided by (used
in) continuing operations... (3,671) (11,070) (15,955) 2,353
Net cash provided by (used
in) discontinued
operations.................. 1,528 (10,534) (8,914) (25,521)
-------- --------- --------- --------
Net cash used in operating
activities.................. (2,143) (21,604) (24,869) (23,168)
Cash flows from investing
activities:
Proceeds from sale of
discontinued operations....... -- -- -- 85,490
Capital expenditures........... (721) (2,174) (1,034) (745)
Other assets................... (132) (35) (11) --
-------- --------- --------- --------
Net cash provided by (used
in) continuing operations .. (853) (2,209) (1,045) 84,745
Net cash used in discontinued
operations.................. (1,149) (1,274) (192) --
Net cash provided by (used
in) investing activities.... (2,002) (3,483) (1,237) 84,745
Cash flows from financing
activities:
Capital contributions by
HotWired Ventures LLC minority
participants.................. 6,898 -- -- --
Repurchase of Series A
preferred stock............... (4) (296) -- --
Issuance of Series B preferred
stock, net.................... -- 12,300 -- --
Issuance of Series C preferred
stock, net.................... -- 3,900 17,083 --
Proceeds from exercise of
employee stock options........ -- 4 59 30
Net proceeds (repayment) from
note payable and line of
credit........................ 2,685 7,199 4,786 (14,883)
-------- --------- --------- --------
Net cash provided by (used
in) financing activities.... 9,579 23,107 21,928 (14,853)
-------- --------- --------- --------
Effect of foreign exchange rate
changes........................ 50 (318) 69 --
-------- --------- --------- --------
Increase (decrease) in cash and
cash equivalents............... 5,484 (2,298) (4,109) 46,724
Cash and cash equivalents,
beginning of year.............. 1,750 7,234 4,936 827
-------- --------- --------- --------
Cash and cash equivalents, end
of year........................ $ 7,234 $ 4,936 $ 827 $ 47,551
======== ========= ========= ========
Supplemental disclosure of cash
flow information -- Cash paid
for interest................... $ 16 $ 359 $ 1,223 $ 1,660
======== ========= ========= ========
Noncash investing and financing
activities:
Acquisition of minority
interest in HotWired Ventures
LLC for preferred stock........ $ -- $ 24,852 -- --
======== ========= ========= ========
Capital lease obligations...... $ -- -- -- $ 1,056
======== ========= ========= ========
Accretion of preferred stock
redemption value.............. $ -- -- -- $ 3,107
======== ========= ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(1) THE COMPANY
Wired Ventures, Inc. ("Wired" or the "Company") is a diversified media
company that produces and distributes branded online content and search and
navigation services on the World Wide Web through its wholly owned subsidiary,
Wired Digital, Inc. Prior to its sale in June 1998 (see note 2) the Company's
wholly owned subsidiary, Wired Magazine, Group, Inc., owned and published Wired
Magazine. The Company's television and book businesses, which were also sold in
June 1998, have historically not been significant.
The Company (a Delaware C corporation) was recapitalized in May 1996 such
that the ownership interests of Wired Holdings Inc. (previously a California S
corporation), Wired USA Ltd., and Wired Ventures, Ltd. were contributed to the
Company and approximately 14,000,000 shares of the Company's Series A preferred
stock were issued to the owners of such entities. The effective ownership
percentage of each respective equity holder in the Company after the
recapitalization is the same as their respective interests in the operating
assets and liabilities of the Company prior to the recapitalization, and there
was no change in control as a result of the recapitalization. Thus, all
indirect and direct ownership interests in Wired Ventures, Ltd. have been
converted to direct ownership interests in Wired. The consolidated financial
statements reflect the accounting for this transaction as a combination of
companies under common control.
The Company's businesses were historically conducted in partnership and
limited liability company form, beginning with Wired Partners in 1992, and
continuing through Wired USA Ltd., a California limited partnership (from its
formation in January 1993 to January 1994) and Wired Ventures, Ltd., a
California limited partnership (from its formation in January 1994 to May
1996). From January 1994 to May 1996, all businesses were conducted by Wired
Ventures, Ltd. Wired (via Wired Ventures, Ltd.) maintained a majority interest
in HotWired Ventures LLC, a California limited liability company (from its
formation in January 1995 through May 1996), and in May 1996 acquired the
remaining minority interest (see note 5). Wired Holdings Inc. and Wired USA
Ltd. had no operations, operating assets, or operating liabilities.
(2) DISCONTINUED OPERATIONS
In June 1998, the Company sold substantially all of the assets and
liabilities of its print and television businesses to Advance Magazine
Publishers Inc. for approximately $90,000,000 (of which $4,500,000 was placed
in a one-year escrow). Accordingly, operating results of the Company's print
and television operations have been reclassified and reported as discontinued
operations in the accompanying consolidated financial statements.
The following table reconciles the proceeds received from the sale of these
discontinued operations to the gain on sale of the discontinued operations, net
of tax (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Sale proceeds....................................................... $ 90,000
Net assets of discontinued operations as of disposal date......... (1,042)
Transaction-related expenses...................................... (7,090)
Estimated tax liability on gain................................... (32,500)
--------
Gain on sale of discontinued operations............................. $ 49,368
========
</TABLE>
F-7
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
Summary operating results of discontinued print and television businesses are
as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
PERIODS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues......................... $23,313 $ 33,504 $34,850 $24,031 $14,728
Loss before income taxes......... (4,926) (10,986) (2,628) (3,848) (715)
Income tax benefit (expense)..... (4) (5) (4) (4) 4,900
------- -------- ------- ------- -------
Net income (loss).............. $(4,930) $(10,991) $(2,632) $(3,852) $ 4,185
======= ======== ======= ======= =======
</TABLE>
Assets and liabilities of discontinued print and television businesses are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Current assets:
Accounts receivable, net.................................... $ 3,759 $ 4,747
Deferred production costs................................... 685 1,526
Prepaid expenses and other current assets................... 223 47
Acquired subscribers list intangibles....................... -- 4,247
------- -------
Total current assets...................................... 4,667 10,567
Noncurrent assets:
Property and equipment, net................................. 1,540 894
Other assets................................................ 144 101
------- -------
Total noncurrent assets................................... 1,684 995
------- -------
Total assets.............................................. 6,351 $11,562
======= =======
Current liabilities:
Accounts payable............................................ $ 2,690 $ 961
Accrued expenses............................................ 3,916 2,586
Deferred revenue............................................ 4,016 5,812
------- -------
Total current liabilities................................. 10,622 9,359
Long-term liabilities:
Deferred revenue............................................ 124 124
------- -------
Total long-term liabilities............................... 124 124
------- -------
Total liabilities......................................... 10,746 9,483
======= =======
Net assets (liabilities) of discontinued operations....... $(4,395) $ 2,079
======= =======
</TABLE>
F-8
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. Minority interest represents
the minority participants' share of the equity of HotWired Ventures LLC through
May 1996.
All material intercompany balances and transactions have been eliminated in
consolidation.
(B) REVENUE RECOGNITION
Online advertising revenue consists of revenue from selling advertisements,
which are placed in content or search and navigation services web pages.
Revenue from the sale of online advertising is recognized over the period
advertisements are displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of minimum number of pageviews, or
times that the page containing the advertisement is viewed by users. To the
extent minimum guaranteed pageviews are not met, the Company defers recognition
of the corresponding revenues until guaranteed pageview levels are achieved.
Cash received in advance for online advertising is classified as deferred
revenue and is recognized as revenue over the time the advertisements are
displayed.
(C) STOCK-BASED COMPENSATION
The Company has elected to use the intrinsic value-based method of Accounting
Principles Board (APB) Opinion No. 25, as allowed under Statement of Financial
Accounting Standards SFAS No. 123, Accounting for Stock-Based Compensation, to
account for all of its employee stock-based compensation plans. Therefore, the
Company has made the required pro forma disclosures in note 9.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of amounts held with banks with original
maturities of 90 days or less. As of December 31, 1997 and September 30, 1998,
the Company had no significant cash investments subject to the provisions of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
As of September 30, 1998, the Company had approximately $47,905,000 held in
money market accounts, classified as cash equivalents.
(E) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist of cash and cash equivalents and accounts
receivable. The Company holds cash in deposit accounts with various major
banks. The Company's accounts receivable are principally with trade
advertisers. The Company generally does not require collateral.
F-9
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on the
straight-line basis over an estimated useful life of 3 years for equipment and
up to 10 years for leasehold improvements. Maintenance and repairs are charged
to expense as incurred.
(G) NONMONETARY TRANSACTIONS
Agreements to exchange advertising in the Wired Digital network of online
sites for equipment or services, primarily online advertising services, are
recorded at the estimated fair value of the equipment or service upon the
completion of both parties' obligations. Total barter revenues of approximately
$335,000, $965,000, $1,732,000 and $2,598,000 were recorded in 1995, 1996, 1997
and the nine months ended September 30, 1998, respectively.
(H) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities as the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(I) INCOME TAXES
Wired accounts for income taxes under the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in income in the period that includes the
enactment date.
Prior to the recapitalization discussed in Note 1, Wired consisted of an S
corporation and several partnerships and limited liability companies for
federal income tax purposes. As such, income was taxed at the individual
stockholder or partner level. Accordingly, tax expense in the accompanying
consolidated statements of operations for the year ended December 31, 1995 only
includes the state minimum franchise taxes.
(4) BALANCE SHEET AND STATEMENT OF OPERATIONS COMPONENTS
(A) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses at September 30, 1998 includes approximately $1.8 million in
prepaid commercial air time, which is scheduled to be utilized in October and
November 1998.
F-10
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(B) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands) as of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements............................... $ 843 $ 1,024
Computer and communications equipment................ 2,254 2,638
Other................................................ 63 533
------ -------
3,160 4,195
Less accumulated depreciation and amortization....... (658) (1,782)
------ -------
$2,502 $ 2,413
====== =======
</TABLE>
(C) ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
<S> <C> <C> <C>
Payroll related..................................... $ 753 $ 727 $ 739
Professional services............................... 1,369 450 298
License fees........................................ 756 1,810 2,058
Restructuring....................................... -- -- 3,485
Taxes payable....................................... -- -- 6,086
Transaction-related expenses........................ -- -- 2,760
Other............................................... 3,048 3,484 2,478
------ ------ -------
$5,926 $6,471 $17,904
====== ====== =======
</TABLE>
(D) RESTRUCTURING CHARGES
During the nine-months ended September 30, 1998, the Company recorded
approximately $5.8 million in charges associated with the termination of
various employees.
F-11
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(5) BUSINESS COMBINATIONS
(A) WIRED UK
Wired UK was formed in 1994. The Company contributed intellectual property in
exchange for a 50% interest in Guardian Media Group plc (Guardian), a United
Kingdom corporation, contributed cash of approximately $216,000 for its 50%
interest. Wired UK had no material results of operations prior to 1995. In July
1995, Wired purchased Guardian's 50% interest in Wired UK. The Company closed
the operation in 1997.
(B) HOTWIRED VENTURES LLC
In May 1996, the Company purchased the minority interest in HotWired Ventures
LLC in exchange for 1,242,000 shares of Series A preferred stock. The Company
has accounted for this transaction using the purchase method, and accordingly,
the operating results of HotWired Ventures LLC previously attributable to
minority interests have been included in the consolidated financial statements
from the date of acquisition.
The value of the stock was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net tangible assets acquired............................. $ 371
Research and development in-process.................................... 20,500
Purchased technology and goodwill, net of deferred income taxes........ 3,982
-------
$24,853
=======
</TABLE>
The reseach and development in-process was written off and charged to
operations in 1996. Approximately $774,000 in amortization of purchased
technology and goodwill was recognized in the year ended December 31, 1996. The
remaining $3,208,000 in purchased technology and goodwill was written off in
1996, primarily based on a reassessment of the pace of innovation in the online
industry and its impact on the recoverablility of purchased technology.
The following combined results of operations for the years ended December 31,
1995 and 1996, are presented as if the business combination with HotWired
Ventures LLC had occurred at the beginning of each of the years presented
(HotWired Ventures LLC had no significant operations prior to 1995). The
$20,500,000 charge associated with in-process research and development has been
reflected in each period of the following summary. The summary also reflects
the acquisition of Wired UK (see above) as if the acquisition had occurred in
the beginning of 1995. The summary does not necessarily reflect the results of
operations as they would have been if the Company and the minority interest in
HotWired Ventures LLC and Wired UK had constituted a single entity during such
years (in thousands).
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Total revenues from continuing operations.................. $ 1,942 $ 4,312
======== ========
Net loss from continuing operations........................ $(23,829) $(38,441)
======== ========
Net loss................................................... $(29,613) $(49,432)
======== ========
</TABLE>
F-12
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(6) NOTE PAYABLE AND LINE OF CREDIT
(A) NOTE PAYABLE
The Company had a non-interest bearing note payable with a stated value of
(Pounds)1,000,000 (approximately U.S. $1,700,000) to Guardian, which was due in
July 1998. As of December 31, 1997, the note payable had an estimated present
value of approximately $1,500,000. It was payable on demand with a stated
interest rate of 5% in the event of certain changes in ownership or certain
transactions with Guardian. In the event that the Company entered into certain
joint venture transactions in Continental Europe, Guardian had the right to
convert its loan to equity of the new joint venture.
As of July 22, 1998, this note had been repaid in full.
(B) LINE OF CREDIT
As of December 31, 1997, the Company maintained a $14,975,000 line of credit
($10,000,000 as of December 31, 1996) collateralized by all of the Company's
tangible and intangible assets. The line bore an interest rate of 18% and
expired on September 30, 1998. The outstanding balance on the line of credit
was $8,550,000 and $13,424,500 as of December 31, 1996 and 1997, respectively.
As of December 31, 1997, the Company was in compliance with all financial
covenants contained in the credit facility.
(C) BRIDGE LOAN
On March 23, 1998, the Company obtained a $10,000,000 Bridge Loan bearing
interest at 18%. Of the bridge loan, $5,000,000 was available and drawn upon at
the close. If the loan was not repaid by December 1998, the debt may have been
converted into Series D redeemable preferred shares. These preferred shares
would have similar features and rights as Series C redeemable convertible
preferred shares (see note 8), except it would rank senior to Series C.
The drawings against the Bridge Loan triggered noncompliance with certain of
the financial covenants of the Series C redeemable convertible preferred stock
agreement. In the event of noncompliance the holders of the Series C preferred
stock had the right nd appointed an additional four board members. In addition,
the holders of Series C preferred stock had the right to redeem the stock and
the Company has accrued cumulative dividends of approximately $3.1 million
through September 30, 1998.
As of June 15, 1998, the line of credit and Bridge Loan had been repaid and
were not renewed.
(7) INCOME TAXES
Tax expense for continuing operations recorded in the accompanying historical
consolidated financial statements represents state minimum franchise taxes of
approximately $4,000 and $5,000 for the years ended December 31, 1996 and 1997,
respectively.
Prior to the recapitalization discussed in note 1, Wired consisted of an S
corporation and several partnerships and limited liability companies. As a
result of the recapitalization, Wired is now taxed as a C corporation.
F-13
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the Company's actual net deferred tax assets as of December 31,
1996 and 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals..................................... $ 794 $ 1,590
Deferred revenue.......................................... 1,547 --
Capitalized production costs.............................. 409 --
State taxes............................................... -- 770
Net operating loss carryforwards.......................... 10,744 15,266
Property and equipment.................................... -- 265
-------- --------
Total gross deferred tax assets......................... 13,494 17,891
Valuation allowance....................................... (13,088) (17,891)
-------- --------
Net deferred tax assets................................. 406 --
Deferred tax liabilities:
Property and equipment.................................... 406 --
-------- --------
$ -- $ --
======== ========
</TABLE>
As of December 31, 1996 and 1997, the Company had available net operating
loss carryforwards for federal income tax purposes of approximately $21.5
million and $38.5 million, respectively. In addition, the Company has available
net operating loss carryforwards as of December 31, 1996 and 1997 for state
income tax purposes of approximately $10.1 million and $19.5 million,
respectively. The Company anticipates that all available federal and state net
operating loss carryforwards will be utilized as a result of the sale
transaction described in Note 2.
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 30,000,000 shares of preferred stock, of which
3,800,000 are designated as $0.001 par value redeemable convertible Series C
preferred stock (Series C preferred stock). As of December 31, 1997 and
September 30, 1998, 3,762,760 shares were issued and outstanding. In addition,
the Company issued 50,000 warrants in January 1997 to purchase Series A
preferred stock at a price of $0.01 per share in connection with the Series C
preferred stock issuance, and no significant value was assigned to the
warrants.
The Series C preferred stock may be converted into common stock at the option
of the holder on a one-for-one basis, subject to antidilution provisions and
certain adjustments related to financial performance in 1997 and 1998. Based on
the lack of achievement of certain financial performance criteria in 1997, each
share of Series C preferred stock is currently convertible into 1.075 shares of
common stock. Conversion is automatic upon the closing of an initial public
offering of common stock in which the gross proceeds are at least $25,000,000
and in which the offering price is not less than (i) 2.5 times the original
purchase price of Series C preferred stock ($5.71) if the offering is completed
by December 6, 1998, or (ii) three times the original purchase price if the
offering is completed after December 6, 1998. Conversion is also automatic upon
a sale of the Company in which the purchase price is not less than that set out
in (i) and (ii) above.
Holders of Series C preferred stock accrue cumulative dividends at 8% per
annum, compounded annually, which are payable in cash upon liquidation of the
Company, redemption of the Series C preferred stock, or
F-14
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
upon the closing of an initial public offering for the sale of common stock of
the Company in which the proceeds to the Company are less than $25,000,000. The
dividends are not payable in the event of an initial public offering which
results in proceeds to the Company of at least $25,000,000 or in the event of a
sale of the Company in which the value of the Series C preferred stock is at
least two times the original purchase price ($5.71).
The holders of Series C preferred stock may redeem the stock in the event of
(i) noncompliance with certain financial and nonfinancial covenants, (ii) after
December 6, 2001, or (iii) upon bankruptcy, reorganization, or liquidation of
the Company. The redemption price shall be equal to the original purchase price
($5.71) of the Series C preferred stock, plus accrued dividends thereon, plus
an amount that would be received per share of Series C preferred stock upon a
sale of the Company at fair market value in excess of the original purchase
price plus accrued dividends thereon.
The holders of Series C preferred stock are entitled to preemptive rights to
enable them to maintain their fully diluted percentage ownership in the Company
for each issuance by the Company of equity securities, other than the exercise
of employee stock options. In the event of a sale or disposition of any shares
by a stockholder of the Company owning 5% or more, the holders of Series C
preferred stock have co-sale rights. No holder of more than 2% of the Company's
equity or Series C preferred stock, nor any officer of the Company is entitled
to sell any of their equity without the consent of a majority of the holders of
Series C preferred stock.
The holders of Series C preferred stock have common stock voting rights on an
"as if converted" basis. The holders of Series C preferred stock have the right
to appoint two directors to the seven member Board of Directors of the Company
and to appoint one member to the audit committee and the compensation committee
of the Board of Directors. In the event of noncompliance with certain
covenants, the holders of Series C preferred stock have the right to elect an
additional four board members, for a total of six out of eleven board members,
and the holders of Series C preferred stock, voting as a class, shall have the
right to require a sale of the Company. (See note 6).
In the event of liquidation, the holders of Series C preferred stock are
entitled to receive a liquidation preference equal to the original purchase
price of the Series C preferred stock ($5.71) plus accrued dividends thereon,
plus approximately 20% of any liquidation proceeds distributed to the holders
of Series A and B preferred stock until these holders have received their
liquidation preference ($20.00) (note 9), plus a pro rata share of any amount
distributed to the holders of common stock calculated as if the holders of
Series C preferred stock had converted their shares into common stock.
(9) STOCKHOLDERS' DEFICIT
(A) REVERSE STOCK SPLIT
In September 1996, the Company's Board of Directors authorized, and in
October 1996 the stockholders approved, a one-for-two reverse split of all of
the Company's series of preferred and common stock. All references in the
accompanying consolidated financial statements to number of shares and per
share amounts have been retroactively restated to reflect the decreased number
of shares outstanding.
F-15
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(B) SERIES A AND B PREFERRED STOCK
Each share of Series A and B preferred stock is convertible into common stock
at the exchange rate in effect at the time of conversion and is subject to
appropriate adjustment for common stock splits, stock dividends, and similar
transactions. Conversion is automatic upon a majority vote of the holders of
preferred stock or upon the closing of a public offering of common stock. The
exchange ratio for the holders of Series B preferred stock is equal to the
ratio of the liquidation reference, after adjustment to reflect dilution
protection, to the public offering price per share. The exchange ratio for the
holders of Series A preferred stock is one-to-one.
Each holder of Series A and B preferred stock is entitled to the number of
votes equal to the number of shares of common stock into which such preferred
stock is convertible.
Each holder of preferred stock is entitled to receive, when and as declared
by the Board of Directors, noncumulative dividends at the annual rate of $1.60
per share of Series A preferred stock and $1.60 per share of Series B preferred
stock in preference and priority to any payment of any dividend on common
stock. Each holder of preferred stock will participate pro rata on dividends
paid on the common stock.
In the event of liquidation, the holders of Series B preferred stock are
entitled to a per share liquidation preference equal to $20.00, plus all
declared and unpaid dividends, after which all holders of Series A preferred
stock are entitled to a per share liquidation preference equal to $20.00, plus
all declared but unpaid dividends.
There are no redemption or sinking fund provisions applicable to preferred
stock.
In January 1996, the Company issued equity interests, which represented
approximately 79,000 shares of Series A preferred stock, to certain of its
employees and recorded deferred compensation expense of approximately $790,000,
based on the deemed fair value of the shares. This amount is being amortized
over the vesting period of the Company's repurchase rights to such shares,
which is based upon the employees' continuing employment with the Company.
The Company repurchased approximately 176,000 shares of Series A preferred
stock in 1996 at a total cost of approximately $296,000. During 1997, the
Company repurchased approximately 37,000 shares of Series A preferred stock for
an insignificant amount. During the nine-month period ended September 30, 1998,
the Company repurchased approximately 10,000 shares of Series A preferred stock
for an insignificant amount.
(C) 1996 EQUITY INCENTIVE PLAN
In March and May 1996, the Board of Directors adopted, and the stockholders
approved, respectively, the 1996 Equity Incentive Plan (1996 Equity Plan) and
reserved 3,000,000 shares of common stock for issuance. In May 1996 and August
1997, the Board of Directors reserved an additional 1,250,000 and 1,500,000
shares, respectively of common stock for issuance under the 1996 Equity Plan.
The 1996 Equity Plan provides for the granting of stock options and stock
bonuses and the issuance of restricted stock by the Company to its employees,
officers, directors, and consultants.
During 1996, the Company issued options for the purchases of an aggregate of
approximately 1,800,000 shares of common stock pursuant to the 1996 Equity Plan
at prices varying between $11.90 and $20.00. In September 1996, these options
were canceled by the Company and reissued at prices ranging from $10.00 to
$12.00. In addition, the Company issued options for the purchase of an
aggregate of approximately 700,000
F-16
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
shares of common stock outside of the 1996 Equity Plan at a price of $2.00. In
December 1996, substantially all of the outstanding options were repriced by
the Company and reissued within the 1996 Equity Plan at a price of $1.00.
Options generally vest to the extent of 25% upon the first anniversary of the
employee hire date and an additional 1/36 of the unvested shares vest ratably
over the following 36 months.
(D) DEFERRED COMPENSATION EXPENSE
In 1996, the Company recorded approximately $9,100,000 in deferred
compensation expense for the
difference between the grant price and the deemed fair value of the common
stock of $7.00. The deferred compensation was to be amortized over the vesting
period of the individual options, generally four years. The Company recorded
approximately $6,300,000 in amortization of compensation expense related to
such options in 1996.
As of December 31, 1996, the Company reevaluated the fair value of the common
stock for which options were granted and revised the fair value to $1.00.
Accordingly, as of December 31, 1996, the Company reversed the deferred
compensation of approximately $9,100,000 and the related amortization of
approximately $1,300,000.
(E) 1996 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Under the 1996 Nonemployee Director Stock Option Plan (1996 Director Plan),
adopted and approved in May and July of 1996, respectively, the Company may
grant options to its non-employee directors for up to 50,000 shares of common
stock. No shares have been issued under the 1996 Director Plan.
(F) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation costs for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net loss for 1995, 1996 and 1997 would not have been materially affected.
The fair value of options granted during the year ended December 31, 1996 and
1997 for employee services were estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: risk-free
interest rate of 6.28% and 5.61% respectively, expected lives of 4.5 years, and
no dividends.
The fair value of options granted during the year ended December 31, 1997 and
1996, for other than employee services, representing approximately 58,000 of
the total options granted, were estimated on the date of grant using the Black-
Scholes Pricing Model with the following weighted-average assumptions: risk-
free interest rate of 5.61%, expected life of 4.5 years, expected volatility of
55%, and no dividends.
F-17
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
A summary of the status of the Company's fixed employee benefit plans and
changes during the period then ended are presented below (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1996.............. -- --
Granted..................................... 2,550 $12.74
Forfeited................................... (130) 12.97
Canceled September 1996..................... (1,767) 16.32
Regranted September 1996.................... 1,767 11.24
Canceled December 1996...................... (2,420) 8.81
Regranted December 1996..................... 2,420 1.00
------
Outstanding at December 31, 1996............ 2,420 1.00
------
Options vested at December 31, 1996......... 869 1.00
======
Weighted-average fair value of options
granted during the year at exercise price
equal to market price at grant date........ $ 0.19
======
Weighted-average remaining contractual life
........................................... 8.3 years
====== ======
Outstanding at January 1, 1997.............. 2,420 1.00
Granted..................................... 2,012 1.00
Canceled.................................... (860) 1.00
Exercised................................... (59) 1.00
------
Outstanding at December 31, 1997............ 3,513 1.00
------
Options vested at December 31, 1997......... 1,582 1.00
======
Weighted-average fair value of options
granted during the year at exercise price
equal to market price at grant date........ $ 0.17
======
Weighted-average remaining contractual
life....................................... 9.1 years
====== ======
Outstanding at January 1, 1998.............. 3,513 1.00
Granted (unaudited)......................... 1,742 1.00
Canceled (unaudited)........................ (2,930) 1.00
Exercised (unaudited)....................... (35) 1.00
------
Outstanding at September 30, 1998
(unaudited)................................ 2,290 1.00
------
Options vested at September 30, 1998
(unaudited)................................ 1,086 1.00
======
Weighted-average fair value of options
granted during the period at exercise price
equal to market price at grant date........ $ 0.17
======
Weighted-average remaining contractual life
........................................... 9.1 years
====== ======
</TABLE>
(10) EMPLOYEE BENEFIT PLANS
The salary deferral 401(k) plan allows employees to defer up to 20% of their
salary subject to certain limitations. The Company may make discretionary
contributions to the plan, however, no employer contributions have been made
since inception.
F-18
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS
UNAUDITED)
(11) COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company leases certain office space, office and computer equipment under
noncancelable operating leases with terms exceeding one year. Future minimum
lease payments under noncancelable operating leases as of December 31, 1997,
are as follows (in thousands):
The Company leases certain office space, office and computer equipment under
noncancelable operating leases with terms exceeding one year. Future minimum
lease payments under noncancelable operating leases as of December 31, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1998............................................................... $ 1,592
1999............................................................... 1,662
2000............................................................... 1,556
2001............................................................... 1,176
2002............................................................... 1,055
Thereafter......................................................... 3,780
-------
$10,821
=======
</TABLE>
Net rental expense for continuing operations under operating leases for the
years ended December 31, 1995, 1996, and 1997 and for the nine-month period
ended September 30, 1998, was approximately $138,000, $499,500, $890,500 and
$450,000, respectively.
(B) LEGAL MATTERS
Wired and its subsidiaries are involved in a number of claims arising in the
ordinary course of business. Wired and its subsidiaries believe these matters
will be resolved without material adverse effect on the Company's or its
subsidiaries' financial position, results of operations or cash flows.
(12) SUBSEQUENT EVENTS
On October 2, 1998, the Board of Directors approved an agreement and plan of
merger and reorganization to be acquired by Lycos, Inc. for cash and stock
presently valued at approximately $142 million.
F-19
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
LYCOS, INC.,
A DELAWARE CORPORATION,
BF ACQUISITION CORP.,
A DELAWARE CORPORATION,
WIRED VENTURES, INC.,
A DELAWARE CORPORATION,
AND
H. WILLIAM JESSE, JR., LOUIS ROSSETTO AND PAUL J. SALEM
AS STOCKHOLDER REPRESENTATIVE
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1 DESCRIPTION OF TRANSACTION................................. 1
1.1 Merger of Acquisition Sub into Ventures.................... 1
1.2 Effect of the Merger....................................... 1
1.3 Closing; Effective Time.................................... 1
Certificate of Incorporation and Bylaws; Directors and
1.4 Officers................................................... 2
1.5 Merger Consideration....................................... 2
1.6 Effect on Capital Stock.................................... 5
1.7 Dissenting Shares.......................................... 7
1.8 Exchange of Certificates................................... 8
1.9 Tax Consequences........................................... 9
1.10 Accounting Consequences.................................... 9
1.11 Further Action............................................. 9
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF VENTURES................. 9
2.1 Organization, Standing, Etc. .............................. 9
2.2 Wired Companies; Title to Wired Companies' Shares, Etc. ... 10
2.3 Capitalization of Ventures................................. 10
2.4 Certificate of Incorporation and Bylaws.................... 10
2.5 Compliance with Other Instruments and Laws................. 11
2.6 Governmental Authorizations and Consents................... 11
2.7 No Violations.............................................. 11
2.8 Financial Statements....................................... 11
2.9 Absence of Certain Changes or Events....................... 12
2.10 Title to Assets............................................ 12
2.11 Intellectual Property...................................... 13
2.12 Benefit Plans.............................................. 13
2.13 Litigation................................................. 15
2.14 Taxes...................................................... 16
2.15 Contracts.................................................. 17
2.16 Insurance.................................................. 18
2.17 Environmental Quality...................................... 18
2.18 Brokers.................................................... 18
2.19 Statements; Proxy Statement/Prospectus..................... 19
2.20 Governmental Permits....................................... 19
2.21 Major Customers............................................ 19
2.22 Traffic.................................................... 19
2.23 Accounts Receivable........................................ 19
2.24 Bank Accounts; Powers of Attorney.......................... 20
2.25 Minute Books, Etc. ........................................ 20
2.26 Company Action............................................. 20
2.27 Disclosure................................................. 20
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND ACQUISITION SUB........................................ 20
3.1 Organization and Standing of Purchaser..................... 20
3.2 Charter and Bylaws......................................... 20
3.3 Capitalization of Purchaser................................ 20
3.4 Authorization.............................................. 21
3.5 Enforceability............................................. 21
3.6 Compliance with Other Instruments and Laws................. 21
3.7 Governmental Authorizations and Consents................... 21
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.8 Litigation................................................. 21
3.9 Brokers.................................................... 22
3.10 Public Filings............................................. 22
3.11 Statements; Proxy Statement/Prospectus..................... 22
3.12 Ownership of Ventures Stock................................ 23
3.13 Material Adverse Effect.................................... 23
ARTICLE 4 COVENANTS OF VENTURES...................................... 23
4.1 Conduct of Business........................................ 23
4.2 Access..................................................... 24
4.3 No-Shop Provision.......................................... 24
4.4 Meeting of Stockholders.................................... 25
4.5 Consent of Ventures' Stockholders to Certain Payments...... 25
ARTICLE 5 COVENANTS OF PURCHASER AND ACQUISITION SUB................. 25
5.1 Confidentiality............................................ 25
5.2 Investigation.............................................. 25
5.3 Employees.................................................. 25
5.4 Indemnification............................................ 26
5.5 Stock Options.............................................. 26
5.6 Nasdaq National Market..................................... 26
5.7 Advance Agreement.......................................... 26
5.8 Tax Refund Amount.......................................... 27
ARTICLE 6 COVENANTS OF ALL PARTIES................................... 27
6.1 Best Efforts; Further Assurances........................... 27
6.2 Certain Filings............................................ 27
6.3 Public Announcements....................................... 27
6.4 Tax Returns................................................ 28
6.5 Proxy Statement and Registration Statements................ 29
6.6 Tax-Free Reorganization.................................... 29
6.7 Tax Representation Letters................................. 29
6.8 Marketing Program Funding.................................. 29
ARTICLE 7 CONDITIONS TO OBLIGATIONS OF PURCHASER AND ACQUISITION SUB
TO CLOSE................................................... 30
7.1 Accuracy of Representations and Warranties................. 30
7.2 Performance................................................ 30
7.3 Certificate................................................ 30
7.4 Employment Agreements...................................... 30
7.5 No Injunction.............................................. 30
7.6 HSR Act.................................................... 30
7.7 Legal Opinion.............................................. 30
7.8 Stockholder Approval....................................... 30
7.9 Consents................................................... 30
7.10 Escrow Agreement........................................... 31
7.11 Resignations............................................... 31
7.12 Appraisal Rights........................................... 31
7.13 Termination of Agreements.................................. 31
7.14 Form S-4 Registration Statement............................ 31
7.15 Tax Opinion................................................ 31
7.16 Quotation on Nasdaq National Market........................ 31
7.17 Consent of Ventures' Stockholders to Certain Payments...... 31
ARTICLE 8 CONDITIONS TO OBLIGATION OF VENTURES TO CLOSE.............. 31
8.1 Accuracy of Representations and Warranties................. 31
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
8.2 Performance................................................ 32
8.3 Certificate................................................ 32
8.4 No Injunction.............................................. 32
8.5 HSR Act.................................................... 32
8.6 Consents................................................... 32
8.7 Legal Opinion.............................................. 32
8.8 Stockholder Approval....................................... 32
8.9 Tax Opinion................................................ 32
8.10 Form S-4 Registration Statement............................ 32
8.11 Quotation on Nasdaq National Market........................ 32
ARTICLE 9 TERMINATION................................................ 32
9.1 Right to Terminated Agreement.............................. 32
9.2 Effect of Termination...................................... 33
9.3 Failure to Close........................................... 33
ARTICLE 10 ADJUSTMENT PROCEDURES...................................... 33
10.1 Preparation of Final Closing Balance Sheet................. 33
10.2 Adjustment of Escrow Fund.................................. 35
ARTICLE 11 CERTAIN REMEDIES AND LIMITATIONS........................... 35
11.1 Expiration of Representations, Warranties and Covenants.... 35
11.2 Escrow Fund................................................ 35
11.3 Indemnification by Purchaser............................... 36
11.4 Defense of Third Party Actions............................. 36
11.5 Subrogation; No Contribution............................... 37
11.6 Exclusivity................................................ 37
11.7 Retention of Records....................................... 37
11.8 Notice as to Representations............................... 37
11.9 No Recission............................................... 38
ARTICLE 12 MISCELLANEOUS.............................................. 38
12.1 Material Adverse Effect.................................... 38
12.2 Knowledge of Ventures...................................... 38
12.3 Memorandum; Disclaimer of Projections...................... 38
12.4 Expenses................................................... 38
12.5 Notices.................................................... 39
12.6 Assignment................................................. 41
12.7 Entire Agreement; Amendment; Governing Law; etc. .......... 41
12.8 Counterparts............................................... 41
12.9 Venue...................................................... 41
12.10 Third-Party Rights......................................... 41
12.11 Titles and Headings........................................ 41
12.12 Exhibits and Schedules..................................... 41
12.13 Pronouns................................................... 41
12.14 Severability............................................... 41
12.15 Time of Essence............................................ 42
12.16 Interpretation............................................. 42
</TABLE>
A-4
<PAGE>
TABLE OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
A Forms of Voting Agreement
B Form of Tax Representation Letter of Ventures
C Form of Tax Representation Letter of Purchaser
D Form of Employment Agreement
E Form of Nondisclosure and Developments Agreement
F Opinion of Cooley Godward LLP
G Form of Escrow Agreement
H Opinion of Hutchins, Wheeler & Dittmar
</TABLE>
Certain Exhibits and Schedules have been ommitted but will be provided by Lycos
on request.
A-5
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement") is
entered into as of November 25, 1998 by and among LYCOS, INC., a Delaware
corporation ("Purchaser"), BF ACQUISITION CORP., a Delaware corporation and
wholly-owned subsidiary of Purchaser ("Acquisition Sub"), WIRED VENTURES, INC.,
a Delaware corporation ("Ventures"), and H. William Jesse, Jr., Louis Rossetto
and Paul J. Salem, as Stockholder Representatives (as defined below). This
Agreement amends and restates in its entirety that certain Agreement and Plan
of Merger and Reorganization, dated as of October 5, 1998, among the parties
hereto; provided, however, that all representations and warranties will be
deemed made as of October 5, 1998 and all references to "as of the date of this
Agreement" or language of similar import will be deemed to refer to October 5,
1998.
RECITALS
A. Purchaser, Acquisition Sub and Ventures intend to effect a merger of
Acquisition Sub into Ventures in accordance with this Agreement and applicable
laws (the "Merger"). Upon consummation of the Merger, Acquisition Sub will
cease to exist, and Ventures will become a wholly-owned subsidiary of
Purchaser.
B. The respective boards of directors of Purchaser, Acquisition Sub and
Ventures have adopted this Agreement and approved the Merger.
C. As a condition and inducement to Purchaser's willingness to enter into
this Agreement, certain stockholders of Ventures have, concurrently with the
execution of this Agreement, executed and delivered to Purchaser a Voting
Agreement in one of the forms attached hereto as Exhibit A, pursuant to which
such stockholders have agreed to vote their shares of Ventures' capital stock
in favor of the Merger and to grant Purchaser irrevocable proxies to vote such
shares.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
ARTICLE I
DESCRIPTION OF TRANSACTION
1.1 MERGER OF ACQUISITION SUB INTO VENTURES. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined
in Section 1.3), Acquisition Sub shall be merged with and into Ventures, and
the separate existence of Acquisition Sub shall cease. Ventures will continue
as the surviving corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in this
Agreement and in the applicable provisions of the Delaware General Corporation
Law ("DGCL") and other applicable law.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco,
California, at 10:00 a.m. on a date to be agreed by Purchaser and Ventures (the
"Closing Date"), which shall be no later than the third business day after the
satisfaction or waiver of the conditions set forth in Articles 7 and 8.
Contemporaneously with the Closing, a properly executed agreement of merger or
certificate of merger conforming to the requirements of the DGCL shall be filed
with the Secretary of State of the State of
A-6
<PAGE>
Delaware. The Merger shall take effect at the time such agreement of merger or
certificate of merger is filed with the Secretary of State of the State of
Delaware (the "Effective Time").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless
otherwise agreed by Purchaser and Ventures prior to the Effective Time:
(A) the Certificate of Incorporation of Ventures, as amended by the
agreement of merger or the certificate of merger, as the case may be, shall
be the Certificate of Incorporation of the Surviving Corporation;
(B) the Bylaws of Acquisition Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation;
(C) the directors of the Surviving Corporation immediately after the
Effective Time shall be the individuals who are directors of Acquisition
Sub immediately prior to the Effective Time; and
(D) the officers of the Surviving Corporation immediately after the
Effective Time shall be the individuals who are officers of Acquisition Sub
immediately prior to the Effective Time.
1.5 MERGER CONSIDERATION.
(A) The consideration to be paid by Purchaser in the Merger (the "Merger
Consideration") shall consist of the Merger Shares (as hereinafter
defined), the Cash Portion (as hereinafter defined), the Tax Refund Amount
(as hereinafter defined) and the Advance Escrow Amount (as hereinafter
defined).
(B) For purposes of this Agreement:
(1) The term "Merger Shares" shall mean a number of shares of Common
Stock of Purchaser, $.01 par value per share ("Purchaser Common Stock"),
rounded to the nearest full share, equal to the Aggregate Share Value (as
hereinafter defined) divided by the Average Closing Stock Price (as
hereinafter defined).
(2) The term "Aggregate Share Value" shall mean (i) $95 million, (ii)
plus Wired Cash at Closing, (iii) minus Wired Borrowings at Closing, (iv)
minus Wired Adjusted Working Capital Shortfall at Closing, (v) minus the
Closing Expense Adjustment Amount (as such terms are hereinafter defined):
provided, however, that:
(I) the Aggregate Share Value may be decreased, and the Cash Portion
increased, by such amount, if any (not to exceed Wired Cash at
Closing), as Purchaser may specify no later than the third trading day
preceding the Effective time (as hereinafter defined);
(II) to the extent the Merger Shares would otherwise exceed 19.9% of
the outstanding capital stock of Purchaser as of the Closing Date, the
Aggregate Share Value shall be decreased and the Cash Portion shall be
correspondingly increased;
(III) notwithstanding any other provision of this Agreement to the
contrary, the Aggregate Share Value shall not be decreased and the Cash
Portion shall not be increased if and to the extent such decrease would
result in the Equity Cash Value exceeding twenty percent (20%) of the
Total Equity Value. For purposes hereof, "Equity Cash Value" shall mean
the sum of (A) the Cash Portion payable to the holders of Ventures
Capital Stock plus (B) $9,767,868 plus (C) the dollar amount of the
cash to be paid to the holders of Ventures Capital Stock with respect
to fractional shares pursuant to Section 1.6(e) plus (D) two multiplied
by the cash amount that would have been paid to the holders of
Dissenting Shares (as defined in Section 1.7) if such holders had not
dissented plus (E) two multiplied by the amount equal to (I) the number
of shares of Purchaser Common Stock that would have been issued to the
holders of Dissenting Shares if such holders had not dissented
multiplied by (II) the closing price of Purchaser Common Stock on the
trading date immediately prior to the Effective Time. For purposes
hereof, "Total Equity Value" shall mean (x) the number of shares of
Purchaser Common Stock issued to the holders of Ventures Capital Stock
pursuant to Section 1.6 (other than to the holders of Dissenting Shares
and other than such shares as are placed in the Escrow Fund on behalf
of the holders of Ventures Capital Stock pursuant to Section 1.6(d))
A-7
<PAGE>
multiplied by the closing price of Purchaser Common Stock on the
trading date immediately prior to the Effective Time plus (y) the
Equity Cash Value; and
(IV) notwithstanding any other provision of this Agreement to the
contrary, the Aggregate Share Value shall not be decreased if and to
the extent such decrease would result in the Warrant Cash Value
exceeding twenty percent (20%) of the Total Warrant Value. For purposes
hereof, "Warrant Cash Value" shall mean the sum of (A) the Cash Portion
payable to the holders of Warrants plus (B) $32,132 plus (C) the dollar
amount of the cash to be paid to Warrant holders with respect to
fractional shares pursuant to Section 1.6(e). For purposes hereof,
"Total Warrant Value" shall mean (x) the number of shares of Purchaser
Common Stock issued to the holders of Warrants pursuant to Section 1.6
(other than such shares as are placed in the Escrow Fund on behalf of
Warrant holders pursuant to Section 1.6(d)) multiplied by the closing
price of Purchaser Common Stock on the trading date immediately prior
to the Effective Time plus (y) the Warrant Cash Value.
Immediately following the close of trading on the trading date immediately
prior to the Effective Time (or the business day immediately prior to the
Effective Time, if later), Purchaser will calculate the Aggregate Share
Value and provide such calculation to Ventures in writing.
(3) The term "Average Closing Stock Price" shall mean the average of the
closing prices of one share of Purchaser Common Stock for the 20
consecutive most recent days that Purchaser Common Stock has traded on the
Nasdaq National Market ("NNM") ending on the third trading day preceding
the Effective Time, as reported on the NNM; provided, however, that the
Average Closing Stock Price shall not be greater than $42.86 (the "Upper
Collar Limit") or less than $20.64 (the "Lower Collar Limit").
(4) The term "Advance Escrow Amount" shall mean any and all amounts that
are delivered to or for the benefit of Ventures at any time, or from time
to time, pursuant to the escrow arrangements (the "Advance Escrow")
established under Section 10.2(b) of that certain Asset Purchase Agreement
dated as of May 7, 1998 among Advance Magazine Publishers Inc., Ventures,
Wired Magazine Group, Inc., Wired Digital, Inc., Wired Books, Inc., Wired
Television, Inc. and The Chase Manhattan Bank, as Escrow Agent, as amended
(the "Advance Agreement"), less any portion of such amounts that is
required to be delivered to Purchaser pursuant to Section 10.2 below.
(5) The term "Cash Portion" shall mean the cash amount equal to (i) $95
million, (ii) plus Wired Cash at Closing, (iii) minus Wired Borrowings at
Closing, (iv) minus Wired Adjusted Working Capital Shortfall at Closing,
(v) minus the Closing Expense Adjustment Amount, (vi) minus the Aggregate
Share Value.
(6) The term "Common Share Value" shall mean $12,538,700.
(7) The term "Closing Expense Adjustment Amount" shall mean any amounts
in excess of $2.5 million paid or payable by Ventures at or prior to the
Closing pursuant to Section 12.4
(8) The term "Series A Share Value" shall mean 78.8% of the Residual
Share Value (as hereinafter defined).
(9) The term "Series B Share Value" shall mean $20.00 times the number of
shares of Ventures Series B Preferred Stock (as hereinafter defined)
outstanding immediately prior to the Effective Time.
(10) The term "Series C Share Value" shall mean the sum of:
(I) $5.71 times the number of shares of Ventures Series C Preferred
Stock (as hereinafter defined) outstanding immediately prior to the
Effective Time (the "Series C Liquidation Value");
(II) all Series C Accrued Dividends (as hereinafter defined);
(III) 26.903553% of the Series B Share Value (the "Series C/B
Participation Value"); and
(IV) 21.2% of the Residual Share Value (as hereinafter defined).
(11) The term "Series C Accrued Dividends" shall mean the sum of (i)
$1,718,829 and (ii) $5,085.85 times the number of calendar days in the
period beginning January 1, 1998 and ending the day prior to the Closing
Date.
A-8
<PAGE>
(12) The term "Residual Share Value" shall mean the Aggregate Share Value
less the sum of (i) the Common Share Value, (ii) the Series B Share Value,
(iii) the Series C Liquidation Value, (iv) the Series C Accrued Dividends
and (v) the Series C/B Participation Value.
(13) The term "Tax Refund Amount" shall mean the cash amount equal to the
federal and state tax refunds actually received by Purchaser with respect
to the Wired Companies' pre-Closing tax periods, including without
limitation refunds generated by the carryback of losses of any of the Wired
Companies following the Closing, less any fees and expenses incurred by
Purchaser in connection with the receipt of such refunds by Purchaser;
provided, however, that such net amount shall not exceed $5 million.
Notwithstanding the foregoing, the $5 million amount shall be reduced by
the tax effect on Purchaser or the Wired Companies of the disallowance of
any deduction claimed by Ventures or the Wired Companies with respect to
pre-Closing tax periods, but such amount shall not constitute a Loss for
purposes of Article 11 of this Agreement to the extent of such reduction.
The computation of refunds generated by the carryback of losses of any of
the Wired Companies following the Closing shall include all refunds that
would reasonably be available if Purchaser had prepared its post-Closing
tax returns and made its tax elections in a manner so as to maximize the
dollar value of such refunds, determined solely with regard to the
operations of the acquired Wired Companies on a stand-alone basis.
(14) "Wired Cash at Closing" shall mean all cash and cash equivalents of
the Wired Companies as of the Closing (including any cash held by Ventures
that represents the exercise price of stock options exercised for cash
after the date hereof), as reflected on the Preliminary Closing Balance
Sheet (as hereinafter defined), minus an amount of cash sufficient to fund
Ventures' obligation to pay the amounts identified on Schedule 1.5 (the
"Cash Exclusions"); provided, however, that for purposes of calculating
Wired Cash at Closing, Ventures shall be deemed to hold an incremental
amount of cash equal to the sum of (A) the Marketing Program Funding Amount
described in Section 6.8, (B) any amounts paid by Ventures at or prior to
the Closing pursuant to Section 12.4, and (C) the aggregate exercise price
of all stock options presently held by or hereafter granted to employees of
the Wired Companies (but not non-employees), as described in Schedule 2.3,
and Warrants (as defined in Section 2.3) to the extent such stock options
and Warrants are either held unexercised at the Closing Date or net-
exercised between the date hereof and the Closing Date.
(15) "Wired Borrowings at Closing" shall mean all indebtedness for
borrowed money of the Wired Companies as of the Closing, as reflected on
the Preliminary Closing Balance Sheet. Obligations under capitalized leases
shall not constitute Wired Borrowings at Closing.
(16) "Wired Adjusted Working Capital Shortfall at Closing" shall mean the
absolute value of the difference between (i) $432,172 and (ii) the adjusted
working capital (i.e., current assets less current liabilities) of the
Wired Companies as of the Closing, as reflected on the Preliminary Closing
Balance Sheet; provided, however, that, for the purpose of calculating
Wired Adjusted Working Capital Shortfall at Closing only, Wired Cash at
Closing (together with the offsetting Cash Exclusions) and Wired Borrowings
at Closing shall be disregarded, and no amounts payable by Ventures
pursuant to Section 12.4 at or prior to the Closing shall be deemed to be a
current liability. Notwithstanding the foregoing, Wired Adjusted Working
Capital Shortfall at Closing shall be zero if the adjusted working capital
described in subparagraph (ii) above is $432,172 or greater.
(17) The final result (but not interim results) of all calculations of
fractions, ratios and percentages shall be rounded to six (6) decimal
places.
(C) Not later than ten (10) business days prior to the Closing, Ventures
shall prepare in good faith and deliver to Purchaser an estimated consolidated
balance sheet of Ventures and the other Wired Companies as of the Closing Date
(the "Preliminary Closing Balance Sheet"). Except for the fact that it is based
on estimates and the absence of footnotes, the Preliminary Closing Balance
Sheet shall be prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") on a basis consistent with that used in the preparation of
the Financial Statements (as hereinafter defined). Based on the Preliminary
Closing Balance Sheet, Ventures shall calculate Wired Cash at Closing and Wired
Adjusted Working Capital Shortfall at Closing, and Ventures
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shall calculate Wired Cash at Closing and Wired Adjusted Working Capital
Shortfall at Closing, and Ventures shall deliver such calculations to Purchaser
with the Preliminary Closing Balance Sheet. Within five (5) business days after
such delivery, Purchaser shall concur in such Preliminary Closing Balance Sheet
and calculations or deliver to Ventures is proposed alternatives thereto. If
Ventures and Purchaser cannot agree within two (2) business days on the
appropriate values for Wired Cash at Closing and Wired Adjusted Working Capital
Shortfall at Closing, then Ventures and Purchaser shall submit their respective
proposed values to Arthur Andersen LLP, who shall be asked to select, for each
of such items, either Ventures' or Purchaser's proposed value as the more
correct value in accordance with the standards set forth herein. If both values
proposed by one of the parties are selected, the other party shall pay the fees
and expenses of Arthur Andersen LLP; otherwise such fees and expenses shall be
shared equally between the parties. The conditions to Closing set forth in
Articles 7 and 8 shall be deemed not to have been met until after the
determination of Wired Cash at Closing and Wired Adjusted Working Capital
Shortfall at Closing.
1.6 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger
and without any further action on the part of Purchaser, Acquisition Sub,
Ventures or any stockholder of Ventures or of Acquisition Sub all outstanding
shares of capital stock of Ventures, calculated on a fully-diluted, fully-
converted basis as though all convertible debt and equity securities and
options (whether vested or unvested) and warrants had been converted or
exercised immediately prior to the Effective Time, shall be converted into, or
exchanged for, the Merger Consideration, which shall be allocated as follows:
(A) CONVERSION OF SHARES.
(1) Each share of Common Stock, $0.001 par value per share (the "Ventures
Common Stock"), issued and outstanding immediately prior to the Effective
Time (other than any Dissenting Shares (as defined in Section 1.7)) will be
canceled and extinguished and automatically converted into that fraction of
a share of the Purchaser Common Stock equal to the Common Share Value
divided by the product of (A) the total number of shares of Ventures Common
Stock outstanding on a fully-diluted, fully-converted basis as though all
convertible debt and equity securities (excluding Ventures Series A
Preferred Stock, Ventures Series B Preferred Stock and Ventures Series C
Preferred Stock) and options (whether vested or unvested) and warrants
(other than the Warrants) that are convertible into or exercisable for
Ventures Common Stock had been converted into or exercised for Ventures
Common Stock immediately prior to the Effective Time (the "Fully-diluted
Common Shares Outstanding") and (B) the Average Closing Stock Price.
(2) Each share of Series A Preferred Stock, $0.001 par value per share
(the "Ventures Series A Preferred Stock"), issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into (the
"Series A Per Share Amount"):
(I) that fraction of a share of Purchaser Common Stock equal to the
quotient obtained by dividing (A) the sum of the Series A Share Value
and the aggregate exercise price of all Warrants outstanding
immediately prior to the Effective Time by (B) the product of (1) the
total number of shares of Ventures Series A Preferred Stock outstanding
on a fully-diluted, fully-converted basis as though all convertible
debt and warrants which are convertible into or exercisable for
Ventures Series A Preferred Stock had been converted into or exercised
for Ventures Series A Preferred Stock immediately prior to the
Effective Time (the "Fully-diluted Series A Shares Outstanding") and
(2) the Average Closing Stock Price;
(II) the right to receive that fraction of the Advance Escrow Amount
equal to 0.788 divided by the number of Fully-diluted Series A Shares
Outstanding;
(III) the right to receive that fraction of the Cash Portion equal to
0.788 divided by the number of Fully-diluted Series A Shares
Outstanding; and
(IV) the right to receive that fraction of the Tax Refund Amount
equal to 0.788 divided by the number of Fully-diluted Series A Shares
Outstanding.
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(3) Each Warrant issued and outstanding immediately prior to the
Effective Time will be canceled and extinguished and, with the consent of
the holder thereof, converted into the right to receive cash and stock in
amounts equal to the difference between (i) the product of the Series A Per
Share Amount and the number of shares of Ventures Series A Preferred Stock
issuable upon full cash exercise of such Warrant and (ii) the aggregate
cash exercise price of such Warrant.
(4) Each share of Series B Preferred Stock, $0.001 par value per share
(the "Ventures Series B Preferred Stock") issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into that
fraction of a share of Purchaser Common Stock equal to the Series B Share
Value divided by the product of (A) the total number of shares of Ventures
Series B Preferred Stock outstanding on a fully-diluted, fully-converted
basis as though all convertible debt and warrants which are convertible
into or exercisable for Ventures Series B Preferred Stock has been
converted into or exercised for Ventures Series B Preferred Stock
immediately prior to the Effective Time and (B) the Average Closing Stock
Price.
(5) Each share of Series C Preferred Stock, $0.001 par value per share
(the "Ventures Series C Preferred Stock"), issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into:
(I) that fraction of a share of Purchaser Common Stock equal to the
Series C Share Value divided by the product of (A) the total number of
shares of Ventures Series C Preferred Stock outstanding on a fully-
diluted, fully-converted basis as though all convertible debt and
warrants which are convertible into or exercisable for Ventures Series
C Preferred Stock had been converted into or exercised for Ventures
Series C Preferred Stock immediately prior to the Effective Time (the
"Fully-diluted Series C Shares Outstanding") and (B) the Average
Closing Stock Price;
(II) the right to receive that fraction of the Advance Escrow Amount
equal to 0.212 divided by the number of Fully-diluted Series C Shares
Outstanding;
(III) the right to receive that fraction of the Cash Portion equal to
0.212 divided by the number of Fully-diluted Series C Shares
Outstanding; and
(IV) the right to receive that fraction of the Tax Refund Amount
equal to 0.212 divided by the number of Fully-diluted Series C Shares
Outstanding.
(B) STOCK OPTIONS AND WARRANTS. At the Effective Time, all Options (as
defined in Section 2.3) will be assumed by Purchaser in accordance with Section
5.5.
(C) CAPITAL STOCK OF ACQUISITION SUB. Each share of Common Stock, $0.01 par
value per share, of Acquisition Sub (the "Acquisition Sub Common Stock") issued
and outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock, $0.01
par value per share, of the Surviving Corporation. At and after the Effective
Time, each certificate evidencing ownership of shares of Acquisition Sub Common
Stock shall evidence ownership of such shares of capital stock of the Surviving
Corporation.
(D) ESCROW. At the Closing, on behalf of the holders of the outstanding
Ventures Capital Stock, Options and Warrants and pursuant to Article 11,
Purchaser shall deposit with State Street Bank and Trust Company (the "Escrow
Agent"): (1) that number of shares of Purchaser Common Stock representing 10%
of the total number of shares of Purchaser Common Stock issuable pursuant to
Section 1.6(a), less 10% of that number of shares obtained by dividing the
amount of Wired Cash at Closing (less the amount of Cash Portion increase, if
any, specified by Purchaser pursuant to proviso (x) of Section 1.5(b)(2)) by
the Average Closing Stock Price; and (2) instruments or other documentation
representing Options to purchase 10% of the shares of Purchaser Common Stock
issuable upon the exercise thereof (collectively, the "Escrow Shares"). The
portion of the Escrow Shares deemed to have been contributed on behalf of each
holder Ventures Capital Stock or Options shall be determined as follows:
(1) Each of the holders of Ventures Common Stock (including holders of
Options and Warrants to purchase Ventures Common Stock) shall be deemed to
have contributed 10% of the aggregate number of
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shares of Purchaser Common Stock (including Purchaser Common Stock issuable
upon exercise of such Options) to which each such holder is entitled under
Sections 1.6(a) and 5.5.
(2) Of the balance of the Escrow Shares:
(I) 78.8% shall be deemed to have been contributed on behalf of the
holders of Ventures Series A Preferred Stock (including holders of
Options and Warrants to purchase Ventures Series A Preferred Stock) in
proportion to the aggregate number of shares of Purchaser Common Stock
(including Purchaser Common Stock issuable upon exercise of such
Options and Warrants) to which each such holder is entitled under
Sections 1.6(a) and 5.5; and
(II) 21.2% shall be deemed to have been contributed on behalf of the
holders of Ventures Series C Preferred Stock (including holders of
Options and Warrants to purchase Ventures Series C Preferred Stock) in
proportion to the aggregate number of shares of Purchaser Common Stock
(including Purchaser Common Stock issuable upon exercise of such
Options and Warrants) to which each such holder is entitled under
Sections 1.6(a) and 5.5.
(E) FRACTIONAL SHARES. No fraction of a share of Purchaser Common Stock will
be issued by virtue of the Merger, but in lieu thereof each holder of shares of
Ventures Common Stock, Ventures Series A Preferred Stock, Ventures Series B
Preferred Stock or Ventures Series C Preferred Stock (collectively, the
"Ventures Capital Stock") or Warrants (after aggregating all fractional shares
of Purchaser Common Stock that otherwise would be received by such holder)
shall receive from Purchaser an amount of cash (rounded to the nearest whole
cent) equal to the product of (1) such fraction and (2) the Average Closing
Stock Price.
(F) ADJUSTMENTS TO EXCHANGE RATIOS. If, between the date of this Agreement
and the Effective Time, the outstanding shares of Purchaser Common Stock or
Ventures Capital Stock (or any class or series thereof) are changed into a
different number or class of shares by reason of any stock dividend,
subdivision, reclassification, recapitalization, split-up, combination or
similar transaction, the exchange ratios for the Ventures Capital Stock set
forth in Section 1.6(a)(1) through (4) above and, in the case of changes in the
Purchaser Common Stock, the Upper Collar Limit and the Lower Collar Limit shall
be appropriately adjusted. With respect to the Escrow Shares, if, between the
Effective Time and the date of termination of the Escrow Fund, the outstanding
shares of Purchaser Common Stock are changed into a different number or class
of shares by reason of any stock dividend, subdivision, reclassification,
recapitalization, split-up, combination or similar transaction, the number and
type of Escrow Shares shall be appropriately adjusted.
1.7 DISSENTING SHARES.
(A) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Ventures Capital Stock who (1) has the right under
applicable law to demand dissenter's or appraisal rights for such shares, (2)
has demanded and perfected such rights under applicable law and (3) as of the
Effective Time, has not effectively withdrawn or lost such rights ("Dissenting
Shares"), shall not be converted into Purchaser Common Stock pursuant to
Section 1.6(a), but the holder thereof shall only be entitled to such rights as
are granted by applicable law.
(B) Notwithstanding the foregoing, if any holder of shares of Ventures
Capital Stock who has the right under applicable law to demand and who does
demand appraisal of such shares under applicable law shall effectively withdraw
or lost (through failure to perfect or otherwise) the right to appraisal, then,
as of the later of the Effective Time and the occurrence of such event, such
holder's shares shall automatically be converted into and represent only
Purchaser Common Stock in accordance with Section 1.6(a).
(C) Ventures shall give Purchaser (1) prompt written notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served on Ventures pursuant to applicable law and (2) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under applicable law. Ventures will not voluntarily make any
payment with respect to any demands for appraisal and
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will not, except with the prior written consent of Purchaser, settle or offer
to settle any such demands. It is understood and agreed that the obligation to
make any payment under applicable law shall be exclusively that of the
surviving corporation and that Purchaser (i) shall be under no obligation to
perform and discharge any such obligation or to reimburse or make any
contribution to the capital of the surviving corporation to enable it to
perform or discharge any such obligation, and (ii) shall have no recourse
pursuant to Article 11 of this Agreement or otherwise against the Wired
Companies or their affiliates or stockholders with respect to any such demands
or obligation.
1.8 EXCHANGE OF CERTIFICATES.
(A) Boston EquiServe, Purchaser's transfer agent, shall serve as an exchange
agent in the Merger (the "Exchange Agent").
(B) At the Effective Time, Purchaser shall (1) authorize the Exchange Agent
to make available in accordance with this Article 1 the shares of Purchaser
Common Stock issuable pursuant to Section 1.6(a) in exchange for outstanding
shares of Ventures Capital Stock and (2) deliver to the Exchange Agent cash in
the amount of the Cash Portion plus cash in an amount sufficient for payment in
lieu of fractional shares pursuant to Section 1.6(e).
(C) No later than three (3) business days prior to the mailing date of the
notice of meeting of stockholders (or written consent of stockholders in lieu
of meeting), Purchaser shall provide Ventures with copies of the following
materials: (1) a letter of transmittal in customary form and (2) instructions
for use in effecting the surrender of Ventures certificates and (3) any other
documents required to be signed by a holder of a certificate or certificates
(the "Ventures Certificates") that immediately prior to the Effective Time
represented outstanding shares of Ventures Capital Stock or warrants that were
converted into shares of Purchaser Common Stock pursuant to Section 1.6(a) and
cash in lieu of any fractional shares pursuant to Section 1.6(e) in order to
surrender such Ventures Certificates in exchange for certificates representing
the Purchaser Common Stock and portion of the Cash Portion pursuant to Section
1.6(a) and cash in lieu of any fractional shares pursuant to Section 1.6(e).
Holders of Ventures Certificates who complete and validly execute and submit
such documents in accordance with the instructions thereto, together with such
Ventures Certificates (or affidavit of loss and indemnity in accordance with
Section 1.8(e) below), to Purchaser at the Closing shall be deemed to have
effected a surrender of such Ventures Certificates to the Exchange Agent for
cancellation in accordance with the requirements of Section 1.8(d) below.
Promptly after the Effective Time, but in no event later than ten (10) business
days thereafter, Purchaser shall cause the Exchange Agent to mail to each such
holder who has surrendered Ventures Certificates at the Closing (i)
certificates evidencing the number of full shares of Purchaser Common Stock and
portion of the Cash Portion into which the shares of Ventures Capital Stock
represented by the Ventures Certificates so surrendered by such holder were
converted pursuant to Section 1.6(a) and (ii) cash in lieu of any fractional
shares in accordance with Section 1.6(e).
(D) Promptly after the Effective Time, but in no event later than ten (10)
business days thereafter, Purchaser shall cause the Exchange Agent to mail to
each holder of record (as of the Effective Time) of Ventures Certificates that
did not surrender such Certificate pursuant to Section 1.8(c), the following
materials: (1) a letter of transmittal in customary form and (2) instructions
for use in effecting the surrender of the Ventures Certificates in exchange for
certificates representing the Purchaser Common Stock and portion of the Cash
Portion pursuant to Section 1.6(a) and cash in lieu of any fractional shares
pursuant to Section 1.6(e). Upon surrender of Ventures Certificates for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions
thereto, the holders of such Ventures Certificates shall be entitled to receive
in exchange therefor certificates representing the number of whole shares of
Purchaser Common Stock and portion of the Cash Portion into which their shares
of Ventures Capital Stock were converted at the Effective Time and payment in
lieu of fractional shares that such holders have the right to receive pursuant
to Section 1.6(e). Until so surrendered, outstanding Ventures Certificates will
be deemed from and after the Effective Time, for all corporate purposes, to
evidence the ownership of the
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number of full shares of Purchaser Common Stock and portion of the Cash Portion
into which the shares of Ventures Capital Stock represented thereby were so
converted and the right to receive an amount in cash in lieu of any fractional
shares in accordance with Section 1.6(e).
(E) In the event any Ventures Certificates have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Ventures Certificates, upon the making of an affidavit of that fact
by the holder thereof in a form reasonably acceptable to Purchaser,
certificates representing the shares of Purchaser Common Stock and portion of
the Cash Portion into which the shares of Ventures Capital Stock represented by
such Ventures Certificates were converted pursuant to Section 1.6(a) and any
cash for fractional shares pursuant to Section 1.6(e). Purchaser may in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Ventures Certificate to provide to
Purchaser an indemnity agreement, reasonable in form and substance, against any
claim that may be made against Purchaser with respect to the Ventures
Certificate alleged to have been lost, stolen or destroyed.
1.9 TAX CONSEQUENCES. For federal income tax purposes, the Merger is intended
to constitute a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). The parties to this
Agreement hereby adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
1.10 ACCOUNTING CONSEQUENCES. For financial reporting purposes, the Merger is
intended to be accounted for as a purchase.
1.11 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Purchaser to necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full
right, title and possession of and to all rights and property of Acquisition
Sub and Ventures, the officers and directors of the Surviving Corporation and
Purchaser shall be fully authorized (in the name of Acquisition Sub, in the
name of Ventures and otherwise) to take such action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF VENTURES
Except as set forth in the Disclosure Schedule attached hereto (the
"Disclosure Schedule"), of which the Schedules referred to below are a part,
and in the documents and other materials identified in the Disclosure Schedule,
the section numbers and letters of which correspond to the section and
subsection numbers and letters of this Agreement, Ventures represents and
warrants to Purchaser as follows:
2.1 ORGANIZATION, STANDING, ETC. of the Wired Companies; Corporate
Authorization; Enforceability.
(A) Each of the Wired Companies (as defined below) is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has all requisite corporate power and
authority to carry on its business as currently conducted and to own or lease
and to operate its properties. Each of the Wired Companies is qualified to do
business and is in good standing in each jurisdiction in which the property
owned, leased or operated by it, or the nature of the business conducted by it,
makes such qualification necessary and in which the failure to so qualify would
have a material adverse effect on the business, operations, financial condition
or results of operations of the Wired Companies, taken as a whole (a "Material
Adverse Effect on Wired"). With respect to each of the Wired Companies, the
jurisdiction in which it is organized and qualified to do business is listed in
Schedule 2.1.
(B) Ventures has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and all other documents and instruments executed
or to be executed by Ventures pursuant to this Agreement have been duly
authorized by
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all necessary corporate and other action on the part of Ventures. This
Agreement and all other documents and instruments executed or to be executed by
Ventures pursuant to this Agreement have been, or will have been, at the time
of their respective executions and deliveries, duly executed and delivered by a
duly authorized officer of Ventures.
(C) This Agreement and all other agreements executed or to be executed by
Ventures pursuant to this Agreement constitute, or will constitute, the valid
and legally binding obligations of Ventures, enforceable in accordance with
their respective terms, except as such enforceability may be limited by
equitable principles and by applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium or similar laws relating to or affecting the rights of
creditors generally.
2.2 WIRED COMPANIES; TITLE TO WIRED COMPANIES' SHARES, ETC. Schedule 2.2
contains a list of each corporation or other entity of which Ventures owns,
directly or indirectly, 50% or more of the outstanding equity interests
(collectively with Ventures, the "Wired Companies") and the capitalization and
ownership thereof. Except as set forth in Schedule 2.2, each of the equity
interests in the Wired Companies owned by Ventures is free and clear of any
lien, pledge, charge, adverse claim, security interest, encumbrance (including
any imposed by law in any jurisdiction), title retention agreement, option,
equity or right to purchase of any kind except for restrictions on transfer
imposed by applicable securities laws. Except as set forth in Schedule 2.2, the
Wired Companies do no own any shares of capital stock or other securities of,
or have an ownership interest in, any corporation, partnership, association or
other entity.
2.3 CAPITALIZATION OF VENTURES. The authorized capital stock of Ventures
consists of: (a) 30,000,000 shares of Preferred Stock, par value $0.001 per
share, of which 15,300,000 shares have been designated Series A Preferred
Stock, 700,000 shares have been designated Series B Preferred Stock, 3,800,000
shares have been designated Series C Preferred Stock and 50,000 shares have
been designated Series D Preferred Stock; and (b) 45,000,000 shares of Common
Stock. As of the date of this Agreement, the shares of Ventures Capital Stock
that are issued and outstanding consist of 15,199,794 shares of Ventures Series
A Preferred Stock, 625,000 shares of Ventures Series B Preferred Stock,
3,762,760 shares of Ventures Series C Preferred Stock, no shares of Ventures
Series D Preferred Stock and 96,223 shares of Ventures Common Stock. All of the
issued and outstanding shares of Ventures Capital Stock are owned of record by
the persons set forth on Schedule 2.3. Each issued and outstanding share of
Ventures Capital Stock has been duly authorized and validly issued and is fully
paid and nonassessable. Except for warrants to purchase an aggregate of 50,000
shares of Ventures Series A Preferred Stock (the "Warrants") and options to
purchase an aggregate of 2,297,430 shares of Ventures Common Stock (the
"Options"), and except as set forth on Schedule 2.3, no subscriptions, options,
warrants, calls or rights of any kind, directly or indirectly to purchase or
otherwise acquire any shares of capital stock of any of the Wired Companies,
and no securities directly or indirectly convertible into or exchangeable for
any shares of capital stock of any of the Wired Companies are outstanding. The
Options are held by present or former directors, officers and employees of and
consultants to the Wired Companies, in the amounts and with the exercise prices
and vesting schedules set forth on Schedule 2.3.
2.4 CERTIFICATE OF INCORPORATION AND BYLAWS. Copies of the certificate of
incorporation and bylaws or other organizational documents of each of the Wired
Companies have been made available to Purchaser, and each such copy is true,
correct and complete.
2.5 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. The execution and delivery of
this Agreement and all other documents and instruments executed or to be
executed by Ventures pursuant to this Agreement, and the consummation of the
transactions contemplated hereby, will not (A) conflict with or result in any
violation of or default under any provision of the charter or bylaws of any of
the Wired Companies, (B) breach, violate or constitute an event of default (or
an event which with the lapse of time or the giving of notice or both would
constitute an event of default) under any note, bond security agreement,
mortgage, indenture, trust, lease, partnership or other agreement or other
instrument, permit, concession, grant, franchise or license, or give rise to
any right of termination, cancellation, modification or acceleration under, or
require any consent or the giving of any notice under, any agreement or other
instrument or obligation to which any of the Wired
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Companies is a party, or by which any of the Wired Companies or any of their
properties or assets may be bound, or result in the creation of any lien, claim
or encumbrance or other right of any third party of any kind whatsoever upon
the properties or assets of any of the Wired Companies pursuant to the terms of
any such instrument or obligation, the result of which (either individually or
in the aggregate) would have a Material Adverse Effect on Wired, or (C) violate
or conflict with any law, judgment, order, decree, statute, law, ordinance,
rule or regulation, writ injunction, decree or other instrument of any Federal,
state, local or foreign court or governmental or regulatory body, agency or
authority applicable to any of the Wired Companies or by which any of their
properties or assets may be bound, the result of which (either individually or
in the aggregate) would have a Material Adverse Effect on Wired. Ventures has
complied with all of its obligations under Section 1.5 of the Advance Agreement
and Advance Magazine Publishers Inc. ("AMP") has waived any rights under
Section 1.5 to purchase Ventures or Wired Digital, Inc.
2.5 GOVERNMENTAL AUTHORIZATIONS AND CONSENTS. Except as set forth on Schedule
2.6, no material consents, licenses, approvals or authorizations of, or
registrations or declarations with, any governmental authority, agency, bureau
or commission, or any third party, are required to be obtained or made by any
of the Wired Companies in connection with the execution, delivery, performance,
validity and enforceability of this Agreement or the Merger, other than (a) a
filing with the Federal Trade Commission and the Department of Justice under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (b) the approval of Ventures' stockholders in accordance with applicable
law, (c) filing the Certificate of Merger under the DGCL and (d) other
consents, licenses, approvals, authorizations, registrations or declarations,
where the failure to obtain such would not have a Material Adverse Effect on
Wired.
2.7 NO VIOLATIONS. None of the Wired Companies is in violation of any term of
its certificate of incorporation or bylaws or other charter documents or any
note, bond, security agreement, mortgage, indenture, instrument or agreement
relating to indebtedness for borrowed money or of any judgment, decree or order
which names such entity, or of any term of any other instrument, contract or
agreement, which violation either individually or when aggregated with all
other such violations, would have a Material Adverse Effect on Wired. None of
the Wired Companies is in violation of any law, ordinance, rule or governmental
regulation applicable to it or any of its properties or of any judgment, order,
writ, injunction, decree or other instrument of any federal, state, local or
foreign court or governmental or regulatory body, which violation either
individually or when aggregated with all other such violations would have a
Material Adverse Effect on Wired.
2.8 FINANCIAL STATEMENTS. Ventures has delivered to Purchaser (a) the
consolidated balance sheets of Ventures as of December 31, 1997, 1996 and 1995
and the related consolidated statements of income, stockholders' equity and
cash flows for the years then ended, accompanied in each case by the opinion
thereon of KPMG Peat Marwick LLP, independent public accountants, and (b) the
unaudited consolidated balance sheet of Ventures (the "Unaudited Balance
Sheet") as of August 31, 1998 (the "Balance Sheet Date") and the related
unaudited consolidated statements of income, stockholders' equity and cash
flows for the eight months then ended (such financial statements, including the
notes thereto, hereinafter being referred to as the "Financial Statements").
The Financial Statements are attached hereto as Schedule 2.8. All of the
Financial Statements have been prepared from the books and records of Ventures
and have been prepared in accordance with GAAP and present fairly in all
material respects the consolidated financial position of Ventures as of the
dates thereof and the consolidated results of its operations for the periods
then ended, except that the unaudited financial statements were prepared on an
interim basis, are subject to normal year-end adjustments and do not contain
all the footnote disclosures required by GAAP consistently applied. None of the
Wired Companies has any debts, obligations, guaranties of the obligations of
others or liabilities of the type required to be disclosed in a balance sheet
prepared in accordance with GAAP or the notes thereto, except for (a) debts,
obligations, guaranties and liabilities reflected or reserved against in the
Unaudited Balance Sheet, (b) debts, obligations, guaranties and liabilities
referred to in this Agreement or any of the Schedules hereto or in any of the
documents or other materials identified in the Schedules hereto (excluding
obligations or liabilities arising from the breach or violation of the
documents or other materials identified in the Schedules, unless such
obligations or liabilities are specifically identified in the Schedules), (c)
debts, obligations, guaranties and liabilities
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incurred or entered into in the ordinary course of business after the Balance
Sheet Date, and (d) debts, obligations and liabilities directly or indirectly
relating to this Agreement and the other agreements and instruments being
executed and delivered in connection herewith and the transactions referred to
herein and therein (including obligations to pay legal, accounting and
investment banker fees and other amounts in connection therewith).
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Schedule 2.9
and except for (a) any transfers, borrowings, dividends or guaranties between
the Wired Companies that were made, paid or incurred in the ordinary course of
business, (b) transactions and other matters contemplated by this Agreement and
any changes, indebtedness, agreements, encumbrances, damages, liabilities or
obligations arising therefrom or relating thereto, and (c) matters disclosed in
the Financial Statements, since the Balance Sheet Date, none of the Wired
Companies has:
(A) declared, set aside, made or paid any dividend or other distribution
in respect of its capital stock or purchased or redeemed, directly or
indirectly, any shares of its capital stock;
(B) issued or sold any shares of its capital stock of any class or any
subscriptions, options, warrants, calls or other rights to purchase
directly or indirectly any such shares or any securities directly or
indirectly convertible into or exchangeable for such shares (except for
sales of Ventures Capital Stock upon exercise of Warrants and Options or
conversion of convertible securities outstanding on the Balance Sheet
Date);
(C) incurred any indebtedness for money borrowed by any of the Wired
Companies or issued or sold any debt securities;
(D) mortgaged, pledged or subjected to any lien, lease, security interest
or other charge or encumbrance any of its properties or assets, tangible or
intangible;
(E) acquired or disposed of any material assets or properties except in
the ordinary course of business and consistent with past practice, or
canceled or compromised any debts or knowingly waived any claims or rights
of a material nature;
(F) granted to any officer, director or employee any increase in
compensation, except in the ordinary course of its current personnel
policies consistent with past practice or any bonus or service award or
other like benefit, or instituted, increased, augmented or improved any
Benefit Plan (as that term is hereinafter defined);
(G) suffered any damage, destruction or loss (whether or not covered by
insurance) that has had or would reasonably be expected to have a Material
Adverse Effect on Wired;
(H) incurred any material obligation or liability (whether absolute,
accrued, contingent or otherwise) except for fair equivalent value or in
the ordinary course of business and consistent with past practice;
(I) experienced any Material Adverse Effect on Wired;
(J) made any change in any accounting principle or practice or in its
methods of applying any such principle or practice; or
(K) entered into any agreement to do any of the foregoing.
2.10 TITLE TO ASSETS. Except as set forth in Schedule 2.10, each of the Wired
Companies has good title to all personal property, tangible or intangible,
which it purports to own, including the tangible assets reflected on the
Unaudited Balance Sheet, other than (a) assets disposed of after the Balance
Sheet Date in the ordinary course of business, and (b) other assets disposed of
after the Balance Sheet Date and referred to in the Financial Statements.
Except as set forth in Schedule 2.10, all personal property, tangible or
intangible, owned by the Wired Companies is owned free and clear of all liens,
mortgages, pledges, charges, security interests or encumbrances except for (a)
liens for current taxes not yet due and payable, and (b) purchase money
security interest and common law liens, in each case for goods purchased in the
ordinary course of business, and (c) such imperfections of title and
encumbrances, if any, that are not material in character, amount or extent and
do not materially detract from the value, or materially interfere with the use
of, the property subject thereto or
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affected thereby. None of the Wired Companies owns any real property or any
interest in real property, except for the leasehold interests created under the
leases referred to in Schedule 2.15 hereto.
2.11 INTELLECTUAL PROPERTY.
(A) Except as set forth on Schedule 2.11(a), the Wired Companies own, or
are licensed or otherwise possess legally enforceable rights to use, all
patents, trademarks, trade names, service marks, copyrights and Internet
domain names, and any applications therefor, technology, know-how, computer
software programs and applications, and tangible and intangible proprietary
information or material that are used in the business of the Wired
Companies as currently conducted in all material respects (the
"Intellectual Property Rights"), free and clear of all liens, claims and
encumbrances. The Intellectual Property Rights are sufficient to carry on
the business of the Wired Companies as presently conducted in all material
respects.
(B) Schedule 2.11(b) sets forth a list of patents, registered and
material unregistered trademarks, trade names and service marks, Internet
domain names, and any pending applications therefor, included in the
Intellectual Property Rights and specifies, where applicable, the
jurisdictions in which each such Intellectual Property Right has been
issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners.
(C) The present business activities or products of the Wired Companies do
not infringe any intellectual property rights of others, except where such
infringement would not have a Material Adverse Effect on Wired. Except as
set forth on Schedule 2.11, no material claims with respect to the
Intellectual Property Rights have been asserted and are pending against any
of the Wired Companies as of the date of this Agreement (1) to the effect
that the sale, licensing or use of any of the products of any of the Wired
Companies infringes any other party's valid copyright, trademark, service
mark, trade secret or other intellectual property right, (2) against the
use by any of the Wired Companies of any material trademarks, service
marks, trade names, trade secrets, copyrights, patents, technology, know-
how or computer software programs or applications used in the Wired
Companies' business as currently conducted, or (3) challenging the
ownership by any of the Wired Companies, of any of the Intellectual
Property Rights owned by the Wired Companies.
(D) The Wired Companies have the right to use all trade secrets, customer
lists, hardware designs, programming processes, software and other
information required for its products or their business as presently
conducted where the absence of such right would have a Material Adverse
Effect on Wired. The Wired Companies have taken commercially reasonable
measures to protect and preserve the security and confidentiality of its
trade secrets and other confidential information. All employees and
consultants of the Wired Companies involved in the design, review,
evaluation or development of proprietary products or Intellectual Property
Rights have executed nondisclosure and assignment of inventions agreements
substantially in the form provided to Purchaser or otherwise sufficient to
give the Wired Companies the legal right to protect the confidentiality of
the Wired Companies' trade secrets and other confidential information and
to assign the interests of such employees or consultants in Intellectual
Property Rights to the Wired Companies.
2.12 BENEFIT PLANS.
(A) Except as set forth on Schedule 2.12, none of the Wired Companies
maintains, is a party to, contributes to or is obligated to contribute to, or
has liability or contingent liability for, any of the following (whether or not
set forth in a written document):
(1) Any employee benefit plan, employee pension benefit plan, employee
welfare benefit plan, or multiemployer plan, all as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), regardless of
whether or not a plan is exempt from some or all of the otherwise
applicable requirements of ERISA; or
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(2) Any bonus, deferred compensation, incentive, restricted stock, stock
purchase, stock option, stock appreciation right, debenture, supplemental
pension, profit sharing, royalty pool, severance or termination pay, loan
guarantee, relocation assistance, employee loan or other extensions of
credit, or other similar plan, program, agreement, policy, commitment,
arrangement or benefit currently in effect which is applicable to any
present or former employee or his or her survivors (whether or not
published or generally known).
(B) As to each plan, program, agreement, policy, commitment, arrangement or
benefit listed on Schedule 2.12 (each, a "Benefit Plan"), Ventures has
furnished to Purchaser complete, accurate and current copies of the text
(including amendments) of the Benefit Plan if previously reduced to writing or
has provided in Schedule 2.12 a description of all material elements of the
Benefit Plan if not previously reduced to writing. With respect to each
employee benefit plan (as defined in section 3(3) of ERISA) listed on Schedule
2.12, Ventures has made available to Purchaser the following:
(1) Where applicable, the most recent summary plan description, as
described in section 102 of ERISA;
(2) Any summary of material modifications which has been distributed to
participants or filed with the U.S. Department of Labor but which has not
been incorporated in an updated summary plan description furnished under
paragraph (1) above;
(3) The annual reports, as described in section 103 of ERISA, for the
most recent three plan years for which an annual report has been prepared
(including any schedules), and any financial statements and opinions
required by Section 103(a)(3) of ERISA;
(4) Where applicable, the actuarial reports for the most recent three
reporting periods for which such a report has been prepared;
(5) Any trust agreement, investment management agreement, contract with
an insurance company or service provider, administration agreement or other
contract, agreement or insurance policy; and
(6) Where applicable, the most recent determination letter issued by the
Internal Revenue Service ("IRS").
(C) With respect to each Benefit Plan:
(1) All of the currently applicable requirements of ERISA and regulations
thereunder have been fully and timely complied with in all material
respects and each Benefit Plan has been administered in material respects
in accordance with its terms;
(2) There is no act or omission of any of the Wired Companies, or any
other person or entity, which would constitute a material violation of or
material prohibited act (for which an exemption is not available) under any
applicable section of ERISA or the Code, or regulations under either, and
no amendment to such Benefit Plan is precluded by any waiver, extension or
prior amendment described in Section 412(f)(1) of the Code;
(3) All contributions, premiums or other payments due from any of the
Wired Companies to (or under) a Benefit Plan for all periods prior to the
date of this Agreement have been fully paid or adequately provided for on
the books of the Wired Companies and all accruals have been made in
accordance with generally accepted accounting principles;
(4) The provisions of each Benefit Plan intended to meet the requirements
of Section 401(a) of the Code meet such requirements; a favorable
determination letter covering the provisions of the Tax Reform Act of 1986
has been issued by the Internal Revenue Service (the "IRS") with respect to
each plan and trust; and nothing has occurred since the date of such
determination letter that would adversely affect the qualification of such
plan;
(5) None of the Benefit Plans nor any fiduciary thereof has been the
subject of an order or investigation or examination by a governmental
agency and there are no matters pending before the IRS, the Department of
Labor, or any other governmental agency pertaining to these Benefit Plans.
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(D) The Wired Companies have not maintained or contributed to or in any way
directly or indirectly have any liability (whether contingent or otherwise)
with respect to any Benefit Plan subject to Title IV of ERISA; except as
indicated on Schedule 2.12, the Wired Companies have no obligation to provide
medical or other benefits to employees or former employees of the Wired
Companies or their survivors, dependents and beneficiaries, except as may be
required by the Consolidated Omnibus Budget Reconciliation Act of 1986 or
applicable state medical benefits continuation statues.
(E) Schedule 2.12(e) sets forth the names of all current employees of the
Wired Companies (the "Employees") and such Employee's job title, such
Employee's current salary, the amount of any bonuses or other compensation paid
since January 1, 1998 to such Employee, the date of employment of such Employee
and the accrued vacation time of such Employee. Except as set forth in Schedule
2.12(e), there are no outstanding loans from any Wired Company to any officer,
director, employee or consultant of any Wired Company.
(F) None of the Benefit Plans is a "multiple employer welfare plan" (as
defined in Section 3(40) of ERISA), or an employee benefit pension plan
maintained by more than one employer (as described in Section 413(c) of the
Code).
(G) With respect to any Benefit Plan that is an employee welfare benefit
plan, there are no understandings, agreements or undertakings, written or oral,
that would prevent any such plan (including any such plan covering retirees or
other former employees) from being amended or terminated without material
liability to Ventures or the Surviving Corporation on or at any time after the
Closing Date Time.
(H) Except as set forth in Schedule 2.12(h), no employee of Ventures will be
entitled to any additional compensation or benefits or any acceleration of the
time of payment or vesting of any compensation or benefits under any Benefit
Plan as a result of the transactions contemplated by this Agreement, except to
the extent required by operation of law in the event of a termination or
partial termination of the Benefit Plan.
(I) Except as set forth in Schedule 2.12(i), no amount that could be received
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated by this Agreement by any employee, officer, or
director of Ventures or any of its subsidiaries who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation Section
1.280G-1) under any employment, severance or termination agreement, other
compensation arrangement or Benefit Plan currently in effect would be an
"excess parachute payment" (as such term is defined in Section 280G(b)(1) of
the Code). Except as set forth in Schedule 2.12(i), no such person is entitled
to receive any additional payment from Ventures, the Surviving Corporation or
any other person in the event that the excise tax of Section 4999(a) of the
Code is imposed on such person.
(J) No person is entitled to receive a bonus or other compensation pursuant
to the Wired Ventures, Inc. Employee Transaction Bonus Plan as a result of the
consummation of the transactions contemplated by this Agreement.
2.13 LITIGATION. Schedule 2.13 sets forth, as of the date hereof, each
action, suit, proceeding or governmental investigation pending against any of
the Wired Companies or their respective properties, at law or in equity or
before any court, governmental department, commission, board, agency, authority
or instrumentality, domestic or foreign, or that have been settled, dismissed
or resolved on or since the Balance Sheet Date and each action, suit,
proceeding or governmental investigation known to Ventures as of the date
hereof that is overtly threatened against any of the Wired Companies or other
respective properties. Except as disclosed in Schedule 2.13, there are no
actions, suits, proceedings or governmental investigations pending against any
of the Wired Companies or their respective properties, at law or in equity or
before any court, governmental department, commission, board, agency, authority
or instrumentality, domestic or foreign, or that have been settled, dismissed
or resolved on or since the Balance Sheet Date, that have had or would
reasonably be expected to have a Material Adverse Effect on Wired and, to
Ventures' knowledge, no action, suit,
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proceeding or governmental investigation that would reasonably be expected to
have a Material Adverse Effect on Wired is overtly threatened against any of
the Wired Companies or their respective properties. None of the Wired Companies
is subject to any judgment, stipulation, order or decree arising from any
action, suit, proceeding or investigation that individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect on Wired. There
are no threatened strikes or work stoppages by the employees of any of the
Wired Companies and, to Ventures' knowledge, there are no pending union
organizing efforts with respect to such employees. No action, suit, proceeding
or governmental investigation is pending or, to Ventures' knowledge, overtly
threatened against any of the Wired Companies that seeks to question, delay or
prevent the consummation of the transactions contemplated hereby. Ventures has
not received any Officer's Certificate (as such term is defined in Section
10.2(d) of the Advance Agreement).
2.14 TAXES. Except as set forth in Schedule 2.14, with respect to Taxes (as
defined below):
(A) Each of the Wired Companies has filed or will file or cause to be
filed (or extensions of the time for filing have been or will be duly
filed), within the time prescribed by law, all returns, reports and other
filings ("Returns") required to be filed under federal, state, local or any
foreign laws by such company for all taxable periods ending on or prior to
the Closing Date and such Returns have been, or will be when filed prior to
the Closing Date, accurately and completely prepared in all material
respects in compliance with all laws, rules and regulations;
(B) Each of the Wired Companies has, within the time and in the manner
prescribed by law, paid (and until the Closing will, within the time and in
the manner prescribed by law, pay) all Taxes (as defined below) that are
shown on Returns filed prior to the Closing to be due on or before the
Closing Date;
(C) Since the Balance Sheet Date, Ventures has established (and until the
Closing Ventures will continue to maintain) on its books and records
reserves that are adequate under GAAP for the payment of all Taxes not yet
due and payable; at the Closing, such reserves as adjusted in accordance
with past practice will be sufficient for the then unpaid Taxes of the
Wired Companies attributable to periods prior to or ending on the Closing
Date;
(D) Ventures has not filed (and will not file prior to the Closing Date)
any consent agreement under Section 341(f) of the Code (or any
corresponding provision of state, local or foreign law) or agreed to have
Section 341(f)(2) of the Code (or any corresponding provision of state,
local or foreign law) apply to any disposition of the subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by any of
the Wired Companies;
(E) No deficiency or adjustment for any Taxes has been proposed or
asserted in writing, or assessed against any of the Wired Companies and no
federal, state or local audits or other administrative proceedings or your
proceedings are presently pending with regard to any Taxes, there are no
matters under discussion with any governmental authority regarding claims
for the assessment or collection of Taxes, and no waiver or consent
extending any statute of limitations for the assessment or collection of
any Taxes, which waiver or consent remains in effect, has been executed by
(or on behalf of ) any of the Wired Companies nor are any requests for such
waiver or consent pending;
(F) Ventures has not elected to be treated as an S Corporation pursuant
to Section 1362(a) of the Code;
(G) None of the Wired Companies is, or has at any time been a "United
States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code;
(H) There is no agreement, plan or arrangement covering any employee or
independent contractor or former employee or independent contractor of the
Wired Companies that, considered individually or considered collectively
with any other such agreement, plan or arrangement, will, or could
reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible
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pursuant to Section 280G of the Code or that would be subject to an excise
tax under Section 4999 of the Code;
(I) None of the Wired Companies is or has ever been a party to or bound
by any tax indemnity agreement, tax sharing agreement, tax allocation
agreement or similar agreement or arrangement and none of them has any
liability for Taxes of any person (other than such Wired Company) under
Treasury Regulation 1.1502-6 (or any similar provision of state, local or
foreign law);
(J) Each of the Wired Companies has withheld amounts from its employees
and other persons required to be withheld under the tax, social security,
unemployment and other withholding provisions of all federal, state, local
and foreign laws; and
(K) For purposes of this Agreement, "Taxes" in the plural and "Tax" in
the singular shall refer to all or any taxes, charges, fees, levies or
other assessments of whatever kind or nature, including, without
limitation, all net income, gross income, gross receipts, value added,
unitary, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, social security, payroll, employment, excise, estimated,
severance, stamp, occupancy or property taxes, customs duties, fees,
assessments or charges of any kind whatsoever, including the recapture of
any tax items, (together with any interest and any penalties, additions to
tax or additional amounts) imposed by any taxing authority (domestic or
foreign) upon or payable by any of the Wired Companies.
2.15 CONTRACTS. Ventures has made available to Purchaser a copy or
description of any outstanding written or oral (a) contract or arrangement for
the employment of any person by any of the Wired Companies providing for cash
compensation equal to or greater than $100,000 per annum, (b) collective
bargaining agreement to which any of the Wired Companies is a party, (c)
mortgage, indenture, credit facility, note or installment obligation or other
instrument or contract for or relating to any borrowing of an amount in excess
of $50,000 by any of the Wired Companies (other than intercompany borrowings
between the Wired Companies), (d) guaranty of any loan obligation in excess of
$50,000 by any of the Wired Companies (excluding any endorsement made in the
ordinary course of business for collection), (e) agreement between any of the
Wired Companies and any holder of 5% or more of the outstanding Ventures
Capital Stock or any officer or director of any Wired Company, (f) lease or
real or personal property under which any of the Wired Companies is lessor,
except equipment leases entered into in the ordinary course of business, (g)
lease of real property under which any of the Wired Companies is lessee
involving annual rentals in excess of $50,000, (h) lease of personal property
under which any of the Wired Companies is lessee and under which any such
entity is obligated to make annual aggregate payments of more than $50,000, (i)
agreement for the purchase by any of the Wired Companies of equipment involving
outstanding commitments in excess of $50,000, (j) agreement materially limiting
the freedom of any of the Wired Companies to compete in any line of business,
with any person or other entity or in any geographical area, (k) other
agreement, contract or obligation of any of the Wired Companies calling for or
involving the payment by or to any Wired Company, potential payment by or to
any Wired Company or accrued obligation by such company, form the date hereof
through the earliest date such agreement, contract or obligation can be
terminated unilaterally without material penalty by such company, of an amount
in excess of $100,000, (1) any contract, arrangement or understanding not
otherwise identified on the Disclosure Schedule and relating to the
acquisition, issuance or transfer of any securities, (m) any material contract,
arrangement or understanding having more than one year remaining on its term
and relating to the acquisition, transfer, distribution, use, development,
sharing or license of any Intellectual Property Rights, and (n) any outstanding
offer, commitment or obligation to enter into any contract or arrangement of
the nature described in subsections (a) through (m) of this subsection 2.15. A
list or description of each of the items described in the previous sentence
("Material Contracts") is set forth on Schedule 2.15. Except as disclosed in
Schedule 2.15, all of the Material Contracts are in full force and effect and,
as to each Material Contract, there does not exist thereunder any material
breach on the part of any of the Wired Companies, nor (to the best knowledge of
the Wired Companies) is any other party in material breach of any Material
Contract, and there does not exist any event, occurrence or condition,
including the consummation of the transactions contemplated hereunder, which
(after notice, passage of time, or both) would constitute a material breach
thereunder on the part of any of the Wired Companies.
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2.16 INSURANCE. Schedule 2.16 contains a list of all material insurance
policies maintained by or on behalf of or covering any of the Wired Companies
(the "Policies"), together with, in respect of each such policy, the name of
the insurer, the number of the policy, the annual policy premium payable
therefor, the limits of coverage, the deductible amount (if any), the
expiration date thereof and each pending claim thereunder. Ventures has made
available to Purchaser copies of all current declaration sheets relating to the
Policies. Except as noted on Schedule 2.16, as of the date hereof, the Policies
are in full force and effect, no notices of cancellation or nonrenewal have
been received by any of the Wired Companies with respect thereto, and all
premiums due thereon have been paid.
(A) To Ventures' knowledge, during the period of time that the Wired
Companies have leased or owned their respective properties, none of the Wired
Companies used, generated, manufactured, installed, released, discharged,
stored or disposed of any "Hazardous Materials," as defined below, on, under,
in or about the site of such properties. The term "Hazardous Materials" shall
mean any substance, material or waste which is regulated by any local
government authority, the State of California, or the United States Government,
including, without limitation, any material or substance that is (1) defined as
a "hazardous waste," "hazardous material," "hazardous substance," "extremely
hazardous waste" or "restricted hazardous waste" under any provision of
California or any other applicable law, (2) petroleum, (3) asbestos, (4)
designated as a "hazardous substance" pursuant to Section 311 of the Clean
Water Act, 33 U.S.C. (S) 1251 et seq. (33 U.S.C. (S) 1321) or listed pursuant
to Section 307 of the Clean Water Act (33 U.S.C. (S) 1317), (5) defined as a
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 6901 et seq. (42 U.S.C. (S) 6903), or (6) defined
as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S) 9601 et
seq. (42 U.S.C. (S) 9601).
(B) The conduct of the Wired Companies' business complies in all material
respects with all applicable Federal, state and local laws, ordinances and
regulations pertaining to air and water quality, Hazardous Materials, waste,
disposal or other environmental matters, including the Clean Water Act, the
Clean Air Act, the Federal Water Pollution Control Act, the Solid Waste
Disposal Act, the Resource Conservation Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, and the rules,
regulations and ordinances of the city and county in which their business is
located, the Environmental Protection Agency and all other applicable Federal,
state, regional and local agencies and bureaus.
(C) To Ventures' knowledge, none of the Wired Companies (1) has ever sent a
Hazardous Material to a site that, pursuant to any applicable Federal, state or
local law, ordinance and regulation pertaining to environmental matters, (A)
has been placed on the "National Priorities List" of hazardous waste sites, the
"CERCLIS" list, or any similar state list, or (B) is subject to a claim, an
administrative order or other request to take "removal" or "remedial" action,
as defined in any applicable Federal, state or local law, ordinance and
regulation pertaining to environmental matters, or to pay for the costs of
cleaning up the site, (2) is not in compliance in all material respects with
all applicable Federal, state or local laws, ordinances and regulations
pertaining to environmental matters in all of its activities and operations,
(3) is involved in any suit or proceeding or has received any notice or request
for information from any governmental agency or authority or other third party
with respect to a release or threatened release of any Hazardous Material or a
violation or alleged violation of any applicable Federal, state or local law,
ordinance and regulation pertaining to environmental matters, or has received
notice of any claims from any person or entity relating to property damage or
to personal injuries from exposure to any Hazardous Material, or (4) has failed
to timely file any report required to be filed, failed to acquire all necessary
certificates, approvals and permits or failed to generate and maintain all
required data, documentation and records under all applicable Federal, state or
local laws, ordinances and regulations pertaining to environmental matter.
2.18 BROKERS. No agent, broker, person or firm acting on behalf of Ventures
or its stockholders is, or will be, entitled to any commission or broker's or
finder's fees from any of the parties hereto, or from and person controlling,
controlled by or under common control with any of the parties hereto, in
connection with any of the transactions contemplated herein, except for Lazard
Freres LLC, whose fees and expenses will be
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paid as provided in Section 12.4. A copy of the Lazard Freres LLC, engagement
letter setting forth such fees and expenses has been made available to
Purchaser.
2.19 STATEMENTS; PROXY STATEMENT/PROSPECTUS. The information supplied by
Ventures for inclusion in the Form S-4 Registration Statement (as defined in
Section 3.7) shall not, at the time the Form S-4 Registration Statement becomes
effective under the Securities Act of 1933, as amended (the "Securities Act"),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The information supplied by Ventures for inclusion in the proxy
statement/prospectus or information statement/prospectus to be sent to
stockholders of Ventures in connection with a meeting of Ventures' stockholders
(or, alternatively, the solicitation of written consents in lieu of a meeting)
to approve and adopt this Agreement and approve the Merger (such proxy
statement/prospectus or information statement/prospectus as amended or
supplemented being referred to herein as the "Proxy Statement") shall not, on
the date the Proxy Statement is first mailed to Ventures stockholders or at the
time of the meeting of stockholders (or, alternatively, on the date the
necessary written consent under applicable law has been obtained) contain any
untrue statement of material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
Notwithstanding the foregoing, Ventures makes no representation or warranty
with respect to any information provided by Purchaser or Acquisition Sub that
is contained in any of the foregoing documents.
2.20 GOVERNMENTAL PERMITS. The Wired Companies have in force, and are in
compliance with, in all material respects, all material governmental permits,
licenses, exemptions, consents, authorizations and approvals used in or
required for the conduct of their business as presently conducted and where the
absence of such compliance would have a Material Adverse Effect on Wired, all
of which shall continue in full force and effect, without requirement of any
filing or the giving of any notice and without modification thereof, following
the consummation of the transactions contemplated hereby.
2.21 MAJOR CUSTOMERS. Schedule 2.21 sets forth a complete and correct list of
the ten largest customers of the Wired Companies, in terms of revenue
recognized in respect of such customers during the fiscal year ended December
31, 1997 and the six months ended June 30, 1998, showing the amount of revenue
recognized for each such customer during such period. Except as set forth on
Schedule 2.21, as of the date hereof, to the knowledge of the Wired Companies,
none of the Wired Companies has received any written notice or other written
communication from any of the customers listed as customers for the six (6)
months ended June 30, 1998 in Schedule 2.21 hereto terminating or reducing in
any material respect, or setting forth an intention to terminate or reduce in
the future, or otherwise reflecting a material adverse change in, the business
relationship between such customer and the Wired Companies.
2.22 TRAFFIC. Schedule 2.22 attached hereto sets forth certain statistics
regarding Ventures' business which are true and correct in all material
respects as of the dates stated in such Schedule. Without limiting the
materiality of any other representations, warranties and covenants of Ventures
contained herein, Ventures specifically acknowledges that the accuracy in all
material respects of this representation is material to the Purchaser's
decision to enter into the transactions contemplated by this Agreement and to
pay the Merger Consideration.
2.23 ACCOUNTS RECEIVABLE. All accounts receivable of the Wired Companies (a)
arose from bona fide transactions in the ordinary course of business and
consistent with past practice, (b) except as set forth on Schedule 2.23, are
owned by the Wired Companies free and clear of any claim, security interest,
lien or other encumbrance and (c) with respect to accounts receivable owned by
the Wired Companies as of the Balance Sheet Date, are accurately and fairly
reflected on the Balance Sheet, or, with respect to accounts receivable of the
Wired Companies created after the Balance Sheet Date, are accurately and fairly
reflected in the books and records of the Wired Companies. The reserves for bad
debts reflected on the Balance Sheet and in the balance sheet included in the
Financial Statements are reasonable and were calculated in accordance with
generally accepted accounting principles consistent with past practice.
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2.24 BANK ACCOUNTS; POWERS OF ATTORNEY. Schedule 2.24 sets forth a complete
and correct list showing:
(I) all bank accounts of the Wired Companies, together with, with respect
to each such account, the account number, the names of all signatories
thereof, the authorized powers of each such signatory and the approximate
balance thereof on the date of this Agreement; and
(II) the names of all persons holding powers of attorney from the Wired
Companies and a summary statement of the terms thereof.
2.25 MINUTE BOOKS, ETC. The minute books, stock certificate book and stock
ledger of the Wired Companies are complete and correct in all material
respects. The minute books of the Wired Companies contain accurate and complete
records of all formal actions taken at meetings or by written consent of the
Board of Directors and stockholders of the Wired Companies and accurately
reflect all formal corporate actions of the Wired Companies which are required
by law to be passed upon by the Board of Directors or stockholders of the WIred
Companies.
2.26 COMPANY ACTION. The Board of Directors of Ventures, by unanimous written
consent or at a meeting duly called and held, has (a) determined that the
Merger is fair and in the best interests of Ventures and its stockholders, (b)
approved the Merger and this Agreement in accordance with the provisions of the
DGCL and any applicable California law, and (c) directed that this Agreement
and the Merger be submitted to Ventures' stockholders for their approval and
resolved to recommend that Ventures' stockholders vote favor of the approval of
this Agreement and the Merger.
2.27 DISCLOSURE. No representation or warranty by any of the Wired Companies
contained in this Agreement, when considered together with the statements
contained in the Disclosure Schedule and any certificates or other documents or
instruments delivered or to be delivered by the Wired Companies pursuant to
this Agreement, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND ACQUISITION SUB
Purchaser and Acquisition Sub jointly and severally represent and warrant to
Ventures as follows:
3.1 ORGANIZATION AND STANDING OF PURCHASER. Each of Purchaser and Acquisition
sub is a corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation and has all requisite corporate
power and authority to enter into this Agreement, to carry out the transactions
contemplated hereby and to perform its obligations hereunder.
3.2 CHARTER AND BYLAWS. Purchaser has delivered or made available to Ventures
a true and correct copy of the charter and Bylaws of Purchaser and Acquisition
Sub, each as amended to date, and each such instrument is in full force and
effect. Neither Purchaser nor Acquisition Sub is in violation of any of the
provisions of its charter or Bylaws.
3.3 CAPITALIZATION OF PURCHASER. The authorized capital stock of Purchaser
consists of: (a) 5,000,000 shares of Preferred Stock, par value .01 per share;
and (b) 100,000,000 shares of Purchaser Common Stock. As of August 31, 1998,
the shares of Purchaser's capital stock that are issued and outstanding consist
of 42,847,741 shares of Purchaser Common Stock. Each issued and outstanding
share of Purchaser Common Stock has been duly authorized and validly issued and
is fully paid and nonassessable. The Purchaser Common Stock to be issued in the
Merger, when issued by Purchaser pursuant to the terms of this Agreement, will
be duly authorized, validly issued, fully paid and nonassessable.
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3.4 AUTHORIZATION. Each of Purchaser and Acquisition Sub has full corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and all other documents and instruments executed or to be executed by Purchaser
or Acquisition Sub pursuant to this Agreement, and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate and other action on the part of Purchaser and Acquisition
Sub. This Agreement and all other documents and instruments executed or to be
executed by Purchaser or Acquisition Sub pursuant to this Agreement have been,
or will have been, at the time of their respective executions and deliveries,
duly executed and delivered by a duly authorized officer of Purchaser or
Acquisition Sub.
3.5 ENFORCEABILITY. This Agreement and all other agreements executed or to be
executed by Purchaser or Acquisition Sub pursuant to this Agreement constitute,
or will constitute, the valid and legally binding obligations of Purchaser and
Acquisition Sub, enforceable in accordance with their respective terms, except
as such enforceability may be limited by equitable principles and by applicable
bankruptcy, insolvency, reorganization, arrangement moratorium or similar laws
relating to or affecting the rights of creditors generally.
3.6 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. The execution and delivery of
this Agreement and all other documents and instruments executed or to be
executed by Purchaser or Acquisition Sub pursuant to this Agreement, and the
consummation of the transactions contemplated hereby, will not (A) conflict
with or result in any violation of or default under any provision of the
charter or bylaws of Purchaser or Acquisition Sub, (B) breach, violate or
constitute an event of default (or an event which with the lapse of time or the
giving of notice or both would constitute an event of default) under any note,
bond, security agreement, mortgage, indenture, trust, lease, partnership or
other agreement or other instrument, permit, concession, grant, franchise or
license, or give rise to any right of termination, cancellation, modification
or acceleration under, or require any consent or the giving of any notice
under, any agreement or other instrument or obligation to which Purchaser or
Acquisition Sub is a party, or by which Purchaser or Acquisition Sub or any of
their properties or assets may be bound, or result in the creation of any lien,
claim or encumbrance or other right of any third party of any kind whatsoever
upon the properties or assets of Purchaser or Acquisition Sub pursuant to the
terms of any such instrument or obligation, the result of which (either
individually or in the aggregate)
would have a material adverse effect on the business, operations, financial
condition or results of operations of Purchaser and its subsidiaries, taken as
a whole (a "Material Adverse Effect on Purchaser"), or (C) violate or conflict
with any law, judgment, order, decree, statute, law, ordinance, rule or
regulation, writ injunction, decree or other instrument of any Federal, state,
local or foreign court or governmental or regulatory body, agency or authority
applicable to Purchaser or Acquisition Sub or by which any of their properties
or assets may be bound the result of which (either individually or in the
aggregate) would have a Material Adverse Effect on Purchaser.
3.7 GOVERNMENT AUTHORIZATIONS AND CONSENTS. No material consents, licenses,
approvals or authorizations of, or registrations or declarations with, any
governmental authority, bureau, agency or commission, or any third party, are
required to be obtained or made by Purchaser or Acquisition Sub in connection
with the execution, delivery, performance, validity and enforceability of this
Agreement or the Merger, other than (a) a filing with the Federal Trade
Commission and the Department of Justice under the HSR Act, (b) the filing of a
Form S-4 Registration Statement covering the issuance of the Purchaser Common
Stock issuable pursuant to Section 5.1(a) (the "Form S-4 Registration
Statement") with, and the declaration of the effectiveness of the Form S-4
Registration Statement by, the Securities and Exchange Commission (the "SEC")
in accordance with the Securities Act, the filing of the Certificate of Merger
in accordance with the DGCL (d) other consents, licenses, approvals,
authorizations, registrations or declarations, where the failure to obtain such
would not have a Material Adverse Effect on Purchaser.
3.8 LITIGATION. There are no actions, suits, proceedings or governmental
investigations pending against Purchaser or Acquisition Sub or their respective
properties, at law or in equity or before any court, governmental department,
commission, board, agency, authority or instrumentality, domestic or foreign,
or that have been settled, dismissed or resolved on or since the Balance Sheet
Date, that have had or would reasonably
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be expected to have a Material Adverse Effect on Purchaser and, to Purchaser's
knowledge, no action, suit, proceeding or governmental investigation that would
reasonably be expected to have a Material Adverse Effect on Purchaser has been
overtly threatened against Purchaser or Acquisition Sub or their respective
properties. Neither Purchaser nor Acquisition Sub is subject to any judgment,
stipulation, order or decree arising from any action, suit, proceeding or
investigation that individually or in the aggregate would reasonably be
expected to have a Material Adverse Effect on Purchaser. There are no
threatened strikes or work stoppages by the employees or Purchaser or
Acquisition Sub and, to Purchaser's knowledge, there are no pending union
organizing efforts with respect to such employees. No action, suit, proceeding
or governmental investigation is pending or, to Purchaser's knowledge, overtly
threatened against Purchaser or Acquisition Sub that seeks to question, delay
or prevent the consummation of the transactions contemplated hereby.
3.9 BROKERS. No agent, broker, person or firm acting on behalf of Purchaser,
Acquisition Sub or their respective stockholders is, or will be, entitled to
any commission or broker's or finder's fees from any of the parties hereto, or
from and person controlling, controlled by or under common control with any of
the parties hereto, in connection with any of the transactions contemplated
herein, except for Hambrecht & Quist LLC, whose fees and expenses will be paid
by the Purchaser.
3.10 PUBLIC FILINGS.
(A) Purchaser has filed all forms, reports and documents required to be filed
by Purchaser with the SEC since July 31, 1997 and has made available to
Purchaser such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that Purchaser may
file subsequent to the date of this Agreement) are referred to herein as the
"SEC Reports." As of their respective dates, the SEC Reports (1) were prepared
in accordance with, and in compliance with, the requirements of the Securities
Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
the case may be, and the rules and regulations of the SEC thereunder applicable
to such SEC Reports and (2) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. None of Purchaser's subsidiaries is required to file
any forms, reports or other documents with the SEC.
(B) Each of the consolidated financial statements (including, in ease case,
any related notes thereto) contained in the SEC Reports (the "Purchaser
Financials"), including any SEC Reports filed after the date hereof until the
Closing, (1) complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, (2) was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved and (3) present fairly in all material respects the consolidated
financial position of Purchaser as of the dates thereof and the consolidated
results of its operations and cash flows for the periods then ended, except
that the unaudited financial statements were prepared on an interim basis, are
subject to normal year-end adjustments and do not contain all the footnote
disclosures required by GAAP.
3.11 STATEMENTS; PROXY STATEMENT/PROSPECTUS.
The information supplied by Purchaser for inclusion in or incorporation by
reference the Form S-4 Registration Statement shall not at the time the Form S-
4 Registration Statement at the time it becomes effective under the Securities
Act contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The information supplied by Purchaser for inclusion or
incorporation by reference in the Proxy Statement shall not, on the date the
Proxy Statement is first mailed to Ventures stockholders or at the time of the
meeting of stockholders (or, alternatively, on the date the necessary written
consent under applicable law has been obtained) contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
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foregoing, neither Purchaser nor Acquisition Sub makes any representation or
warranty with respect to any information provided by Ventures that is contained
in any of the foregoing documents.
3.12 OWNERSHIP OF VENTURES STOCK. Purchaser does not own, beneficially or of
record, any shares of Ventures Capital Stock.
3.13 MATERIAL ADVERSE EFFECT. Since July 31, 1998, Purchaser has not
experienced any Material Adverse Effect on Purchaser.
ARTICLE 4
COVENANTS OF VENTURES
4.1 CONDUCT OF BUSINESS. Between the date of this Agreement and the Closing
Date, except as contemplated by this Agreement or referred to in the Disclosure
Schedule, and except as may be necessary to carry out the transactions
contemplated by this Agreement or to comply with the terms of the contracts
referred to in this Agreement or the Disclosure Schedule, Ventures will carry
on its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, pay its debts and taxes when due, subject
to good faith disputes over such debts or taxes, and perform all other
obligations when due and, to the extent consistent with such business, use
commercially reasonable efforts to preserve intact its present business
organization, maintain its existing insurance policies, keep available the
services of its officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it to the end that its goodwill and ongoing business
shall not be materially impaired at the Effective Time. Purchaser acknowledges
that the transactions contemplated by this Agreement and attendant publicity
may adversely affect Ventures' ability to preserve intact its business and
relationships and to keep available the services of employees. Except as
expressly contemplated by this Agreement, none of the Wired Companies shall,
without Purchaser's prior written consent:
(A) amend its charter documents or by-laws;
(B) enter into any agreement to dissolve, merge, consolidate or, except
in the ordinary course of business, sell any material assets of the Wired
Companies, or acquire or agree to acquire by merging or consolidating with,
or by purchasing an equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership or
other business organization or division, or otherwise acquire or agree to
acquire any assets in excess of $50,000 in the aggregate;
(C) enter into any material transaction;
(D) declare or pay any dividends on or make any other distributions
(whether in cash, stock, equity securities or property) in respect of any
Ventures Capital Stock or split, combine or reclassify any Ventures Capital
Stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any Ventures Capital Stock;
(E) repurchase, redeem or otherwise acquire, directly or indirectly, any
shares of Ventures Capital Stock, except repurchases of unvested shares at
cost in connection with the termination of the employment or consulting
relationship with any employee or consultant pursuant to agreements in
effect as of the date hereof;
(F) issue or sell, or authorize the issuance or sale of, any shares of
Ventures Capital Stock or any securities convertible into or exercisable
for Ventures Capital Stock other than (1) shares of Ventures Common Stock
pursuant to the exercise of Options outstanding on the date hereof, (2)
shares of Ventures Series A Preferred Stock pursuant to the exercise of
Warrants outstanding on the date hereof and (3) certain options to be
granted prior to the Closing Date as described on Schedule 2.3;
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(G) conduct its business in a manner that departs materially from the
manner in which such business was being conducted prior to the date of this
Agreement;
(H) make any capital expenditures in excess of $25,000 per month in the
aggregate;
(I) adopt or amend any Benefit Plan for the benefit of employees or
increase the salary or other compensation (including, without limitation,
bonuses or severance compensation) payable or to become payable to its
employees (except for salary increases consistent with past practice in
connection with annual performance evaluations and increases pursuant to
existing contractual obligations which have been disclosed to Purchaser on
Schedule 2.12), hire any employee or consultant, or accelerate, amend or
change the period of exercisability, the exercise price, or the vesting
schedule of options or restricted stock granted under any stock option plan
or agreements except as specifically required by the terms of such plans or
agreements, or enter into any agreement to do any of the foregoing;
(J) amend or terminate any material contract, agreement or license to
which it is a party, except in the ordinary course of business;
(K) enter into any inbound content licensing agreement providing
exclusivity to the licensor or any outbound content license or distribution
agreement providing exclusivity to the licensee or any other agreement in
which the obligation of Ventures or any Wired Company exceeds $50,000 or
any other agreement which shall not terminate or be subject to termination
for convenience (without penalty or premium) within 180 days following
execution;
(L) enter into or terminate any lease of, or purchase or sell, any real
property, or enter into any leases of personal property involving
individually in excess of $25,000 annually or in the aggregate in excess of
$100,000 annually;
(M) accelerate receivables or delay payables inconsistent with practices
followed in the operation of the business of Wired Digital, Inc. during the
three months ended August 31, 1998 (after giving effect to the working
capital adjustments upon which Purchaser and Ventures agreed in arriving at
the working capital amount set forth in Section 1.5(b)(16) above); or
(N) agree or commit to do any of the foregoing.
In addition, Ventures will promptly advise Purchaser of the commencement of,
or overt threat of (to the extent that such threat comes to the knowledge of
the Wired Companies), any claim, action, suit, proceeding or investigation
against, relating to or involving the Wired Companies or any of their
directions, officers or employees, in connection with their businesses or the
transactions contemplated hereby that would reasonably be expected to have a
Material Adverse Effect.
4.2 ACCESS. Between the date of this Agreement and the Closing Date, and
subject to the provisions of the Non-Disclosure Agreement between Ventures and
Purchaser dated June 24, 1998 (the "Non-Disclosure Agreement"), Ventures shall,
after receiving reasonable advance notice from Purchaser, give Purchaser
reasonable access (during normal business hours) to the books, records,
contracts and officers of Ventures for the purpose of enabling Purchaser to
further familiarize itself, at Purchaser's sole expense, with the business,
operations and legal affairs of Ventures.
4.3 NO-SHOP PROVISION. From and after the date of this Agreement until the
earlier of the Effective Time or termination of this Agreement pursuant to its
terms, the Wired Companies will not, and will instruct their respective
officers, directors, employees, agents, representatives and affiliates not to,
directly or indirectly (a) solicit or knowingly encourage submission of any
Acquisition Proposal (as defined below) by any person, entity or group (other
than Purchaser) or (b) participate in any discussions or negotiations with, or
disclose any non-public information concerning Ventures or any of its
subsidiaries to, any person, entity or group (other than Purchaser) in
connection with any Acquisition Proposal with respect to Ventures or any
material subsidiary. For the purposes of this Agreement, "Acquisition Proposal"
means any proposal or offer for any merger, consolidation, sale of substantial
assets, equity or debt financing, disposition of all or any substantial portion
of the Intellectual Property Rights or similar transactions involving Ventures
or any of its material
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subsidiaries (other than sales of assets in the ordinary course of business or
as permitted by the terms of this Agreement). Upon execution of this Agreement,
Ventures will immediately cease any and all existing activities, discussion or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal. In the event Ventures receives any Acquisition Proposal
after the date of this Agreement, it will as promptly as practicable thereafter
notify Purchaser of the existence and all material terms of such Acquisition
Proposal.
4.4 MEETING OF STOCKHOLDERS. Promptly after the date hereof, Ventures will
take all action necessary in accordance with the DGCL, other applicable law,
Ventures' Certificate of Incorporation and Ventures' Bylaws to convene and hold
a meeting of stockholders (or, alternatively, solicit the written consent of
the requisite number of stockholders in lieu of a meeting) as promptly as
practicable, and in any event within 30 days after the date on which Purchaser
makes available sufficient quantities of the final Prospectus/Proxy Statement
included in the Form S-4 Registration Statement, for the purpose of approving
and adopting this Agreement and approving the Merger. In soliciting such
proxies or written consents, the Board of Directors of Ventures will recommend
to the stockholders of Ventures that they approve this Agreement and the Merger
and shall use best efforts to obtain the approval of the stockholders of
Ventures entitled to vote on or consent to this Agreement and the Merger in
accordance with the DGCL, other applicable law, and Ventures' Certificate of
Incorporation and By-laws.
4.5 CONSENT OF VENTURES' STOCKHOLDERS TO CERTAIN PAYMENTS. Ventures will use
commercially reasonable efforts to obtain, as promptly as practicable after the
date of this Agreement, the requisite approval of its stockholders with respect
to any payments identified on Schedule 2.12(i) made or to be made to persons
who are to be employed by any of the Wired Companies as of the Effective Time.
ARTICLE 5
COVENANTS OF PURCHASER AND ACQUISITION SUB
5.1 CONFIDENTIALITY. Purchaser and Acquisition Sub shall hold in strict
confidence, and shall cause each of their respective stockholders, affiliates,
directors, officers, employees, agents, attorneys, accountants and
representatives and those of their respective affiliates ("Associates") to hold
in strict confidence, all documents and information obtained with respect to
the Wired Companies. Purchaser shall not permit any of such documents or
information to be improperly utilized or to be disclosed or conveyed to any
other person or entity, and Purchaser shall comply in all respects with the
provisions of the Non-Disclosure Agreement. Without limiting the generality of
the foregoing, and except as required by law or pursuant to valid legal
process, (a) neither Purchaser nor Acquisition Sub shall disclose to any
person, or permit any of its Associates to disclose to any person or entity,
the existence of this Agreement or any of the terms or provisions hereof and
(b) neither Purchaser nor Acquisition Sub shall contact any customers or
employees of any of the Wired Companies without the prior consent of an officer
of Ventures.
5.2 INVESTIGATION. In conducting its review of the business, operations and
legal affairs of Ventures, neither Purchaser nor Acquisition Sub shall
interfere in any manner with the business of operations of the Wired Companies
or with the performance of any of their employees.
5.3 EMPLOYEES. Purchaser will offer each Employee who is employed by any of
the Wired Companies on the Closing Date employment after the Closing Date as an
employee at will and will provide such Employee with benefit plans which in the
aggregate are no less favorable to such Employee that those provided from time
to time by Purchaser to similarly situated employees. Purchaser's offer of
employment to each of the persons named on Schedule 5.3 will include the grant
of a standard Purchaser stock option covering a number of shares of Purchaser
Common Stock no less than the number of shares of Ventures Common Stock set
forth opposite such employee's name on Schedule 5.3, appropriately adjusted to
reflect the exchange ratio of shares of Purchaser Common Stock for shares of
Ventures Common Stock pursuant to this Agreement.
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5.4 INDEMNIFICATION. Purchaser will cause each of the Wired Companies to ensure
the following;
(A) The respective certificates of incorporation, by-laws and other
governing documents of each of the Wired Companies shall contain the
provisions with respect to indemnification set forth in the respective
certificates of incorporation, by-laws and other governing documents of the
Wired Companies on the date of this Agreement, which provisions shall not,
for a period of six years from the Closing Date, be amended, repealed or
otherwise modified in any manner that would adversely affect the rights
therender of individuals who at or prior to the Closing Date were
directors, officers, employees or agents of the Wired Companies, unless
such modification is required by law.
(B) From and after the Closing Date, each of the Wired Companies shall
honor all of the indemnity agreements entered into prior to the date of
this Agreement by the Wired Companies with their respective directors and
officers, all of which are listed on Schedule 2.15, whether or not such
persons continue in their positions with the Wired Companies following the
Closing Date.
(C) The provisions of Sections 5.3 and 5.4 shall survive the Closing and
are intended to be for the benefit of, and shall be enforceable by, each
Employee and by each director and officer of the Wired Companies described
in this Section 5.4 and his or her heirs, representatives and assigns.
5.5 STOCK OPTIONS.
(A) At the Effective Time, each outstanding Option, whether or not
exercisable, will be assumed by Purchaser. Each Option so assumed by
Purchaser under this Agreement will continue to have, and be subject to,
the same terms and conditions set forth in Ventures' 1996 Equity Incentive
Plan immediately prior to the Effective Time and the stock option agreement
by which it is evidenced, except that (1) each Option will be exercisable
(or will become exercisable in accordance with its terms) for that number
of whole sales of Purchaser Common Stock (including Escrow Shares, if
applicable) into which the shares of Ventures Common Stock subject to such
option would have been converted pursuant to Section 1.6(a) if such option
had been exercised in its entirety immediately prior to the Effective Time,
rounded down to the nearest whole share of Purchaser Common Stock, and (2)
the per share exercise price for the shares of Purchaser Common Stock
issuable upon exercise of such Option will be equal to the quotient
determined by dividing (A) the aggregate exercise price of such option,
less any cash in lieu of a fractional share to which the holder of the
Option would have been entitled had such Option been exercised immediately
prior to the Effective Time, by (B) the number of shares of Purchaser
Common Stock issuable upon exercise of such Option pursuant to clause (1)
above, and rounding the resulting exercise price up to the nearest whole
cent. As soon as practicable following the Effective Time, Purchaser will
issue to each holder of an Option a notice describing the foregoing
assumption of such Option by Purchaser.
(B) Purchaser will, within fifteen (15) business days after the Closing,
file a registration statement on Form S-8 covering the shares of Purchaser
Common Stock issuable upon exercise of the assumed Options and deliver
prospectuses relating thereto to the holders thereof in accordance with the
rules and regulations of the SEC.
5.6 NASDAQ NATIONAL MARKET. Purchaser shall cause appropriate notice to be
filed with Nasdaq National Market with respect to the issuance of the Purchaser
Common Stock in the Merger.
5.7 ADVANCE AGREEMENT. Following the Closing Date, Purchaser shall take all
such action as may be reasonably necessary (including, without limitation,
using commercially reasonable efforts to amend the Advance Agreement), to
irrevocably designate the Stockholder Representatives (as hereinafter defined)
to act as agents and attorneys-in-fact on behalf of Ventures in connection with
the Escrow Fund (as defined in the Adverse Agreement) established pursuant to
the Advance Agreement, with sole power and full authority to do all acts and
things with respect to such Escrow Fund that Ventures could otherwise do,
including, without limitation, to give and receive notices and communications,
to authorize delivery to Advance of cash from such Escrow Fund in satisfaction
of claims by Advance, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, to demand arbitration, to comply
with orders of courts and awards of
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arbitrators with respect to such claims, to appoint substitute Stockholder
Representatives, and to take all such actions necessary or appropriate in the
judgment of the Stockholder Representatives for the accomplishment of the
foregoing; provided, however, that the assets subject to the authority of the
Stockholder Representatives to enter into any such settlement or compromise
shall be limited to the assets held in the Advance Escrow. All costs and
expenses reasonably incurred by Purchaser in complying with its obligations
under this Section 5.7 will be paid out of the Escrow Fund. Upon release of any
funds from such Escrow fund from time to time, Ventures and the Stockholder
Representatives shall promptly (but in no event later than two business days
after receipt thereof) deliver all such funds to the Escrow Agent (as
hereinafter defined). Ventures and the Stockholder Representatives shall take
all such action as may be necessary to ensure the delivery of such funds to the
former holders of Ventures Series A Preferred Stock, Warrants and Ventures
Series C Preferred Stock identified in Schedule 5.7 hereto and in such
proportion as is set forth thereon.
5.8 TAX REFUND AMOUNT. Within 15 days following the receipt of any tax refund
(including any offset to tax payments that would otherwise be required)
applicable to any tax year of Purchaser or the Wired Companies following the
Closing Date, Purchaser shall calculate the Tax Refund Amount with respect to
such recently-ended tax year and shall pay such amount to the Escrow Agent for
distribution to the former holders of Ventures Series A Preferred Stock and
Ventures Series C Preferred Stock in such manner and proportions as are set
forth in the Escrow Agreement. Purchaser shall prepare and file its post-
Closing period tax returns and shall make its tax elections in a manner so as
to maximize the dollar amount of any Tax Refund Amount and shall use its best
efforts to take such other actions, including with respect to the manner in
which Purchaser shall operate the Wired Companies and Purchaser following the
Closing, as shall maximize the dollar amount of any Tax Refund Amount.
Purchaser shall provide the Stockholder Representatives with copies of all tax
returns filed on behalf of, or including the taxable results of, any of the
Wired Companies with respect to the first three tax years of the Wired
Companies following the Closing. Without limiting the materiality of any other
representations, warranties and covenants of Purchaser contained herein,
Purchaser specifically acknowledges that Purchaser's performance in all
material respects of its obligations under this Section 5.8 is material to
Ventures' decision to enter into the transactions contemplated by this
Agreement.
ARTICLE 6
COVENANTS OF ALL PARTIES
6.1 BEST EFFORTS; FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each party will use all its best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary or
desirable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement. Ventures, Purchaser and Acquisition Sub each
will execute and deliver such other documents, certificates, agreements and
other writings and to take such other actions as may be necessary or desirable
in order to consummate or implement expeditiously the transactions contemplated
by this Agreement.
6.2 CERTAIN FILINGS. Ventures, Purchaser and Acquisition Sub shall cooperate
with one another (a) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority is required,
or any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, in furnishing such information as may be required in
connection therewith, including without limitation filings under the HSR Act,
and in seeking timely to obtain any such actions, consents, approvals or
waivers.
6.3 PUBLIC ANNOUNCEMENTS. The parties will not issue any press release or
make any public statement with respect to this Agreement or the transactions
contemplated hereby prior to or within three (3) business days after the
Closing except as mutually agreed by Purchaser and Ventures, or except as may
be required by law or applicable regulatory authority (including, without
limitation, the rules applicable to Nasdaq National
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Market companies). Prior to the issuance of any such press release or public
statement determined by Purchaser or Ventures to be required by law or
applicable regulatory authority, the party making such determination shall use
commercially reasonable efforts to consult with the other party regarding the
appropriate contents of such press release or public statement.
6.4 TAX RETURNS.
(A) Ventures shall prepare and submit to Purchaser all returns or reports of
each of the Wired Companies for Taxes for any taxable period that, under
applicable law, ends with or prior to the Closing Date, and shall prepare and
submit to Purchaser for its review and approval (which review and approval
shall not be unreasonably withheld or delayed) not later than 30 days before
the due date of such return or report (or extension thereof) all returns or
reports of each of the Wired Companies for Taxes for any taxable period that,
under applicable law, does not end on or prior to the Closing Date but that
includes any portion of the Pre-Closing Tax Period (as defined below).
(1) Any such return or report referred to in this Section 6.4 shall be
prepared on a basis consistent with returns or reports prepared for prior
taxable periods. If Purchaser reasonably determines that changes or
supplements are required on any return or report described in this Section
6.4, the parties shall meet in an effort to agree on any such changes.
(2) Purchaser and Ventures shall deliver to the Stockholder
Representatives such information and data concerning the operations of each
of the Wired Companies as they relate to any Taxes for the Pre-Closing Tax
Period and make available such knowledgeable employees of each of the Wired
Companies as the Stockholder Representatives may reasonably request,
including providing the information and the data required by Ventures'
customary tax and accounting questionnaires, in order to enable each of the
Wired Companies to complete and file all forms and reports which it may be
required to file with respect to its Pre-Closing Tax Period operations and
business with respect to such operations, and otherwise to enable it to
satisfy accounting, tax and other legitimate requirements.
(B) Purchaser, Ventures and the Stockholder Representatives will furnish or
cause to be furnished to each other as promptly as practicable such information
(including access to books and records) and assistance relating to each of the
Wired Companies as is reasonably requested for the filing of any return,
determining a Tax liability or right to refund, the preparation for any audit
or other proceeding, the prosecution or defense of any claim, suit or
proceeding relating to any proposed adjustment, and the enforcement of this
Agreement, and shall cooperate with each other in the conduct of any Tax audit
or other Tax proceedings involving any of the Wired Companies. Such parties
shall execute and deliver such powers of attorney and other documents as are
reasonably requested to carry out the provisions and purposes of this
Agreement.
(C) Purchaser, Ventures and their respective successors and assigns will use
commercially reasonable efforts to preserve and retain all books, records,
returns, schedules, work papers, and other documents (including, without
limitation, appraisals and other background information) relating to any
returns, claims, audits or other proceedings that relate to Pre-Closing Tax
Periods of the Wired Companies until the expiration of the statutory period of
limitations (including extensions) of the taxable periods to which such
documents relate or until the Final Determination (as defined below) of any
payments which may be required with respect to such taxable periods, whichever
period is longer. Purchaser, Ventures and The Stockholder Representatives and
their successors shall make such documents available to each other's
representatives upon reasonable notice for purposes specified in such notice
and at reasonable times, it being understood that such representatives shall be
entitled to make copies of any such materials as they shall deem necessary.
(D) Each of the parties hereto agrees to permit representatives of the other
parties to meet with their employees (and the employees of their successors) on
a mutually convenient basis in order to enable such representatives to obtain
additional information and explanations of any document described in this
Section 6.4. The parties shall make available, or cause to be made available,
to the representatives of the other parties sufficient work space and
facilities to perform the activities described in this Section 6.4. Any
information
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obtained pursuant to this Section 6.4 shall be kept confidential, except as may
be otherwise necessary in connection with the filing of returns or claims or
refund or in conducting any audit or other proceeding.
(E) The following terms, as used herein, have the following meaning:
(1) "Final Determination" means the later to occur of: (a) a decision of
the United States Tax Court, or a judgment, decree or other order by
another court of competent jurisdiction, which has become final and
unappealable; (b) a closing agreement under Code Section 7121; and (c) any
other final disposition by reason of an agreement between the affected
party or parties and the appropriate tax authority, the expiration of the
application statute of limitations, or otherwise.
(2) "Pre-Closing Tax Period" means any period ending with, on or prior to
the Closing Date with respect to which any of the Wired Companies is
required to report and/or pay any Tax.
6.5 PROXY STATEMENT AND REGISTRATION STATEMENTS.
(A) As promptly as practicable following the execution of this Agreement,
Purchaser and Ventures will prepare the Proxy Statement and will prepare and
file with the SEC the Form S-4 Registration Statement. Each of Ventures and
Purchaser will respond to any comments of the SEC and will use its respective
reasonable best efforts to have the Form S-4 Registration Statement declared
effective under the Securities Act as promptly as practicable following such
filing. Ventures will use its reasonable best efforts to cause the Proxy
Statement to be mailed to the Ventures stockholders at the earliest practicable
time following the time the Form S-4 Registration Statement is declared
effective by the SEC.
(B) As promptly as practicable after the date of this Agreement, each of
Purchaser and Ventures will prepare and file any other filings required to be
filed by it under the Exchange Act, the Securities Act or any other Federal,
state or foreign laws relating to the Merger and the transactions contemplated
by this Agreement (the "Other Filings"). Purchaser and Ventures will notify
each other promptly upon the receipt of any comments from the SEC or its staff
or any other government officials for amendments or supplements to the Form S-4
Registration Statement, the Proxy Statement or any Other Filings. Each of
Ventures and Purchaser will cause all documents that it is responsible for
filing with the SEC or other regulatory authorities under this Section 6.5 to
comply in all material respects with all applicable requirements of law the
rules and regulations promulgated thereunder.
(C) Purchaser will cause each of the shares of Purchaser Common Stock
issuable pursuant to Section 1.6 to be listed for trading on the NNM at the
Effective Time. Purchaser will cause each of the shares of Purchaser Common
Stock issuable upon exercise of the Options to be listed for trading on the NNM
on or prior to the effective date of the Form S-8 registration statement filed
pursuant to Section 5.5(b).
6.6 TAX-FREE REORGANIZATION. No party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368 of the Code.
6.7 TAX REPRESENTATION LETTERS. At or prior to the filing of the Form S-4
Registration Statement with the SEC and, to the extent necessary, at the
Closing, Purchaser and Ventures shall each execute and deliver to Hutchins,
Wheeler & Dittmar and Cooley Godward LLP management tax representation letters
in the form attached hereto as Exhibit B and Exhibit C, respectively. Each of
Purchaser and Ventures shall use its reasonable efforts to cause Hutchins,
Wheeler & Dittmar and Cooley Godward llp, respectively, to deliver promptly to
it a legal opinion satisfying the requirements of Item 601 of Regulation S-K
promulgated under the Securities Act. In rendering such opinion, each of such
counsel shall be entitled to rely on the management tax representation letters.
6.8 MARKETING PROGRAM FUNDING. Purchaser and Ventures have agreed that,
between the date of this Agreement and the Closing Date, Wired Digital, Inc.
will carry out certain intensive marketing activities, including a television
advertising campaign previously described to Purchaser, that are beyond the
scope of its
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ordinary ongoing marketing programs. Ventures will obtain Purchaser's written
approval for all expenditures in connection with such activities, and the
aggregate amount of such approved expenditures (the "Marketing Program Funding
Amount") shall be deemed to be Wired Cash at Closing as described in Section
1.5(b)(14). Production costs incurred prior to the date hereof are not included
in the Marketing Program Funding Amount, and the cost (approximately $700,000)
of television advertising during the week beginning Sunday, October 18, 1998 is
included in the Marketing Program Funding Amount. Except with Purchaser's
written approval, the cost of television advertising scheduled to air after the
Closing Date will not be included in the Marketing Program Funding Amount.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF PURCHASER ANDACQUISITION SUB TO CLOSE
The obligations of Purchaser and Acquisition Sub to effect the Merger and
otherwise consummate the transactions that are to be consummated at the Closing
are subject to the satisfaction, as of the Closing Date, of the following
conditions (any of which may be waived by Purchaser in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Ventures set forth in Article 2 shall be accurate in all material
respects as of the Closing, as though made on and as of the Closing Date,
except to the extent that (a) any of such representations and warranties refers
specifically to another date, in which such case such representation or
warranty shall have been accurate as of such other date or (b) the accuracy of
any of such representations and warranties is affected by any of the
transactions contemplated by this Agreement.
7.2 PERFORMANCE. Ventures shall have performed, in all material respects, all
obligations required by this Agreement to be performed by Ventures on or before
the Closing Date.
7.3 CERTIFICATE. Purchaser shall have received from a duly a authorized
officer of Ventures a certificate dated the Closing Date confirming, to such
person's knowledge, that the conditions in Sections 7.1 and 7.2 have been met.
7.4 EMPLOYMENT AGREEMENTS. Elizabeth Vanderslice, Richard D. Boyce, Joel
Truher, June Cohen, Mary M. Moore and Barbara Kuhr shall have entered into
employment agreements in the form attached hereto as Exhibit D, and Purchaser's
Nondisclosure and Developments Agreement in the form attached hereto as Exhibit
E.
7.5 NO INJUNCTION. There shall not be in effect, at the Closing, any
injunction or other binding order of any court or other tribunal having
jurisdiction over Purchaser or Acquisition Sub that prohibits the Merger or
that limits or restricts the conduct or operation of the business of the Wired
Companies after the Merger.
7.6 HSR ACT. Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been terminated.
7.7 LEGAL OPINION. Purchaser shall have received from Cooley Godward LLP, to
counsel to Ventures, an opinion in substantially the form of Exhibit F attached
hereto.
7.8 STOCKHOLDER APPROVAL. The Merger shall have been approved by the
stockholders of Ventures in accordance with applicable law.
7.9 CONSENTS. All approvals, consents, waivers and authorizations required to
be obtained by Ventures in connection with the Merger and the other
transactions contemplated by this Agreement set forth on Schedule 7.9 shall
have been obtained and shall be in full force and effect.
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7.10 ESCROW AGREEMENT. Purchaser shall heave entered into the Escrow
Agreement annexed as Exhibit G hereto (the "Escrow Agreement"), duly executed
by the Stockholder Representatives, together with counterparts signed by the
escrow agent named therein and blank stock powers executed by each of the
holders with respect to such holder's portion of the Escrow Shares.
7.11 RESIGNATIONS. Purchaser shall have received resignations of all
directors and officers of all subsidiaries of Ventures, effective as of the
Effective Time.
7.12 APPRAISAL RIGHTS. The holders of those outstanding shares of Ventures
Capital Stock representing the right to receive no more than 5% of the Merger
Consideration shall have affirmatively demanded appraisal rights in respect of
the Merger.
7.13 TERMINATION OF AGREEMENTS. The agreements identified on Schedule 7.13
between Ventures and certain of its stockholders shall have been terminated,
effective no later than the Effective Time.
7.14 FORM S-4 REGISTRATION STATEMENT. The Form S-4 Registration Statement
shall have been declared effective under the Securities Act and shall not be
subject to a stop order or any threatened stop order. All necessary state
securities and blue sky permits, approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained.
7.15 TAX OPINION. Purchaser shall have received a written opinion from
Hutchins, Wheeler & Dittmar in form and substance reasonably satisfactory to
them, to the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code and such opinion shall not have been
withdrawn; provided, however, that if Hutchins, Wheeler & Dittmar does not
render such opinion or withdraws or modifies such opinion to Purchaser, this
condition shall nonetheless be deemed to be satisfied if counsel to Ventures
renders such opinion to Purchaser. In rendering such tax opinion, counsel shall
be entitled to rely on the management tax representation letters referred to in
Section 6.7.
7.16 QUOTATION ON NASDAQ NATIONAL MARKET. The Purchaser Common Stock issuable
in the Merger shall have been approved for quotation on the Nasdaq National
Market upon official notice of issuance thereof.
7.17 CONSENT OF VENTURES' STOCKHOLDERS TO CERTAIN PAYMENTS. Ventures shall
have either (a) obtained the requisite approval of its stockholders with
respect to any payments identified on Schedule 2.12(i) made or to be made to
persons who are to be employed by any of the Wired Companies as of the
Effective Time (the "Recipients") or (b) made available to Purchaser and the
Recipients, by amendment of this Agreement or otherwise, such arrangements
(including the establishment of an additional cash escrow fund in an
appropriate amount) as may be necessary to indemnify Purchaser and the
Recipients fully against any after-tax cost to them (including the after-tax
cost of any tax "gross-up" obligation of Ventures) of Ventures' failure to
obtain such approval.
ARTICLE 8
CONDITIONS TO OBLIGATION OF VENTURES TO CLOSE
The obligation of Ventures to effect the Merger and otherwise consummate the
transactions that are to be consummated at the Closing is subject to the
satisfaction, as of the Closing Date, of the following conditions (any of which
may be waived by Ventures):
8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser and Acquisition Sub set forth in Article 3 shall be
accurate in all material respects as of the Closing, as though made on and as
of the Closing Date, except to the extent that (a) any of such representations
and warranties refers specifically to a date other than the Closing Date, in
which such case such representation or warranty
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shall have been accurate in all material respects of such other or (b) the
accuracy of any of such representations and warranties is affected by any of
the transactions contemplated by this Agreement.
8.2 PERFORMANCE. Purchaser and Acquisition Sub shall have performed, in all
material respects, all obligations required by this Agreement to be performed
by Purchaser and Acquisition Sub on or before the Closing Date.
8.3 CERTIFICATE. Ventures shall have received from a duly authorized officer
of Purchaser a certificate dated the Closing Date confirming, to such person's
knowledge, that the conditions in Sections 8.1 and 8.2 have been met.
8.4 NO INJUNCTION. There shall not be in effect, at the Closing, any
injunction or other binding order of any court or other tribunal having
jurisdiction over Ventures that prohibits the Merger or that limits or
restricts the conduct or operations of Purchaser after the Merger.
8.5 HSR ACT. Any applicable waiting period under the HSR Act relating to the
transactions contemplated shall have expired or been terminated.
8.6 CONSENTS. The consents, licenses, approvals, releases and authorizations
specified on Schedule 2.6 shall have been obtained, except where the failure to
obtain such consents did not and would not reasonably be expected to result in
a Material Adverse Effect on Purchaser or a material adverse effect on the
transactions contemplated by this Agreement.
8.7 LEGAL OPINION. Ventures shall have received from Hutchins, Wheeler &
Dittmar, counsel to Purchaser, an opinion in substantially the form of Exhibit
H attached hereto.
8.8 STOCKHOLDER APPROVAL. The Merger shall have been approved by the
stockholders of Ventures in accordance with applicable law.
8.9 TAX OPINION. Ventures shall have received a written opinion from Cooley
Godward LLP in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368 of the Code and such opinion shall not have been withdrawn;
provided, however, that if Cooley Godward LLP does not render such opinion or
withdraws or modifies such opinion to Ventures, this condition shall
nonetheless be deemed to be satisfied if counsel to Purchaser renders such
opinion to Ventures. In rendering such tax opinion, counsel shall be entitled
to rely on the management tax representation letters referred to in Section
6.7.
8.10 FORM S-4 REGISTRATION STATEMENT. The Form S-4 Registration Statement
shall have been declared effective under the Securities Act and shall not be
subject to a stop order or any threatened stop order. All necessary state
securities and blue sky permits, approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained.
8.11 QUOTATION ON NASDAQ NATIONAL MARKET. The Purchaser Common Stock issuable
in the Merger shall have been approved for quotation on the Nasdaq National
Market upon official notice of issuance thereof.
ARTICLE 9
TERMINATION
9.1 RIGHT TO TERMINATE AGREEMENT. This Agreement may be terminated prior to
the Closing:
(A) by mutual agreement of Ventures and Purchaser;
(B) by Purchaser at any time after 150 days after signing (excluding the
number of days, if any, elapsed during the dispute resolution proceedings
relating to the Preliminary Closing Balance Sheet
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pursuant to Section 1.5(c)), if the Closing shall not have occurred on or
prior to such date; provided, however, that the right to terminate this
Agreement under this Section 9.1(b) shall not be available to Purchaser if
the action of Purchaser or Acquisition Sub or any of their Associates has
been a principal cause of or resulted in the failure of the Merger to occur
on or before such date and such action or failure to act constitutes a
breach of this Agreement; or
(C) by Ventures at any time after 150 days after signing (excluding the
number of days, if any, elapsed during the dispute resolution proceedings
relating to the Preliminary Closing Balance Sheet pursuant to Section
1.5(c)), if the Closing shall not have occurred on or prior to such date;
provided, however, that the right to terminate this Agreement under this
Section 9.1(c) shall not be available to Ventures if the action of Ventures
or any of its Associates (including those persons who have signed the
Voting Agreement) has been a principal cause of or resulted in the failure
of the Merger to occur on or before such date and such action or failure to
act constitutes a breach of this Agreement.
9.2 EFFECT OF TERMINATION. Upon the termination of this Agreement pursuant to
Section 9.1:
(A) Purchaser and Acquisition Sub shall promptly cause to be returned to
Ventures all documents and information obtained in connection with this
Agreement and the transactions contemplated by this Agreement and all
documents and information obtained in connection with the Purchaser's
investigation of Ventures' business, operations and legal affairs,
including any copies made by or supplied to Purchaser or any of Purchaser's
agents of any such documents or information; and
(B) No party hereto shall have any obligation or liability to other
parties hereto, except that the parties hereto shall remain bound by the
provisions of this Section 9.2 and Sections 5.1, 6.3 and 9.3 and Article 12
and by the provisions of the Non-Disclosure Agreement, and except that
nothing herein shall relieve any party from liability for a breach of this
Agreement prior to the termination hereof.
9.3 FAILURE TO CLOSE.
(A) If Purchaser fails to consummate the transactions contemplated on its
part to occur on the Closing Date, in circumstances whereby this Agreement
has not been terminated and all conditions of the Closing set forth in
Article 7 have been satisfied in all material respects or waived, Purchaser
shall be liable to Ventures for damages to the extent provided by law and
Ventures shall be entitled to be reimbursed by Purchaser for its expenses
as provided in Section 12.4.
(B) If Ventures fails to consummate the transactions contemplated on its
part to occur on the Closing Date, in circumstances whereby this Agreement
has not been terminated and all conditions of the Closing set forth in
Article 8 have been satisfied in all material respects or waived, Ventures
shall be liable to Purchaser for damages to the extent provided by law and
Purchaser shall be entitled to be reimbursed by Ventures for its expenses
as provided in Section 12.4.
ARTICLE 10
ADJUSTMENT PROCEDURES
10.1 PREPARATION OF FINAL CLOSING BALANCE SHEET.
(A) For purposes of this Article 10:
(1) "Final Cash at Closing" shall mean all cash and cash equivalents held
by the Wired Companies as of the Closing (including any cash held by
Ventures that represents the exercise price of stock options exercised for
cash after the date hereof), as shown on the Final Closing Balance Sheet
(as hereinafter defined), minus the Cash Exclusions; provided, however,
that, for purposes of calculating Final Cash at Closing, Ventures shall be
deemed to hold an incremental amount of cash equal to the sum of (A) the
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Marketing Program Funding Amount described in Section 6.8, (B) any amounts
paid by Ventures at or prior to the Closing pursuant to Section 12.4, and
(C) the aggregate exercise price of all stock options presently held by or
hereafter granted to employees of the Wired Companies (but not non-
employees), as described in Schedule 2.3, and Warrants to the extent such
stock options and Warrants are either held unexercised at the Closing Date
or net-exercised between the date hereof and the Closing Date.
(2) "Final Borrowings at Closing" shall mean all indebtedness for
borrowed money of the Wired Companies as of the Closing, as shown on the
Final Closing Balance Sheet.
(3) "Final Adjusted Working Capital Shortfall at Closing" shall mean the
absolute value of the difference between (i) $432,172 and (ii) the adjusted
working capital (i.e., current assets less current liabilities) of the
Wired Companies as of the Closing, as reflected on the Final Closing
Balance Sheet; provided, however, that, for the purpose of calculating
Final Adjusted Working Capital Shortfall at Closing only, Final Cash at
Closing (together with the offsetting Cash Exclusions) and Final Borrowings
at Closing shall be disregarded, and amounts payable by Ventures as
contemplated by Section 6.8 or Section 12.4 at or prior to Closing shall
not be deemed to be a current liability. Notwithstanding the foregoing,
Final Adjusted Working Capital Shortfall at Closing shall be zero if the
adjusted working capital described in subparagraph (ii) above is $432,172
or greater.
(B) As soon as practicable following the Closing, Purchaser shall prepare in
good faith, and shall cause Purchaser's independent auditors to review, the
consolidated balance sheet of Ventures and the other Wired Companies as of the
Closing Date (the "Final Closing Balance Sheet"). Except for the absence of
footnotes, the Final Closing Balance Sheet shall be prepared in accordance with
GAAP on a basis consistent with that used in the preparation of the Financial
Statements. Based on the Final Closing Balance Sheet, Purchaser shall
calculate, and shall cause Purchaser's independent auditors to review, Final
Cash at Closing, Final Borrowings at Closing and Final Adjusted Working Capital
Shortfall at Closing, and Purchaser shall deliver such calculations to the
Stockholder Representatives with the Final Closing Balance Sheet. If the
Stockholder Representatives have not given the Purchaser notice of their
objection to the Final Closing Balance Sheet (which notice must contain a
statement of the basis of the Stockholder Representatives' objection) within
fifteen (15) days after delivery of such Final Closing Balance Sheet, then
Final Cash at Closing and Final Adjusted Working Capital Shortfall at Closing
based on the Final Closing Balance Sheet as delivered by Purchaser shall be
used in computing the Escrow Adjustment Shares (as hereinafter defined).
(C) In the event the Stockholder Representatives have provided notice of
their objection in accordance with Section 10.1(b) within such fifteen (15) day
period, then the issues in dispute shall be resolved in accordance with this
Section 10.1(c). First, Purchaser and the Stockholder Representatives shall
attempt to resolve the issues outstanding with respect to the Final Closing
Balance Sheet and the calculation of Final Cash at Closing, Final Borrowings at
Closing and Final Adjusted Working Capital Shortfall at Closing. If Purchaser
and the Stockholder Representatives are unable to resolve those issues within
thirty (30) days of Purchaser's receipt of the Stockholders Representatives'
objections, then Purchaser and the Stockholder Representatives shall submit the
remaining issues in dispute to Arthur Andersen LLP, independent auditors (the
"Independent Auditors"), for resolution. If issues in dispute are submitted to
the Independent Auditors for resolution, (1) each party shall furnish to the
Independent Auditors such workpapers and other documents and information
relating to the disputed issues as the Independent Auditors may request and as
are available to that party and shall be afforded the opportunity to present to
the Independent Auditors and material relating to the determination and to
discuss the determination with the Independent Auditors; (2) the Determination
by the Independent Auditors, as set forth in a notice delivered to both
Purchaser and the Stockholder Representatives by the Independent Auditors
within thirty (30) days of the submission to them of the issues in dispute,
shall be binding and conclusive on the parties and any determination of Final
Cash at Closing, Final Borrowings at Closing and Final Adjusted Working Capital
Shortfall at Closing made by the Independent Auditors in their determination of
the issues in dispute shall be used in computing the Escrow Adjustment Shares;
and (3) Purchaser shall bear the fees and costs of the Independent Auditors in
making such determination and shall be entitled to recover 50% of such fees and
cost from the Escrow Fund.
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(D) Within one (1) business day after Final Cash at Closing, Final Borrowings
at Closing and Final Adjusted Working Capital Shortfall at Closing have been
determined pursuant to Section 10.1(b), Section 10.1(c) or any combination
thereof, the Escrow Adjustment Shares shall be calculated as follows: the
number of shares of Purchaser Common Stock, rounded to the nearest full share,
equal to the absolute value of the Adjusted Amount (as hereinafter defined)
shall be divided by the Average Closing Stock Price. The term "Adjustment
Amount" shall mean the aggregate of: (1) Final Cash at Closing minus Wired Cash
at Closing minus Excess Expenses, (2) Wired Borrowings at Closing minus Final
Borrowings at Closing and (3) Wired Adjusted Working Capital Shortfall at
Closing minus Final Adjusted Working Capital Shortfall at Closing. The term
"Excess Expenses" shall mean (i) the amount paid or payable by Ventures
pursuant to Section 12.4 (except to the extent such amount was included as a
Closing Expense Adjustment Amount thereby reducing the Aggregate Share Value as
determined pursuant to Section 1.5(b)(2) or to the extent Purchaser has made a
claim against the Escrow Fund with respect to such amount under Section 12.4),
minus (ii) $2.5 million; provided that the amount in clause (i) above exceeds
the amount in clause (ii) above.
10.2 ADJUSTMENT OF ESCROW FUND. If the Adjustment Amount is greater than
zero, Purchaser shall issue the Escrow Adjustment Shares and deposit such
shares in the Escrow Fund within five (5) business days following the
determination of the Escrow Adjustment Shares. If the Adjustment Amount is less
than zero, then, within five (5) business days following the determination of
the Escrow Adjustment Shares, Purchaser and the Stockholder Representatives
shall deliver to the Escrow Agent a notice authorizing the release to the
Purchaser from the Escrow Fund of the number of shares of Purchaser Common
Stock equal to the Escrow Adjustment Shares. If the Adjustment Amount is
negative and the amount exceeds $2 million, then, within five (5) business days
following the determination of the Escrow Adjustment Shares, Purchaser and the
Stockholder Representatives shall deliver to the Escrow Agent a notice
instructing the Escrow Agent that: (a) it is promptly to release to Purchaser
from the Escrow Fund a number of shares of Purchaser Common Stock having a
value, determined as provided in the Escrow Agreement, of $2 million; and (b)
if it subsequently (but before the end of the Escrow Period) receives any funds
released from the Advance Escrow as contemplated by Section 5.7, an amount of
such funds equal to the Adjustment Amount in excess of $2 million shall be
added to the Escrow Fund and promptly released to Purchaser before any
distribution of the balance, if any, of such funds to the former holders of
Ventures capital stock. In the event that the cash received from the Advance
Escrow is not sufficient to reimburse Purchaser for the entire Adjustment
Amount, an additional number of shares of Purchaser Common Stock shall be
released from the Escrow Fund such that Purchaser is reimbursed for the entire
Adjustment Amount. In the event of any increase or decrease in the number of
shares of Purchaser Common Stock or cash held in the Escrow Fund pursuant to
this Section 10.2, the term "Escrow Fund" shall thereafter mean the Escrow Fund
as adjusted.
ARTICLE 11
CERTAIN REMEDIES AND LIMITATIONS
11.1 EXPIRATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All of the
representations and warranties of Ventures set forth in this Agreement and all
of the covenants set forth in Article 4 shall terminate and expire, and shall
cease to be of any force or effect, at 5:00 p.m., Massachusetts time, on the
first anniversary of the Closing Date, and all liability with respect to such
representations, warranties and covenants shall thereupon be extinguished.
Notwithstanding the foregoing, if, prior to such date, Purchaser shall have in
good faith delivered a Claim Notice (as defined below) to the Stockholder
Representatives and the Escrow Agent in conformity with all of the applicable
procedures set forth in the Escrow Agreement, then the specific indemnification
claim set forth in such Claim Notice shall survive such date and shall not be
extinguished thereby.
11.2 ESCROW FUND. At the Effective Time, Ventures' stockholders and Warrant
and Option holders will be deemed to have received and deposited the Escrow
Shares with the Escrow Agent without any act of any stockholder, Warrant holder
or Option holder. At the Closing, the Escrow Shares, without any act of
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stockholder, Warrant holder or Option holder will be deposited with State
Street Bank and Trust Company (or other institution acceptable to Purchaser and
the Stockholder Representatives), as Escrow Agent (the "Escrow Agent"), such
deposit for a period of one year from the Closing Date to constitute an escrow
fund (the "Escrow Fund") to be governed by the terms set forth herein and in
the Escrow Agreement at Purchaser's cost and expense. The Escrow Fund shall be
available to compensate Purchaser and its affiliates for any and all losses,
damages, deficiencies, liabilities, obligations, actions, claims, suits,
proceedings, demands, assessments, judgments, recoveries, fees, costs and
expenses (including, without limitation, all out-of-pocket expenses, reasonable
investigation expenses and reasonable fees and disbursements of accountants and
counsel) of any nature whatsoever, net of insurance proceeds actually realized
or to be realized by Purchaser (collectively, "Losses"), arising out of, based
upon or resulting from (1) any inaccuracy in or breach of any representation
and warranty of Ventures which is contained in this Agreement or any Schedule
or certificate delivered pursuant hereto or thereto; (2) any breach or non-
fulfillment of, or any failure to perform, any of the covenants, agreements or
undertakings of Ventures (which covenants, agreements or undertakings were to
be performed or complied with on or prior to the consummation of the Merger)
which are contained in or made pursuant to the terms and conditions of this
agreement; (3) any losses of Purchaser or any Wired Company (whether or not
disclosed on a Schedule hereto) to the extent arising out of the Wired
Companies' obligations to provide indemnification in excess of the amount of
the Advance Escrow pursuant to Section 10.3(b) of the Advance Agreement or
otherwise resulting from or relating to the operation or sale of the Business
(as such term is defined in the Advance Agreement); or (4) any Losses resulting
from the delayed form filings described in paragraph (c) of Schedule 2.12.
Purchaser may not receive any payment from the Escrow Fund unless and until
Officer's Certificates (as defined in paragraph (d) below) identifying Losses,
the aggregate amount of which exceed $500,000, have been delivered to the
Escrow Agent as provided in paragraph (e); in such case, Purchaser may recover
from the Escrow Fund its Losses in excess of the first $500,000 (the
"Deductible"); provided, however, that in no event shall the Deductible apply
to the Losses resulting from any inaccuracy or breach of any representation and
warranty contained in Sections 2.1(b), 2.2, 2.14 or 2.18, any Losses arising
under clause (3) or (4) above, any fees and costs that Purchaser is entitled to
recover pursuant to Section 10.1(c), or any negative Adjustment Amount
determined pursuant to Section 10.1(d), and provided, further, that any such
Losses or fees and costs or Adjustment Amount shall not be taken into account
in determining whether aggregate Losses exceed the threshold of the Deductible
or whether the Deductible has been satisfied for purposes of calculating
Purchaser's recovery from the Escrow Fund.
11.3 INDEMNIFICATION BY PURCHASER. Subject to the limitations and the
provisions set forth herein, Purchaser and the Surviving Corporation, jointly
and severally, will indemnify and hold harmless the stockholders, Warrant
holders and Option holders of Ventures from, against and in respect of the net
amount (after deduction of the amount of any insurance proceeds recoverable and
net of any tax benefit) of any and all Losses actually suffered by them as a
direct result of the failure of any representation or warranty made by
Purchaser or Acquisition Sub in Article 3 to have been true in all material
respects when made.
11.4 DEFENSE OF THIRD PARTY ACTIONS. If either Purchaser, on the one hand, or
the Stockholder Representatives, on the other hand (the "Indemnitee"), receives
notice or otherwise obtains knowledge of any matter or any threatened matter
that may give rise to an indemnification claim against the Escrow Fund, on the
one hand, or Purchaser, on the other hand (the "Indemnifying Party"), then the
Indemnitee shall promptly deliver to the Indemnifying Party a written notice
describing such matter in reasonable detail. The timely delivery of such
written notice by the Indemnitee to the Indemnifying Party shall be a condition
precedent to any liability on the part of the Indemnifying Party under this
Article 11 with respect to such matter. The Indemnifying Party shall have the
right at its option (acting through the Stockholder Representatives, if the
"Indemnifying Party" is the Escrow Fund), to assume the defense of any such
matter with its own counsel, but only if the Indemnifying Party simultaneously
agrees to indemnify the Indemnitee for such matter. If the Indemnifying Party
elects to assume the defense of and indemnification for any such matter, then:
(A) notwithstanding anything to the contrary contained in this Agreement,
the Indemnifying Party shall not be required to pay or otherwise indemnify
the Indemnitee against any attorneys' fees or other
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expenses incurred on behalf of the Indemnitee in connection with such matter
following the Indemnifying Party's election to assume the defense of such
matter;
(B) the Indemnitee shall make available to the Indemnifying Party all books,
records and other documents and materials that are under the direct or indirect
control of the Indemnitee or any of the Indemnitee's agents and that the
Indemnifying Party considers necessary or desirable for the defense of such
matter;
(C) the Indemnitee shall execute such documents and take such other actions
as the Indemnifying Party may reasonably request for the purpose of
facilitating the defense of, or any settlement, comprise or adjustment relating
to, such matter;
(D) the Indemnitee shall otherwise fully cooperate as reasonably requested by
the Indemnifying Party in the defense of such matter; and
(E) the Indemnitee shall not admit any liability with respect to such matter.
Notwithstanding the foregoing, the Indemnifying Party shall not, without the
prior written consent of the Indemnitee, agree to settlement of any third party
claim, unless the settlement provides an unconditional release and discharge of
the Indemnitee. If the Indemnifying Party elects not to assume the defense of
and indemnification for such matter, then the Indemnitee shall proceed
diligently to defend such matter with the assistance of counsel reasonably
satisfactory to the Indemnifying Party; provided, however, that the Indemnitee
shall not settle, adjust or compromise such matter, or admit any liability with
respect to such matter, without the prior written consent of the Indemnifying
Party, such consent not to be unreasonably withheld or delayed. In the event
the Escrow Fund is the "Indemnifying Party" in connection with a matter, the
Stockholder Representatives shall have the right to pay any attorneys' fees and
other expenses of any defense of a matter assumed pursuant to this Section 11.4
out of the amount then available thereunder.
11.5 SUBROGATION; NO CONTRIBUTION. To the extent that the Indemnifying Party
makes or is required to make any indemnification payment to the Indemnitee, the
Indemnifying Party shall be entitled to exercise, and shall be subrogated to,
any rights and remedies (including rights of indemnity, rights of contribution
and other rights of recovery) that the Indemnitee or any of the Indemnitee's
affiliates may have against any other person with respect to any Losses,
circumstances or matter to which such indemnification payment is directly or
indirectly related. The Indemnitee shall permit the Indemnifying Party to use
the name of the Indemnitee and the names of the Indemnitee's affiliates in any
transaction or in any proceeding or other matter involving any of such rights
or remedies; and the Indemnitee shall take such actions as the Indemnifying
Party may reasonably request for the purpose of enabling the Indemnitee to
perfect or exercise the Indemnifying Party's right of subrogation hereunder.
Notwithstanding the foregoing, the Stockholder Representative, on behalf of all
holders of Ventures Capital Stock, Warrants and Options, hereby waives, and
acknowledges and agrees that no holder of Ventures Capital Stock, Warrants or
Options shall have and shall not exercise or assert (or attempt to exercise or
assert), any right of contribution, right of indemnity or other right or remedy
against Purchaser or Ventures in connection with any indemnification obligation
to which such stockholder may become subject under this Agreement or the Escrow
Agreement.
11.6 EXCLUSIVITY. The right of each party hereto to assert indemnification
claims and receive indemnification payments pursuant to this Article 11 shall
be the sole and exclusive right and remedy exercisable by such party with
respect to any breach by the other party hereto of any representation, warranty
or covenant, except for claims based on fraud.
11.7 RETENTION OF RECORDS. From and after the date of this Agreement,
Purchaser shall preserve, and shall cause the Surviving Corporation and the
Wired Companies to preserve, all books, records and other documents, materials
and information relevant to the representations, warranties and covenants set
forth in this Agreement for a period of six years following the date of this
Agreement or for such longer period as the rights of the parties hereunder may
exist.
11.8 NOTICE AS TO REPRESENTATIONS. Without limiting any of the other
obligations of the respective parties hereunder, if at any time after the date
of this Agreement, Purchaser shall have any reason to believe
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that any representation or warranty made by Ventures hereunder may have been
untrue, Purchaser shall promptly provide the Stockholder Representatives
written notice to that effect, indicating the basis for Purchaser's belief that
such representation or warranty may have been untrue. For purposes of this
Article 11, Ventures shall not be deemed to have breached any representation or
warranty if Purchaser, prior to the Closing Date, had knowledge of the breach,
or facts and circumstances constituting or resulting in a breach, of such
representation or warranty, and consummated the Merger notwithstanding such
knowledge.
11.9 NO RESCISSION. Neither Purchaser, Acquisition Sub nor Ventures shall be
entitled to rescind the Merger by virtue of any failure of any party's
representations and warranties herein to have been true or any breach of any
party's obligations hereunder.
ARTICLE 12
MISCELLANEOUS
12.1 MATERIAL ADVERSE EFFECT. Any adverse change, event or effect that is
proximately caused by conditions affecting the United States economy generally
shall not be taken into account in determining whether there has been or would
be a Material Adverse Effect on Wired or a Material Adverse Effect on Purchaser
(unless such conditions adversely affect Ventures or Purchaser, as the case may
be, in a materially disproportionate manner). Any adverse change, event or
effect that is proximately caused by any industry in which Purchaser or
Ventures competes shall not be taken into account in determining whether there
has been or would be a Material Adverse Effect on Purchaser or Material Adverse
Effect on Ventures (unless such conditions adversely affect Ventures or
Purchaser, as the case may be, in a materially disproportionate manner). Any
adverse change, event or effect that is proximately caused by the announcement
or pendency of the Merger shall not be taken into account in determining
whether there has been or would be a Material Adverse Effect on Purchaser or a
Material Adverse Effect on Wired. Any adverse change, event or effect that is
proximately caused by any breach by Purchaser or Ventures of any covenant or
obligation set forth in this Agreement shall not be taken into account in
determining whether there has been or would be a Material Adverse Effect on
Wired or Material Adverse Effect on Purchaser, respectively.
12.2 KNOWLEDGE OF VENTURES. As used in this Agreement, a corporate party's
"knowledge" means the actual knowledge of any director or executive officer of
such party.
12.3 MEMORANDUM; DISCLAIMER OF PROJECTIONS. Ventures makes no representation
or warranty to Purchaser or Acquisition Sub except as specifically made in this
Agreement. In particular, Ventures makes no representation or warranty to
Purchaser or Acquisition Sub with respect to any financial projection or
forecast delivered by or on behalf of Ventures to Purchaser. Purchaser and
Acquisition sub acknowledge that (a) there are uncertainties inherent in
attempting to make such projections and forecasts, (b) they are familiar with
such uncertainties, (c) they are taking full responsibility for making their
own evaluation of the adequacy and accuracy of all such projections and
forecasts so furnished to them and (d) they shall have no claim against
Ventures or its stockholders with respect thereto.
12.4 EXPENSES.
(A) If the Merger is consummated or if this Agreement is terminated under
circumstances other than those specified in Section 9.3(a) or (b), Ventures and
Purchaser shall pay their own respective expenses and costs incidental to the
preparation of this Agreement, the performance and compliance with all
agreements contained in this Agreement to be performed or complied with by them
and the consummation of the transactions contemplated hereby. Ventures shall
pay all such legal, accounting, investment banking and other fees and expenses
that are payable by it in full at or prior to the Closing against appropriate
invoices therefor. So that Purchaser may calculate the Aggregate Share Value
pursuant to Section 1.5(b)(2), Ventures shall provide Purchaser with an
estimate of amounts to be paid by Ventures at or prior to the Closing at least
two days prior to the Effective Time. Notwithstanding anything to the contrary
contained herein, if the Merger is
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consummated, and if the aggregate legal, accounting, investment banking and
other fees and expenses paid or payable by Ventures and determined by Ventures
to be substantially related to the preparation for, negotiation of or
consummation of this Agreement or the transactions contemplated hereby exceed
$2.5 million and have not otherwise been included as a Closing Expense
Adjustment Amount thereby reducing the Aggregate Share Value pursuant to
Section 1.5(b)(2) or included in the definition of Excess Expenses as defined
in Section 10.1(d), Purchaser shall be entitled to seek indemnification, by
making a claim against the Escrow Fund pursuant to Article 11, with respect to
the amount by which such fees and expenses exceed $2.5 million. The Deductible
shall not apply to any such claim, and any such claim shall not be taken into
account in determining whether aggregate Losses exceed the threshold of the
Deductible or whether the Deductible has been satisfied for purposes of
calculating Purchaser's recovery from the Escrow Fund.
(B) If the Merger is not consummated under the circumstances described in
Section 9.3(a), Purchaser shall pay (1) all of its own expenses and costs and
(2) the reasonable expenses and costs of Ventures incidental to the preparation
of this Agreement, the performance and compliance with all agreements contained
in this Agreement and the consummation of the transactions contemplated hereby
including, without limitation, the reasonable fees and expenses of their
respective counsel and investment bankers, in an aggregate amount not to exceed
$200,000.
(C) If the Merger is not consummated under the circumstances described in
Section 9.3(b), Ventures shall pay (1) all of its own expenses and costs and
(2) the reasonable expenses and costs of Purchaser incidental to the
preparation of this Agreement, the performance and compliance with all
agreements contained in this Agreement and the consummation of the transactions
contemplated hereby including, without limitation, the reasonable fees and
expenses of their respective counsel and investment bankers, in an aggregate
amount not to exceed $200,000.
12.5 NOTICES. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (a) by registered or
certified mail, return receipt requested, postage prepaid, or (b) via a
reputable nationwide overnight courier service, in each case to the address set
forth below. Any such notice, instruction or communication shall be deemed to
have been delivered three business days after it is sent prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to Purchaser, Acquisition Sub or the Surviving Corporation to:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: General Counsel
Tel: (781) 370-2700
Fax: (781) 370-2600
with a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: Michael J. Riccio, Jr., Esq.
Tel: (617) 951-6639
Fax: (617) 951-1295
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If to Ventures, to:
Wired Ventures, Inc.
660 Third Street, 4th Floor
San Francisco, CA 94107
Attention: President
Tel: (415) 276-8400
Fax: (415) 276-8699
with a copy to:
Cooley Godward llp
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
Tel: (415) 693-2000
Fax: (415) 951-3699
If to the Stockholder Representatives, to:
H. William Jesse, Jr.
222 Sutter Street, 8th Floor
San Francisco, CA 94108
Tel: (415) 274-4550
Fax: (415) 274-4567
and to:
Louis Rossetto
1732 La Vereda
Berkeley, CA 94702
Tel: (510) 841-7567
Fax: (510) 841-7568
and to:
Paul J. Salem
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Tel: (401) 751-6763
Fax: (401) 751-1790
with a copy to:
Cooley Godward llp
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
Tel: (415) 693-2000
Fax: (415) 951-3699
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or, in each case, to such other address as may be specified in writing to the
other parties.
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery,
telecopy or ordinary mail), but no such notice, instruction or communication
shall be deemed to have been delivered unless and until it is actually received
by the party to whom it was sent. Any party may change the address to which
notices, instructions or communications are to be delivered by giving the other
parties to this Agreement notice thereof in the manner set forth in this
Section 12.5.
12.6 ASSIGNMENT. No party may assign or otherwise transfer this Agreement or
any of his rights hereunder to any person or entity, without the prior written
consent of Purchaser, Ventures and the Stockholder Representatives, which
consent shall not be unreasonably withheld or delayed. Subject to the
foregoing, this Agreement shall inure to the benefit of and be binding upon the
parties hereto and their successors and assigns.
12.7 ENTIRE AGREEMENT; AMENDMENT; GOVERNING LAW; ETC. This Agreement
(together with the Exhibits and Schedules hereto) and the Non-Disclosure
Agreement embody the entire agreement and understanding among the parties
hereto with respect to the subject matter hereof. This Agreement may be
amended, modified, waived, discharged or terminated only by (and any consent
hereunder shall be effective only if contained in) an instrument in writing
signed by the party against which enforcement of such amendment, modification,
waiver, discharge, termination or consent is sought. This Agreement shall be
construed in accordance with and governed by the laws of the State of Delaware
as it applies to contracts to be performed entirely within the State of
Delaware.
12.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which is an original, but all of which shall constitute one instrument.
12.9 VENUE. If any legal proceeding or other action relating to this
Agreement or any of the other agreements being executed and delivered in
connection herewith, or any of the transactions contemplated hereby or thereby,
is brought or otherwise initiated, the venue therefor shall be in the city and
state in which the principal executive offices of the party who is not
initiating the legal proceeding, which shall be deemed to be a convenient
forum. Each of the parties hereto hereby expressly and irrevocably consents and
submits to the jurisdiction of the Federal and State courts sitting in such
city and state in connection with any such legal proceeding or other action.
12.10 THIRD-PARTY RIGHTS. The stockholders of Ventures and holders of Options
and Warrants, acting solely through the Stockholder Representatives, are
intended third-party beneficiaries of the obligations of Purchaser and
Acquisition Sub set forth in Articles 1, 5, 6, 10, 11 and 12 of this Agreement.
Except as otherwise set forth herein, the parties do not intend to confer any
benefit hereunder on any person or entity other than the parties hereto and
their respective successors in interest.
12.11 TITLES AND HEADINGS. Titles and headings of sections of this Agreement
and the "Table of Contents" and the "Table of Exhibits" included herewith are
for convenience of reference only and shall not affect the construction of any
provision of this Agreement.
12.12 EXHIBITS AND SCHEDULES. Each of the Exhibits and Schedules referred to
herein and attached hereto is an integral part of this Agreement and is
incorporated herein by this reference.
12.13 PRONOUNS. All pronouns and any variations thereof used in this
Agreement shall be deemed to refer to the masculine, feminine or neuter,
singular or plural, as appropriate.
12.14 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction, as to such jurisdiction, shall be
ineffective to the extent of such invalidity or unenforceability, without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
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12.15 TIME OF ESSENCE. Time is of the essence of this Agreement.
12.16 INTERPRETATION. Each party acknowledges that such party, either
directly or through such party's representatives, has participated in the
drafting of this Agreement and any applicable rule of constructions that
ambiguities are to be resolved against the drafting party should not be applied
in connection with the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be
executed as of the date first above written.
LYCOS, INC.,
a Delaware corporation
By: _________________________________
Its: ________________________________
BF ACQUISITION CORP.,
a Delaware corporation
By: _________________________________
Its: ________________________________
WIRED VENTURES, INC.,
a Delaware corporation
By: _________________________________
Its: ________________________________
STOCKHOLDER REPRESENTATIVES:
_____________________________________
H. William Jesse, Jr.
_____________________________________
Louis Rossetto
_____________________________________
Paul J. Salem
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ANNEX II
EXHIBIT A-1
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of October 5, 1998, between the undersigned
holder (the "Holder") of shares of the common stock, $.001 par value (the
"Company Common Stock") of Wired Ventures, Inc., a Delaware corporation (the
"Company"), the Series A Preferred Stock, $.001 par value per share (the
"Company Series A Preferred Stock") of the Company, the Series B Preferred
Stock, $.001 par value (the "Company Series B Preferred Stock") of the Company
and/or the Series C Preferred Stock, $.001 par value (the "Company Series C
Preferred Stock" and together with the Company Common Stock, Company Series A
Preferred Stock, Company Series B Preferred Stock and Company Series C
Preferred Stock, the "Ventures Capital Stock") of the Company and Lycos, Inc.,
a Delaware corporation ("Parent").
RECITALS
WHEREAS, the Company, Parent, BF Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), and the representatives
of the shareholders of the Company propose to enter into an Agreement and Plan
of Merger and Reorganization dated the date hereof (the "Merger Agreement")
pursuant to which Merger Sub would be merged (the "Merger") with and into the
Company, and each outstanding share of Ventures Capital Stock would be
converted into the right to receive shares ("Parent Shares") of the common
stock, $0.01 par value, of Parent as provided therein;
WHEREAS, in order to induce Parent to enter into the Merger Agreement, and at
the request of Parent, the Holder has agreed, to enter into this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Merger Agreement.
2. Representations and Warranties of Holder. The Holder represents and
warrants to Parent as follows:
(a) Ownership of Securities. The Holder is the record and beneficial
owner of the number of shares of Ventures Capital Stock (together with any
shares of Ventures Capital Stock hereafter acquired by the Holder, the
"Subject Shares") and the number and kind of other securities of the
Company (together with the Subject Shares and any other securities of the
Company hereafter acquired by the Holder, the "Subject Securities") set
forth on the signature page to this Agreement. The Holder has sole voting
power and sole power to issue instructions with respect to the voting of
the Subject Securities, sole power of disposition, sole power of exercise
or conversion and the sole power to demand appraisal right, in each case
with respect to all of the Subject Securities.
(b) Power; Binding Agreement. The Holder has the legal capacity, power
and authority to enter into and perform all of the Holder's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Holder will not violate any other agreement to which such
Holder is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by the Holder and
constitutes a valid and binding agreement of such Holder, enforceable
against the Holder in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of
creditors' rights
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generally and by general principles of equity, regardless of whether such
enforceability is considered in a proceeding at law or in equity. If the
Holder is married and the Subject Securities constitute community property,
this Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Holder's spouse,
enforceable against such person in accordance with its terms.
(c) No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary
for the execution of this Agreement by the Holder and the consummation by
the Holder of the transactions contemplated hereby and neither the
execution and delivery of this Agreement by the Holder nor the consummation
by the Holder of the transactions contemplated hereby nor compliance by the
Holder with any of the provisions hereof shall conflict with or result in
any breach of any applicable partnership or other organizational documents
applicable to the Holder, result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any thirdparty right of termination, cancellation, material modification
or acceleration) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which the Holder is a party or by which the Holder's properties
or assets may be bound or violate any order, writ, injunction, decree,
judgment, order, statute, rule or regulation applicable to the Holder or
any of the Holder's properties or assets.
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Holder, or by a nominee or custodian for
the benefit of the Holder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any
encumbrances arising hereunder and under applicable securities laws and
except as provided in the Shareholders' Agreement dated December 30, 1996,
as amended by Amendment No. 1 thereto dated March 23, 1998.
3. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, the Holder shall vote or
cause to be voted all of the Subject Securities that it beneficially owns on
the record date of any such vote: (i) in favor of the Merger, the adoption of
the Merger Agreement and the approval of the terms thereof and (ii) against the
following actions (other than the Merger and the transactions contemplated by
the Merger Agreement): (1) any merger, consolidation or other business
combination involving the Company or its subsidiaries; (2) a sale, lease or
transfer of a material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries that under applicable law requires the approval of the
Company's stockholders; (3) any change in a majority of the board of directors
of the Company; (4) any amendment to the Company's Certificate of Incorporation
other than a change necessary or desirable in connection with the Merger and
acceptable to Parent, or (5) any other action that under applicable law or
contract requires the approval of the Company's stockholders which is intended,
or could reasonably be expected, to impede, interfere with, delay, postpone, or
materially adversely affect the consummation of the Merger or the transactions
contemplated by the Merger Agreement or this Agreement. The Holder will retain
at all times during the term hereof the right to vote the Holder's Subject
Securities, in Holder's sole discretion, on all matters other than those in
this Section 3 which are at any time or from time to time presented to the
Company's stockholders.
4. PROXY. THE STOCKHOLDER HEREBY GRANTS TO, AND APPOINTS MERGER SUB AND THE
PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER SUB, IN THEIR RESPECTIVE
CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY INDIVIDUAL WHO SHALL HEREAFTER
SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND ANY OTHER DESIGNEE OF MERGER SUB,
EACH OF THEM INDIVIDUALLY, THE STOCKHOLDER'S PROXY AND ATTORNEY-IN-FACT (WITH
FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY WRITTEN CONSENT WITH RESPECT TO
THE SUBJECT SECURITIES SOLELY WITH RESPECT TO THE MATTERS IN CLAUSES (i) and
(ii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 3 HEREOF.
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THIS PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE, AND THE HOLDER
WILL TAKE SUCH FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE
NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY
PREVIOUSLY GRANTED BY HIM OR IT WITH RESPECT TO THE SUBJECT SECURITIES.
5. Covenants of the Holder. The Holder hereby agrees and covenants that:
(a) No Solicitation. The Holder shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub and other than advising such person or entity of the
existence of this Agreement) with respect to the Company that constitutes
or could reasonably be expected to lead to an Acquisition Transaction. If
the Holder receives any such inquiry or proposal, then it shall promptly
inform Parent of the terms and conditions, if any, of such inquiry or
proposal and the identity of the person making it. The Holder will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing.
(b) Restriction on Transfer, Proxies and Noninterference. The Holder shall
not, directly or indirectly: (i) except pursuant to the terms of the Merger
Agreement, offer for sale, sell, transfer, tender, pledge, encumber, assign
or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for
sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of the Holder's Subject Securities; (ii) except
as contemplated hereby, grant any proxies or powers of attorney, deposit
any Subject Shares into a voting trust or enter into a voting agreement
with respect to any Subject Shares; or (iii) take any action that would
make any representation or warranty contained herein untrue or incorrect or
have the effect of preventing or disabling the Holder from performing its
obligations under this Agreement.
6. Agreement as Shareholder. Parent and the Holder acknowledge and agree that
none of the provisions set forth herein shall be deemed to restrict or limit
any fiduciary duty that the Holder may have as a director or an officer of the
Company provided that no such duty shall excuse the Holder from its obligation
to vote the Subject Securities, to the extent that they may be so voted as
provided herein, and to otherwise comply with each of the terms and conditions
of the Agreement.
7. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Holder, Parent and their respective successors and permitted assigns.
8. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
If to the Holder, to the Holder at the address appearing on the signature
page beneath the Holder's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
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If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Michael J. Riccio, Jr., Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
9. Specific Performance. The parties hereto agree that irreparable harm would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
10. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
11. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 8 or by any other method permitted by law.
12. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
13. Termination. This Agreement shall terminate upon the earliest to occur of
(i) the consummation of the Merger, or (ii) the termination of the Merger
Agreement pursuant to Section 9.1 thereof. The date and time at which this
Agreement is terminated in accordance with this Section 13 is referred to
herein as the "Termination Date." Upon any termination of this Agreement, this
Agreement shall thereupon become void and of no further force and effect, and
there shall be no liability in respect of this Agreement or of any transactions
contemplated hereby or by the Merger Agreement on the part of any party hereto
or any of its directors, officers, partners, stockholders, employees, agents,
advisors, representatives or affiliates; provided, however, that nothing herein
shall relieve any party from any liability for such party's willful breach of
this Agreement; and provided further that nothing herein shall limit, restrict,
impair, amend or otherwise modify the rights, remedies, obligations or
liabilities of any person under any contract or agreement, including, without
limitation, the Merger Agreement.
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IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
LYCOS, INC.
By:__________________________________
Name: Edward M. Philip
Title: Chief Operating Officer
THE HOLDER:
By:__________________________________
Name:
Title:
Shares of Common Stock: _____________
Shares of Preferred Stock: __________
Warrants: ___________________________
Stock Options: ______________________
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EXHIBIT A2
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of October 5, 1998, between the Wired
Ventures, Inc. Voting Trust (the "Trust"), Raymond M. Mathieu of Pawtucket,
Rhode Island as trustee of the Trust (in his capacity as such the "Trustee")
and Lycos, Inc., a Delaware corporation ("Parent").
RECITALS
WHEREAS, Wired Ventures, Inc., a Delaware corporation (the "Company"),
Parent, BF Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and the representatives of the
shareholders of the Company propose to enter into an Agreement and Plan of
Merger and Reorganization dated the date hereof (the "Merger Agreement")
pursuant to which Merger Sub would be merged (the "Merger") with and into the
Company, and each outstanding share of Ventures Capital Stock would be
converted into the right to receive shares of the common stock, $0.01 par
value, of Parent ("Parent Shares") as provided therein;
WHEREAS, in order to induce Parent to enter into the Merger Agreement, and at
the request of Parent, the Trust and the Trustee have agreed, to enter into
this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Merger Agreement.
2. Representations and Warranties of Trustee. The Trustee represents and
warrants to Parent as follows:
(a) Ownership of Securities. The Trustee is the record owner of the
number of shares of Ventures Capital Stock (together with any shares of
Ventures Capital Stock hereafter acquired by the Trustee, the "Subject
Shares") and the number and kind of other securities of the Company
(together with the Subject Shares and any other securities of the Company
hereafter acquired by the Trustee, the "Subject Securities") set forth on
the signature page to this Agreement. The Trustee has sole voting power and
sole power to issue instructions with respect to the voting of the Subject
Securities for or against the Merger.
(b) Power; Binding Agreement. The Trustee has the legal capacity, power
and authority to enter into and perform all of the Trustee's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Trustee will not violate any other agreement to which such
Trustee is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by the Trustee and
constitutes a valid and binding agreement of such Trustee, enforceable
against the Trustee in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of
creditors' rights generally and by general principles of equity, regardless
of whether such enforceability is considered in a proceeding at law or in
equity.
(c) Trustee. The Trustee is the duly appointed trustee of the Trust
pursuant to that certain Wired Ventures, Inc. Voting Trust Agreement by and
among the Trustee, the Company and certain stockholders of the Company
dated March 23, 1998 (the "Voting Trust Agreement") and as such has the
exclusive right to vote all of the shares of Ventures Capital Stock listed
on the signature page to this Agreement for
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or against the Merger on behalf of the persons on Schedule A attached
hereto. The Merger constitutes a Board Approved Sale of the Company (as
defined in the Voting Trust Agreement).
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Trustee, or by a nominee or custodian for
the benefit of the Trustee, free and clear of any liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances created or granted by Trustee,
except for the Voting Trust Agreement and except for any encumbrances
arising hereunder and under applicable securities laws.
3. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, the Trustee shall vote or
cause to be voted all of the Subject Securities that it owns of record on the
record date of any such vote: (i) in favor of the Merger, the adoption of the
Merger Agreement and the approval of the terms thereof and (ii) against the
following actions (other than the Merger and the transactions contemplated by
the Merger Agreement) to the extent the Trustee is entitled to vote thereon
under the Trust: (1) any merger, consolidation or other business combination
involving the Company or its subsidiaries; (2) a sale, lease or transfer of a
material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries that under applicable law requires the approval of the
Company's stockholders; (3) any change in a majority of the board of directors
of the Company; (4) any amendment to the Company's Certificate of Incorporation
other than a change necessary or desirable in connection with the Merger and
acceptable to Parent, or (5) any other action that under applicable law or
contract requires the approval of the Company's stockholders which is intended,
or could reasonably be expected, to impede, interfere with, delay, postpone, or
materially adversely affect the consummation of the Merger or the transactions
contemplated by the Merger Agreement or this Agreement. The Trustee will retain
at all times during the term hereof the right to vote the Subject Securities,
in Trustee's sole discretion, on all matters provided for in the Trust.
4. PROXY. THE TRUSTEE HEREBY GRANTS TO, AND APPOINTS MERGER SUB AND THE
PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER SUB, IN THEIR RESPECTIVE
CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY INDIVIDUAL WHO SHALL HEREAFTER
SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND ANY OTHER DESIGNEE OF MERGER SUB,
EACH OF THEM INDIVIDUALLY, THE TRUSTEE'S PROXY AND ATTORNEY-IN-FACT (WITH FULL
POWER OF SUBSTITUTION) TO VOTE OR ACT BY WRITTEN CONSENT WITH RESPECT TO THE
SUBJECT SECURITIES SOLELY WITH RESPECT TO THE MATTERS IN CLAUSE (i) AND, TO THE
EXTENT THE TRUSTEE IS ENTITLED TO VOTE THEREON UNDER THE TRUST, CLAUSE (ii) OF,
AND SOLELY IN ACCORDANCE WITH SECTION 3 HEREOF. THIS PROXY IS COUPLED WITH AN
INTEREST AND SHALL BE IRREVOCABLE, AND THE TRUSTEE WILL TAKE SUCH FURTHER
ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE
INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY HIM
WITH RESPECT TO THE SUBJECT SECURITIES.
5. Covenants of the Trustee. The Trustee hereby agrees and covenants that:
(a) No Solicitation. The Trustee shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub) with respect to the Company that constitutes or could
reasonably be expected to lead to an Acquisition Transaction. If the
Trustee receives any such inquiry or proposal, then he shall promptly
inform Parent of the terms and conditions, if any, of such inquiry or
proposal and the identity of the person making it. The Trustee will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing.
(b) Restriction on Proxies and Noninterference. The Trustee shall not,
directly or indirectly: (i) except as contemplated hereby, grant any
proxies or powers of attorney, deposit any Subject Shares into a
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voting trust or enter into a voting agreement with respect to any Subject
Shares; or (ii) take any action that would make any representation or
warranty contained herein untrue or incorrect or have the effect of
preventing or disabling the Trustee from performing its obligations under
this Agreement.
(c) Release. The Trustee shall not, directly or indirectly release any of
the Stock (as defined in the Voting Trust Agreement) from the Trust until
the Termination Date (as defined herein).
(d) Termination. The Trustee shall not, directly or indirectly, terminate
the Trust prior to the Termination Date (as defined herein).
6. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Trustee, Parent and their respective successors and permitted assigns.
7. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
If to the Trustee, to the Trustee at the address appearing on the signature
page beneath the Trustee's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Michael J. Riccio, Jr., Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
8. Specific Performance. The parties hereto agree that irreparable harm would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
9. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
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<PAGE>
10. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 7 or by any other method permitted by law.
11. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
12. Termination. This Agreement shall terminate upon the earliest to occur of
(i) the consummation of the Merger, or (ii) the termination of the Merger
Agreement pursuant to Section 9.1 thereof. The date and time at which this
Agreement is terminated in accordance with this Section 12 is referred to
herein as the "Termination Date." Upon any termination of this Agreement, this
Agreement shall thereupon become void and of no further force and effect, and
there shall be no liability in respect of this Agreement or of any transactions
contemplated hereby or by the Merger Agreement on the part of any party hereto
or any of its directors, officers, partners, stockholders, employees, agents,
advisors, representatives or affiliates; provided, however, that nothing herein
shall relieve any party from any liability for such party's willful breach of
this Agreement; and provided further that nothing herein shall limit, restrict,
impair, amend or otherwise modify the rights, remedies, obligations or
liabilities of any person under any contract or agreement, including, without
limitation, the Merger Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
LYCOS, INC.
By:__________________________________
Name: Edward M. Philip
Title: Chief Operating Officer
WIRED VENTURES, INC. VOTING TRUST:
By:__________________________________
Raymond M. Mathieu
Trustee
Shares of Common Stock: _____________
8,786,741
Shares of Series A Preferred Stock: _
350,000
Shares of Series B Preferred Stock: _
Shares of Series C Preferred Stock: _
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EXHIBIT A-3
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of October 5, 1998, between the undersigned
holder (the "Holder") of shares of the common stock, $.001 par value (the
"Company Common Stock") of Wired Ventures, Inc., a Delaware corporation (the
"Company"), options to acquire shares of Company Common Stock (the "Stock
Options"), the Series A Preferred Stock, $.001 par value per share (the
"Company Series A Preferred Stock") of the Company, the Series B Preferred
Stock, $.001 par value (the "Company Series B Preferred Stock") of the Company
and/or the Series C Preferred Stock, $.001 par value (the "Company Series C
Preferred Stock" and together with the Company Common Stock, Company Series A
Preferred Stock, Company Series B Preferred Stock and Company Series C
Preferred Stock, the "Ventures Capital Stock") of the Company and Lycos, Inc.,
a Delaware corporation ("Parent").
RECITALS
WHEREAS, the Company, Parent, BF Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), and the representatives
of the shareholders of the Company propose to enter into an Agreement and Plan
of Merger and Reorganization dated the date hereof (the "Merger Agreement")
pursuant to which Merger Sub would be merged (the "Merger") with and into the
Company, and each outstanding share of Ventures Capital Stock would be
converted into the right to receive shares ("Parent Shares") of the common
stock, $0.01 par value, of Parent as provided therein;
WHEREAS, in order to induce Parent to enter into the Merger Agreement, and at
the request of Parent, the Holder has agreed, to enter into this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Merger Agreement.
2. Representations and Warranties of Holder. The Holder represents and
warrants to Parent as follows:
(a) Ownership of Securities. The Holder is the record and beneficial
owner of the number of shares of Ventures Capital Stock (together with any
shares of Ventures Capital Stock hereafter acquired by the Holder, the
"Subject Shares") and the number and kind of other securities of the
Company (together with the Subject Shares and any other securities of the
Company hereafter acquired by the Holder, the "Subject Securities") set
forth on the signature page to this Agreement. The Holder has sole voting
power and sole power to issue instructions with respect to the voting of
the Subject Securities, sole power of disposition, sole power of exercise
or conversion and the sole power to demand appraisal right, in each case
with respect to all of the Subject Securities.
(b) Power; Binding Agreement. The Holder has the legal capacity, power
and authority to enter into and perform all of the Holder's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Holder will not violate any other agreement to which such
Holder is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by the Holder and
constitutes a valid and binding agreement of such Holder, enforceable
against the Holder in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of
creditors' rights generally and by general principles of equity, regardless
of whether such enforceability is considered in a proceeding at law or in
equity. If the Holder is married and the Subject Securities constitute
community property, this Agreement has been duly authorized, executed and
delivered by, and constitutes a valid and binding agreement of, the
Holder's spouse, enforceable against such person in accordance with its
terms.
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(c) No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary
for the execution of this Agreement by the Holder and the consummation by
the Holder of the transactions contemplated hereby and neither the
execution and delivery of this Agreement by the Holder nor the consummation
by the Holder of the transactions contemplated hereby nor compliance by the
Holder with any of the provisions hereof shall conflict with or result in
any breach of any applicable partnership or other organizational documents
applicable to the Holder, result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any third-party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which the Holder is a party or by which the
Holder's properties or assets may be bound or violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Holder or any of the Holder's properties or assets.
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Holder, or by a nominee or custodian for
the benefit of the Holder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any
encumbrances arising hereunder and under applicable securities laws.
3. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, the Holder shall vote or
cause to be voted all of the Subject Securities that he or she beneficially
owns on the record date of any such vote: (i) in favor of the Merger, the
adoption of the Merger Agreement and the approval of the terms thereof and
(ii) against the following actions (other than the Merger and the transactions
contemplated by the Merger Agreement): (1) any merger, consolidation or other
business combination involving the Company or its subsidiaries; (2) a sale,
lease or transfer of a material amount of assets of the Company or its
subsidiaries or a reorganization, recapitalization, dissolution or liquidation
of the Company or its subsidiaries that under applicable law requires the
approval of the Company's stockholders; (3) any change in a majority of the
board of directors of the Company; (4) any amendment to the Company's
Certificate of Incorporation other than a change necessary or desirable in
connection with the Merger and acceptable to Parent, or (5) any other action
that under applicable law or contract requires the approval of the Company's
stockholders which is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, or materially adversely affect the
consummation of the Merger or the transactions contemplated by the Merger
Agreement or this Agreement. The Holder will retain at all times during the
term hereof the right to vote the Holder's Subject Securities, in Holder's sole
discretion, on all matters other than those in this Section 3 which are at any
time or from time to time presented to the Company's stockholders.
4. PROXY. THE STOCKHOLDER HEREBY GRANTS TO, AND APPOINTS MERGER SUB AND THE
PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER SUB, IN THEIR RESPECTIVE
CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY INDIVIDUAL WHO SHALL HEREAFTER
SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND ANY OTHER DESIGNEE OF MERGER SUB,
EACH OF THEM INDIVIDUALLY, THE STOCKHOLDER'S PROXY AND ATTORNEY-IN-FACT (WITH
FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY WRITTEN CONSENT WITH RESPECT TO
THE SUBJECT SECURITIES SOLELY WITH RESPECT TO THE MATTERS IN CLAUSES (i) and
(ii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 3 HEREOF. THIS PROXY IS COUPLED
WITH AN INTEREST AND SHALL BE IRREVOCABLE, AND THE HOLDER WILL TAKE SUCH
FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO
EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY
GRANTED BY HIM OR HER WITH RESPECT TO THE SUBJECT SECURITIES.
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5. Covenants of the Holder. The Holder hereby agrees and covenants that:
(a) No Solicitation. The Holder shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub) with respect to the Company that constitutes or could
reasonably be expected to lead to an Acquisition Transaction. If the Holder
receives any such inquiry or proposal, then he or she shall promptly inform
Parent of the terms and conditions, if any, of such inquiry or proposal and
the identity of the person making it. The Holder will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing.
(b) Restriction on Transfer, Proxies and Noninterference. The Holder
shall not, directly or indirectly: (i) except pursuant to the terms of the
Merger Agreement, offer for sale, sell, transfer, tender, pledge, encumber,
assign or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for
sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of the Holder's Subject Securities; (ii) except
as contemplated hereby, grant any proxies or powers of attorney, deposit
any Subject Shares into a voting trust or enter into a voting agreement
with respect to any Subject Shares; or (iii) take any action that would
make any representation or warranty contained herein untrue or incorrect or
have the effect of preventing or disabling the Holder from performing its
obligations under this Agreement.
(c) Option Exercise. If requested by Parent at any time prior to the
earlier of the record date for the meeting of the stockholders of the
Company called for the purpose of approving the Merger or the date on which
written consents to approve the Merger are first solicited by the Company
(the earlier of such dates being referred to as the "Record Date"), the
Holder will exercise Stock Options to purchase the number of shares of
Ventures Common Stock (the "Option Shares") which will, after giving effect
to the exercise of such Stock Options, represent a majority of the shares
of Company Common Stock outstanding on the Record Date. The Option Shares
shall be Subject Shares for purposes of this Agreement. In the event that
Parent requests that the Holder exercise the Stock Options, Parent will
make an interest free loan to the Holder in the amount of the aggregate
exercise price necessary to purchase the Option Shares which shall be
secured by a security interest in the Option Shares and which shall be
repaid upon the sale of the Option Shares, or any securities issued in
exchange for the Option Shares, from the proceeds of such sale.
6. Agreement as Shareholder. Parent and the Holder acknowledge and agree that
none of the provisions set forth herein shall be deemed to restrict or limit
any fiduciary duty that the Holder may have as a director or an officer of the
Company provided that no such duty shall excuse the Holder from its obligation
to vote the Subject Securities, to the extent that they may be so voted as
provided herein, and to otherwise comply with each of the terms and conditions
of the Agreement.
7. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Holder, Parent and their respective successors and permitted assigns.
8. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
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If to the Holder, to the Holder at the address appearing on the signature
page beneath the Holder's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Michael J. Riccio, Jr., Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
9. Specific Performance. The parties hereto agree that irreparable harm would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
10. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
11. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 8 or by any other method permitted by law.
12. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
13. Termination. This Agreement shall terminate upon the earliest to occur of
(i) the consummation of the Merger, or (ii) the termination of the Merger
Agreement pursuant to Section 9.1 thereof. The date and time at which this
Agreement is terminated in accordance with this Section 13 is referred to
herein as the "Termination Date." Upon any termination of this Agreement, this
Agreement shall thereupon become void and of no further force and effect, and
there shall be no liability in respect of this Agreement or of any transactions
contemplated hereby or by the Merger Agreement on the part of any party hereto
or any of its directors, officers, partners, stockholders, employees, agents,
advisors, representatives or affiliates; provided, however, that nothing herein
shall relieve any party from any liability for such party's willful breach of
this Agreement; and provided further that nothing herein shall limit, restrict,
impair, amend or otherwise modify the
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rights, remedies, obligations or liabilities of any person under any contract
or agreement, including, without limitation, the Merger Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
LYCOS, INC.
By:__________________________________
Name: Edward M. Philip
Title: Chief Operating Officer
THE HOLDER:
By:__________________________________
Name:
Title:
Shares of Common Stock: _____________
Shares of Preferred Stock: __________
Warrants: ___________________________
Stock Options: ______________________
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ANNEX III
ESCROW AGREEMENT
This Agreement is made as of by and among Lycos, Inc., a Delaware
corporation (the "Parent"), State Street Bank and Trust Company, as escrow
agent (the "Escrow Agent"), and H. William Jesse, Jr., Louis Rossetto and Paul
J. Salem, as representatives of the holders of shares of Ventures Capital Stock
and options and warrants to purchase Ventures Capital Stock at the Effective
Time (except such holders as shall have properly exercised their appraisal or
dissenters' rights under applicable law) (the "Holders"). Capitalized terms
used in this Agreement that are not otherwise defined herein shall be defined
as set forth in the Agreement and Plan of Merger and Reorganization, dated as
of October 5, 1998 (the "Merger Agreement") among Wave Ventures, Inc., a
Delaware corporation (the "Company"), the Parent, and Acquisition Sub, a
Delaware corporation (the "Subsidiary").
WITNESSETH:
Whereas, the Company, the Parent and the Subsidiary have entered into the
Merger Agreement, pursuant to which the Subsidiary is being merged with and
into the Company; and
Whereas, the Merger Agreement provides that, at the Effective Time, share
certificates representing an aggregate of shares of Common Stock of Parent,
$.01 par value per share ("Parent Common Stock"), and documents evidencing
options and warrants to purchase an aggregate of shares of Parent Common
Stock (together with any additional such shares held by the Escrow Agent
hereunder, the "Escrow Shares" or the "Escrow Fund"), shall be deposited in
escrow, to be held and disposed of by the Escrow Agent as provided herein; and
Whereas, pursuant to the Merger Agreement, each of the Holders has appointed
H. William Jesse, Jr., Louis Rossetto and Paul J. Salem (or such individuals as
may succeed them pursuant to the provisions of Section 1.1 hereof) as such
Holder's agents and attorneys-in-fact (such individuals or such other
individuals as may succeed them being hereinafter referred to as the
"Representatives") to act with full authority for such Holder and on such
Holder's behalf pursuant to this Agreement; and
Whereas, the Parent and the Representatives desire the Escrow Agent to serve
as the escrow agent, and the Escrow Agent is willing to do so, upon the terms
and conditions hereinafter set forth;
Now, Therefore, it is agreed:
ARTICLE 1
Indemnification; Appointment of Representative
1.1 Appointment of Representative. Each of the Holders has appointed the
Representatives as such Holder's agents and attorneys-in-fact to give and
receive notices and communications, to authorize delivery to the Parent of
Escrow Shares from the Escrow Fund in satisfaction of claims by Parent, to
object to such deliveries, to agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Representatives for the
accomplishment of the foregoing. Such agency may be changed by the Holders from
time to time upon not less than 30 days prior written notice to Parent;
provided, however, that no Representative may be removed unless Holders of a
two-thirds interest in the Escrow Fund agree to such removal and to the
identity of the substituted agent. Any vacancy in the position of
Representatives may be filled by approval of the Holders of a majority in
interest of the Escrow Fund. No bond shall be required of the Representatives,
and no Representative shall receive any compensation for his or her services.
Notices or communications to or from the Representatives shall constitute
notice to or from each
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of the Holders. The Representatives shall not be liable for any act done or
omitted hereunder as Representatives while acting in good faith and in the
exercise of reasonable judgment, except in the case of their bad faith, gross
negligence or willful misconduct. The Holders shall severally indemnify the
Representatives and hold the Representatives harmless against any loss,
liability or expense incurred without gross negligence or bad faith on the part
of the Representatives and arising out of or in connection with the acceptance
or administration of the Representatives' duties hereunder, including the
reasonable fees and expenses of any legal counsel retained by the
Representatives.
1.2 Actions of the Representatives. A decision, act, consent or instruction
of a majority of the Representatives shall constitute a decision of all Holders
and shall be final, binding and conclusive upon each of such Holders, and the
Escrow Agent and the Parent may rely upon any such decision, act, consent or
instruction of the Representatives as being the decision, act, consent or
instruction of each such Holder. The Escrow Agent and the Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Representatives.
ARTICLE 2
Appointment of Escrow Agent; Creation of Escrow Fund
2.1 Appointment of Escrow Agent. The Parent and the Representatives hereby
appoint the Escrow Agent, and the Escrow Agent hereby agrees to act, as
depository and administrator of the Escrow Fund, upon the terms and conditions
set forth below.
2.2 Creation of Escrow Fund. Pursuant to the Merger Agreement, at the
Effective Time, Parent shall deposit in escrow with the Escrow Agent, as escrow
agent, a stock certificate or certificates representing the Escrow Shares which
shall be registered in the name of the Escrow Agent as Escrow Agent hereunder.
The Escrow Fund shall be held and distributed by the Escrow Agent in accordance
with the terms and conditions of the Merger Agreement and this Agreement. The
number of Escrow Shares beneficially owned by each Holder is set forth in
Exhibit A attached hereto. The Holders hereby authorize the Parent to deliver
directly to the Escrow Agent all dividends and other distributions paid in the
Parent's common stock made in respect of any Escrow Shares held in the Escrow
Fund, all of which dividends and distributions shall be added to and become
part of the Escrow Fund held for the respective Holders on account of whose
shares such dividends or distributions were paid. Any cash dividends or
distributions of property (other than securities) received by the Escrow Agent
in respect of the Escrow Fund shall be paid by the Escrow Agent to the Holders
according to the Escrow Shares, cash or other property held by it for each
Holder. The Parent, upon depositing the Escrow Shares (and upon depositing any
dividends and other distributions made in respect of the Escrow Shares which
are paid in securities) with the Escrow Agent in the Escrow Fund, as
hereinabove provided, shall deliver to the Escrow Agent three copies of a
schedule, signed by the chief financial officer or the controller of the
Parent, identifying the securities being deposited by the Parent in the Escrow
Fund, two copies of which schedule shall be countersigned by an appropriate
officer of the Escrow Agent, acknowledging the deposit of such securities in
the Escrow Fund, and returned by the Escrow Agent to, respectively, the Parent
and the Representatives. The Escrow Agent shall hold the Escrow Fund in a
separate account and shall invest such account (to the extent of any cash held
therein) and disburse such account as hereinafter provided. The Escrow Fund,
less any amounts therefrom disbursed to the Parent, shall be disbursed by the
Escrow Agent to the Holders on or after the Expiration Date (as that term is
hereinafter defined) in accordance with the provisions of this Agreement.
2.3 Holder Rights. While any Escrow Shares, cash or other property are held
in escrow in the Escrow Fund, and pending the disbursement thereof to the
Parent or the Holders, as the case may be, in connection with any disbursement
of property from the Escrow Fund in accordance with Article III hereof, the
Holders will have all rights with respect thereto (including, without
limitation, the right to vote such shares), except (i) the right of possession
thereof, (ii) except as set forth in Section 2.5, the right to sell, assign,
pledge, hypothecate or otherwise dispose of such Escrow Shares or any interest
therein, and (iii) the right to receive
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any dividends or other distributions in respect thereof paid in securities. The
Escrow Agent will vote the Escrow Shares in the manner instructed by each
Holder based upon such Holder's pro rata percentage of the Escrow Shares
referred to on Schedule 2.4.
2.4 HOLDER PERCENTAGE INTEREST IN ESCROW FUND. Attached hereto as Schedule
2.4 is a schedule listing each Holder, such Holder's address and Social
Security or other tax identification number and such Holder's interest in the
Escrow Fund (expressed as a percentage, based on the number of Escrow Shares
delivered to the Escrow Agent at the Effective Time on behalf of such Holder).
At the time of its delivery to the Escrow Agent of any shares of its common
stock, the Parent shall notify the Escrow Agent of the Holder's account for
which such shares are delivered.
2.5 SALE OF ESCROW SHARES. The Representatives may direct the Escrow Agent to
sell Escrow Shares, at any price that is at least equal to the Average Closing
Stock Price, by delivery to the Escrow Agent of a notice stating the number of
Escrow Shares to be sold and the minimum price per share to be realized from
such sale. To the extent directed to do so by the Representatives, the Escrow
Agent shall promptly upon receipt of such notice (provided that the minimum
price per share indicated may be realized), sell such number of Escrow Shares
as is designated by the Representatives, at no more than the usual and
customary brokerage commissions, and shall add the proceeds of such sale to the
Escrow Fund; provided, however, that to the extent such proceeds per share
exceed the Average Closing Stock Price, such excess amounts shall not be added
to the Escrow Fund and shall be promptly paid in the form of checks issued by
and drawn on the Escrow Agent and distributed to the Holders, in the
proportions indicated on Schedule 2.4, by first class mail or expedited courier
service to each Holder at the address indicated on such Schedule, or such other
address as shall have been specified in a written notice to the Escrow Agent
from the relevant Holder or the Representatives.
ARTICLE 3
DISPOSITION OF ESCROW FUND
3.1 ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW PERIODS. Subject
to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Massachusetts time, on the first anniversary of the Closing Date (the period
from the Effective Time to such anniversary being referred to herein as the
"Escrow Period," and the last day of the Escrow Period being referred to herein
as the "Expiration Date"); provided, however, that the Escrow Period shall not
terminate with respect to such amount (or some portion thereof) that, together
with the aggregate amount remaining in the Escrow Fund, is necessary in the
reasonable judgment of Parent, subject to the objection of the Representatives
and the subsequent arbitration of the matter in the manner provided in Section
3.4 hereof, to satisfy any unsatisfied claims concerning facts and
circumstances existing prior to the termination of such Escrow Period specified
in any Officer's Certificate delivered to the Escrow Agent prior to termination
of such Escrow Period. As soon as all such claims have been resolved, the
Escrow Agent shall deliver to the Holders the remaining portion of the Escrow
Fund not required to satisfy such claims. Deliveries of amounts from the Escrow
Fund to the Holders pursuant to this Section 3.1 shall be made in proportion to
their respective original contributions to the Escrow Fund.
3.2 CLAIMS UPON ESCROW FUND. Claims for Losses may be made pursuant to
Section 11.2 of the Merger Agreement up to a maximum of the product of the
number of Escrow Shares multiplied by the Average Closing Stock Price. Upon the
occurrence of an event which the Parent asserts constitutes a Loss for which
Parent may properly claim indemnity under Section 11.2 of the Merger Agreement
(an "Indemnity Claim") on or before the last day of the Escrow Period, the
Parent shall deliver to the Escrow Agent a certificate signed by any officer of
Parent (an "Officer's Certificate"): (1) stating the aggregate amount of
Parent's Losses or an estimate thereof, and (2) specifying in reasonable detail
the individual items of Losses included in the amount so stated, the date each
such item was paid or properly accrued or arose, or the basis for such
anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant or other matter to which such
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item is related. Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of an Officer's Certificate, the Escrow Agent
shall, subject to the provisions of Section 3.3 hereof, deliver to Parent out
of the Escrow Fund, as promptly as practicable, an amount equal to the amount
of such Losses (1) in cash, (2) if no cash is remaining in the Escrow Fund,
then that number of shares of Parent Common Stock held in the Escrow Fund equal
to the quotient obtained by dividing (i) the amount of such Losses by (ii) the
Average Closing Stock Price, or, (3) if the Escrow Fund consists of both cash
and shares of Parent Common Stock, then the amount of such Losses in cash and
shares of Parent Common Stock (determined as described in clause (2) above) pro
rata in accordance with the relative value of the cash and shares of Parent
Common Stock (valued at the Average Closing Stock Price) constituting the
Escrow Fund at the time of payment.
3.3 OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Representatives and for a period of 30 days after such
delivery, the Escrow Agent shall make no delivery to Parent of any amount from
the Escrow Fund pursuant to Section 3.2 unless the Escrow Agent shall have
received written authorization from the Representatives to make such delivery.
After the expiration of such 30-day period, the Escrow Agent shall make
delivery of an amount from the Escrow Fund in accordance with Section 3.2
hereof; provided, however, that no such payment or delivery may be made if the
Representatives shall object in a written statement to the claim made in the
Officer's Certificate, and such statement shall have been delivered to the
Escrow Agent prior to the expiration of such 30-day period.
3.4 RESOLUTION OF CONFLICTS; ARBITRATION. In case the Representatives shall
so object in writing to any claim or claims made in any Officer's Certificate,
the Representatives and Parent shall attempt in good faith to agree upon the
rights of the respective parties with respect to each of such claims, if the
Representatives and Parent should so agree, a memorandum setting forth such
agreement shall be prepared and signed by both parties and shall be furnished
to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such
memorandum and distribute an amount from the Escrow Fund in accordance with the
terms thereof.
If no such agreement can be reached after good faith negotiation, either
Parent or the Representatives may demand arbitration of the matter unless the
amount of the damage or loss is at issue pending litigation with a third party,
in which event arbitration shall not be commenced until such amount is
ascertained or both parties agree to arbitration; and in either such event the
matter shall be settled by arbitration conducted by three arbitrators. Parent
and the Representatives shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator, each of which
arbitrators shall be independent and have at least ten years' relevant
experience. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing
the parties an opportunity, adequate in the sole judgment of the arbitrators,
to discover relevant information from the opposing parties about the subject
matter of the dispute. The arbitrators shall rule upon motions to compel or
limit discovery and shall have the authority to impose sanctions, including
attorneys' fees and costs, to the same extent as a court of competent
jurisdiction, sitting in law or equity, should the arbitrators determine that
discovery was sought without substantial justification or that discovery was
refused or objected to without substantial justification. The decision of a
majority of the three arbitrators as to the validity and amount of any claim in
such Officer's Certificate shall be binding and conclusive upon the parties to
this Agreement (the "Arbitration Award"), and notwithstanding anything in
Section 3.3 hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
Judgment upon any award rendered by the arbitrators may be entered in any
court having jurisdiction. Any such arbitration shall be held in the City and
County of Denver, Colorado under the rules then in effect of the Judicial
Arbitration and Mediation Services, Inc. Except as provided below, the non-
prevailing party to an arbitration shall pay its own expenses, the fees of each
arbitrator, the administrative costs of the arbitration, and the expenses,
including without limitation, reasonable attorneys' fees and costs, incurred by
the other party to the arbitration. In the event Parent is awarded less than
50% of the disputed amount (excluding any amounts
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not in dispute), then Parent shall pay its own expenses in addition to one-half
the fees of each arbitrator and one half of the administrative costs of the
arbitration.
3.5 Notice to Withhold on Expiration Date. On or prior to the Expiration
Date, the Parent shall notify the Escrow Agent and the Representatives of the
amount, if any, in Parent's reasonable judgment, to be retained after the
Expiration Date on account of Indemnity Claims concerning facts or
circumstances existing prior to the termination of the Escrow Period and
concerning which the Parent has delivered to the Escrow Agent, prior to
termination of the Escrow Period, the Officer's Certificate specified in
Section 3.2 hereof, which Indemnity Claims are not, at such time, absolute as
to liability or liquidated as to amount. Such notice to contain the information
specified in Section 3.2 to the extent it requires supplementation or change
based on the Parent's then knowledge, whereupon the Escrow Agent shall, subject
to the objection of the Representatives and the subsequent arbitration of the
matter in the manner provided in Section 3.4 hereof, retain an amount in the
Escrow Fund having a value (determined in accordance with Section 3.2 hereof)
equal to the amount set forth in the notice given by the Parent pursuant to
this Section 3.5. In the event the Parent does not timely provide the notice
required by this Section 3.5, all remaining property held in the Escrow Fund
shall be distributed by the Escrow Agent to the Holders promptly after the
Expiration Date.
3.6 Distribution Following Expiration Date. As soon as practicable following
the Expiration Date, such number of Escrow Shares and such cash and other
property as shall remain in the Escrow Fund, less all amounts in the Escrow
Fund retained pursuant to Section 3.5 hereof, shall be released from the
provisions of this Agreement and distributed promptly by the Escrow Agent to
the Holders, in the proportions indicated on Schedule 2.4, by first class mail
or expedited courier service to each Holder at the address indicated on such
Schedule, or such other address as shall have been specified in a written
notice to the Escrow Agent from the relevant Holder or the Representatives,
with any cash amounts paid in the form of a check issued by and drawn on the
Escrow Agent.
3.7 Retention of Escrow Fund After Expiration Date. Upon receipt of a notice
pursuant to Section 3.5 hereof, the Escrow Agent shall continue to hold after
the Expiration Date, with respect to each Indemnity Claim included in such
notice, the amount specified by such notice in respect of such Indemnity Claim
determined pursuant to Section 3.5 until such time as the Escrow Agent receives
a written agreement signed by the Representatives and the Parent stating the
amount, if any, which the Parent is entitled to receive from the Escrow Fund in
connection with such Indemnity Claim, or a copy of an Arbitration Award with
respect to such Indemnity Claim, at which time the Escrow Agent shall return to
the Parent, with respect to such Indemnity Claim, cash from the Escrow Fund or
Escrow Shares having a value (determined in accordance with the final sentence
of Section 3.2 hereof) equal to the amount specified in such agreement or
Arbitration Award and shall distribute to the Holders, in the proportions
indicated on Schedule 2.4, such property, if any, which the Escrow Agent was
holding after the Expiration Date pursuant to Section 3.5 by reason of such
Indemnity Claim and which is in excess of the amount so distributed to the
Parent with respect thereto; provided, however, that to the extent the
distribution of such property from the Escrow Fund to the Holders would cause
the value of the property remaining in the Escrow Fund after such distribution
to fall below the amount (determined pursuant to Section 3.5) of all still
unresolved Indemnity Claims identified in the Section 3.5 notice, such property
shall be retained by the Escrow Agent in the Escrow Fund and shall be available
for distribution to the Parent upon the resolution of any unresolved Indemnity
Claims, and such property shall not be distributed to the Holders until such
time, if any, as such distribution can be made without causing the value of all
property remaining in the Escrow Fund to fall below the amount of all remaining
unresolved Indemnity Claims identified in the Section 3.5 notice.
3.8 Allocation of Escrow Shares Distributed to the Parent. In the event
amounts from the Escrow Fund are retained by the Escrow Agent or distributed to
the Parent pursuant to any provisions of this Article III, such amounts from
the Escrow Fund shall be taken from the amounts in such Escrow Fund deposited
by each Holder in proportion to such Holder's percentage interest in the Escrow
Fund as set forth on Schedule 2.4.
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3.9 Adjustment of Escrow Fund. Promptly upon receipt by the Escrow Agent of a
notice from the Parent and the Representatives indicating that the Adjustment
Amount, as determined pursuant to Section 10.1 of the Merger Agreement, is
negative and authorizing release to the Parent of an amount from the Escrow
Fund, the Escrow Agent shall release to the Parent that number of shares of
Parent Common Stock from the Escrow Fund equal to the Escrow Adjustment Shares
an amount equal to the Adjustment Amount in cash shares of Parent Common Stock
or both as determined as set forth in Section 3.2; provided, however, that such
Adjustment Amount shall not exceed $2 million.
3.10 Advance Escrow. Promptly after receipt by the Escrow Agent of any funds
released from the Advance Escrow as contemplated by Section 5.7 of the Merger
Agreement, the Escrow Agent shall (i) comply with any instruction previously
received from the Parent and the Representatives pursuant to Section 10.2 of
the Merger Agreement with respect to addition of some or all of such funds to
the Escrow Fund, in which case, a portion of the Advance Escrow equal to the
Adjustment Amount in excess of $2 million shall be promptly paid to Parent in
accordance with such instructions, and (ii) distribute any portion of such
funds not subject to any such instruction to the former holders of Ventures
Series A Preferred Stock and Ventures Series C Preferred Stock identified on
Schedule 5.7 to the Merger Agreement in the proportions specified thereon.
3.11 Tax Refund Amount. Promptly after receipt by the Escrow Agent of any
funds from Purchaser as contemplated by Section 5.8 of the Merger Agreement,
the Escrow Agent shall distribute such funds to the former holders of Ventures
Series A Preferred Stock and Ventures Series C Preferred Stock identified on
Schedule 5.7 to the Merger Agreement in the proportions specified thereon.
ARTICLE 4
Investment of Escrow Fund and Accounting
4.1 Investment of Escrow Fund. All cash held in the Escrow Fund shall be
invested by the Escrow Agent in interest-bearing securities of, or guaranteed
by, the United States Government with maturities of not more than 30 days, or
in such other investments as the Parent and the Representative may agree in a
writing delivered to the Escrow Agent. All interest and other income earned on
the Escrow Fund shall be added to and become part of the Escrow Fund, and the
distribution thereof shall be subject to the terms of this Agreement.
4.2 Accounting. In the event cash is held in the Escrow Fund, the Escrow
Agent shall supply a written account to the Parent and the Representatives at
the end of each month prior to the Expiration Date in which there is cash in
the Escrow Fund (and thereafter to the extent any amounts remain in escrow
pursuant to Section 3.5 hereof) listing all transactions with respect to the
Escrow Fund during the immediately preceding month.
4.3 Tax Reporting. The parties hereto agree that, for tax reporting purposes,
all interest or other income earned from the investment of the Escrow Fund
shall be allocable one-half to Parent and one-half to the Holders in the
proportions set forth on Schedule 2.4 as such proportions may be modified due
to the receipt by the Escrow Agent of any additional Escrow Shares.
4.4 Certification of Tax Identification Number. The Holders agree to provide
the Escrow Agent with their respective certified tax identification numbers by
signing and delivering a Form W-9 (or Form W-8, in the case of non-U.S.
persons) to the Escrow Agent within 30 days from the date hereof. The parties
hereto understand that, in the event their tax identification numbers are not
certified to the Escrow Agent, the Internal Revenue Code may require
withholding of a portion of any interest or other income earned on the
investment of the Escrow Fund in accordance with the Internal Revenue Code of
1986, as amended from time to time.
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ARTICLE 5
Representatives
5.1 Expenses. Any out-of-pocket fees and expenses incurred by the
Representatives shall be paid out of the Escrow Fund in preference to other
distributions from such Escrow Fund, and shall be payable from the proceeds of
the sales of shares made pursuant to Section 5.2 below; provided, however, that
under no circumstances will the Representatives have personal liability for any
such fees and expenses.
5.2 Sale of Escrow Shares. To the extent directed to do so by the
Representatives, the Escrow Agent shall sell a portion of the Escrow Shares
during the term of this Agreement and shall apply the proceeds of such sale to
pay expenses incurred by the Representatives on behalf of the Holders as
provided in Section 5.1 above.
ARTICLE 6
Escrow Agent
6.1 Escrow Agent Duties, Protections, Indemnifications, Etc.
(a) The other parties hereto acknowledge and agree that the Escrow Agent (i)
shall not be responsible for any of the agreements referred to herein but shall
be obligated only for the performance of such duties as are specifically set
forth in this Escrow Agreement; (ii) shall not be obligated to take any legal
or other action hereunder which might in its judgment involve expense or
liability unless it shall have been furnished with indemnity acceptable to it;
(iii) may rely on and shall be protected in acting or refraining from acting
upon any written notice, instruction (including, without limitation, wire
transfer instructions, whether incorporated herein or provided in a separate
written instruction), instrument, statement, request or document furnished to
it hereunder and believed by it to be genuine and to have been signed or
presented by the proper person, and shall have no responsibility for making any
investigation into the facts or matters set forth therein or otherwise
determining the accuracy or rightfulness thereof; and (iv) may consult counsel
satisfactory to it, including house counsel, and the advice or opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
accordance with the advice or opinion of such counsel.
(b) Neither the Escrow Agent nor any of its directors, officers or employees
shall be liable to anyone for any action taken or omitted to be taken by it or
any of its directors, officers or employees hereunder except in the case of
gross negligence, bad faith or willful misconduct. Subject to the limitations
contained in Section 6.1(e), the Parent and Holders, jointly and severally,
covenant and agree to indemnify the Escrow Agent and hold it harmless without
limitation from and against any loss, liability or expense of any nature
incurred by the Escrow Agent arising out of or in connection with this Escrow
Agreement or with the administration of its duties hereunder, including, but
not limited to, legal fees and expenses and other costs and expenses of
defending or preparing to defend against any claim of liability in the
premises, unless such loss, liability or expense shall be caused by the Escrow
Agent's gross negligence, bad faith or willful misconduct.
(c) Subject to the limitations contained in Section 6.1(e), the Holders,
severally and not jointly, agree to assume any and all obligations imposed on
each of them now or hereafter by any applicable tax law with respect to the
payment of Escrow Funds to such Holders under this Agreement, and to indemnify
and hold the Escrow Agent harmless from and against any taxes, additions for
late payment, interest, penalties and other expenses, that may be assessed
against the Escrow Agent on any such payment or other activities under this
Escrow Agreement. The Holders undertake to instruct the Escrow Agent in writing
with respect to the Escrow Agent's responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting in connection with its acting as Escrow Agent under this
Escrow Agreement. The Holders, severally and not jointly, agree to indemnify
and hold the Escrow Agent harmless from any liability on account of taxes,
assessments or other governmental charges with respect to the Holders,
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including without limitation the withholding or deduction of the failure to
withhold or deduct same, and any liability for failure to obtain proper
certifications or to properly report to governmental authorities, to which the
Escrow Agent may be or become subject in connection with or which arises out of
this Escrow Agreement, including costs and expenses (including reasonable fees
and expenses), interest and penalties, except in the event of the Escrow
Agent's gross negligence, bad faith or willful misconduct.
(d) The Parent agrees to pay or reimburse the Escrow Agent up to $1,400 for
any legal fees and expenses incurred in connection with the preparation of this
Agreement and to pay the Escrow Agent's reasonable compensation for its normal
services hereunder in accordance with the attached fee schedule, which may be
subject to change on an annual basis. The Escrow Agent shall be entitled to
reimbursement from Parent on demand for all expenses incurred in connection
with the administration of the escrow created hereby which are in excess of its
compensation for normal services hereunder, including without limitation,
payment of any legal fees and expenses incurred by the Escrow Agent in
connection with the resolution of any claim by any party hereunder.
(e) The provisions of paragraphs (b), (c) and (d) shall survive the
resignation or removal of the Escrow Agent or the termination of this Escrow
Agreement. As between the Parent and Holders, the indemnification obligations
of Parent and the Holders shall be paid first from the Escrow Fund and, after
the Escrow Fund has been exhausted or otherwise committed, the remaining
indemnification obligations shall be paid by Parent and not by the Holders.
6.2 Disputes. In the event that the Escrow Agent shall be uncertain as to its
duties or rights hereunder, or shall receive instructions from any party hereto
with respect to the Escrow Fund which, in its opinion, are in conflict with any
of the provisions of this Agreement or the Merger Agreement, it shall be
entitled to refrain from taking any action until such time as there has been a
final determination of the rights of the Parent and the Representatives with
respect to the Escrow Fund (or relevant portion thereof). For purposes of this
Section 6.2 there shall be deemed to have been a final determination of the
rights of the Parent and the Representative with respect to the Escrow Fund (or
relevant portion thereof) at such time as Escrow Agent shall receive (i) an
executed counterpart of an agreement between the Representatives and the Parent
or (ii) a copy of an Arbitration Award, which provides for the disposition of
the Escrow Fund (or relevant portion thereof).
6.3 Resignation. The Escrow Agent may at any time resign and be discharged of
the duties imposed hereunder (but without prejudice for any liability for bad
faith, gross negligence or willful misconduct hereunder) by giving notice to
the Representatives and the Parent at least 60 business days prior to the date
specified for such resignation to take effect, in which case, upon the
effective date of such resignation:
(a) all property then held by the Escrow Agent hereunder shall be
delivered by it to such person as may be designated in writing by the
Parent and the Representatives, whereupon the Escrow Agent's obligations
hereunder shall cease and terminate;
(b) if no such person has been designated by such date, all obligations
of the Escrow Agent hereunder shall, nevertheless, cease and terminate,
subject to clause (c) below; and
(c) the Escrow Agent's sole responsibility thereafter shall be to keep
all property then held by it (and to make the investments as hereinbefore
provided) and to account for and deliver the same to the successor escrow
agent designated in writing by the Parent and the Representatives or, if no
such successor escrow agent shall have been so designated, in accordance
with the directions of an Arbitration Award, and the provisions of Section
6.1(d) and Section 6.1(e) shall remain in effect.
6.4 Removal of Escrow Agent. The Parent and the Representatives may, upon at
least 30 business days prior written notice to the Escrow Agent executed by
each of them, dismiss the Escrow Agent hereunder and appoint a successor. In
such event, the Escrow Agent shall promptly account for and deliver to the
successor escrow agent named in such notice the then balance of the Escrow
Fund, including all investments thereof and accrued income thereon. Upon
acceptance thereof and of such accounting by such successor escrow agent, and
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upon reimbursement to the Escrow Agent of all expenses and other amounts due to
it hereunder through the date of such accounting and delivery, the Escrow Agent
shall be released and discharged from all of its duties and obligations
hereunder, but without prejudice to any liability of the Escrow Agent for its
bad faith, gross negligence or willful misconduct hereunder.
ARTICLE 7
MISCELLANEOUS
7.1 TERM. This Agreement shall continue in force until the final distribution
of all amounts held by the Escrow Agent hereunder.
7.2 NOTICES. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case to the address set
forth below. Any such notice, instruction or communication shall be deemed to
have been delivered three business days after it is sent prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to Parent:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: General Counsel
Tel: (781) 370-2700
Fax: (781) 370-2600
with a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: Michael J. Riccio, Jr., Esq.
Tel: (617) 951-6639
Fax: (617) 951-1295
If to the Representatives, to:
H. William Jesse, Jr.
222 Sutter Street, 8th Floor
San Francisco, CA 94108
Tel: (415) 274-4550
Fax: (415) 274-4567
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and to:
Louis Rossetto
1732 La Vereda
Berkeley, CA 94702
Tel: (510) 841-7567
Fax: (510) 841-7568
and to:
Paul J. Salem
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Tel: (401) 751-6763
Fax: (401) 751-1790
with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
Tel: (415) 693-2000
Fax: (415) 951-3699
If to Escrow Agent, to:
State Street Bank & Trust Company
Two International Place
Boston, MA 02110
Attention: Corporate Trust Department--Lycos Escrow
or, in each case, to such other address as may be specified in writing to
the other parties.
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery,
telecopy or ordinary mail), but no such notice, instruction or communication
shall be deemed to have been delivered unless and until it is actually received
by the party to whom it was sent. Any party may change the address to which
notices, instructions or communications are to be delivered by giving the other
parties to this Agreement notice thereof in the manner set forth in this
Section 7.2.
7.3 ASSIGNMENT. No party may assign or otherwise transfer this Agreement or
any of his rights hereunder to any person or entity, without the prior written
consent of the Parent, the Escrow Agent and the Representatives, which consent
shall not be unreasonably withheld or delayed. Subject to the foregoing, this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their successors and assigns.
7.4 ENTIRE AGREEMENT; AMENDMENT; GOVERNING LAW; ETC. This Agreement (together
with the Exhibits and Schedules hereto), the Merger Agreement and the Non-
Disclosure Agreement embody the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof. This Agreement may be
amended, modified, waived, discharged or terminated only by (and any consent
hereunder shall be effective
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only if contained in) an instrument in writing signed by the party against
which enforcement of such amendment, modification, waiver, discharge,
termination or consent is sought. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware as it applies
to contracts to be performed entirely within the State of California.
7.5 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which is an original, but all of which shall constitute one instrument.
7.6 VENUE. If any legal proceeding or other action relating to this Agreement
or any of the other agreements being executed and delivered in connection
herewith, or any of the transactions contemplated hereby or thereby, is brought
or otherwise initiated, the venue therefor shall be in the city and state in
which the principal executive offices of the party who is not initiating the
legal proceeding, which shall be deemed to be a convenient forum. Each of the
parties hereto hereby expressly and irrevocably consents and submits to the
jurisdiction of the Federal and State courts sitting in such city and state in
connection with any such legal proceeding or other action.
7.7 TITLES AND HEADINGS. Titles and headings of sections of this Agreement
are for convenience of reference only and shall not affect the construction of
any provision of this Agreement.
7.8 EXHIBITS AND SCHEDULES. Each of the Exhibits and Schedules referred to
herein and attached hereto is an integral part of this Agreement and is
incorporated herein by this reference.
7.9 PRONOUNS. All pronouns and any variations thereof used in this Agreement
shall be deemed to refer to the masculine, feminine or neuter, singular or
plural, as appropriate.
7.10 SEVERABILITY. Any term or provision of this Agreement that is invalid or
unenforceable in any jurisdiction, as to such jurisdiction, shall be
ineffective to the extent of such invalidity or unenforceability, without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
7.11 TIME OF ESSENCE. Time is of the essence of this Agreement.
7.12 INTERPRETATION. Each party acknowledges that such party, either directly
or through such party's representatives, has participated in the drafting of
this Agreement and any applicable rule of constructions that ambiguities are to
be resolved against the drafting party should not be applied in connection with
the construction or interpretation of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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COUNTERPART SIGNATURE PAGE
TO ESCROW AGREEMENT
In Witness Whereof, the parties hereto have executed this Agreement as of the
date first above set forth.
Lycos, Inc.
By: _________________________________
State Street Bank and Trust Company
By: _________________________________
Name: _______________________________
Title: ______________________________
Stockholder Representatives:
_____________________________________
H. William Jesse, Jr.
_____________________________________
Louis Rossetto
_____________________________________
Paul J. Salem
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ANNEX IV
[LETTERHEAD]
October 5, 1998
Board of Directors
Wired Ventures, Inc.
660 Third Street
San Francisco, CA 94107
Ladies and Gentlemen:
We understand that Wired Ventures, Inc. (the "Company"), Lycos, Inc.
("Parent") and BF Acquisition Corp., a wholly owned subsidiary of Parent
("Merger Sub"), have entered into an Agreement and Plan of Merger and
Reorganization, dated as of the date hereof (the "Agreement"), pursuant to
which Merger Sub will be merged with and into the Company (the "Merger").
Pursuant to the Agreement, upon consummation of the Merger, the security
holders of the Company will receive aggregate consideration (the "Merger
Consideration") comprised of (i) $5.0 million in cash contingent upon certain
events (the "Tax Refund Amount") and (ii) shares of the common stock, par value
$.01 per share, of Parent ("Parent Common Stock") with a value of approximately
$130.0 million, based on the average closing price of Parent Common Stock for
the 20 consecutive trading days ending on the third trading day preceding
consummation of the Merger (the "Average Closing Stock Price"); provided,
however, that the Average Closing Stock Price shall not be greater than 135% of
the Parent Common Stock closing price on the date immediately prior to the date
hereof or less than 65% of such closing price. The terms and conditions of the
Merger are more fully set forth in the Agreement.
You have requested our opinion as to the fairness in the aggregate of the
Merger Consideration to the stockholders of the Company taken as a whole, from
a financial point of view. In connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of the Agreement;
(ii) Analyzed certain historical business and financial information
relating to the Company and Parent;
(iii) Reviewed various internal financial forecasts and other financial and
operating data provided to us by the Company relating to its business
and financial performance;
(iv) Reviewed analysts' financial forecasts regarding Parent with Parent in
order to elicit Parent's views of its future financial performance,
Parent having informed us that it does not have a current forecast;
(v) Held discussions with certain members of the senior managements of the
Company and Parent with respect to the past and current business
operations and financial condition and the prospects of the Company and
Parent, respectively, the strategic objectives of each, certain
possible strategic, financial and operating benefits that may be
realized following the Merger and the Company's competitive position;
(vi) Reviewed the pro forma impact of the Merger on the earnings per share
of Parent;
(vii) Reviewed the historical stock prices and trading volumes of the
Parent Common Stock;
(viii) Reviewed publicly available commentary of the research analysts
following Parent and the Internet sector generally;
(ix) Participated in discussions with the Company's Board of Directors and
its legal and other advisors; and
(x) Considered such other financial studies, analyses and investigations as
we deemed appropriate.
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We note that while we reviewed public information with respect to certain
other companies in the Internet sector and the financial terms, to the extent
publicly available, of certain business combinations involving companies in the
Internet sector, there was no such company or transaction that we considered
comparable to the Company or the Merger.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of the Company or Parent, or concerning the
solvency or fair value of either of the foregoing entities. With respect to
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates in the case of the
Company and judgments of the managements of the Company and Parent as to the
financial performance of the Company and Parent, respectively. We assume no
responsibility for and express no view as to such forecasts or the assumptions
on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. In rendering our opinion, we took into account the
Company's commercial assessment regarding the timing of a transaction and the
Company's ability to access the capital markets.
In rendering our opinion, we have assumed that (i) the Merger will be
consummated on the terms described in the Agreement, without any waiver of any
material terms or conditions by the Company, (ii) obtaining the necessary
regulatory approvals for the Merger will not have a material adverse effect on
the Company or Parent, (iii) the Merger Consideration will not be reduced as a
result of the adjustment, indemnification or escrow provisions of the Agreement
and (iv) the full amount of the Tax Refund Amount will be paid to security
holders of the Company. In addition, we are not expressing any opinion as to
(a) the prices at which the Parent Common Stock may trade following the date of
this opinion or (b) the manner in which the Merger Consideration is allocated
among the different classes of Company securities or among the different
holders of such securities.
Lazard Freres & Co. LLC is acting as investment banker to the Board of
Directors of the Company in connection with the Merger and will receive a fee
for our services, all of which is contingent upon the consummation of the
Merger. As you know, certain managing directors of our Firm are limited
partners of Providence Equity Partners LP, a significant stockholder of the
Company. We have in the past provided investment banking services to the
Company for which we expect to receive customary fees.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors, and our opinion is rendered in connection with
its consideration of the Merger. This opinion is not intended to and does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger. Except for the inclusion of
this letter in its entirety in the proxy statement/prospectus distributed to
the security holders of the Company in connection with the Merger, this letter
may not be disclosed or otherwise referred to without our prior written
consent, except as may otherwise be required by law or by a court of competent
jurisdiction.
Based on and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Merger Consideration is fair in the aggregate to the
stockholders of the Company taken as a whole, from a financial point of view.
Very truly yours,
Lazard Freres & Co. LLC
/s/ Richard P. Emerson
By: _________________________________
Richard P. Emerson
Managing Director
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ANNEX V
DELAWARE CODE TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
(S) 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264
of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such a merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
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<PAGE>
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to
E-3
<PAGE>
the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
E-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, Lycos'
Amended and Restated Certificate of Incorporation, as amended, included a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, the
Delaware General Corporation Law and Lycos' Amended and Restated By-laws
provide for indemnification of Lycos' directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
Lycos, and with respect to any criminal action or proceeding, actions that the
indemnitee has no reasonable choice to believe were unlawful.
Lycos has purchased insurance with respect to, among other things, the
liabilities that may arise under the provisions referred to above. The
directors and officers of Lycos are also insured against certain liabilities
arising under the Securities Act of 1933, as amended, which might be incurred
by them in such capacities and against which they are not indemnified by Lycos.
Lycos has entered into separate indemnification agreements with its directors
and officers. The indemnification agreements create certain indemnification
obligations of Lycos in favor of the directors and officers and, as permitted
by applicable law, will clarify and expand the circumstances under which a
director or officer will be indemnified.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of
November 25, 1998 by and among Registrant, BF Acquisition Corp.,
Wired Ventures, Inc., and H. William Jesse, Jr., Louis Rossetto
and Paul J. Salem as Stockholder Representatives (filed as Annex
I to the Proxy Statement/Prospectus forming a part of this
Registration Statement).
3.1* Restated Certificate of Incorporation of the Registrant dated as
of April 4, 1996.
3.2* Amended and Restated By-Laws of Registrant.
4.1 Specimen Certificate of Registrant's Common Stock (incorporated
by reference to Exhibit 4.1 to the Registration Statement on Form
S-1 (Reg. No. 333-1354)).
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to the legality of the securities to be
registered.
8.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to federal income tax consequences.
8.2 Opinion of Cooley Godward LLP, as to federal income tax
consequences.
10.1* Subscription Agreement between Registrant and CMG@Ventures, dated
June 16, 1995.
10.2* Subscription Agreement between Registrant and CMU, dated June 16,
1995.
10.3* Subscription Agreement between Registrant and Dr. Mauldin, dated
June 16, 1995.
10.4* Subscription Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.5* Subscription Agreement between Registrant and CMU, dated February
9, 1996.
10.6* License Agreement among CMU, CMGI, CMG@Ventures, and Registrant,
dated June 16, 1995, as amended.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.7* Amendment and Waiver to License Agreement among CMU, CMGI,
CMG@Ventures, Registrant and Dr. Mauldin, dated February 9, 1996.
10.8* Stockholders' Agreement between Registrant and Christopher Kitze,
dated October 12, 1995.
10.9* Right of First Refusal Agreement between Registrant and
Christopher Kitze, dated October 12, 1995.
10.10* Registration Rights Agreement among Registrant, CMU, CMG@Ventures
and Dr. Mauldin, dated February 9, 1996.
10.11* Consulting, Non-Compete, Invention and Non-Disclosure Agreement
between Registrant and Dr. Mauldin, dated June 16, 1995.
10.12* Non-Competition, Non-Disclosure and Developments Agreement
between Point Communications Corporation and Christopher Kitze,
dated October 12, 1995.
10.13* Letter Agreement between Robert J. Davis and Registrant dated
October 12, 1995.
10.14* Lycos, Inc. 1995 Stock Option Plan.
10.15* Lycos, Inc. 1996 Stock Option Plan.
10.16* Lycos, Inc. 1996 Non-Employee Director Stock Option Plan.
10.17* Lycos, Inc. 1996 Employee Stock Purchase Plan.
10.18* Option Agreement between Registrant and Christopher Kitze, dated
October 12, 1995.
10.19* Option Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.20* Option Agreement between Registrant and CMU, dated February 9,
1996.
10.21* Letter Agreement between Fleet Bank of Massachusetts, N.A. and
Registrant, dated January 31, 1996.
10.22* Office lease between Everett Realty Company and Point
Communications, dated July 13, 1995.
10.23* Office lease between Rosewood III Associates, L.P. and
Registrant, dated August 29, 1995, as amended.
10.24* Office lease between Wilpen, Inc. and Registrant dated October
19, 1995.
10.25* Form of Indemnity Agreement between Registrant and its executive
officers and directors.
10.26* Amendment to License Agreement among CMU, CMGI and Registrant,
dated March 4, 1996.
10.27** Agreement between Registrant and Netscape Communications
Corporation dated as of March 29, 1996.
10.28***+ Agreement between Registrant and Netscape Communications
Corporation dated as of April 1, 1997.
10.29***+ Agreement between Registrant and Bertelsmann Internet Services
GmbH dated as of May 1, 1997.
10.30***+ Agreement between Registrant and GTE New Media Services dated as
of November 18, 1996.
10.31*** Office sublease between Praxis International and Registrant dated
December 4, 1996.
10.32*****+ Agreement between Registrant and Barnes and Noble.com, Inc. dated
July 31, 1997.
10.33**** Leggat McCall Properties Lease, dated January 30, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.34****+ Agreement between Registrant and Netscape Communications
Corporation dated as of May 19, 1998.
21.1 Subsidiaries of the Registrant include:
a.Tripod, Inc., a Delaware corporation, doing business as
"Tripod;"
b.WiseWire, Inc., a Pennsylvania corporation, doing business as
"WiseWire;"
c.WhoWhere, Inc., a California corporation, doing business as
"WhoWhere;"
d.GuestWorld, Inc., a Delaware corporation, doing business as
"GuestWorld"; and
e.BF Acquisition Corp., a Delaware corporation, doing business as
"BF Acquisition Corp."
23.1 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (set forth in Exhibit 5.1).
23.2 Consent of Cooley Godward LLP (set forth in Exhibit 8.2).
23.3 Consent of KPMG Peat Marwick, LLP, Independent Auditors of the
Registrant.
23.4 Consent of KPMG Peat Marwick, LLP, Independent Auditors of
Ventures.
24.1 The power of attorney of officers and directors of the Registrant
is set forth on the signature page of this Registration
Statement.
27.1 Financial Data Schedule.
99.1 Consent of Lazard Freres & Co. LLC (filed as Annex IV to the
Proxy Statement/Prospectus forming a part of this Registration
Statement).
99.2 Form of Proxy for Special Meeting of Stockholders of Ventures.
</TABLE>
- --------
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-1354).
** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1996 (File No. 0-27830).
*** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1997 (File No. 0-27830).
**** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1998 (File No. 0-27830).
*****Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the annual period ended July 31, 1998.
+Confidential material omitted and filed separately with the Securities and
Exchange Commission.
ITEM 22. UNDERTAKINGS
A. UNDERTAKING REGARDING FILINGS INCORPORATING SUBSEQUENT SECURITIES EXCHANGE
ACT OF 1934 DOCUMENTS BY REFERENCE
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in this Registration Statement 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.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, 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 of 1933, as amended, and is,
II-3
<PAGE>
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, as amended,
and will be governed by the final adjudication of such issue.
C. UNDERTAKING REGARDING 145(A) TRANSACTION
The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 19(a)(3) of the Securities Act of 1933, as amended, and is used in
connection with an offering subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
D. UNDERTAKING IN RESPONSE TO PROVIDING INFORMATION
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
E. UNDERTAKING REGARDING POST-EFFECTIVE AMENDMENTS
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF WALTHAM, COMMONWEALTH OF MASSACHUSETTS, ON THIS 25TH
DAY OF NOVEMBER, 1998.
Lycos, Inc.
/s/ Robert J. Davis
By: _________________________________
Robert J. Davis
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW
CONSTITUTES AND APPOINTS ROBERT J. DAVIS AND EDWARD M. PHILIP AND EACH OF THEM,
WITH THE POWER TO ACT WITHOUT THE OTHER, AS ATTORNEYS-IN-FACT, EACH WITH THE
POWER OF SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL CAPACITIES, TO SIGN ANY
AMENDMENT OR POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT AND TO
FILE THE SAME, WITH EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION
THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING TO SAID
ATTORNEYS-IN-FACT, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN CONNECTION
THEREWITH, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN
PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT OR ANY
OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO
BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert J. Davis President, Chief Executive November 25, 1998
____________________________________ Officer and Director
Robert J. Davis (Principal Executive
Officer)
/s/ Edward M. Philip Chief Operating Officer and November 25, 1998
____________________________________ Chief Financial Officer
Edward M. Philip (Principal Financial and
Accounting Officer)
/s/ John M. Connors, Jr. Director November 25, 1998
____________________________________
John M. Connors, Jr.
/s/ Daniel J. Nova Director November 25, 1998
____________________________________
Daniel J. Nova
/s/ Richard H. Sabot Director November 25, 1998
____________________________________
Richard H. Sabot
/s/ David S. Wetherell Director November 25, 1998
____________________________________
David S. Wetherell
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of
November 25, 1998 by and among Registrant, BF Acquisition Corp.,
Wired Ventures, Inc., and H. William Jesse, Jr., Louis Rossetto
and Paul J. Salem as Stockholder Representatives (filed as Annex
I to the Proxy Statement/Prospectus forming a part of this
Registration Statement).
3.1* Restated Certificate of Incorporation of the Registrant dated as
of April 4, 1996.
3.2* Amended and Restated By-Laws of Registrant.
4.1 Specimen Certificate of Registrant's Common Stock (incorporated
by reference to Exhibit 4.1 to the Registration Statement on Form
S-1 (Reg. No. 333-1354)).
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to the legality of the securities to be
registered.
8.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to federal income tax consequences.
8.2 Opinion of Cooley Godward LLP, as to federal income tax
consequences.
10.1* Subscription Agreement between Registrant and CMG@Ventures, dated
June 16, 1995.
10.2* Subscription Agreement between Registrant and CMU, dated June 16,
1995.
10.3* Subscription Agreement between Registrant and Dr. Mauldin, dated
June 16, 1995.
10.4* Subscription Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.5* Subscription Agreement between Registrant and CMU, dated February
9, 1996.
10.6* License Agreement among CMU, CMGI, CMG@Ventures, and Registrant,
dated June 16, 1995, as amended.
10.7* Amendment and Waiver to License Agreement among CMU, CMGI,
CMG@Ventures, Registrant and Dr. Mauldin, dated February 9, 1996.
10.8* Stockholders' Agreement between Registrant and Christopher Kitze,
dated October 12, 1995.
10.9* Right of First Refusal Agreement between Registrant and
Christopher Kitze, dated October 12, 1995.
10.10* Registration Rights Agreement among Registrant, CMU, CMG@Ventures
and Dr. Mauldin, dated February 9, 1996.
10.11* Consulting, Non-Compete, Invention and Non-Disclosure Agreement
between Registrant and Dr. Mauldin, dated June 16, 1995.
10.12* Non-Competition, Non-Disclosure and Developments Agreement
between Point Communications Corporation and Christopher Kitze,
dated October 12, 1995.
10.13* Letter Agreement between Robert J. Davis and Registrant dated
October 12, 1995.
10.14* Lycos, Inc. 1995 Stock Option Plan.
10.15* Lycos, Inc. 1996 Stock Option Plan.
10.16* Lycos, Inc. 1996 Non-Employee Director Stock Option Plan.
10.17* Lycos, Inc. 1996 Employee Stock Purchase Plan.
10.18* Option Agreement between Registrant and Christopher Kitze, dated
October 12, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.19* Option Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.20* Option Agreement between Registrant and CMU, dated February 9,
1996.
10.21* Letter Agreement between Fleet Bank of Massachusetts, N.A. and
Registrant, dated January 31, 1996.
10.22* Office lease between Everett Realty Company and Point
Communications, dated July 13, 1995.
10.23* Office lease between Rosewood III Associates, L.P. and
Registrant, dated August 29, 1995, as amended.
10.24* Office lease between Wilpen, Inc. and Registrant dated October
19, 1995.
10.25* Form of Indemnity Agreement between Registrant and its executive
officers and directors.
10.26* Amendment to License Agreement among CMU, CMGI and Registrant,
dated March 4, 1996.
10.27** Agreement between Registrant and Netscape Communications
Corporation dated as of March 29, 1996.
10.28***+ Agreement between Registrant and Netscape Communications
Corporation dated as of April 1, 1997.
10.29***+ Agreement between Registrant and Bertelsmann Internet Services
GmbH dated as of May 1, 1997.
10.30***+ Agreement between Registrant and GTE New Media Services dated as
of November 18, 1996.
10.31*** Office sublease between Praxis International and Registrant dated
December 4, 1996.
10.32*****+ Agreement between Registrant and Barnes and Noble.com, Inc. dated
July 31, 1997.
10.33**** Leggat McCall Properties Lease, dated January 30, 1998.
10.34****+ Agreement between Registrant and Netscape Communications
Corporation dated as of May 19, 1998.
21.1 Subsidiaries of the Registrant include:
a.Tripod, Inc., a Delaware corporation, doing business as
"Tripod;"
b.WiseWire, Inc., a Pennsylvania corporation, doing business as
"WiseWire;"
c.WhoWhere, Inc., a California corporation, doing business as
"WhoWhere;"
d.GuestWorld, Inc., a Delaware corporation, doing business as
"GuestWorld"; and
e.BF Acquisition Corp., a Delaware corporation, doing business as
"BF Acquisition Corp."
23.1 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (set forth in Exhibit 5.1).
23.2 Consent of Cooley Godward LLP (set forth in Exhibit 8.2).
23.3 Consent of KPMG Peat Marwick, LLP, Independent Auditors of the
Registrant.
23.4 Consent of KPMG Peat Marwick, LLP, Independent Auditors of
Ventures.
24.1 The power of attorney of officers and directors of the Registrant
is set forth on the signature page of this Registration
Statement.
27.1 Financial Data Schedule.
99.1 Consent of Lazard Freres & Co. LLC (filed as Annex IV to the
Proxy Statement/Prospectus forming a part of this Registration
Statement).
99.2 Form of Proxy for Special Meeting of Stockholders of Ventures.
</TABLE>
- --------
*Incorporated by reference from the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1354).
**Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended April 30, 1996 (File No. 0-27830).
<PAGE>
***Incorporated by reference from the Registrant's Quarterly Report on Form 10-
Q for the quarterly period ended April 30, 1997 (File No. 0-27830).
****Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1998 (File No. 0-27830).
*****Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the annual period ended July 31, 1998.
+Confidential material omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
Exhibit 5.1
-----------
November 25, 1998
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02154
Gentlemen:
We have acted as counsel to Lycos, Inc., a Delaware corporation (the
"Company"), in connection with proceedings being taken to register under the
Securities Act of 1933, as amended, up to 6,300,000 shares of the Company's
Common Stock, $.01 par value per share (the "Common Stock") pursuant to a
Registration Statement on Form S-4 (the "Registration Statement") to be issued
to former shareholders of Wired Ventures, Inc. in connection with the Company's
acquisition of Wired Ventures, Inc.
As such counsel, we have examined (i) certain corporate records of the
Company, including its Restated Certification of Incorporation, its Bylaws,
stock records and Minutes of Meetings of its Board of Directors; (ii) a
Certificate of the Secretary of the State of Delaware as to the legal existence
of the Company; and (iii) such other documents as we have deemed necessary as a
basis for the opinions hereinafter expressed.
Based upon the foregoing, and having regard for such legal considerations
as we deem relevant, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware.
2. The Company, as of the effective date of the foregoing Restated
Certificate of Incorporation, will be authorized to issue 100,000,000
shares of Common Stock, par value $.01 per share and 5,000,000 shares
of Preferred Stock, par value $.01 per share.
<PAGE>
Lycos, Inc.
November 25, 1998
Page 2
3. When issued and sold under the circumstances contemplated in the
Registration Statement, the 6,300,000 shares of Common Stock offered
by the Company will be duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
<PAGE>
EXHIBIT 8.1
November 25, 1998
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section 6.7 of
the Agreement and Plan of Merger and Reorganization dated as of November 25,
1998 (the "Merger Agreement") by and among Lycos, Inc., a Delaware corporation
("Parent"), BF Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Parent ("Sub"), Wired Ventures, Inc., a Delaware corporation (the
"Company") and H.W. Jesse Jr., Louis Rossetto and Paul J. Salem, as stockholder
representatives. Pursuant to the terms of the Merger Agreement, Sub will merge
with and into the Company (the "Merger"), and the Company will become a wholly-
owned subsidiary of Parent.
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Merger Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to Parent in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations,
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
(a) the Merger Agreement;
(b) those certain tax representation letters dated November 24, 1998 and
November 18, 1998, delivered to us by Parent and Sub, and the Company,
respectively, containing certain representations of Parent, Sub, and
the Company (the "Tax Representation Letters");
(c) Form S-4 registration statement filed in connection with the Merger
(the "Registration Statement"); and
<PAGE>
Lycos, INc.
November 25, 1998
Page 2
(d) such other instruments and documents related to the formation,
organization, and operation of Parent, Sub, and the Company and
related to the consummation of the Merger and the other transactions
contemplated by the Merger Agreement as we have deemed necessary or
appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and all such documents have been (or will be by the Effective Time)
duly and validly executed and delivered where due execution and delivery are a
prerequisite to the effectiveness thereof;
2. All statements, covenants, representations, and warranties made or
agreed to by Parent, Sub, and the Company, their managements, employees,
officers, directors, and stockholders in connection with the Merger, including,
but not limited to, those set forth in the Merger Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
3. All covenants contained in the Merger Agreement (including exhibits
thereto) and the Tax Representation Letters are performed without waiver or
breach of any material provision thereof;
4. The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
5. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification;
6. The opinion, dated November 25, 1998, from Cooley Godward LLP with
respect to the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code has been delivered and has not been
withdrawn.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions, and caveats set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will be a
reorganization within the meaning of Section 368(a) of the Code.
In addition to your request for our opinion on this specific matter of
federal income tax law, you have asked us to review the discussion of federal
income tax consequences contained in the Registration Statement. We have
reviewed the discussion entitled "Material Federal
<PAGE>
Lycos, INc.
November 25, 1998
Page 3
Income Tax Consequences" contained in the Registration Statement, and are of the
opinion that the discussion fairly presents the material federal income tax
consequences to Parent, the Company and the Company's shareholders as a result
of the Merger.
We consent to the reference to our firm under the captions "Material
Federal Income Tax Consequences" and "Legal Matters" in the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement.
This opinion does not address the various state, local, or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Merger Agreement. In addition, no opinion is expressed as to
any federal income tax consequence of the Merger or the other transactions
contemplated by the Merger Agreement, except as specifically set forth herein,
and this opinion may not be relied upon except with respect to the consequences
specifically discussed herein. No opinion is expressed as to the federal income
tax treatment that may be relevant to any particular investor in light of
personal circumstances or to certain types of investors subject to special
treatment under the federal income tax laws (for example, life insurance
companies, dealers in securities, taxpayers subject to the alternative minimum
tax, banks, tax exempt organizations, non-United States persons, and
stockholders who acquired their shares of Company capital stock pursuant to the
exercise of options or otherwise as compensation or who hold their Company
capital stock as part of a straddle or risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement, or as to the Merger if all of the
transactions described in the Merger Agreement are not consummated in accordance
with the terms of the Merger Agreement and without waiver or breach of any
material provision thereof. To the extent that any of the statements,
covenants, representations, warranties, and assumptions material to our opinion
and upon which we have relied are not accurate and complete in all material
respects at all relevant times, our opinion would be adversely affected and
should not be relied upon.
This opinion represents only our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency, or other governmental body.
The conclusions are based on the Code, judicial decisions, administrative
regulations, and published rulings existing on the date hereof. No assurance
can be given that future legislative, judicial, or administrative changes or
interpretations, on either a prospective or retroactive basis, would not
adversely affect the accuracy of the conclusions stated herein. Nevertheless,
by rendering this opinion, we undertake no responsibility to advise you of any
new developments in the application or interpretation of the federal income tax
laws.
This opinion is being delivered by us in our capacity as counsel to the
Parent, for the
<PAGE>
Lycos, INc.
November 25, 1998
Page 4
purpose of satisfying the conditions set forth in Section 6.7(c) of the Merger
Agreement and for the purpose of being included as an exhibit to the
Registration Statement. It is intended for the benefit of Parent, and may not be
relied upon or utilized for any other purpose or by any other person and may not
be made available to any other person without our prior written consent.
Very truly yours,
HUTCHINS, WHEELER & DITTMAR,
A Professional Corporation
<PAGE>
EXHIBIT 8.2
[COOLEY GODWARD LLP]
ATTORNEYS AT LAW Palo Alto
650 843-5000
One Maritime Plaza Menlo Park, CA
20th Floor 650 843-5000
San Francisco, CA San Diego, CA
94111-3580 619 550-6000
Main 415 693-2000 Boulder, CO
Fax 415 951-3699 303 546-4000
Denver, CO
www.cooley.com 303 606-4800
SUSAN COOPER PHILPOT
415 693-2078
[email protected]
November 25, 1998
Wired Ventures, Inc.
660 Third Street, 4th Floor
San Francisco, CA 94107
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of November 25, 1998
(the "Reorganization Agreement") by and among Lycos, Inc., a Delaware
corporation ("Parent"), BF Acquisition Corp., a Delaware corporation and wholly-
owned subsidiary of Parent ("Merger Sub"), Wired Ventures, Inc., a Delaware
corporation (the "Company") and H. William Jesse, Jr., Louis Rossetto and Paul
J. Salem, as Stockholder Representatives.
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
(A) the Reorganization Agreement;
(B) those certain tax representation letters delivered to us by Parent,
Merger Sub and the Company containing certain representations of Parent,
Merger Sub and the Company (the "Tax Representation Letters"); and
(C) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and
related to the consummation of the Merger and the other transactions
contemplated by the Reorganization Agreement as we have deemed necessary or
appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
(A) Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such
<PAGE>
Wired Ventures, Inc.
November 25, 1998
Page Two
documents have been (or will be by the Effective Time) duly and validly executed
and delivered where due execution and delivery are a prerequisite to the
effectiveness thereof;
(B) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
(C) All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
(D) The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
(E) Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification; and
(F) The opinion dated November 25, 1998 rendered by Hutchins, Wheeler &
Dittmar, A Professional Corporation to the Company with respect to the
qualification of the Merger as a reorganization within the meaning of Section
368(a)(1) of the Code has been delivered and has not been withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a)(1) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, is correct in all material respects.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. No opinion is expressed as to
the federal income tax treatment that may be relevant to a particular investor
in light of personal circumstances or to certain types of
<PAGE>
Wired Ventures, Inc.
November 25, 1998
Page Three
investors subject to special treatment under the federal income tax laws (for
example, life insurance companies, dealers in securities, taxpayers subject to
the alternative minimum tax, banks, tax-exempt organizations, non-United States
persons, and stockholders who acquired their shares of Company capital stock
pursuant to the exercise of options or otherwise as compensation or who hold
their Company capital stock as part of a straddle or risk reduction
transaction).
No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any transaction whatsoever, including
the Merger, if all of the transactions described in the Reorganization Agreement
are not consummated in accordance with the terms of the Reorganization Agreement
and without waiver of any material provision thereof. To the extent that any of
the representations, warranties, statements and assumptions material to our
opinion and upon which we have relied are not accurate and complete in all
material respects at all relevant times, our opinion would be adversely affected
and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with the filing of the
Registration Statement. It is intended for the benefit of the Company and the
stockholders of the Company and may not be relied upon or utilized for any other
purpose or by any other person and may not be made available to any other person
without our prior written consent.
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the reproduction and filing of this opinion as an exhibit to
the Registration Statement.
Sincerely,
Cooley Godward LLP
By: Susan Cooper Philpot
<PAGE>
EXHIBIT 21.1
21.1 Subsidiaries of the Registrant include:
a. Tripod, Inc., a Delaware corporation, doing business as "Tripod;"
b. WiseWire, Inc., a Pennsylvania corporation, doing business as
"WiseWire;"
c. WhoWhere, Inc., a California corporation, doing business as
"WhoWhere;"
d. GuestWorld, Inc., a Delaware corporation, doing business as
"GuestWorld"; and
e. BF Acquisition Corp., a Delaware corporation, doing business as
"BF Acquisition Corp."
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Lycos, Inc.:
We consent to the use of our report incorporated herein by reference and to
the references to our firm under the headings "Experts" and "Selected
Historical Financial Data" in the proxy statement/prospectus.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
November 25, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Wired Ventures, Inc. and Subsidiaries:
We consent to the use of our report included herein and to the references to
our firm under the headings "Experts" and "Selected Historical Financial Data"
in the proxy statement/prospectus.
/s/ KPMG Peat Marwick LLP
San Francisco, California
November 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-START> AUG-01-1998 AUG-01-1997
<PERIOD-END> OCT-31-1998 OCT-31-1997
<CASH> 140,771 41,017
<SECURITIES> 8,427 0
<RECEIVABLES> 17,231 7,952
<ALLOWANCES> 1,324 659
<INVENTORY> 0 0
<CURRENT-ASSETS> 203,041 63,935
<PP&E> 6,155 2,239
<DEPRECIATION> 3,522 1,495
<TOTAL-ASSETS> 396,495 67,694
<CURRENT-LIABILITIES> 52,817 25,832
<BONDS> 0 0
0 0
0 0
<COMMON> 434 144
<OTHER-SE> 312,494 38,291
<TOTAL-LIABILITY-AND-EQUITY> 396,495 67,694
<SALES> 24,784 9,303
<TOTAL-REVENUES> 24,784 9,303
<CGS> 5,300 1,779
<TOTAL-COSTS> 36,056 9,735
<OTHER-EXPENSES> 15,400 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (14,656) 107
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (14,656) 107
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,656) 107
<EPS-PRIMARY> (0.35) (0.00)
<EPS-DILUTED> (0.35) (0.00)
</TABLE>
<PAGE>
EXHIBIT 99.2
WIRED VENTURES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY , 1999
The undersigned hereby appoints BETH VANDERSLICE and JANELLE MITCHELL, and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of WIRED VENTURES, INC. that
the undersigned may be entitled to vote at the Special Meeting of Stockholders
to be held at Cooley Godward LLP, One Maritime Plaza, 20th Floor, San
Francisco, California 94111 on , January , 1999 at 9:00 a.m. local
time, and at any and all postponements, continuations and adjournments
thereof, with all powers that the undersigned would possess if personally
present, upon and in respect of the following matters and in accordance with
the following instructions, with discretionary authority as to any and all
other matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
PROPOSAL SET FORTH BELOW, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY
STATEMENT/PROSPECTUS. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL
BE VOTED IN ACCORDANCE THEREWITH.
PROPOSAL: To approve and adopt the Agreement and Plan of Merger and
Reorganization, dated as of November 25, 1998, among Wired Ventures,
Inc., Lycos, Inc., BF Acquisition Corp. and H. William Jesse, Jr.,
Louis Rossetto and Paul J. Salem, as Stockholder Representatives, and
to approve the merger contemplated thereby, all as more specifically
described in the proxy statement/prospectus.
<TABLE>
<S> <C> <C>
[_] For [_] Against [_] Abstain
</TABLE>
Dated: -------------------------------------
-------------------------------------
Please sign exactly as your name
appears on your Wired Ventures, Inc.
stock certificate(s). If the stock
is registered in the names of two or
more persons, each should sign.
Executors, administrators, trustees,
guardians and attorneys-in-fact
should add their titles. If signer
is a corporation, please give full
corporate name and have a duly
authorized officer sign, stating
title. If signer is a partnership,
please have this signed in
partnership name by an authorized
person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE, WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
