<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported) AUGUST 13, 1998
COMMISSION FILE NUMBER 0-27830
------------------------------
LYCOS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3277338
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
400-2 TOTTEN POND ROAD, WALTHAM, MA 02451-2000
(Address of principal executive offices, including Zip Code)
(781) 370-2700
(Registrant's telephone number, including area code)
================================================================================
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of the Current Report on Form 8-K filed
by the Registrant on August 13, 1998 as set forth in the pages attached hereto:
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------- ------------------------------------------------------------------
(a) Financial Statements of Business Acquired and Lycos, Inc. Pro Forma
Condensed Consolidated Financial Information
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
WhoWhere?, Inc. Financial Statements
Condensed Balance Sheet at July 31, 1998 (unaudited).............................................. F-1
Condensed Statements of Operations for the seven months ended July 31, 1998
and 1997 (unaudited)........................................................................... F-2
Condensed Statements of Cash Flows for the seven months ended July 31, 1998
and 1997 (unaudited)........................................................................... F-3
Notes to Consolidated Financial Statements........................................................ F-5
Lycos, Inc. Pro Forma Condensed Consolidated Financial Information
Unaudited Pro Forma Condensed Consolidated Balance Sheet at
July 31, 1998.................................................................................. F-9
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended July 31, 1998....................................................................... F-10
Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information.................................................................................... F-11
</TABLE>
3
<PAGE>
WHOWHERE?, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, 1998
-------------
ASSETS (UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents $ 2,004
Accounts receivable, net of allowance
for doubtful accounts of $223 at July 31, 1998 2,472
Prepaid expenses 316
Other current assets 107
-------------
Total current assets 4,899
Property and equipment, net 3,129
Intangible assets, net 1,085
Notes receivable from founders, including interest 648
-------------
Total assets $ 9,761
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,265
Borrowings under bank line of credit 1,499
Accounts payable 843
Accrued expenses 2,325
Current portion of capital leases 159
-------------
Total current liabilities 6,091
Non current portion of capital lease obligations 196
Long-term debt 2,105
Commitments
Stockholders' equity:
Preferred stock,
Series A convertible preferred stock 3,687
Series B convertible preferred stock 9,884
Common stock 326
Accumulated deficit (12,528)
-------------
Total stockholders' equity 1,369
-------------
Total liabilities and stockholders' equity $ 9,761
=============
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
WHOWHERE?, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
JULY 31,
------------------------------------------
1998 1997
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Advertising revenues $ 5,365 $ 605
Cost of revenues 1,544 252
------------------- -------------------
Gross profit 3,820 353
Operating expenses:
Product development 2,059 527
Sales and marketing 4,003 1,356
General and administrative 2,562 759
Amortization of intangibles 542 -
------------------- -------------------
Total operating expenses 9,167 2,642
------------------- -------------------
Operating loss (5,347) (2,289)
Interest and other expense 129 22
Interest income (225) (39)
------------------- -------------------
Net loss (5,444) $(2,306)
=================== ===================
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
WHOWHERE?, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
-----------------------------------
JULY 31, 1998 JULY 31, 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,444) $(2,306)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,145 124
Accrued interest on notes receivable from founders (20) -
Changes in operating assets and liabilities:
Accounts receivable (1,576) (206)
Prepaid expenses and other current assets (225) (66)
Notes receivable from founders - -
Accounts payable 435 152
Accrued expenses 1,696 79
----------- -----------
Cash used in operating activities (3,989) (2,223)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (2,377) (586)
----------- -----------
Cash used in investing activities (2,666) (586)
----------- -----------
FINANCING ACTIVITIES
Payments on capital lease obligations (86) 197
Payments on long term debt (289) -
Proceeds from bank line of credit 171 1,800
Proceeds from long-term debt 527 -
Proceeds from issuance of notes receivable 2,650 -
Proceeds from issuance of common stock 189 -
----------- -----------
Cash provided by financing activities 3,450 1,997
----------- -----------
Net decrease in cash and cash equivalents (3,205) (812)
Cash and cash equivalents at beginning of period 5,209 2,033
----------- -----------
Cash and cash equivalents at end of period $ 2,004 $ 1,221
=========== ===========
</TABLE>
F-3
<PAGE>
WHOWHERE?, INC.
CONDENSED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
Equipment acquired under capital leases $ - $ 287
========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest $ 156 $ 29
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
WHOWHERE?, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
WhoWhere?, Inc. ("WhoWhere" or the "Company"), formerly Parsec Communications,
was formed in 1995. The Company is a leading online global communications
directory of people and business information from around the world, including e-
mail address, telephone listings, business URLs and personal home-page listing
presented in English, French, and Spanish. The Company's goal is to develop and
offer network-based services that help people and businesses from across the
world find, communicate, and collaborate with one another on the World Wide Web.
The Company derives a substantial portion of its revenue from selling
advertisements on its Web Sites to customers in various industries.
The unaudited balance sheet as of July 31, 1998, and the unaudited statements
of operations, changes in stockholders' equity and cash flows for the seven
month periods ended July 31, 1998 and 1997, in the opinion of management, have
been prepared on the same basis as the audited financial statements and include
all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. Operating results for the seven month period ended July
31, 1998, are not necessarily indicative of the results of the entire year.
On August 13, 1998, the Company merged with Lycos, Inc. (See Note 7.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents. The
Company's cash and cash equivalents are primarily invested in money market
accounts with major financial institutions. The fair value of money market
accounts approximate their carrying value at July 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization and
depreciation. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the asset, generally three years. Leasehold
improvements and equipment purchased under capital leases are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset or
the lease term. Amortization on capital leases is included in depreciation
expense. Property and equipment, at cost, consist of the following (in
thousands):
<TABLE>
<CAPTION>
JULY 31, 1998
---------------
<S> <C>
Computer hardware and software $ 3,203
Furniture and fixtures 297
Leasehold improvements 76
Leased computer equipment 600
---------------
4,176
Less accumulated depreciation and amortization (1,047)
---------------
$ 3,129
===============
</TABLE>
Stock-Based Compensation
The Company has elected to continue to use the intrinsic value method of
accounting for stock-based compensation, as permitted by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), and thus recognizes no compensation expense for options granted with
exercise prices that are not less than the fair value of the Company's common
stock on the date of grant.
F-5
<PAGE>
WHOWHERE?, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. Advertising revenues
are recognized ratably over the term of the contract provided that the Company
does not have any significant remaining obligations and collection of the
resulting receivable is probable. To the extent minimum guaranteed impression
levels are not met, the Company defers recognition of the corresponding revenues
until guaranteed levels are achieved.
Advertising revenues are also derived from revenue sharing agreements for
advertising sold by third parties on cobranded Internet sites. Revenues from the
sale of certain advertising space are shared with third parties pursuant to the
terms of certain agreements. To date, amounts allocable to third parties have
not been significant.
Consulting and other revenues consist primarily of consulting revenue
generated by assisting other entities setting up web pages and consulting on
directory content and technology for those other entities. Consulting revenue is
recognized when the services are performed.
ADVERTISING
Costs related to advertising are expenses as incurred. Advertising expense for
the years ended July, 1998 and 1997 was $1,434,416 and $259,758 respectively.
The Company has not incurred any significant direct response advertising costs
to date.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of trade receivables. The Company performs
ongoing evaluations of its customers' financial condition and generally does not
require collateral. The Company maintains reserves for credit losses, and such
losses have been within management's expectations. Revenues derived from
customers outside the Untied States have not been significant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, adoption in 1998 will have no impact on the Company's net loss or
stockholders' equity.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which established guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. The Company is required to adopt SOP 98-1 effective
July 1, 1999. The adoption of SOP 98-1 is not expected to have a material impact
on the Company's consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities." The statement is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 effective August 1, 1999. The adoption of SOP 98-5 is not expected to
have a material impact on the Company's consolidated financial statements.
2. ACQUISITION
In October 1997, the Company acquired certain net assets of Angelfire, Inc.
("Angelfire") for approximately $2,720,000 in cash and notes payable (see Note
4). Angelfire provides personal home page capabilities for Internet users. The
acquisition has been accounted for by the purchase method of accounting and
accordingly, the accompanying financial statements include the results of
Angelfire subsequent to the acquisition date.
The purchase included tangible net assets of $62,000 and in-process purchased
technology of $797,000 at fair market value. The remaining purchase price of
$1,861,000 is being amortized over the estimated useful lives of the intangible
assets acquired of two years. The Company determined the amounts to be allocated
to developed and in-process technology based on whether technological
feasibility had been achieved (as defined and utilized by the Company in
assessing software capitalization) and whether there was any alternative future
use for the technology. Other considerations included the time and cost to
complete each project, anticipated gross profit, and associated risks which
included the inherent difficulties and uncertainties in completing the project
and thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. The Company
concluded that the in-process technology had no alternative future use after
taking into consideration the potential for usage of the technology in different
products, resale of the technology and internal usage.
Pro forma information for periods prior to the acquisition have not been
presented, because the results of Angelfire's operations were not material to
the Company's historical results.
3. NOTES RECEIVABLE FROM STOCKHOLDERS
In November 1997, the Company received a secured full-recourse promissory note
from a stockholder for $2,650,000 in exchange for the issuance of 1,394,737
shares of Series B preferred stock. The note bears interest at 6% per annum and
was due in February 1998. The note was repaid in February 1998.
In December 1997, the Company made a loan to two of the Company's founders in
the amount of $250,000 each. The notes bear interest at a rate of 6% per annum,
and are secured by shares of common stock of the Company. The notes mature no
later than November 2001 and as early as 30 days after a change in control or
the consummation of an initial public offering.
4. BANK LINE OF CREDIT AND NOTES PAYABLE
In May 1997, the Company entered into a convertible note and warrant purchase
agreement with various investors which raised approximately $1,425,000. The
notes accrued interest at 8% per annum and were converted into 750,000 shares of
Series B convertible preferred stock in November 1997 at $1.90 per share.
The Company has a line of credit with a bank that provides for working capital
advances up to $1,500,000 and expires in September 1998. A portion of the
borrowings under the line of credit are limited to specified percentages of
eligible accounts receivable, as defined, and are collateralized by
substantially all the assets of the Company. Borrowings under the line of
credit bear interest at the bank's prime rate plus 0.5% (9.0% at July 31, 1998).
Under the terms of the line of credit agreement, the Company is required to
maintain certain financial covenants. In addition, payment of cash dividends is
prohibited without the bank's consent when borrowings are outstanding. At
July 31, 1998, outstanding borrowings under the line of credit were
approximately $1,498,675. The Company was out of compliance with certain
covenants at the end of the year. The bank has waived these covenants during the
period the Company was out of compliance.
In October 1997, the Company entered into a $1,600,000 credit facility with a
leasing company to finance equipment purchases. Amounts outstanding under this
credit facility bear interest at an imputed rate of 15.7%, are repayable in 42
equal monthly installments and are collateralized by the underlying property and
equipment. At July 31, 1998, the Company has borrowed $1,145,277 under the
credit facility.
In connection with the Company's acquisition of Angelfire, the Company entered
into notes payable to the former stockholders in the aggregate principal amount
of $2,509,000. The notes earn interest at a rate of 7% compounded annually and
are subordinate to outstanding borrowings under the Company's $1,5000,000 line
of credit with a bank. The principal and accumulated interest on the notes is
due in three remaining installments as follows: $1,000,000, $1,000,000 and
$500,000 in 1998, 1999 and 2000, respectively. For the seven months ended
July 31, 1998, $289,000 was repaid under these notes.
F-6
<PAGE>
WHOWHERE?, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
5. COMMITMENTS
Capital Leases
The Company leases certain property and equipment under noncancelable lease
agreements that are accounted for as capital leases. Property and equipment at
July 31, 1998 include assets under capital leases of approximately $600,000.
Accumulated amortization related to leased assets at July 31, 1998 was $293,500.
Operating Leases
The Company leases its corporate offices under a noncancelable lease that
expires December 31, 2002.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
Years ending July 31:
1999 $ 175 $ 409
2000 159 368
2001 58 384
2002 - 398
2003 - 170
------------ ------------
Total minimum lease and principal
payments, respectively 392 $1,729
============
Amount representing interest 37
------------
Present value of future lease payments 355
Current portion of capital lease obligations 159
Noncurrent portion of capital lease obligations ------------
$ 196
============
</TABLE>
Rent expense under noncancellable operating leases was $343,863 and $132,654
for the seven months ended July 31, 1998 and 1997, respectively.
6. CONCENTRATIONS OF OTHER RISKS
The Company currently uses one vendor to supply customer activity information
that is required for timely revenue recognition and customer billing on certain
customer contracts. If this vendor were to experience supply constraints or
financial difficulties, the Company could experience difficulties in the timely
recognition of revenue and customer billing for certain contracts.
7. SUBSEQUENT EVENTS (UNAUDITED)
On August 7, 1998, WhoWhere?, Inc., ("the Company") entered into an Agreement
and Plan of Merger (the "Agreement") by and among Lycos, Inc., What Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Lycos, Inc.
("WWAC"), the Company and certain shareholders of the Company providing for the
merger of WWAC with and into the Company (the "Merger"). On August 13, 1998, the
Company completed the closing of the Merger and it became a wholly-owned
subsidiary of Lycos, Inc.
F-7
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------- ------------------------------------------------------------------
(b) Pro forma Financial Information
In August 1998, the Company acquired WhoWhere? Inc. ("WhoWhere?"), for
approximately $145.9 million including acquisition costs. See Note 4 to the
Company's Consolidated Financial Statements for the year ended July 31, 1998
filed on Form 10-K with the Securities and Exchange Commission.
The unaudited Pro Forma Condensed Consolidated Statements of Operations (the
"Pro Forma Statements of Operations") for the year ended July 31, 1997 gives
effect to the acquisition of WhoWhere? as if it had occurred on August 1, 1997.
The Pro Forma Statements of Operations are based on historical results of
operations of the Company and WhoWhere? for the year ended July 31, 1998. The
unaudited Pro Forma Condensed Consolidated Balance Sheet (the "Pro Forma Balance
Sheet") gives effect to the acquisition of WhoWhere? as if the acquisition had
occurred on that date. The Pro Forma Statements of Operations and Pro Forma
Balance Sheet and the accompanying notes (the "Pro Forma Financial Information")
should be read in conjunction with and are qualified by the historical financial
statements of the Company and notes thereto.
The Pro Forma Financial Information is intended for informational purposes
only and is not necessarily indicative of the future financial position or
future results of operations of the consolidated company after the acquisition
of WhoWhere?, or of the financial position or results of operations of the
consolidated company that would have actually occurred had the acquisition of
WhoWhere? been effected on August 1, 1997.
F-8
<PAGE>
LYCOS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, 1998 JULY 31, 1998 PRO FORMA PRO FORMA
LYCOS, INC. WHOWHERE? INC. ADJUSTMENTS AS ADJUSTED
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents $153,728 $2,004 $ (1,841)(b) $153,891
Accounts receivable, net 10,958 2,472 13,430
License fees receivable 30,224 -- 30,224
Other current assets 5,886 423 6,309
----------- --------- ---------- ----------
Current assets 200,796 4,899 (1,841) 203,854
Property, plant, and equipment, net 3,960 3,129 7,089
Other non current assets 44,002 1,733 136,865 (a) 182,600
----------- --------- ---------- ----------
Total assets $248,758 $9,761 $135,024 $393,543
=========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 22,462 $6,091 $ (159)(b) $ 28,394
Deferred revenues 30,731 -- 30,731
Other current liabilities 682 -- 682
----------- --------- ---------- ----------
Current liabilities 53,875 6,091 (159) 59,807
Non current liabilities 26,196 2,301 (1,682)(b) 26,815
Stockholders' equity 168,687 1,369 136,865 (a) 306,921
Total liabilities and ----------- --------- ---------- ----------
stockholders' equity $248,758 $9,761 $135,024 $393,543
=========== ========= ========== ==========
</TABLE>
F-9
<PAGE>
LYCOS INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
------------------------------------------
JULY 31, 1998 JULY 31, 1998
------------------- ------------------- PRO FORMA PRO FORMA
LYCOS, INC. WHOWHERE?, INC. ADJUSTMENTS AS ADJUSTED
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenues $ 56,060 $ 6,984 $ $ 63,044
Cost of revenues 13,405 2,041 14,554
--------------- -------------- -------------- --------------
Gross profit 42,655 4,943 48,490
Operating expenses:
Research and development 9,478 2,729 12,207
In process research and
development 92,479 797 92,036
Sales and marketing 35,036 5,497 40,533
General and administrative 5,631 4,226 9,857
Amortization of intangible assets 2,132 -- 27,373 (a) 29,505
--------------- -------------- -------------- --------------
Total operating expenses 142,624 13,249 27,373 184,138
Operating loss (99,969) (8,306) (27,373) (135,648)
Interest income (expense) 3,052 (201) 201 (b) 3,052
--------------- -------------- -------------- --------------
Net loss $ (96,917) $ (8,507) $ (27,172) $ (132,596)
=============== ============== ============== ==============
Basic net loss per share $ (3.13) $ (3.82)(c)
=============== ==============
Weighted average shares used in
computing basic net loss
per share 30,932,982 34,703,236 (d)
=============== ==============
</TABLE>
F-10
<PAGE>
LYCOS, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(1) Pro Forma Adjustments and Assumptions
(a) The Company acquired WhoWhere?, Inc. for approximately $158.2 million
in August 1998, including costs of acquisition, of which approximately $146.9
million was allocated to intangible assets. Goodwill and other intangible assets
and developed technology 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.
The value of the intangible assets at August 1, 1997 would have been
approximately $146.0 million. Based on preliminary estimates, approximately $10
million to $20 million of the purchase price will be allocated to in-process
research and development expense, which will be charged to operations during the
quarter ending October 31, 1998. For the purposes of this presentation, $20
million was used ad the in-process research and development expense. This amount
has not been reflected in the Pro Forma Statements of Operations.
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 will be 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, plant and equipment........... 3,129
Other assets............................ 2,156
In-process research and development..... 20,000
Goodwill and other intangible assets.... 136,865
Liabilities assumed....................... (8,392)
-----------
Purchase price.......................... $158,234
===========
</TABLE>
The Pro Forma adjustment reconciles the historical balance sheet of WhoWhere?
at July 31, 1998 to the allocated purchase price assuming the transaction had
occurred on July 31, 1998.
(b) Retirement of debt and retirement of capital leases immediately upon
closing by Lycos.
(c) 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
the 3,770,254 shares of the Company's common stock issued in its acquisition
were outstanding for the entire period.
(d) The pro forma basic net adjustment assumes the conversion of shares of
WhoWhere? Common stock upon acquisition of WhoWhere? by Lycos.
F-11
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------- ------------------------------------------------------------------
(c) Exhibits
2.1 Agreement and Plan of Merger dated as of August 7, 1998 by and
among Lycos, Inc.,
What Acquisition Corp. and WhoWhere, Inc.*
20.1 WhoWhere?, Inc. audited financial statements as of December 31,
1997, 1996 and 1995.
23.1 Consent of Ernst and Young L.L.P., Independent Accountants.
* Previously filed with Form 8-K dated August 13, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYCOS, INC.
Date: October 27, 1998 By: /s/ Edward M. Philip
-----------------------
Edward M. Philip
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer,
Authorized Officer)
<PAGE>
EXHIBIT 2.1
___________________________________________________________
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LYCOS, INC.
WHAT ACQUISITION CORP.
WHOWHERE? INC.
AND
CERTAIN SHAREHOLDERS OF
WHOWHERE? INC.
DATED
AUGUST 7, 1998
___________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
THE MERGER ................................................. - 1 -
1.1 The Merger ............................................ - 1 -
----------
1.2 Effective Time ........................................ - 2 -
--------------
1.3 Effect of the Merger .................................. - 2 -
--------------------
1.4 Articles of Incorporation; By-Laws .................... - 2 -
----------------------------------
1.5 Directors and Officers ................................ - 2 -
----------------------
1.6 Additional Actions .................................... - 3 -
------------------
ARTICLE II
CONSIDERATION; CONVERSION OF SHARES .......................... - 3 -
2.1 Merger Consideration .................................. - 3 -
--------------------
2.2 Conversion of Shares .................................. - 3 -
--------------------
2.3 Exchange of Certificates .............................. - 6 -
------------------------
2.4 No Fractional Securities .............................. - 7 -
------------------------
2.5 Stock Transfer Books .................................. - 7 -
--------------------
2.6 No Further Ownership Rights in
Company Stock ......................................... - 7 -
-------------------------------
2.7 Adjustment Event ...................................... - 7 -
----------------
2.8 Escrow ................................................ - 8 -
------
2.9 Tax Consequences ...................................... - 8 -
----------------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS ..................... - 8 -
3.1 Corporate Organization ................................ - 8 -
----------------------
3.2 Authorization ......................................... - 9 -
-------------
3.3 Consents and Approvals; No
Violations ............................................ - 9 -
--------------------------
3.4 Capitalization ........................................ - 10 -
--------------
3.5 Financial Statements .................................. - 11 -
--------------------
3.6 Absence of Undisclosed Liabilities .................... - 11 -
----------------------------------
3.7 Absence of Certain Changes or Events .................. - 11 -
------------------------------------
3.8 Legal Proceedings, etc. ............................... - 12 -
-----------------------
3.9 Taxes ................................................. - 12 -
-----
3.10 Title to Properties and Related Matters ............... - 14 -
---------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
3.11 Intellectual Property; Proprietary
Rights; Employee Restrictions ......................... - 15 -
-----------------------------
3.12 Contracts ............................................. - 16 -
---------
3.13 Employees; Employee Benefits .......................... - 18 -
----------------------------
3.14 Compliance with Applicable Law ........................ - 21 -
------------------------------
3.15 Ability to Conduct the Business ....................... - 21 -
-------------------------------
3.16 Major Customers ....................................... - 22 -
---------------
3.17 Consultants, Sales Representatives
and Other Agents ...................................... - 22 -
----------------------------------
3.18 Accounts Receivable ................................... - 22 -
-------------------
3.19 Insurance ............................................. - 23 -
---------
3.20 Bank Accounts; Powers of Attorney ..................... - 23 -
---------------------------------
3.21 Minute Books, etc. .................................... - 23 -
------------------
3.22 Related Person Indebtedness and Contracts ............. - 23 -
-----------------------------------------
3.23 Brokers; Payments ..................................... - 23 -
-----------------
3.24 Company Action ........................................ - 24 -
--------------
3.25 Disclosure ............................................ - 24 -
----------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDERS .............................. - 24 -
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE PARENT AND ACQUISITION .............................. - 25 -
5.1 Corporate Organization ................................ - 25 -
----------------------
5.2 Authorization ......................................... - 26 -
-------------
5.3 Consents and Approvals; No
Violations ............................................ - 26 -
--------------------------
5.4 Capitalization ........................................ - 27 -
--------------
5.5 SEC Reports and Financial Statements .................. - 27 -
------------------------------------
5.6 Absence of Certain Changes ............................ - 28 -
--------------------------
5.7 Litigation ............................................ - 28 -
----------
5.8 Tax Treatment of Merger ............................... - 28 -
-----------------------
5.9 Disclosure ............................................ - 28 -
----------
ARTICLE VI
CONDUCT OF BUSINESS OF THE COMPANY AND
THE PARENT PRIOR TO THE EFFECTIVE TIME ..................... - 29 -
6.1 Conduct of Business of the Company .................... - 29 -
----------------------------------
6.2 Conduct of Business of the Parent ..................... - 30 -
---------------------------------
6.3 Conduct of Business of Acquisition .................... - 31 -
----------------------------------
6.4 Other Negotiations .................................... - 31 -
------------------
</TABLE>
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<PAGE>
<TABLE>
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<S> <C>
ARTICLE VII
ADDITIONAL AGREEMENTS ...................................... - 31 -
7.1 Access to Properties and Records ...................... - 31 -
--------------------------------
7.2 Shareholder Approval .................................. - 32 -
--------------------
7.3 Reasonable Efforts; etc. .............................. - 32 -
------------------------
7.4 Material Events ....................................... - 33 -
---------------
7.5 Registration Statement on Form S-8 .................... - 33 -
----------------------------------
7.6 Fees and Expenses ..................................... - 33 -
-----------------
7.7 Employees ............................................. - 33 -
---------
7.8 Nasdaq National Market Listing ........................ - 34 -
------------------------------
7.9 Tax Treatment ......................................... - 34 -
-------------
7.10 Indemnification ....................................... - 34 -
---------------
7.11 Shares of Parent Common Stock ......................... - 34 -
-----------------------------
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF
THE PARENT AND ACQUISITION ................................. - 35 -
8.1 Representations and Warranties True ................... - 35 -
-----------------------------------
8.2 Performance ........................................... - 35 -
-----------
8.3 Absence of Litigation ................................. - 35 -
---------------------
8.4 Consents .............................................. - 36 -
--------
8.5 Additional Agreements ................................. - 36 -
---------------------
8.6 Opinion of Venture Law Group .......................... - 36 -
----------------------------
8.7 Appraisal Rights ...................................... - 36 -
----------------
8.8 Termination of Agreements ............................. - 36 -
-------------------------
8.9 Certificate of Merger ................................. - 37 -
---------------------
8.10 Completion of Due Diligence ........................... - 37 -
---------------------------
8.11 Conversion of Company Preferred Stock ................. - 37 -
-------------------------------------
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS ..................... - 37 -
9.1 Representations and Warranties True ................... - 37 -
-----------------------------------
9.2 Performance ........................................... - 37 -
-----------
9.3 Absence of Litigation ................................. - 38 -
---------------------
9.4 Consents .............................................. - 38 -
--------
9.5 Additional Agreements ................................. - 38 -
---------------------
9.6 Opinion of Hutchins, Wheeler & Dittmar ................ - 38 -
--------------------------------------
9.7 Certificate of Merger ................................. - 38 -
---------------------
9.8 Tax Opinion ........................................... - 38 -
-----------
</TABLE>
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<PAGE>
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<S> <C>
ARTICLE X
TERMINATION ................................................ - 39 -
10.1 Termination ........................................... - 39 -
-----------
10.2 Effect of Termination ................................. - 39 -
---------------------
ARTICLE XI
INDEMNIFICATION; SURVIVAL OF
REPRESENTATIONS AND WARRANTIES ............................. - 39 -
11.1 Indemnity Obligations of the Holders .................. - 39 -
------------------------------------
11.2 Appointment of Representative ......................... - 40 -
-----------------------------
11.3 Notification of Claims ................................ - 40 -
----------------------
11.4 Duration .............................................. - 41 -
--------
11.5 Escrow ................................................ - 41 -
------
11.6 No Contribution ....................................... - 42 -
---------------
11.7 Liability of Principal Shareholders ................... - 42 -
-----------------------------------
ARTICLE XII
REGISTRATION RIGHTS ........................................ - 42 -
12.1 Registration Rights ................................... - 42 -
-------------------
12.2 Indemnification ....................................... - 45 -
---------------
12.3 Current Public Information ............................ - 46 -
--------------------------
12.4 Termination of Registration Rights .................... - 46 -
----------------------------------
12.5 Transferability of Registration Rights ................ - 46 -
--------------------------------------
ARTICLE XIII
MISCELLANEOUS PROVISIONS ................................... - 46 -
13.1 Amendment ............................................. - 46 -
---------
13.2 Waiver of Compliance .................................. - 47 -
--------------------
13.3 Notices ............................................... - 47 -
-------
13.4 Assignment ............................................ - 48 -
----------
13.5 No Third Party Beneficiaries .......................... - 48 -
----------------------------
13.6 Public Announcements .................................. - 48 -
--------------------
13.7 Brokers and Finders ................................... - 48 -
-------------------
13.8 Counterparts .......................................... - 49 -
------------
13.9 Headings .............................................. - 49 -
--------
13.10 Entire Agreement ..................................... - 49 -
----------------
13.11 Governing Law ........................................ - 49 -
-------------
13.12 Survival ............................................. - 49 -
--------
</TABLE>
(iv)
<PAGE>
EXHIBITS
- --------
Exhibit A Voting Agreement
Exhibit B-1 Certificate of Merger (Delaware
Exhibit B-2 Agreement of Merger (California)
Exhibit C Form of Letter of Transmittal
Exhibit D Escrow Agreement
Exhibit E `Forms of Offer Letters
Exhibit F Form of Nondisclosure and Inventions Agreement
Exhibit G Opinion of Venture Law Group, A Professional Corporation
Exhibit H Opinion of Hutchins, Wheeler & Dittmar
Exhibit I Form of Stock Option Assumption Agreement
Exhibit J Form of Warrant Assumption Agreement
Exhbit K Tax Opinion of Venture Law Group, A Professional Corporation
(v)
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated August 7, 1998 by and among Lycos, Inc.,
a corporation organized under the laws of the State of Delaware (the "Parent"),
What Acquisition Corp., a corporation organized under the laws of the State of
Delaware and a wholly-owned subsidiary of the Parent ("Acquisition"), WhoWhere?
Inc., a corporation organized under the laws of the State of California (the
"Company"), and certain shareholders of the Company, each of whom is listed on
the signature page hereto (each a "Principal Shareholder " and, collectively,
the "Principal Shareholders").
WHEREAS, the respective Boards of Directors of the Parent, Acquisition and
the Company have approved the merger of Acquisition with and into the Company
(the "Merger"), pursuant to which the Company will be the surviving corporation
and the shareholders of the Company and all holders of options and warrants to
purchase capital stock of the Company (collectively, the "Holders") will be
entitled to receive the consideration provided for in this Agreement, all upon
the terms and subject to the conditions set forth herein;
WHEREAS, it is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS, as a condition and inducement to Parent's willingness to enter
into this Agreement, the Principal Shareholders and certain other shareholders
of the Company have, concurrently with the execution of this Agreement, executed
and delivered a Voting Agreement in the form attached hereto as Exhibit A,
---------
pursuant to which the Principal Shareholders and such other shareholders have
agreed to vote their shares of the Company's capital stock in favor of the
Merger and to grant Parent irrevocable proxies to vote such shares.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements set forth herein, and intending to be legally bound
hereby, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. (a) At the Effective Time (as defined in Section 1.2),
----------
and subject to and upon the terms and conditions of this Agreement, the
California General Corporation Law (the "CGCL") and the Delaware General
Corporation Law (the "DGCL"), Acquisition shall be merged with and into the
Company, the separate corporate existence of Acquisition shall cease, and the
Company shall continue as the surviving corporation. The Company as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
(b) Closing. Unless this Agreement shall have been terminated and the
-------
transactions herein contemplated shall have been abandoned pursuant to Article X
and subject to the satisfaction or waiver of the conditions set forth in
Articles VIII and IX, the consummation of
<PAGE>
the Merger (the "Closing") will take place as promptly as practicable (and in
any event within two business days) after satisfaction or waiver of the
conditions set forth in Articles VIII and IX, at the offices of Hutchins,
Wheeler & Dittmar, A Professional Corporation, 101 Federal Street, Boston,
Massachusetts, unless another date, time or place is agreed to in writing by the
Company and the Parent. The date of such Closing is referred to herein as the
"Closing Date".
1.2 Effective Time. As promptly as practicable after the satisfaction or
--------------
waiver of the conditions set forth in Articles VIII and IX, the parties hereto
shall cause the Merger to be consummated by filing agreements or certificates of
merger as contemplated by the CGCL and the DGCL in the forms of Exhibit B-1 and
-----------
Exhibit B-2 hereto (collectively, the "Certificate of Merger"), together with
- -----------
any required related certificates, with the Secretary of State of the State of
California and the Secretary of State of the State of Delaware, in such form as
required by, and executed in accordance with the relevant provisions of, the
CGCL and the DGCL (the time of such filing being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the CGCL and the DGCL. Without limiting the generality
of the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers and franchises of the Company and Acquisition shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Acquisition shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Articles of Incorporation; By-Laws.
----------------------------------
(a) Articles of Incorporation. Unless otherwise determined by the
-------------------------
Parent prior to the Effective Time, at the Effective Time, the Articles of
Incorporation of the Company, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended in accordance with the CGCL and such Articles of
Incorporation.
(b) By-Laws. Unless otherwise determined by the Parent prior to the
-------
Effective Time, the By-Laws of the Company, as in effect immediately prior to
the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended in accordance with the CGCL, the Articles of Incorporation of
the Surviving Corporation and such By-Laws.
1.5 Directors and Officers. The directors of Acquisition immediately
----------------------
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and the officers of
Acquisition immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
-2-
<PAGE>
1.6 Additional Actions. If, at any time after the Effective Time, the
------------------
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other acts or things are necessary or
desirable to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation, its right, title or interest in or to any of the rights, properties
or assets of Acquisition or the Company acquired or to be acquired by reason of,
or as a result of, the Merger, or otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors shall
be authorized to execute and deliver, in the name and on behalf of Acquisition
or the Company, all such deeds, bills of sale, assignments and assurances and to
do, in the name and on behalf of Acquisition or the Company, all such other acts
and things necessary or desirable to vest, perfect or confirm any and all right,
title or interest in, to or under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out the purposes of this Agreement.
ARTICLE II
CONSIDERATION; CONVERSION OF SHARES
2.1 Merger Consideration. Except as set forth in Section 2.2(f) hereof,
--------------------
the consideration payable in the Merger to holders of shares of the Company's
Common Stock, par value $.001 per share ("Company Common Stock"), and shares of
each series of the Company's Preferred Stock, par value $.001 per share (the
"Company Preferred Stock" and, together with the Company Common Stock, the
"Company Stock"), shall consist solely of shares of the Common Stock, par value
$.01 per share, of the Parent ("Parent Common Stock"), such shares of Parent
Common Stock to be issuable at the Closing in accordance with the terms of this
Agreement.
2.2 Conversion of Shares.
--------------------
(a) Conversion of Shares. Each share of Company Stock (treating all
--------------------
shares of Company Preferred Stock as having been converted, as of the Effective
Time, into shares of Company Common Stock at the respective conversion ratios
therefor) issued and outstanding as of the Effective Time (other than shares
owned by holders who have properly exercised their rights of appraisal within
the meaning of Chapter 13 of the CGCL ("Dissenting Shares")) shall, by virtue of
the Merger and without any action on the part of the holder thereof,
automatically be converted into that number of shares of Parent Common Stock as
shall be obtained by dividing (A) 2,419,006 (the "Merger Consideration") minus
-----
any Expense Shares (as defined in Section 7.6) by (B) the number of Fully
Diluted Shares (as hereinafter defined), with the resulting quotient (carried to
four decimal places) being referred to herein as the "Exchange Ratio." "Fully
Diluted Shares" shall be equal to the total number of outstanding shares of
Company Common Stock calculated on a fully diluted, fully converted basis as
though all convertible debt and equity securities (including the Company
Preferred Stock and Company Preferred Stock issuable upon the exercise of any
outstanding warrants) and outstanding options (whether vested or unvested) and
outstanding warrants had been converted or exercised into Common Stock,
-3-
<PAGE>
provided that the term "Fully Diluted Shares" shall exclude forty percent (40%)
of the sum of (x) the number of shares of Company Common Stock issuable upon the
exercise of outstanding stock options which are unvested as of the Closing Date
after giving effect to the Merger and (y) the number of shares of Company Common
Stock outstanding on the Closing Date which are unvested and subject to the
right of repurchase as of the Closing Date after giving effect to the Merger.
Schedule 2.2(a) sets forth the number of outstanding unvested stock options and
- ---------------
unvested shares after giving effect to the Merger and the holders thereof. The
Exchange Ratio shall not change as a result of fluctuations in the market price
of Parent Common Stock between the date of this Agreement and the Effective
Time. The aggregate number of shares of Parent Common Stock issued pursuant to
this Section 2.2(a) shall be referred to in this Agreement as the "Merger
Shares."
(b) Treasury Shares. Each share of Company Common Stock held in the
---------------
Company's treasury as of the Effective Time, if any, shall, by virtue of the
Merger, be canceled without payment of any consideration therefor.
(c) Stock Options. At the Effective Time, the outstanding options to
-------------
purchase an aggregate of up to 3,545,662 shares of Company Common Stock (each a
"Stock Option") granted under the Company's 1995 Stock Plan (the "Company Stock
Plan"), whether vested or unvested, shall be deemed assumed by the Parent and
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Stock Option prior to the Effective Time (including
terms and conditions relating to such Stock Option's term, exercisability,
vesting schedule and status as an "incentive stock option" under Section 422 of
the Code), the number (rounded down to the nearest whole number) of shares of
Parent Common Stock equal to the aggregate of that number of shares of Parent
Common Stock (based on the Exchange Ratio) as the holder of such Stock Option
would have been entitled to receive pursuant to the Merger had such holder
exercised such Option in full immediately prior to the Effective Time (not
taking into account whether or not such Option was in fact exercisable). The
exercise price for such Stock Options shall be the price per share equal to (x)
the aggregate exercise price for Company Common Stock otherwise purchasable
pursuant to such Stock Option divided by (y) the number of shares of Parent
Common Stock deemed purchasable pursuant to such Stock Option (the exercise
price per share, so determined, being rounded up to the nearest full cent). No
payment shall be made for fractional shares. The aggregate number of shares of
Parent Common Stock issuable upon the exercise of Options assumed by Parent
pursuant to this Section 2.2(c) shall be referred to in this Agreement as the
"Option Shares." Any adjustment to an incentive stock option made under this
Section 2.2(c) shall comply with Section 424(a) of the Code. The Parent's
assumption of each Stock Option pursuant to this Section 2.2(c) shall be subject
to the holder of such Stock Option executing and delivering to the Parent the
Stock Option Assumption Agreement in the form of Exhibit I hereto providing that
---------
ten percent (10%) of the Option Shares subject to such Stock Option will be
deposited in escrow as security for the indemnification obligations of the
Holders under Article XI hereof.
-4-
<PAGE>
(d) Warrants. At the Effective Time, each outstanding warrant to
--------
purchase Company Stock (each, a "Warrant" and collectively the "Warrants")
shall, by virtue of the Merger and without any further action on the part of the
Company or the holder of any of Warrants (unless further action may be required
by the terms of any of the Warrants), be assumed by Parent and each Warrant
assumed by Parent shall be exercisable upon the same terms and conditions as
under the applicable warrant agreements with respect to such Warrants, except
that (A) each such Warrant shall be exercisable for that whole number of shares
of Parent Common Stock (rounded down to the nearest whole share) into which the
number of shares of Company Stock subject to such Warrant would be converted
under Section 2.2(a) and (B) the exercise price per share of Parent Common Stock
shall be equal to (x) the aggregate exercise price for the Company Stock subject
to such Warrant in effect immediately prior to the Effective Time divided by (y)
the number of shares of Parent Common Stock deemed purchasable pursuant to such
Warrant (the exercise price per share, so determined, being rounded down to the
nearest full cent). From and after the Effective Time, all references to the
Company in the warrant agreement underlying the Warrants shall be deemed to
refer to Parent. Parent further agrees that if required under the terms of the
Warrants it will execute a supplemental agreement with the holders of the
Warrants to effectuate the foregoing. No payment shall be made for fractional
shares. The aggregate number of shares of Parent Common Stock issuable upon the
exercise of Warrants assumed by Parent pursuant to this Section 2.2(d) shall be
referred to in this Agreement as the "Warrant Shares." The Parent's assumption
of each Warrant pursuant to this Section 2.2(d) shall be subject to the holder
of such Warrant executing and delivering to the Parent the Warrant Assumption
Agreement in the form of Exhibit J hereto providing that ten percent (10%) of
---------
the Warrant Shares subject to such Warrant will be deposited in escrow as
security for the indemnification obligations of the Holders under Article XI
hereof.
(e) Acquisition Shares. Each share of common stock, par value $0.01
------------------
per share, of Acquisition issued and outstanding at the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder thereof,
automatically be converted into one fully paid and nonassessable share of common
stock of the Surviving Corporation, as such shares of common stock are
constituted immediately following the Effective Time.
(f) Dissenting Shares. Any Dissenting Shares shall be converted into
-----------------
the right to receive from the Surviving Corporation such consideration as may be
determined to be due with respect to each such Dissenting Share pursuant to
Chapter 13 of the CGCL; provided, however, Shares that are Dissenting Shares at
-------- -------
the Effective Time of the Merger and are held by a holder who shall, after the
Effective Time of the Merger, withdraw his demand for appraisal or lose his
right of appraisal as provided in the Chapter 13 of the CGCL, shall be deemed to
be converted, as of the Effective Time of the Merger, into the right to receive
the Merger Shares in accordance with the procedures specified in Section 2.3.
The Company shall give Parent (i) prompt notice of any written demands for
appraisal, withdrawals of demands for appraisal and any other instruments served
pursuant to Chapter 13 of the CGCL received by the Company and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under Chapter 13 of the CGCL. The Company will not voluntarily
make any payment
-5-
<PAGE>
with respect to any demands for appraisal and will not, except with the prior
written consent of Parent, settle or offer to settle any such demands. It is
understood and agreed that the obligation to make any payment under Chapter 13
of the CGCL shall be exclusively that of the Surviving Corporation and that
Parent 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 and discharge any such obligation.
2.3 Exchange of Certificates.
------------------------
(a) From and after the Effective Time, each holder of an outstanding
certificate or certificates (the "Certificates") which represented shares of
Company Common Stock or Company Preferred Stock immediately prior to the
Effective Time shall have the right to surrender each Certificate to Parent, and
receive in exchange for all Certificates held by such holder a certificate
representing the number of whole shares of Parent Common Stock (other than the
Escrow Shares (as defined below)) into which the Company Common Stock or Company
Preferred Stock evidenced by the Certificates so surrendered shall have been
converted pursuant to Section 2.2(a) of this Agreement. The surrender of
Certificates shall be accompanied by duly completed and executed Letters of
Transmittal in the form of Exhibit C attached hereto. Until surrendered, each
---------
outstanding Certificate which prior to the Effective Time represented shares of
Company Common Stock or Company Preferred Stock shall be deemed for all
corporate purposes to evidence ownership of the number of whole shares of Parent
Common Stock into which the shares of Company Common Stock or Company Preferred
Stock have been converted but shall, subject to applicable appraisal rights
under the CGCL and Section 2.2(f), have no other rights. Subject to appraisal
rights under the CGCL and Section 2.2(f), from and after the Effective Time, the
holders of shares of Company Common Stock or Company Preferred Stock shall cease
to have any rights in respect of such shares and their rights shall be solely in
respect of the Parent Common Stock into which such shares of Company Common
Stock or Company Preferred Stock have been converted.
(b) If any shares of Parent Common Stock are to be issued in the name
of a person other than the person in whose name the Certificate(s) surrendered
in exchange therefor is registered, it shall be a condition to the issuance of
such shares that (i) the Certificate(s) so surrendered shall be properly
assigned, endorsed or accompanied by appropriate stock powers, and (ii) the
person requesting such transfer shall pay Parent, or its exchange agent, any
transfer or other taxes payable by reason of the foregoing or establish to the
satisfaction of Parent that such taxes have been paid or are not required to be
paid. Notwithstanding the foregoing, neither Parent or the Company shall be
liable to a holder of shares of Company Common Stock or Company Preferred Stock
for shares of Parent or the Company issuable to such holder pursuant to the
provisions of Section 2.2(a) of this Agreement that are delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or
-6-
<PAGE>
destroyed, Parent shall issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Common Stock issuable in exchange therefor
pursuant to the provisions of Section 2.2(a) of this Agreement. The Board of
Directors of Parent may in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to provide to Parent an indemnity agreement, reasonable in form and
substance, against any claim that may be made against Parent with respect to the
Certificate alleged to have been lost, stolen or destroyed.
2.4 No Fractional Securities. No fractional shares of Parent Common Stock
------------------------
shall be issuable by the Parent upon the conversion of shares of Company Common
Stock or the Company Preferred Stock in the Merger pursuant to Section 2.2(a)
hereof. In lieu of any such fractional shares, each holder of Company Common
Stock or Company Preferred Stock who would otherwise have been entitled to
receive a fraction of a share of Parent Common Stock shall be entitled to
receive instead an amount in cash equal to such fraction multiplied by the
Closing Market Price (as defined below). For purposes of this Agreement, the
term "Closing Market Price" shall mean the average of the last quoted sale price
for shares of Parent Common Stock on The Nasdaq National Market for each of the
twenty trading days preceding the third trading day prior to the Effective Time.
2.5 Stock Transfer Books. At the Effective Time, the stock transfer books
--------------------
of the Company shall be closed, and there shall be no further registration of
transfers of Company Stock or Company Preferred Stock thereafter on the records
of the Company.
2.6 No Further Ownership Rights in Company Stock. The Merger Shares
--------------------------------------------
delivered upon the surrender for exchange of shares of Company Stock in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article II.
2.7 Adjustment Event. If, between the date hereof and the Effective Time,
----------------
the issued and outstanding shares of Parent Common Stock shall have been
combined, split, reclassified or otherwise changed into a different number of
shares or a different class of shares, an appropriate adjustment to the Exchange
Ratio shall be made to fully reflect such change in such manner as is reasonably
acceptable to the Parent and the Company. Specifically, if the Parent's
proposed two-for-one stock split is effected prior to the Effective Time, the
Exchange Ratio shall be adjusted to give effect to such split. In addition,
during the period beginning on the date of this Agreement and ending on the
earlier of the termination of this Agreement and the Effective Time, Parent
shall not, without the prior written consent of the Company, declare or pay any
dividend or distribution on Parent Common Stock unless prior thereto either (i)
Parent shall have provided that holders of Company Stock, upon the Effective
Time, shall receive such dividend or distribution to the same extent they would
have had their shares of Company Stock been
-7-
<PAGE>
converted into shares of Parent Common Stock immediately prior to the record
date of any such dividend or distribution, or (ii) Parent and the Company shall
have mutually agreed upon an adjustment of the Exchange Ratio to fully reflect
the effect of any such dividend or distribution.
2.8 Escrow. At the Effective Time, Parent will deposit in escrow
------
certificates representing ten percent (10%) of the Merger Shares (which shall
reduce on a pro rata basis the Merger Shares otherwise issuable to the Holders
of Company Stock under Section 2.2(a)) registered in the name of State Street
Bank and Trust Company, as Escrow Agent, and instruments or other documentation
representing Stock Options to purchase ten percent (10%) of the Option Shares
and Warrants to purchase ten percent (10%) of the Warrant Shares issuable to
each Holder under Section 2.2(c) or 2.2(d), as the case may be (collectively,
the "Escrow Shares"). The Escrow Shares shall be held as security for the
indemnification obligations under Article XI pursuant to the provisions of an
Escrow Agreement (the "Escrow Agreement ") in the form of Exhibit D attached
---------
hereto.
2.9 Tax Consequences. For Federal income tax purposes, the Merger is
----------------
intended to constitute a reorganization within the meaning of Section 368(a) of
the Code, and that this Agreement shall constitute a "plan of reorganization"
within the meaning of Section 368(a) of the Code.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS
The Company and each of the Principal Shareholders represent and warrant to
the Parent and Acquisition as set forth below, subject to the exceptions set
forth in the disclosure schedules attached hereto (the "Disclosure Schedules"),
the section numbers and letters of which correspond to the section and
subsection numbers and letters of this Agreement. Notwithstanding anything to
the contrary contained in this Agreement, any information disclosed in one
section of the Disclosure Schedules shall, should the existence of the
information be relevant to any other section of the Disclosure Schedules, be
deemed to be disclosed in all sections of the Disclosure Schedules, but only to
the extent that the relevance of such information to such other section is
apparent. The disclosure of any information shall not be deemed to constitute
an acknowledgment that such information is required to be disclosed in
connection with the representations and warranties made by the Company in this
Agreement or that it is material, nor shall such information be deemed to
establish a standard of materiality
3.1 Corporate Organization. (a) The Company is a corporation duly
----------------------
organized, validly existing and in good standing under the laws of the State of
California. The Company has no Subsidiaries (as that term is hereinafter
defined). The Company has all requisite corporate power and authority to own,
operate and lease the properties and assets it now owns, operates and leases and
to carry on its business as presently conducted. The Company is duly qualified
to
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<PAGE>
transact business as a foreign corporation and in good standing in the
jurisdictions set forth in Schedule 3.1, which are the only jurisdictions where
such qualification is required by reason of the nature of the properties and
assets currently owned, operated or leased by the Company or the business
currently conducted by it, except for such jurisdictions where the failure to be
so qualified would not have a Company Material Adverse Effect (as defined
below). The Company has previously delivered to the Parent complete and correct
copies of its Articles of Incorporation (certified by the secretary of state of
the jurisdiction in which it was formed as of a recent date) and its By-Laws
(certified by the Secretary of the Company as of a recent date). Except as set
forth in Schedule 3.1, neither the Articles of Incorporation nor the By-Laws of
the Company have been amended since the respective dates of certification
thereof, nor has any action been taken for the purpose of effecting any
amendment of such instruments. The term "Company Material Adverse Effect"
means, for purposes of this Agreement, any change, event or effect that is, or
that would be, materially adverse to the business, operations, assets,
liabilities, financial condition or results of operations of the Company;
provided, however, that a Company Material Adverse Effect shall not include any
adverse effect that is attributable to the Merger or the announcement of the
Merger or that is due to any downturn in the Internet industry or any national
economic downturn.
3.2 Authorization. The Company 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 the consummation of
the transactions contemplated hereby have been duly approved by the Board of
Directors of the Company, and no other corporate action on the part of the
Company is necessary to approve and authorize the execution and delivery of this
Agreement or (subject to the approval of this Agreement and the transactions
contemplated hereby by the Holders which will be obtained in the manner set
forth in Section 7.2 hereof and the filing of the Certificate of Merger pursuant
to the CGCL and the DGCL) the consummation of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by the Company and
constitutes the valid and binding agreement of the Company, enforceable 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 in law or in equity.
3.3 Consents and Approvals; No Violations. Subject to the filing of the
-------------------------------------
Certificate of Merger with the Secretary of State of the State of California and
the Secretary of State of the State of Delaware and compliance with applicable
federal and state securities laws, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby will not: (i)
violate or conflict with any provision of the Articles of Incorporation or By-
Laws of the Company, (ii) 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, give rise to any right of termination,
cancellation, modification or acceleration under, or require any consent or the
giving of any notice under, any note, bond, indenture, mortgage, security
agreement, lease, license, franchise, permit, agreement or other instrument or
obligation to which the Company is a party, or by which
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<PAGE>
the Company or any of its 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 the Company pursuant to the
terms of any such instrument or obligation, other than any breach, violation,
default, termination, cancellation, modification or acceleration which would not
have a Company Material Adverse Effect, (iii) violate or conflict with any law,
statute, ordinance, code, rule, regulation, judgment, order, writ, injunction,
decree or other instrument of any Federal, state, local or foreign court or
governmental or regulatory body, agency or authority applicable to the Company
or by which any of its properties or assets may be bound, except for such
violations and conflicts which would not have a Company Material Adverse Effect
or result in a fine or penalty in excess of $10,000 individually or in the
aggregate, or (iv) require, on the part of the Company, any filing or
registration with, or permit, license, exemption, consent, authorization or
approval of, or the giving of any notice to, any governmental or regulatory
body, agency or authority other than any filing, registration, permit, license,
exemption, consent, authorization, approval or notice which if not obtained or
made would not have a Company Material Adverse Effect or result in a fine or
penalty in excess of $10,000 individually or in the aggregate. Without limiting
the generality of clause (ii) above, except for the finder's agreements
described in Section 13.7 hereof, neither the Company nor any of the Holders is
a party to any agreement, arrangement or understanding which contemplates the
sale of the business of the Company, in whole or in part, whether by means of a
sale of shares, sale of assets, merger, consolidation or otherwise.
3.4 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of 40,000,000
shares of Company Common Stock, of which 5,650,047 shares are issued and
outstanding and 10,000,000 shares of Company Preferred Stock, of which 1,444,162
shares of Series A Convertible Preferred Stock, and 5,231,577 shares of Series B
Convertible Preferred Stock, are issued and outstanding. Schedule 3.4(a) sets
forth a complete and correct list of the record ownership of the issued and
outstanding shares of Company Stock. All of the issued and outstanding shares
of Company Stock were duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of any preemptive rights or
Federal or state securities laws. Except as disclosed in Schedule 3.4(a)
hereto, the Company has never repurchased or redeemed any shares of its capital
stock, and there are no amounts owed or which may be owed to any person by the
Company as a result of any repurchase or redemption of shares of its capital
stock. Except as disclosed in Schedule 3.4(a) hereto, there are no agreements,
arrangements or understandings to which the Company is a party or by which it is
bound to redeem or repurchase any shares of its capital stock. Except as set
forth in Schedule 3.4(a), there are no outstanding options, warrants or other
rights to purchase, or any securities convertible into or exchangeable for,
shares of the capital stock of the Company, and there are no agreements,
arrangements or understandings to which the Company is a party or by which it is
bound pursuant to which the Company is or may be required to issue additional
shares of its capital stock.
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<PAGE>
(b) Schedule 3.4(b) sets forth a complete and correct list of all
indebtedness for borrowed money of the Company outstanding as of the date
hereof, including, the name of the lender, the principal amount of such
indebtedness, together with all accrued and unpaid interest thereon, and any
prepayment penalties or premiums payable if such indebtedness is repaid prior to
its stated maturity date.
(c) The Company does not own, directly or indirectly, any equity
securities, or options, warrants or other rights to acquire equity securities,
or securities convertible into or exchangeable for equity securities, of any
other corporation, or any partnership interest in any general or limited
partnership or unincorporated joint venture (a "Subsidiary").
3.5 Financial Statements. Attached hereto as Schedule 3.5 are the balance
--------------------
sheets of the Company as of June 28, 1998, December 31, 1997, and December 31,
1996 and the statements of income and statements of cash flows of the Company
for the fiscal years or periods then ended, including the notes thereto
(hereinafter collectively referred to as the "Financial Statements"). The
Financial Statements (i) have been prepared from the books and records of the
Company, (ii) have been prepared in accordance with generally accepted
accounting principles consistently applied (except as may be expressly indicated
therein or on the face of the schedules or notes to such Financial Statements)
during the periods covered thereby and (iii) present fairly in all material
respects the financial condition, results of operations and cash flows of the
Company as at the dates, and for the periods, stated therein, except that the
Financial Statements are subject to normal year-end adjustments which will not
be individually or in the aggregate material in amount or effect and do not
include footnotes. At July 31, 1998, the Company's total assets (as computed in
accordance with generally accepted accounting principles) did not equal or
exceed $10 million.
3.6 Absence of Undisclosed Liabilities. Except (i) as set forth or
----------------------------------
reserved against in the balance sheet of the Company dated as of June 28, 1998,
included in the Financial Statements (the "Balance Sheet"), (ii) for obligations
incurred since June 28, 1998 in the ordinary course of business, which are not
individually or in the aggregate, material in amount, and (iii) as set forth in
Schedule 3.6, the Company does not have any liabilities or obligations of the
nature that would be reasonably required, in accordance with generally accepted
accounting principles applied on a consistent basis, to be reflected on the face
of a balance sheet or, in the case of the financial statements for the years
ended December 31, 1996 and December 31, 1997, the notes thereto.
3.7 Absence of Certain Changes or Events. Except as set forth in Schedule
------------------------------------
3.7, since June 28, 1998, the Company has carried on its business in the
ordinary course and consistent with past practice. Except as set forth on
Schedule 3.7 hereto, since June 28, 1998, the Company has not: (i) incurred any
material obligation or liability (whether absolute, accrued, contingent or
otherwise) except in the ordinary course of business and consistent with past
practice; (ii) experienced any Company Material Adverse Effect; (iii)
accelerated receivables or delayed payables or made any change in any accounting
principle or practice or in its methods of
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<PAGE>
applying any such principle or practice; (iv) suffered any material damage,
destruction or loss, whether or not covered by insurance, affecting its
properties, assets or business; (v) mortgaged, pledged or subjected to any lien,
charge or other encumbrance, or granted to third parties any rights in, any of
its assets, tangible or intangible; (vi) sold or transferred any of its assets,
except in the ordinary course of business and consistent with past practice, or
canceled or compromised any debts or waived any claims or rights of a material
nature; (vii) issued any additional shares of capital stock or any rights,
options or warrants to purchase, or securities convertible into or exchangeable
for, shares of its capital stock other than shares of Company Common Stock
issued upon exercise of employee stock options; (viii) declared or paid any
dividends on or made any distributions (however characterized) in respect of
shares of its capital stock; (ix) repurchased or redeemed any shares of its
capital stock; (x) granted any general or specific increase in the compensation
payable or to become payable to any of their Employees (as that term is
hereinafter defined) 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); or (xi) entered into any agreement to do any of the
foregoing.
3.8 Legal Proceedings, etc. Except as set forth in Schedule 3.8 hereto,
-----------------------
there are no suits, actions, claims, proceedings (including, without limitation,
arbitral or administrative proceedings) or investigations pending or, to the
best knowledge of the Company or any Principal Shareholder, threatened against
the Company or its properties, assets or business or, to the best knowledge of
the Company or any Principal Shareholder, pending or threatened against any of
the officers, directors, employees, agents or consultants of the Company in
connection with the business of the Company. There are no such suits, actions,
claims, proceedings or investigations pending, or, to the best knowledge of the
Company or any Principal Shareholder, threatened challenging the validity or
propriety of the transactions contemplated by this Agreement. There is no
judgment, order, injunction, decree or award (whether issued by a court, an
arbitrator or an administrative agency) to which the Company is a party, or
involving the Company's properties, assets or business, which is unsatisfied or
which requires continuing compliance therewith by the Company.
3.9 Taxes.
-----
(a) Except as set forth in Schedule 3.9, the Company has duly and
timely filed, or will duly and in a timely manner file, all material Tax returns
and other filings in respect of Taxes (as that term is hereinafter defined)
required to be filed by it or which are required to be filed by it on or prior
to the Effective Time, and has in a timely manner paid (or will in a timely
manner pay) all material Taxes which are (or will be) due for all periods ending
on or before the Effective Time, whether or not shown on such returns. All such
Tax returns have been, or will be when filed, accurately and completely prepared
in all material respects in compliance with all laws, rules and regulations.
The provisions for Taxes payable reflected in the Financial Statements are
adequate under generally accepted accounting principles.
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<PAGE>
(b) Except as set forth in Schedule 3.9 hereto, there are no actions
or proceedings currently pending or, to the best knowledge of the Company or any
Principal Shareholder, threatened against the Company by any governmental
authority for the assessment or collection of Taxes, no claim for the assessment
or collection of Taxes has been asserted against the Company, and there are no
matters under discussion with any governmental authority regarding claims for
the assessment or collection of Taxes. Any Taxes that have been claimed or
imposed as a result of any examinations of any tax return of the Company by any
governmental authority are being contested in good faith and have been disclosed
in writing to the Parent. Except as set forth in Schedule 3.9, there are no
agreements or applications by the Company for an extension of time for the
assessment or payment of any Taxes nor any outstanding waiver of the statute of
limitations in respect of Taxes. There are no Tax liens on any of the assets of
the Company, except for liens for Taxes not yet due or payable or that are being
contested in good faith in appropriate proceedings.
(c) For purposes of this Agreement, the terms "Tax" and "Taxes" shall
mean and include any and all United States, state, local, foreign or other
income, sales, use, withholding, employment, payroll, social security, property
taxes and all other taxes of any kind, deficiencies, fees or other governmental
charges in the nature of taxes, including, without limitation, any installment
payment for taxes and contributions or other amounts determined with respect to
compensation paid to directors, officers, employees or independent contractors
from time to time imposed by or required to be paid to any governmental
authority (including penalties and additions to tax thereon, penalties for
failure to file a return or report, and interest on any of the foregoing).
(d) The Company has not, with regard to any assets or property held,
acquired or to be acquired by the Company, filed a consent to the application of
Section 341(f) of the Code.
(e) The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code.
(f) There is no agreement, plan or arrangement covering any employee
or independent contractor or former employee or independent contractor of the
Company 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 pursuant to Section 280G of the Code or that would be subject to an
excise tax under Section 4999 of the Code.
(g) The Company is not and has never been a party to or bound by any
tax indemnity agreement, tax sharing agreement, tax allocation agreement or
similar agreement or arrangement and does not have any liability for Taxes of
any person (other than the Company) under Treasury Regulation 1.1502-6 (or any
similar provision of state, local or foreign law).
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<PAGE>
(h) The Company 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.
3.10 Title to Properties and Related Matters. (a) Except as set forth
---------------------------------------
on Schedule 3.10(a), the Company has good and valid title to all personal
property, tangible or intangible, which the Company purports to own, including
the properties reflected on the Balance Sheet or acquired after the date thereof
(other than properties and assets sold or otherwise disposed of in the ordinary
course of business and consistent with past practice since June 28, 1998), free
and clear of any claims, liens, pledges, security interests or encumbrances of
any kind whatsoever (other than (i) purchase money security interests and common
law vendor's liens, in each case for goods purchased on open account in the
ordinary course of business and having a fair market value of less than $10,000
in each individual case), (ii) liens for Taxes not yet due and payable, and
(iii) such imperfections of title and encumbrances, if any, that are not
material in character, amount or extent and that do not materially detract from
the value, or materially interfere with the use of, the property subject thereto
or affected thereby.
(b) The Company does not own any real property or any interest in real
property, except for the leasehold created under the leases referred to in
Schedule 3.10(d).
(c) Schedule 3.10(c) sets forth a complete and correct list of all
equipment, machinery, instruments, vehicles, furniture, fixtures and other items
of personal property currently owned, leased or used by the Company with a book
value as of June 28, 1998, in each case of $10,000 or more. All such personal
property is in satisfactory operating condition (ordinary and reasonable wear
and tear excepted), is physically located in or about one of the Company's
places of business and is owned by the Company or is leased by the Company under
one of the leases set forth in Schedule 3.10(d). None of such personal property
is subject to any agreement or commitment for its use by any person other than
the Company. The maintenance and operation of such personal property is
appropriate for personal property of such nature and is and has been in material
conformance with all applicable laws and regulations, except as would not have a
Company Material Adverse Effect or result in a fine or penalty in excess of
$10,000 individually or in the aggregate. There are no assets leased by the
Company or used in the business of the Company that are owned, directly or
indirectly, by any Related Person (as that term is hereinafter defined).
(d) Schedule 3.10(d) sets forth a complete and correct list of all
real property and personal property leases to which the Company is a party. The
Company has previously delivered to the Parent complete and correct copies of
each lease (and any amendments or supplements thereto) listed in Schedule
3.10(d). With respect to such leases, (i) each such lease is valid and binding
and in full force and effect; (ii) neither the Company nor (to the best
knowledge of the
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<PAGE>
Company or any Principal Shareholder) any other party is in default under any
such lease, and no event has occurred which constitutes, or with the lapse of
time or the giving of notice or both would constitute, a default by the Company
or (to the best knowledge of the Company or any Principal Shareholder) a default
by any other party under such lease, other than any default which would not have
a Company Material Adverse Effect; (iii) to the best knowledge of the Company or
any Principal Shareholder, there are no disputes or disagreements between the
Company and any other party with respect to any such lease; and (iv) the lessor
under each such lease has consented or been given notice (or prior to the
Closing shall have consented or been given notice), where such consent or the
giving of such notice is necessary, sufficient that such lease shall remain in
full force and effect following the consummation of the transactions
contemplated by this Agreement without requiring modification in the rights or
obligations of the lessee under any such lease.
3.11 Intellectual Property; Proprietary Rights; Employee Restrictions.
----------------------------------------------------------------
(a) The Company has disclosed in Schedule 3.11 all registered
copyrights, copyright registrations and copyright applications, trademark
registrations and applications for registration, patents and patent
applications, trademarks, service marks, trade names, or Internet domain names
(collectively, "Intellectual Property Rights") used by the Company in the
Company's business as presently conducted, including all other registered
Intellectual Property Rights used in connection with or contained in all
versions of the Company's World Wide Web sites (including www.whowhere.com and
www.angelfire.com) and all licenses, assignments and releases of Intellectual
Property Rights of others without which the Company could not offer the services
it currently offers. All Intellectual Property Rights used by the Company in the
Company's business held by any employee, officer or consultant are owned by the
Company by operation of law or have been validly assigned to the Company. The
Company believes that the Intellectual Property Rights are sufficient to carry
on the business of the Company as presently conducted. The Company has exclusive
ownership of or license to use all Intellectual Property Rights identified in
Schedule 3.11 or has obtained any licenses, releases or assignments reasonably
necessary to use all third parties' Intellectual Property Rights in works
embodied in its services. The present business activities or products of the
Company do not infringe any Intellectual Property Rights of others, except as
would not have a Company Material Adverse Effect or result in a liability, fine
or penalty in excess of $10,000 individually or in the aggregate. The Company
has not received any notice or other claim from any person asserting that any of
the Company's present activities infringe or may infringe any Intellectual
Property Rights of such person.
The Company has the right to use all trade secrets, customer lists,
hardware designs, programming processes, software and other information required
for its services or its business as presently conducted or contemplated. The
Company has taken all reasonable measures to protect and preserve the security
and confidentiality of its trade secrets and other confidential information.
All employees and consultants of the Company involved in the design, review,
evaluation or development of products or Intellectual Property Rights have
executed nondisclosure and assignment of inventions agreements to protect the
confidentiality of the Company's trade secrets and other confidential
information and to vest in the Company exclusive ownership of such Intellectual
Property Rights. To the knowledge of the Company and the Principal
Shareholders, all trade secrets and other confidential information of the
Company are not part of the public domain or knowledge, nor, to the knowledge of
the Company and the
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<PAGE>
Principal Shareholders, have they been misappropriated by any person having an
obligation to maintain such trade secrets or other confidential information in
confidence for the Company. To the knowledge of the Company and the Principal
Shareholders, no employee or consultant of the Company has used any trade
secrets or other confidential information of any other person in the course of
their work for the Company.
The Company is the exclusive owner of all right, title and interest in
its Intellectual Property Rights as purported to be owned by the Company, and to
the Company's and the Principal Shareholders' knowledge, such Intellectual
Property Rights are valid and in full force and effect. No university,
government agency (whether federal or state) or other organization sponsored
research and development conducted by the Company or has any claim of right to
or ownership of or other encumbrance upon the Intellectual Property Rights of
the Company. The Company is not aware of any infringement by others of its
copyrights or other Intellectual Proprietary Rights in any of its technology or
services, or any violation of the confidentiality of any of its proprietary
information. To the Company's and the Principal Shareholders' knowledge, the
Company is not making unlawful use of any confidential information or trade
secrets of any past or present employees of the Company.
Neither the Company nor, to the knowledge of the Company and the
Principal Shareholders, any of the Company's employees, have any agreements or
arrangements with former employers of such employees relating to confidential
information or trade secrets of such employers or are bound by any consulting
agreement relating to confidential information or trade secrets of another
entity that are being violated by such persons. The activities of the Company's
employees on behalf of the Company do not violate any agreements or arrangements
known to the Company which any such employees have with former employers or any
other entity to whom such employees may have rendered consulting services. For
the purposes of this Section 3.11, and except where the context otherwise
requires, Intellectual Property Rights also includes any and all intellectual
property rights, licenses, databases, computer programs and other computer
software user interfaces, know-how, trade secrets, customer lists, proprietary
technology, processes and formulae, source code, object code, algorithms,
architecture, structure, display screens, layouts, development tools,
instructions, templates, marketing materials created by the Company, inventions,
trade dress, logos and designs.
(b) The Company has all franchises, permits, licenses and other rights
and privileges reasonably necessary to permit it to own its property and to
conduct its business as it is presently conducted other than any franchises,
permits, licenses and other rights and privileges which if not held by the
Company would not have a Company Material Adverse Effect or result in a fine or
penalty in excess of $10,000 individually or in the aggregate.
3.12 Contracts. (a) Except as set forth in Schedule 3.12(a) (or in
---------
Schedule 3.10(d) or Schedule 3.13(a)), the Company is not a party to, or subject
to:
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<PAGE>
(i) any contract, arrangement or understanding, or series of related
contracts, arrangements or understandings, which involves annual expenditures or
receipts by the Company of more than $50,000;
(ii) any note, indenture, credit facility, mortgage, security
agreement or other contract, arrangement or understanding relating to or
evidencing indebtedness for money borrowed or a security interest or mortgage in
the assets of the Company;
(iii) any guaranty issued by the Company;
(iv) any contract, arrangement or understanding relating to the
acquisition, issuance or transfer of any securities;
(v) any contract, arrangement or understanding relating to the
acquisition, transfer, distribution, use, development, sharing or license of any
technology or Intellectual Property Rights other than licenses granted in the
ordinary course of business with a term of less than one year;
(vi) any contract, arrangement or understanding granting to any person
the right to use any property or property right of the Company other than
licenses granted in the ordinary course of business with a term of less than one
year;
(vii) any contract, arrangement or understanding restricting
the Company's right to (A) engage in any business activity or compete with any
business, or (B) develop or distribute any technology;
(viii) any contract, arrangement or understanding relating to
the employment of, or the performance of services of, any employee, consultant
or independent contractor and pursuant to which the Company is required to pay
more than $25,000 per year;
(ix) any contract, arrangement or understanding with a Related
Person (as that term is hereinafter defined); or
(x) any outstanding offer, commitment or obligation to enter into any
contract or arrangement of the nature described in subsections (i) through (vi)
of this subsection 3.12(a).
(b) The Company has previously made available for inspection and
copying to the Parent complete and correct copies (or, in the case of oral
contracts, a complete and correct description) of each contract (and any
amendments or supplements thereto) listed on Schedule 3.12(a). Except as set
forth in Schedule 3.12(b), (i) each contract listed in Schedule 3.12(a) is in
full force and effect; (ii) neither the Company nor (to the best knowledge of
the Company or any Principal Shareholder) any other party is in default under
any such contract, and no event has
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occurred which constitutes, or with the lapse of time or the giving of notice or
both would constitute, a default by the Company or (to the best knowledge of the
Company or any Principal Shareholder) a default by any other party under such
contract, other than any default which would not have a Company Material Adverse
Effect; (iii) to the best knowledge of the Company or any Principal Shareholder,
there are no disputes or disagreements between the Company and any other party
with respect to any such contract; and (iv) each other party to each such
contract has consented or been given notice (or prior to the Closing shall have
consented or been given notice), where such consent or the giving of such notice
is necessary, sufficient that such contract shall remain in full force and
effect following the consummation of the transactions contemplated by this
Agreement without modification in the rights or obligations of the Company
thereunder.
(c) Except as set forth in Schedule 3.12(c), all indebtedness of the
Company for monies borrowed by the Company is prepayable at any time at the
option of the Company, without premium or penalty.
(d) Except as set forth and described in Schedule 3.12(d), the Company
has not issued any warranty or any agreement or commitment to indemnify any
person other than in the ordinary course of business.
3.13 Employees; Employee Benefits.
----------------------------
(a) Schedule 3.13(a) sets forth the names of all current employees of
the Company (the "Employees") and such Employee's job title, the location of
employment of such Employee, such Employee's current salary, the amount of any
bonuses or other compensation paid since December 31, 1997 to such Employee, the
date of employment of such Employee and the accrued vacation time of such
Employee. The Company has accrued on its books and records all obligations for
salaries, benefits and other compensation with respect to its Employees and
former employees ("Former Employees"), to the extent required by generally
accepted accounting principles, including, but not limited to, vacation pay,
severance, bonuses, incentive and deferred compensation, and all commissions and
other fees payable to salespeople, sales representatives and other agents.
Schedule 3.13(a) hereto sets forth a true and correct statement of the
liability, if any, of the Company for accrued but unused sick pay. Except as
set forth on Schedule 3.13(a) or as contemplated by Section 7.6 of this
Agreement, there are no outstanding loans from the Company to any officer,
director, employee, agent or consultant of the Company, or to any other Related
Person. Schedule 3.13(a) hereto sets forth a complete and correct description
of all severance policies of the Company. Complete and correct copies of all
written agreements with Employees and all employment policies, and all
amendments and supplements thereto, have previously been delivered or made
available to the Parent, and a list of all such agreements and policies is set
forth an Schedule 3.13(a). None of the Employees has, to the best knowledge of
the Company or any Principal Shareholder, indicated a desire to terminate his or
her employment, or any intention to terminate his or her employment upon a sale
of, or business combination relating to, the Company or in connection with the
transactions contemplated by
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<PAGE>
this Agreement. Except as set forth on Schedule 3.13(a), since June 28, 1998,
the Company has not (i) except in the ordinary course of business and consistent
with past practice, increased the salary or other compensation payable or to
become payable to or for the benefit of any of the Employees, (ii) increased the
term or tenure of employment for any Employee, except in the ordinary course of
business consistent with past practice, (iii) increased the amounts payable to
any of the Employees upon the termination of any such person's employment or
(iv) adopted, increased, augmented or improved benefits granted to or for the
benefit of any of the Employees under any Benefit Plan.
(b) Except as disclosed on Schedule 3.13(b), the Company has complied
in all material respects with the Fair Labor Standards Act, as amended, the
Immigration Reform and Control Act of 1986, and all applicable laws, rules and
regulations governing payment of minimum wages and overtime rates and the
withholding and payment of taxes from compensation, except as would not have a
Company Material Adverse Effect or result in a fine or penalty in excess of
$10,000 individually or in the aggregate, and there have been no claims made or,
to the best knowledge of the Company or any Principal Shareholder, threatened
thereunder against the Company arising out of, relating to or alleging any
violation of any of the foregoing or arising out of, relating to or alleging any
violation of Title VII of the Civil Rights Act of 1964, as amended, the Age
Discrimination in Employment Act, as amended, or any other laws prohibiting
discriminatory practices with respect to employment and discharge, or otherwise
relating to the conduct of employers with respect to employees or potential
employees. Except as disclosed in Schedule 3.13(b), there are no material
controversies, strikes, work stoppages, picketing or disputes pending or, to the
knowledge of the Company or any Principal Shareholder, threatened between the
Company and any of the Employees or Former Employees; no labor union or other
collective bargaining unit represents or has ever represented any of the
Employees, including any "leased employees" (within the meaning of Section
414(n) of the Code); no organizational effort by any labor union or other
collective bargaining unit currently is under way or, to the best knowledge of
the Company or the Principal Shareholders, threatened with respect to any
Employees; and the consent of no labor union or other collective bargaining unit
is required to consummate the transactions contemplated by this Agreement.
(c) Schedule 3.13(c) sets forth a list of each material defined
benefit and defined contribution plan, stock ownership plan, employment or
consulting agreement, executive compensation plan, bonus plan, incentive
compensation plan or arrangement, deferred compensation agreement or
arrangement, agreement with respect to temporary employees or "leased employees"
(within the meaning of Section 414(n) of the Code), vacation pay, sickness,
disability or death benefit plan (whether provided through insurance, on a
funded or unfunded basis or otherwise), employee stock option, stock
appreciation rights or stock purchase plan, severance pay plan, arrangement or
practice, employee relations policy, practice or arrangement, and each other
employee benefit plan, program or arrangement, including, without limitation,
each "employee benefit plan" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), which has been
maintained by the Company for the benefit of or relating to any of the Employees
or to any Former Employees or
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<PAGE>
their dependents, survivors or beneficiaries, whether or not legally binding,
whether written or oral or whether express or implied, all of which are
hereinafter referred to as the "Benefit Plans."
(d) Except as set forth on Schedule 3.13(d) and except for such
failures as may be corrected without resulting in a Company Material Adverse
Effect or a fine or penalty in excess of $10,000 individually or in the
aggregate, the provisions of each Benefit Plan which is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to
meet the requirements of Section 401(a) of the Code meet such requirements; the
trust, if any, forming part of such plan is exempt from U.S. federal income tax
under Section 501(a) of the Code; a favorable determination letter has been
issued by the Internal Revenue Service (the "IRS") with respect to each plan and
trust and each amendment thereto; and nothing has occurred since the date of
such determination letter that would adversely affect the qualification of such
plan; no Benefit Plan is a "voluntary employees beneficiary association" (within
the meaning of section 501(c)(9) of the Code) and there have been no other
"welfare benefit funds" (within the meaning of Section 419 of the Code) relating
to Employees or Former Employees; no event or condition exists with respect to
any Benefit Plan that could subject the Company to any material Tax under
Section 4980B of the Code. With respect to each Benefit Plan, the Company has
heretofore delivered or made available to the Parent complete and correct copies
of the following documents, where applicable and to the extent available: (i)
the most recent annual report (Form 5500 series), together with schedules, as
required, filed with the IRS, and any financial statements and opinion required
by Section 103(a)(3) of ERISA, (ii) the most recent determination letter issued
by the IRS, (iii) the most recent summary plan description and all
modifications, as well as all other descriptions distributed to Employees or set
forth in any manuals or other documents, (iv) the text of the Benefit Plan and
of any trust, insurance or annuity contracts maintained in connection therewith
and (v) the most recent actuarial report, if any, relating to the Benefit Plan.
(e) Neither the Company nor any corporation or other trade or business
under common control with the Company (as determined pursuant to Section 414(b)
or (c) of the Code) (a "Common Control Entity") has maintained or contributed to
or in any way directly or indirectly has any liability (whether contingent or
otherwise) with respect to any "multiemployer plan," within the meaning of
Section 3(37) of ERISA; no Benefit Plan or similar benefit plan of any Common
Control Entity has been subject to Title IV of ERISA; neither the Company nor
any Common Control Entity is a party to or has any liability under any agreement
imposing secondary liability on it as a seller of the assets of a business in
accordance with Section 4204 of ERISA or under any other provision of Title IV
of ERISA or other agreement; no contingent or other liability with respect to
which the Company has or could have any liability exists under Title IV of ERISA
to the Pension Benefit Guaranty Corporation ("PBGC") or to any Benefit Plan; and
no assets of the Company are subject to a lien under Sections 4064 or 4068 of
ERISA. Except as indicated on Schedule 3.13(e), the Company has no obligation to
provide medical or other benefits to Employees or Former Employees 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 law. Except as disclosed in
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Schedule 3.13(e), the Company will not incur any liability under any severance
agreement, deferred compensation agreement, employment or similar agreement as a
result of the consummation of the transactions contemplated by this Agreement.
(f) Except as set forth on Schedule 3.13(f), none of the Benefit Plans
has been subject to a "reportable event," within the meaning of Section 4043 of
ERISA (whether or not waived); there have been no "prohibited transactions,"
within the meaning of Section 4975 of the Code or Part 4 of Subtitle B of Title
I of ERISA that would have a Company Material Adverse Effect or result in a fine
or penalty in excess of $10,000 individually or in the aggregate; none of the
Benefit Plans are subject to Section 412 of the Code; each Benefit Plan has, in
all material respects, been administered to date in compliance in all material
respects with the applicable provisions of ERISA, the Code and applicable law
and with the terms and provisions of all documents, contracts or agreements
pursuant to which such Benefit Plan is maintained; all reports and information
required to be filed with the Department of Labor, the IRS, the PBGC or plan
participants or beneficiaries with respect to any Benefit Plan have been timely
filed; there is no dispute, arbitration, claim, suit, or grievance, pending or,
to the best knowledge of the Company or any Principal Shareholder, threatened,
involving a Benefit Plan (other than routine claims for benefits), and, to the
best knowledge of the Company or any Shareholder, there is no basis for such a
claim; none of the Benefit Plans nor any fiduciary thereof has been the subject
of a order or investigation or examination by a governmental agency and there
are no matters pending before the IRS, the Department of Labor, the PBGC or any
other domestic or, to the best knowledge of the Company or any Principal
Shareholder, foreign governmental agency with respect to a Benefit Plan; there
have been no claims, or notice of claims, filed under any fiduciary liability
insurance policy covering any Benefit Plan; and there has been and will be no
"excess parachute payment" (as that term is defined in Section 28OG(b)(1) of the
Code) to any of the Employees as a result of the consummation of the
transactions contemplated hereby.
3.14 Compliance with Applicable Law. Except as set forth in
------------------------------
Schedules 3.13 and 3.14, the Company is not in violation in any material respect
of any applicable safety, health, environmental or other law, statute,
ordinance, code, rule, regulation, judgment, order, injunction, writ or decree
of any Federal, state, local or foreign court or governmental or regulatory
body, agency or authority having, asserting or claiming jurisdiction over it or
over any part of its business, operations, properties or assets, except for any
violation which would not have a Company Material Adverse Effect or result in a
fine or penalty in excess of $10,000 individually or in the aggregate. The
Company has not received any notice alleging any such violation, nor to the best
knowledge of the Company or any Principal Shareholder, is there any inquiry,
investigation or proceedings relating thereto.
3.15 Ability to Conduct the Business. There is no agreement,
-------------------------------
arrangement or understanding, nor any judgment, order, writ, injunction or
decree of any court or governmental or regulatory body, agency or authority
applicable to the Company or to which the Company is a party or by which it (or
any of its properties or assets) is bound, that will prevent the use by the
Surviving Corporation, after the Effective Time, of the properties and assets
owned by, the
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<PAGE>
business conducted by or the services rendered by the Company on the date
hereof, in each case on substantially the same basis as the same are used,
owned, conducted or rendered on the date hereof, except where the prevention of
such use will not have a Company Material Adverse Effect. The Company has in
force, and is 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 its business as presently
conducted, 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. The
Company has not received any notice of, and to the best knowledge of the Company
or any Principal Shareholder, there are no inquiries, proceedings or
investigations relating to or which could result in the revocation or
modification of any such permit, license, exemption, consent, authorization or
approval.
3.16 Major Customers. Schedule 3.16 sets forth a complete and correct
---------------
list of the ten largest customers of the Company, in terms of revenue recognized
in respect of such customers during the six months ended June 28, 1998, showing
the amount of revenue recognized for each such customer during such period.
Except as set forth and described in Schedule 3.16, to the best knowledge of the
Company or any Principal Shareholder, the Company has not received any notice or
other communication (written or oral) from any of the customers listed in
Schedule 3.16 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 Company.
3.17 Consultants, Sales Representatives and Other Agents. Schedule
---------------------------------------------------
3.17 hereto sets forth a complete and correct list of the names and addresses of
each consultant, sales representative or other agent (other than any such person
performing solely clerical functions) currently engaged by the Company who is
not an employee of the Company and who has received compensation in excess of
$25,000 in the six months ended June 28, 1998, the commission rates or other
compensation applicable with respect to each such person and the amount of
commissions or other compensation earned by each such person for the six months
ended June 28, 1998. Complete and correct copies of all current agreements
between the Company and any such person have previously been delivered or made
available by the Company to the Parent.
3.18 Accounts Receivable. All accounts receivable of the Company (i)
-------------------
arose from bona fide transactions in the ordinary course of business and
consistent with past practice, (ii) except as set forth on Schedule 3.18, are
owned by the Company free and clear of any claim, security interest, lien or
other encumbrance and (iii) are accurately and fairly reflected on the Balance
Sheet, or, with respect to accounts receivable of the Company created on or
after June 28, 1998, are accurately and fairly reflected in the books and
records of the Company. The reserves for bad debts reflected on the Balance
Sheet and in the balance sheet included in the Financial Statements were
calculated in accordance with generally accepted accounting principles
consistent with past practice.
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<PAGE>
3.19 Insurance. Schedule 3.19 hereto is a true and complete list of
---------
all insurance policies carried by the Company with respect to its business,
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. Complete and correct copies of each certificate of
insurance have previously been delivered or made available by the Company to the
Parent. All such policies are in full force and effect. All premiums due
thereon have been paid in a timely manner.
3.20 Bank Accounts; Powers of Attorney. Schedule 3.21 sets forth a
---------------------------------
complete and correct list showing:
(i) all bank accounts of the Company, 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
Company and a summary statement of the terms thereof.
3.21 Minute Books, etc. The minute books, stock certificate book and
------------------
stock ledger of the Company are complete and correct in all material respects.
The minute books of the Company contain accurate and complete records of all
meetings or written consents to action of the Board of Directors and
shareholders of the Company and accurately reflect all corporate actions of the
Company which are required by law to be passed upon by the Board of Directors or
shareholders of the Company.
3.22 Related Person Indebtedness and Contracts. Schedule 3.22 sets
-----------------------------------------
forth a complete and correct summary of all contracts, commitments, arrangements
and understandings not described elsewhere in this Agreement between the Company
and any of the following (collectively, "Related Persons"): (i) the Holders;
(ii) the spouses and children of any of the Holders (collectively, "near
relatives"); (iii) any trust for the benefit of any of the Holders or any of
their respective near relatives; or (iv) any corporation, partnership, joint
venture or other entity or enterprise owned or controlled by any of the Holders
or by any of their respective near relatives.
3.23 Brokers; Payments. Except for Broadview International LLC
-----------------
("Broadview"), no broker, investment banker, financial advisor or other person
is entitled to any broker's, finder's, financial advisor's or other similar fee
or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company or any Principal
Shareholder. The Company has suspended or terminated, and has the legal right
to terminate or suspend, all negotiations and discussions of Acquisition
Transactions (as defined in Section 6.4) with parties other than Parent. No
valid claim exists against the Company or the
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<PAGE>
Surviving Corporation or, based on any action by the Company, against the Parent
for payment of any "topping," "break-up" or "bust-up" fee or any similar
compensation or payment arrangement as a result of the transactions contemplated
hereby.
3.24 Company Action. The Board of Directors of the Company, by
--------------
unanimous written consent or at a meeting duly called and held, has (i)
determined that the Merger is fair and in the best interests of the Company and
its shareholders, (ii) approved the Merger and this Agreement in accordance with
the provisions of the CGCL, and (iii) directed that this Agreement and the
Merger be submitted to the Company shareholders for their approval and resolved
to recommend that the Company's shareholders vote favor of the approval of this
Agreement and the Merger.
3.25 Disclosure. No representation or warranty by the Company or the
----------
Principal Shareholders contained in this Agreement and no statement contained in
any of the Disclosure Schedules, certificate or other document or instrument
delivered or to be delivered pursuant to this Agreement by the Company or its
representatives 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 not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDERS
Each of the Principal Shareholders represents and warrants, severally, to
the Parent and Acquisition as follows: (i) such Shareholder is the sole and
exclusive record and beneficial owner of the shares of the Company's capital
stock, Stock Options and/or Warrants set forth opposite such Shareholder's name
in Schedule 3.4 hereto, free and clear of any claims, liens, pledges, options,
rights of first refusal or other encumbrances or restrictions of any nature
whatsoever (other than restrictions on transfer imposed under applicable
securities laws), and, except as set forth on Schedule 3.4 hereto, there are no
agreements, arrangements or understandings to which such Shareholder is a party
(other than this Agreement) involving the purchase, sale or other acquisition or
disposition of the shares owned by such Shareholder; (ii) such Shareholder shall
(A) concurrently with such Shareholder's execution and delivery of this
Agreement, execute and deliver to Parent the Voting Agreement in the form of
Exhibit A hereto pursuant to which Shareholder agrees to vote all shares of
- ---------
capital stock owned by such Shareholder in favor of the Merger and the adoption
of this Agreement by the Company, (B) at the Effective Time, deliver to the
Parent certificates representing all shares of Company Stock owned by such
Shareholder, each such certificate to be duly endorsed for transfer and free and
clear of any claims, liens, pledges, options, rights of first refusal or other
encumbrances or restrictions of any nature whatsoever (other than restrictions
imposed under applicable securities laws); (iii) such Shareholder has all
necessary legal capacity, right, power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby, and this
Agreement constitutes a valid and binding obligation of such Shareholder
enforceable in accordance with its terms, except to the extent that
enforceability may be limited by applicable
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<PAGE>
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 in law
or in equity; and (iv) the execution and delivery of this Agreement by such
Shareholder and the consummation of the transactions contemplated hereby will
not (A) violate or conflict with any provision of any partnership agreement or
other constitutional documents of any such Shareholder that is constituted as a
general or limited partnership, (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, give rise to any right of
termination, cancellation, modification or acceleration under or require any
consent or the giving of any notice under, any note, bond, indenture, mortgage,
security agreement, lease, license, franchise, permit, agreement or other
instrument or obligation to which such Shareholder is a party, or by which such
Shareholder or the shares of Company Stock held by such Shareholder may be
bound, or result in the creation of any material lien, claim or encumbrance or
other right of any third party of any kind whatsoever upon the properties or
assets of such Shareholder pursuant to the terms of any such instrument or
obligation, which breach, violation or event of default would have a material
adverse effect on such Shareholder's ability to perform such Shareholder's
obligations hereunder, or (C) violate or conflict with any law, statute,
ordinance, code, rule, regulation, judgment, order, writ, injunction, decree or
other instrument of any court or governmental or regulatory body, agency or
authority applicable to such Shareholder or by which such the shares of Company
Stock held by such Shareholder may be bound.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF THE PARENT AND ACQUISITION
The Parent and Acquisition jointly and severally represent and warrant to
the Company and the Principal Shareholders that:
5.1 Corporate Organization. Each of the Parent and Acquisition is a
----------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of the Parent and Acquisition has all requisite
corporate power and authority to own, operate and lease the properties and
assets it now owns, operates and leases and to carry on its business as now
being conducted. The Parent and Acquisition are each duly qualified to transact
business as a foreign corporation and are each in good standing in the
jurisdictions set forth opposite their respective names in Schedule 5.1, which
are the only jurisdictions where such qualification is required by reason of the
nature of the properties and assets currently owned, operated or leased by the
Parent or Acquisition or the business currently conducted by them, except for
such jurisdictions where the failure to be so qualified would not have a Lycos
Material Adverse Effect (as defined below). The Parent has previously delivered
to the Company complete and correct copies of (i) its Certificate of
Incorporation (certified by the Secretary of State of Delaware as of a recent
date) and its By-Laws (certified by the Secretary of the Parent as of a recent
date) and
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<PAGE>
(ii) the Certificate of Incorporation of Acquisition and all amendments thereto
to the date hereof (certified by the Secretary of State of the State of Delaware
as of a recent date) and the By-Laws of Acquisition (certified by the secretary
of Acquisition as of a recent date). Neither the Certificate of Incorporation
nor the By-Laws of the Parent or Acquisition has been amended since the
respective dates of certification thereof, nor has any action been taken for the
purpose of effecting any amendment of such instruments. The term "Lycos Material
Adverse Effect" means for purposes of this Agreement, any change, event or
effect that is, or would be, materially adverse to the business, operation,
assets, liabilities, financial condition or results of operations of the Parent
and Acquisition, taken as a whole.
5.2 Authorization. Each of the Parent and Acquisition has full corporate
-------------
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
approved by the Boards of Directors of the Parent and Acquisition and by the
Parent as the sole shareholder of Acquisition, and no other corporate
proceedings on the part of the Parent or Acquisition are necessary to approve
and authorize the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby. This Agreement has been duly executed
and delivered by the Parent and Acquisition and constitutes the valid and
binding agreement of the Parent and Acquisition, enforceable 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 in
equity or in law).
5.3 Consents and Approvals; No Violations. Subject to the filing of
-------------------------------------
Certificate of Merger with the Secretary of State of the State of California and
the Secretary of State of the State of Delaware and compliance with applicable
federal and state securities laws, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby will not: (i)
violate or conflict with any provisions of the Certificate of Incorporation or
By-Laws of the Parent or Acquisition; (ii) 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, give rise to any
right of termination, cancellation, modification or acceleration under, or
require any consent or the giving of any notice under, any note, bond,
indenture, mortgage, security agreement, lease, license, franchise, permit,
agreement or other instrument or obligation to which the Parent or Acquisition
is a party, or by which any of them or any of their respective properties or
assets may be bound, or result in the creation of any lien, claim or encumbrance
of any kind whatsoever upon the properties or assets of the Parent or
Acquisition pursuant to the terms of any such instrument or obligation, other
than any breach, violation, default, termination, cancellation, modification or
acceleration which would not have a Lycos Material Adverse Effect; (iii) violate
or conflict with any law, statute, ordinance, code, rule, regulation, judgment,
order, writ, injunction or decree or other instrument of any Federal, state,
local or foreign court or governmental or regulatory body, agency or authority
applicable to the Parent or Acquisition or by which any of their respective
properties or assets may be bound, except for such violations or
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<PAGE>
conflicts which would not have a Lycos Material Adverse Effect; or (iv) require,
on the part of the Parent or Acquisition, any filing or registration with, or
permit, license, exemption, consent, authorization or approval of, or the giving
of any notice to, any governmental or regulatory body, agency or authority other
than any filing, registration, permit, license, exemption, consent,
authorization, approval or notice which if not obtained or made would not have a
Lycos Material Adverse Effect.
5.4 Capitalization. (a) The authorized capital stock of the Parent
--------------
consists of 40,000,000 shares of Parent Common Stock, of which 18,530,772 shares
are issued and outstanding as of June 30, 1998 and 5,000,000 shares of Preferred
Stock, none of which are issued or outstanding. All of the issued and
outstanding shares of Parent Common Stock are (and all shares of Parent Common
Stock to be issued in connection with the Merger, when issued in accordance with
this Agreement, shall be) duly authorized, validly issued, fully paid and
nonassessable, and none of such shares has been issued in violation of any
applicable preemptive rights. There are no agreements or commitments to which
the Parent is a party or by which it is bound for the redemption or repurchase
of any shares of its capital stock. Except for options issued under the
Parent's stock option and employee stock purchase plans (collectively, the
"Stock Option Plans"), there are no outstanding options, warrants or other
rights to purchase, or securities convertible into or exchangeable for, shares
of the capital stock of the Parent, and (except as contemplated by this
Agreement and except with respect to options issued under the Stock Option
Plans) there are no agreements or commitments to which the Parent is a party or
by which it is bound pursuant to which the Parent is or may become obligated to
issue additional shares of its capital stock.
(b) The authorized capital stock of Acquisition consists of 1,000
shares of common stock, par value $0.01 per share, of which 100 shares are
issued and outstanding, all of which shares are owned beneficially and of record
by the Parent. There are no outstanding options, warrants or other rights to
purchase, or securities convertible into or exchangeable for, shares of the
capital stock of Acquisition, and there are no agreements or commitments to
which Acquisition is a party or by which it is bound pursuant to which
Acquisition is or may become obligated to issue additional shares of its capital
stock.
5.5 SEC Reports and Financial Statements. The Parent has heretofore
------------------------------------
delivered or made available to the Company complete and correct copies of all
reports and other filings filed by the Parent with the SEC pursuant to the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act") since August 1, 1997 (such reports and other
filings collectively referred to herein as the "Exchange Act Filings"). The
Exchange Act Filings constitute all of the documents required to be filed by the
Parent under the Exchange Act with the SEC since such date. As of their
respective dates, the Exchange Act Filings did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements of the Parent included in the Exchange Act
Filings comply in all material respects with the published
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<PAGE>
rules and regulations of the SEC with respect thereto, and such audited
consolidated financial statements (i) were prepared from the books and records
of the Parent and its consolidated subsidiaries, (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes or schedules thereto)
and (iii) present fairly the financial position of the Parent and its
consolidated subsidiaries as at the dates thereof and the results of their
operations and cash flows (or changes in financial position, for the fiscal year
ended July 31, 1997 and earlier years) for the periods then ended. The unaudited
financial statements included in the Exchange Act Filings comply in all material
respects with the published rules and regulations of the SEC with respect
thereto; and such unaudited financial statements (i) were prepared from the
books and records of the Parent and its consolidated subsidiaries, (ii) were
prepared in accordance with generally accepted accounting principles, except as
otherwise permitted under the Exchange Act and the rules and regulations
thereunder, on a consistent basis (except as may be indicated therein or in the
notes or schedules thereto) and (iii) present fairly the financial position of
the Parent and its consolidated subsidiaries as at the dates thereof and the
results of their operations and cash flows (or changes in financial condition)
for the periods then ended, subject to normal year-end adjustments and any other
adjustments described therein or in the notes or schedules thereto.
5.6 Absence of Certain Changes. Since April 30, 1998, the business of the
--------------------------
Parent has been conducted in the ordinary course and consistent with past
practice. Except as set forth in Schedule 5.6 or in the Exchange Act Filings
filed before the date hereof, since April 30, 1998, there has been no Lycos
Material Adverse Effect.
5.7 Litigation. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending, or as to which Parent or any of its Subsidiaries has
received any notice of assertion, that would have a Lycos Material Adverse
Effect, nor, to the best knowledge of the Parent, is there a threatened action,
suit, proceeding, claim, arbitration or investigation against Parent or any of
its Subsidiaries that would have a Lycos Material Adverse Effect or that in any
manner challenges or seeks to prevent, enjoin, alter or delay any of the
transactions contemplated by this Agreement.
5.8 Tax Treatment of Merger. Neither the Parent nor any of its
-----------------------
Subsidiaries has taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from qualifying as
a reorganization under Section 368(a) of the Code.
5.9 Disclosure. No representation or warranty by the Parent or
----------
Acquisition contained in this Agreement and no statement contained in any
Schedule, certificate or other document or instrument delivered or to be
delivered 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 not misleading.
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ARTICLE VI
CONDUCT OF BUSINESS OF THE COMPANY AND
THE PARENT PRIOR TO THE EFFECTIVE TIME
6.1 Conduct of Business of the Company. During the period commencing on
----------------------------------
the date hereof and continuing until the Effective Time, the Company and each of
the Principal Shareholders agree that the Company, except as otherwise expressly
contemplated by this Agreement or agreed to in writing by the Parent:
(a) will carry on its business only in the ordinary course and
consistent with past practice;
(b) will not declare or pay any dividend on or make any other
distribution (however characterized) in respect of shares of its capital stock;
(c) will not, directly or indirectly, redeem or repurchase, or agree
to redeem or repurchase, any shares of its capital stock;
(d) will not amend its Articles of incorporation or By-Laws;
(e) will not issue, or agree to issue, any shares of its capital stock
(except pursuant to the exercise of currently outstanding warrants or options),
or any options, warrants or other rights to acquire shares of its capital stock,
or any securities convertible into or exchangeable for shares of its capital
stock;
(f) will not combine, split or otherwise reclassify any shares of its
capital stock;
(g) will not form a Subsidiary;
(h) will use its commercially reasonable efforts to preserve intact
its present business organization, keep available the services of its officers
and key employees and preserve its relationships with clients 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;
(i) will not (i) make any capital expenditures individually in excess
of $15,000 or in the aggregate in excess of $40,000, (ii) enter into any
license, distribution, OEM, reseller, joint venture or other similar agreement,
(iii) enter into or terminate any lease of, or purchase or sell, any real
property, (iv) enter into any leases of personal property involving individually
in excess of $15,000 annually or in the aggregate in excess of $40,000 annually,
(v) incur or guarantee any additional indebtedness for borrowed money, (vi)
create or permit to become effective any security interest, mortgage, lien,
charge or other encumbrance on its
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properties or assets, (vii) accelerate receivables or delay payables, or (viii)
enter into any agreement to do any of the foregoing;
(j) will not 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 pursuant to existing contractual obligations which have
been disclosed to the Parent) or accelerate, amend or change the period of
exercisability or the vesting schedule of options 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;
(k) will promptly advise the Parent of the commencement of, or threat
of (to the extent that such threat comes to the knowledge of the Company or any
of the Principal Shareholders), any claim, action, suit, proceeding or
investigation against, relating to or involving the Company or any of its
directors, officers, employees, agents or consultants in connection with their
businesses or the transactions contemplated hereby that could reasonably be
expected to have a Company Material Adverse Effect;
(l) will use its commercially reasonable efforts to maintain in full
force and effect all insurance policies maintained by the Company on the date
hereof; and
(m) will not enter into any agreement to dissolve, merge, consolidate
or, except in the ordinary course, sell any material assets of the Company or
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial 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 $25,000 in the aggregate.
6.2 Conduct of Business of the Parent. During the period commencing on
---------------------------------
the date hereof and continuing until the Effective Time, the Parent agrees that,
except as expressly contemplated by this Agreement or agreed to in writing by
the Company, the Parent:
(a) subject to the fiduciary duties of the Parent's Board of
Directors, as advised in writing by counsel, will carry on its business only in
the ordinary course consistent with past practice;
(b) will promptly advise the Company of the commencement of, or threat
of (to the extent that such threat comes to the knowledge of the Parent or any
Parent Subsidiary), any claim, action, suit, proceeding or investigation
against, relating to or involving the Parent or any Parent Subsidiary or any of
their directors, officers, employees, agents or consultants in connection with
their businesses or the transactions contemplated hereby;
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(c) will not take any action or cause its Subsidiaries to take any
action which could cause the Merger to fail to qualify as a reorganization under
the provisions of Section 368(a) of the Code; and
(d) will not enter into any agreement to dissolve, merge, consolidate
or, except in the ordinary course, sell any material assets of the Parent or any
of the Parent Subsidiaries, provided that this Section 6.2(d) shall not restrict
the Parent from effecting acquisitions in which Parent obtains a controlling
interest in the stock or assets of other entities or businesses.
6.3 Conduct of Business of Acquisition. During the period commencing on
----------------------------------
the date hereof and continuing until the Effective Time, Acquisition shall not
engage in any activities of any nature except as provided in or contemplated by
this Agreement.
6.4 Other Negotiations. Neither the Company nor any Principal Shareholder
------------------
will (nor will they permit any of their respective officers, directors,
employees, agents, partners and affiliates on their behalf to) take any action
to solicit, initiate, seek, encourage or support any inquiry, proposal or offer
from, furnish any information to, or participate in any negotiations with, any
corporation, partnership, person or other entity or group (other than Parent)
regarding any acquisition of the Company, any merger or consolidation with or
involving the Company, or any acquisition of any material portion of the stock
or assets of the Company, or any equity or debt financing of the Company or any
material license of Intellectual Property Rights (any of the foregoing being
referred to in this Agreement as an "Acquisition Transaction") or enter into an
agreement concerning any Acquisition Transaction with any party other than
Parent. If between the date of this Agreement and the termination of this
Agreement pursuant to Article X, the Company receives from a third party any
offer to negotiate or consummate an Acquisition Transaction, the Company shall
(i) notify Parent immediately (orally and in writing) of such offer, including
the identity of such party and the terms of any proposal therein, and (ii)
notify such third party of the Company's obligations under this Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Access to Properties and Records. Between the date of this Agreement
--------------------------------
and the Effective Time, the Company will provide the Parent and its accountants,
counsel and other authorized advisors, with reasonable access, during business
hours, to its premises and properties and its books and records (including,
without limitation, contracts, leases, insurance policies, litigation files,
minute books, accounts, working papers and tax returns filed and in preparation)
and will cause its officers to furnish to Parent and its authorized advisors
such additional financial, tax and operating data and other information
pertaining to
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its business as Parent shall from time to time reasonably request. All of such
data and information shall be kept confidential by Parent until the consummation
of the Merger.
7.2 Shareholder Approval. (a) Prior to the Effective Time and at the
--------------------
earliest practicable date following the date hereof, but in no event later than
three business days after the date hereof, the Company will solicit written
consents from its shareholders seeking approval of this Agreement, the Merger
and related matters. In soliciting such written consent, the Board of Directors
of the Company will recommend to the shareholders of the Company that they
approve this Agreement and the Merger and the Company and the Board of Directors
shall use their best efforts to obtain the approval of the shareholders of the
Company entitled to vote on or consent to this Agreement and the Merger in
accordance with the CGCL and the Company's Articles of Incorporation. In
soliciting the written consent of shareholders, the Company will deliver to each
shareholder as soon as reasonably practicable an information statement (the
"Information Statement") substantially the form delivered to Parent on the date
hereof. The Information Statement prepared by the Company in the form approved
by Parent shall be in such form and contain such information that is intended to
permit compliance by the Parent with the requirements of Regulation D under the
Securities Act in connection with the issuance of shares of Parent Common Stock
in the Merger.
(b) Within three business days after the execution of this Agreement,
the Company will distribute the Information Statement to the shareholders of the
Company. As promptly as practicable after the date of this Agreement, the
Company and the Parent will prepare and file any filings required under the
Exchange Act, the Securities Act or any other Federal, foreign or state
securities or blue sky laws relating to the Merger and the transactions
contemplated by this Agreement (the "Filings"). The Information Statement and
the Filings will comply in all material respects with all applicable
requirements of law. Whenever any event occurs which is required to be set
forth in an amendment or supplement to the Information Statement or any Filing,
the Company or Parent, as the case may be, will promptly inform the other of
such occurrence and cooperate in making any appropriate amendment or supplement,
and/or mailing to shareholders of the Company, such amendment or supplement.
The Information Statement will include the recommendation of the Board of
Directors of the Company in favor of adoption and approval of this Agreement and
approval of the Merger.
(c) The Principal Shareholders each severally agree to vote their
shares of the capital stock of the Company for the approval and adoption of this
Agreement and the Merger. The Principal Shareholders each severally agree that
they (i) shall not dispose of or in any way encumber said shares prior to the
consummation of the transactions contemplated hereby, (ii) shall take no action
inconsistent with the approval and consummation of said transactions and (iii)
at the Closing shall surrender the stock certificates representing all shares of
Company Stock owned by them, duly endorsed for transfer.
7.3 Reasonable Efforts; etc. Subject to the terms and conditions herein
------------------------
provided, each of the parties hereto agrees to use his/its reasonable efforts to
take, or cause to be taken, all
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actions, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement, including obtaining any
consents, authorizations, exemptions and approvals from, and making all filings
with, any governmental or regulatory authority, agency or body which are
necessary in connection with the transactions contemplated by this Agreement.
7.4 Material Events. At all times prior to the Effective Time, each party
---------------
shall promptly notify the others in writing of the occurrence of any event which
will or may result in the failure to satisfy any of the conditions specified in
Article VIII or Article IX hereof.
7.5 Registration Statement on Form S-8. As promptly as practicable
----------------------------------
following the Effective Time, but in no event later than the fifth business day
following the Effective Time, the Parent shall cause to be filed with the SEC,
if necessary, one or more Registration Statements on Form S-8 covering the
shares of Parent Common Stock issuable pursuant to the arrangements described in
Section 2.2(c) hereof.
7.6 Fees and Expenses. The parties hereto shall bear and pay all of
-----------------
their own fees, costs and expenses relating to the transactions contemplated by
this Agreement, including, without limitation, the fees and expenses of their
respective counsel, accountants, brokers and financial advisors, except that the
Holders shall be responsible for all the fees, costs and expenses incurred by
the Company in connection with this Agreement and the transactions contemplated
hereby and such fees, costs and expenses shall be deemed to be expenses of the
Holders and paid by the Holders, provided that, upon the consummation of the
Merger, (i) the Company shall be permitted to pay up to $600,000 of such fees,
costs and expenses, and (ii) the Parent shall pay up to $1,754,469 of the fees
of Broadview, which amount shall be paid $877,235 in cash and in 15,157 shares
of Parent Common Stock (collectively, the "Expense Cap"). If the amount of
such fees, costs and expenses exceed the Expense Cap, then the number of shares
of Parent Common Stock constituting the Merger Shares shall be reduced by an
amount equal to the excess of the fees, costs and expenses over the Fee Cap
divided by the Closing Market Price (the "Expense Shares"). All invoices
relating to the fees, costs and expenses which may be paid by the Company or
the Parent shall be delivered to the Parent at least three business days prior
to the Closing so as to enable Parent to calculate the Expense Shares and the
Exchange Ratio, unless the Company certifies in writing to the Parent prior to
the Closing that the fees, costs and expenses to be paid by the Company and the
Parent do not exceed the Expense Cap.
7.7 Employees. Parent shall offer employment with the Parent or the
---------
Company to all employees of the Company at the Effective Time, subject to each
employee signing the applicable agreement referred to in Section 8.5 (i) or
(ii). Employees of the Company at the Effective Time will be provided with
benefit plans by the Surviving Corporation or Parent which in the aggregate are
no less favorable to such employees than those provided from time to time by
Parent and its Subsidiaries to similarly situated employees. If any employee of
the Company becomes a participant in any employee stock purchase plan, employee
benefit plan, program, policy or arrangement of Parent, such employee shall be
given credit for all service prior to the
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Effective Time with the Company to the extent permissible under such plan,
program, policy or arrangement.
7.8 Nasdaq National Market Listing. Parent shall cause the shares of
------------------------------
Parent Common Stock issuable in the Merger to be authorized for listing on The
Nasdaq National Market on or prior to the date that the registration statement
to be filed pursuant to Section 12.1(a) is declared effective by the SEC.
7.9 Tax Treatment. Each of the Parent, Acquisition, any Subsidiary of the
-------------
Parent, the Company and the Principal Shareholders shall use their reasonable
commercial efforts to cause the Merger to qualify as a reorganization under
Section 368(a) of the Code. Parent and its Subsidiaries will not take, or cause
the Company to take, any action after the Effective Time which will cause the
Merger to fail to qualify as a reorganization under the provisions of Section
368(a) of the Code.
7.10 Indemnification. The Parent shall assume the obligations of the
---------------
Company under its existing indemnification agreements with officers and
directors and shall not, for a period of six years after the Effective Time,
take any action to alter or impair any exculpatory or indemnification provisions
now existing in such indemnification agreements or the Articles of Incorporation
or By-laws of the Company for the benefit of any individual who served as a
director or officer of the Company at any time prior to the Effective Time,
except for any changes which may be required to conform with changes in
applicable law and any changes which do not affect the application of such
provisions to acts or omissions of such individuals prior to the Effective Time,
and except that the Parent shall not be required to indemnify, defend or hold
harmless any director or officer of the Company prior to the Effective Time with
respect to claims, losses or liabilities arising from or relating to the
Company's execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
7.11 Shares of Parent Common Stock. Subject to the deposit into
-----------------------------
escrow of shares of Parent Common Stock contemplated under Section 2.8, on or
prior to the date that the registration statement to be filed pursuant to
Section 12.1(a) is declared effective by the SEC, the Parent shall deliver to
each Holder of Company Common Stock who has delivered share certificates
pursuant to Section 8.7 the shares of Parent Common Stock issuable to such
Holders pursuant to Section 2.2(a) hereof.
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ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF
THE PARENT AND ACQUISITION
The obligation of the Parent and Acquisition to consummate the transactions
contemplated hereby shall be subject to the satisfaction, on or prior to the
Closing Date, of each of the following conditions (any of which may be waived in
writing by the Parent and Acquisition in their sole discretion):
8.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of the Company and of each of the Principal Shareholders which are
contained in this Agreement shall be true and correct in all material respects
at and as of the Closing Date as though such representations and warranties were
made on and as of the Closing Date, and at the Closing the Company shall have
delivered to the Parent and Acquisition a certificate (signed on behalf of the
Company by the President and the Chief Financial Officer of the Company) to that
effect with respect to all such representations and warranties made by the
Company, and each Principal Shareholder shall have executed and delivered to the
Parent and Acquisition a certificate to that effect with respect to all such
representations and warranties made, jointly and severally or severally, by such
Shareholder.
8.2 Performance. The Company and each of the Principal Shareholders shall
-----------
have performed and complied in all material respects with all of the obligations
under this Agreement which are required to be performed or complied with by them
on or prior to the Closing Date, and at the Closing the Company shall have
delivered to the Parent and Acquisition a certificate (duly executed on behalf
of the Company by the President and the Chief Financial Officer of the Company)
to that effect with respect to all such obligations required to have been
performed or complied with by the Company on or before the Closing Date, and
each of the Principal Shareholders shall have executed and delivered to the
Parent and Acquisition a certificate to that effect with respect to all such
obligations required to have been performed or complied with by such Principal
Shareholders on or before the Closing Date.
8.3 Absence of Litigation. No statute, rule or regulation shall have been
---------------------
enacted or promulgated, and no order, decree, writ or injunction shall have been
issued and shall remain in effect, by any court or governmental or regulatory
body, agency or authority which restrains, enjoins or otherwise prohibits the
consummation of the transactions contemplated hereby, and no action, suit or
proceeding before any court or governmental or regulatory body, agency or
authority shall have been instituted by any person (or instituted or threatened
by any governmental or regulatory body, agency or authority), and no
investigation by any governmental or regulatory body, agency or authority shall
have been commenced with respect to the transactions contemplated hereby or with
respect to the Company which would have a material adverse effect on the
transactions contemplated hereby or on the business of the Company.
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8.4 Consents. All approvals, consents, waivers and authorizations
--------
required to be obtained by the Company or any Principal Shareholder in
connection with the Merger and the other transactions contemplated by this
Agreement (including those identified on Schedule 3.3) shall have been obtained
and shall be in full force and effect.
8.5 Additional Agreements. Parent shall have the following
---------------------
agreements:
(i) the offer letters in the forms of Exhibit E hereto, duly executed
---------
by each of Michael Armistead, Susan Castillo, Samuel Huey, Dale Fuller, Edward
Shelton and Sean White;
(ii) the Nondisclosure and Development Agreement in the form of
Exhibit F hereto, duly executed by each employee of the Company who is required
- ---------
to execute an offer letter under Section 8.5(i);
(iii) the Escrow Agreement annexed as Exhibit D hereto, duly
---------
executed by Anthony Sun, as Representative of the Holders under such Escrow
Agreement (and countersigned by holders of at least 90% of the outstanding
Company Stock, holders of at least 90% of outstanding Stock Options and holders
of at least 90% of outstanding Warrants where required on the addendum thereto),
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;
(iv) Resignations of all directors of the Company, effective as of the
Effective Time; and
(v) Letters of Transmittal duly executed by holders of at least 90% of
the outstanding shares of Common Stock.
8.6 Opinion of Venture Law Group. The Company shall have delivered to the
----------------------------
Parent an opinion of Venture Law Group, A Professional Corporation, counsel to
the Company, in substantially the form attached as Exhibit G hereto.
----------
8.7 Appraisal Rights. The holders of at least 90% of the issued and
----------------
outstanding shares of Company Stock shall have voted in favor of the approval of
the Merger and the transactions contemplated hereby and holders of no more than
10% of the issued and outstanding shares of Company Stock shall have demanded
appraisal rights in respect of the Merger.
8.8 Termination of Agreements. The following agreements between the
-------------------------
Company and certain of its shareholders shall have been terminated, effective no
later than the Effective Time: (i) the Amended and Restated Co-Sale Agreement
dated as of November 14, 1997 among the Company and the other parties named
therein, (ii) the Voting Agreement dated as of November 14, 1997 among the
Company and the other parties named therein, (iii) the Amended and Restated
Investors' Rights Agreement dated as of November 14, 1997 among the Company
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and the other parties named therein, and (iv) each Preferred Stock Purchase
Agreement relating to the purchase of shares of Company Preferred Stock.
8.9 Certificate of Merger. The Company shall have executed and delivered
---------------------
to the Parent counterparts of the Certificate of Merger to be filed with the
Secretary of State of the State of California and the Secretary of State of the
State of Delaware in connection with the Merger.
8.10 Completion of Due Diligence. The Parent shall have completed its
---------------------------
due diligence review of the Company and shall not have discovered any material
event, liability, condition or other fact (other than conditions or changes in
the Company's business or operations relating to the economy generally, the
Parent's industry or Parent specifically unless any such changes or conditions
affect the Company in an individual, specific manner) which, in the Parent's
judgment, makes it inadvisable to proceed with the Merger.
8.11 Conversion of Company Preferred Stock. All outstanding shares of
-------------------------------------
Company Preferred Stock shall have been converted into Company Common Stock at
the respective conversion prices thereof as set forth in the Company's Articles
of Incorporation.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS
The obligation of the Company and the Principal Shareholders to consummate
the transactions contemplated by this Agreement shall be subject to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions (any of which may be waived in writing by the Company and the
Shareholders in their sole discretion):
9.1 Representations and Warranties True. The representations and
-----------------------------------
warranties of each of the Parent and Acquisition contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as though such representations and warranties were made on and as of the Closing
Date, and at the Closing each of the Parent and Acquisition shall have delivered
to the Company and the Shareholders a certificate (signed on its behalf by its
President and its Chief Financial Officer) to that effect with respect to all
such representations and warranties made by such entity.
9.2 Performance. Each of the Parent and Acquisition shall have performed
-----------
and complied in all material respects with all of the obligations under this
Agreement which are required to be performed or complied with by them on or
prior to the Closing Date, and at the Closing each of the Parent and Acquisition
shall have delivered to the Company and the Shareholders a certificate, signed
on its behalf by its President and its Chief Financial Officer, to that effect
with respect to all such obligations required to have been performed or complied
with by such entity on or before the Closing Date.
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9.3 Absence of Litigation. No statute, rule or regulation shall have been
---------------------
enacted or promulgated, and no order, decree, writ or injunction shall have been
issued and shall remain in effect, by any court or governmental or regulatory
body, agency or authority which restrains, enjoins or otherwise prohibits the
consummation of the transactions contemplated hereby, and no action, suit or
proceeding before any court or governmental or regulatory body, agency or
authority shall have been instituted by any person (or instituted or threatened
by any governmental or regulatory body, agency or authority) and no
investigation by any governmental or regulatory body, agency or authority shall
have been commenced with respect to the transactions contemplated hereby or with
respect to the Parent or the Parent Subsidiaries which would have a material
adverse effect on the transactions contemplated hereby or on the business of the
Parent and the Parent Subsidiaries taken as a whole.
9.4 Consents. All approvals, consents, waivers and authorizations
--------
required to be obtained by Parent or Acquisition in connection with the Merger
and the other transactions contemplated by this Agreement (including those
identified on Schedule 5.3) shall have been obtained and shall be in full force
and effect.
9.5 Additional Agreements. The Parent shall have executed and delivered
---------------------
(and shall have agreed to cause the Surviving Corporation to execute and deliver
immediately following the Effective Time, as applicable) counterparts of the
following agreements;
(i) the offer letters referred to in Section 8.5(i) hereof;
(ii) the Nondisclosure and Development Agreements referred to in
Section 8.5(ii) hereof;
(iii) the Escrow Agreement referred to in Section 8.5(iii) hereof,
together with counterparts signed by the escrow agent named therein.
9.6 Opinion of Hutchins, Wheeler & Dittmar. The Parent shall have
--------------------------------------
delivered to the Company an opinion of Hutchins, Wheeler & Dittmar in
substantially the form annexed as Exhibit H hereto.
---------
9.7 Certificate of Merger. The Parent and Acquisition shall have executed
---------------------
and delivered to the Company counterparts of the Certificate of Merger to be
filed with the Secretary of State of the State of California and the Secretary
of the State of the State of Delaware in connection with the Merger.
9.8 Tax Opinion. Venture Law Group, A Professional Corporation, shall
-----------
have delivered its tax opinion, dated the Closing Date, in substantially the
form of Exhibit K hereto.
---------
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ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Effective Time:
(a) by the mutual written consent of the Company and the Parent;
(b) by either the Company or the Parent
(i) if any court or governmental or regulatory agency, authority or
body shall have enacted, promulgated or issued any statute, rule, regulation,
ruling, writ or injunction, or taken any other action, restraining, enjoining or
otherwise prohibiting the transactions contemplated hereby and all appeals and
means of appeal therefrom have been exhausted; or
(ii) if the Effective Time shall not have occurred on or before August
28, 1998; provided, however, that the right to terminate this Agreement pursuant
to this Section 10.1(b)(ii) shall not be available to any party whose (or whose
affiliate(s)') breach of any representation or warranty or failure to perform or
comply with any obligation under this Agreement or the Voting Agreement has been
the cause of, or resulted in, the failure of the Effective Time to occur on or
before such date;
(c) by the Company, if any of the conditions specified in Article IX
have not been met or waived prior to such time as such condition can no longer
be satisfied; or
(d) by the Parent, if any of the conditions specified in Article VIII
shall not have been met or waived prior to such time as such condition can no
longer be satisfied.
10.2 Effect of Termination. In the event of termination of this
---------------------
Agreement, this Agreement shall forthwith become void and there shall be no
liability on the part of any of the parties hereto or (in the case of the
Company, the Parent and Acquisition) their respective officers or directors,
except for Sections 7.6, 13.6 and 13.7 and the last sentence of Section 7.1,
which shall remain in full force and effect, and except that nothing herein
shall relieve any party from liability for a breach of this Agreement prior to
the termination hereof.
ARTICLE XI
INDEMNIFICATION; SURVIVAL OF
REPRESENTATIONS AND WARRANTIES
11.1 Indemnity Obligations of the Holders. Each of the Holders hereby
------------------------------------
agrees to indemnify and hold the Parent harmless from, and to reimburse the
Parent for, any Indemnity
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Claims (as that term is hereinafter defined) arising under the terms and
conditions of this Agreement on a pro rata basis based on each Holder's share of
the Merger Shares, Option Shares and Warrant Shares. For purposes of this
Agreement, the term "Indemnity Claim" shall mean 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 Parent (collectively, "Losses") arising out of, based upon
or resulting from (i) any breach of any representation and warranty of the
Company or the Holders which is contained in this Agreement or the Letter of
Transmittal; or (ii) any breach or nonfulfillment of, or any failure to perform,
any of the covenants, agreements or undertakings of the Company (which
covenants, agreements or undertakings were to be performed or complied with on
or prior to the consummation of the Merger) or the Holders which are contained
in or made pursuant to the terms and conditions of this Agreement or the Letter
of Transmittal.
11.2 Appointment of Representative. Each of the Holders hereby
-----------------------------
appoints Anthony Sun as such Holder's exclusive agent to act on such Holder's
behalf with respect to any and all Indemnity Claims arising under this
Agreement. In such representative capacity, Anthony Sun or any person who shall
succeed in such representative capacity pursuant to the terms of the Escrow
Agreement referred to in Sections 8.5 and 9.5 hereof, is sometimes referred to
in this Agreement as the "Representative." The Representative shall take, and
the Holders agree that the Representative shall take, any and all actions which
he believes are necessary or appropriate under this Agreement for and on behalf
of the Holders, as fully as if the Holders were acting on their own behalf,
including, without limitation, defending all Indemnity Claims, consenting to,
compromising or settling all Indemnity Claims, conducting negotiations with the
Parent and its representatives regarding such claims, dealing with the Parent
and the Escrow Agent under the Escrow Agreement referred to in Sections 8.5 and
9.5 hereof with respect to all matters arising under such Escrow Agreement,
taking any and all other actions specified in or contemplated by this Agreement
and engaging counsel, accountants or other representatives in connection with
the foregoing matters. The Parent and such Escrow Agent shall have the right to
rely upon all actions taken or omitted to be taken by the Representative
pursuant to this Agreement and the Escrow Agreement, all of which actions or
omissions shall be legally binding upon each of the Holders.
11.3 Notification of Claims. Subject to the provisions of Section
----------------------
11.4 below, in the event of the occurrence of an event which the Parent asserts
constitutes an Indemnity Claim, Parent shall provide the Representative (on
behalf of the indemnifying parties) with prompt written notice of such event and
shall otherwise promptly make available to the Representative all relevant
information which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the Representative as the indemnifying party shall have
the right to elect to join in the defense, settlement, adjustment or compromise
of any such Third-Party Claim, and, if he so elects, to
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<PAGE>
control such defense, settlement, adjustment or compromise, and to employ
counsel to assist such indemnifying party in connection with the handling of
such claim, at the sole expense of the indemnifying party, to be paid from
amounts held in escrow by the Escrow Agent in accordance with the terms of the
Escrow Agreement. Unless the Representative elects to assume such defense,
settlement, adjustment or compromise, Parent shall have the right to settle any
such Third-Party Claim; provided, however, that Parent may not effect the
-------- -------
settlement, adjustment or compromise of any such Third-Party Claim without the
consent of the Representative, which consent shall not be unreasonably withheld.
In the event that the Representative has consented to any such settlement,
adjustment or compromise, the Representative shall have no power or authority to
object to the amount of any claim by Parent against the escrow for indemnity
with respect to such settlement, adjustment or compromise, provided such amount
is not in excess of the amount actually paid by Parent with respect to such
Third Party Claim. The Representative shall have the right to settle, adjust, or
compromise any Third-Party Claim, the defense of which is controlled by the
Representative, using amounts held in escrow; provided, however, that, unless
-------- -------
the settlement, adjustment or compromise involves no more than the payment of an
amount that is less than the amount of funds then remaining in the escrow and
provides for the unconditional release of Parent, the Company and their
respective affiliates, the Representative may not effect the settlement,
adjustment, compromise or satisfaction of any such Third-Party Claim without the
consent of the Parent, which consent shall not be unreasonably withheld.
Parent's failure to give timely notice or to promptly furnish the Representative
with any relevant data and documents in connection with any Third-Party Claim
shall not constitute a defense (in part or in whole) to any claim for
indemnification by such party, except and only to the extent that such failure
shall result in any prejudice to the indemnifying party. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
11.4 Duration. Except as otherwise provided in this Agreement, all
--------
representations, warranties, covenants and agreements of the parties contained
in or made pursuant to this Agreement, and the rights of the parties to seek
indemnification with respect thereto, shall survive the Closing for a period of
one (1) year from the Closing Date, provided that with respect to claims for
indemnification as to which notice shall have been duly given prior to such
expiration date, the number of Escrow Shares (as defined below) reasonably
necessary to satisfy such claims shall remain in escrow until such claims have
been finally resolved. To be duly given, any such notice shall set forth in
reasonable detail the nature of such claim, the provisions under this Agreement
or the Letter of Transmittal pursuant to which such claim is being asserted and,
to the extent feasible, a reasonable estimate of the anticipated amount of such
claim.
11.5 Escrow. At the Effective Time, ten percent (10%) of the Merger
------
Shares and instruments or other documentation representing Stock Options to
purchase ten percent (10%) of the Option Shares and Warrants to purchase ten
percent (10%) of the Warrant Shares (collectively, the "Escrow Shares") shall be
delivered to State Street Bank and Trust Company, as escrow agent (the "Escrow
Agent ") to be held for a period ending on the first anniversary of
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the Closing Date. Parent may make a claim for any Losses indemnified hereunder
until the first anniversary of the Closing Date. The Escrow Shares shall be held
and disbursed by the Escrow Agent in accordance with an Escrow Agreement in the
form attached hereto as Exhibit D. Except with respect to claims based on fraud
---------
committed by the Company or any Holder which are not limited, if the Closing
occurs, Parent agrees that Parent's sole and exclusive remedy and recourse
against each of the Holders under this Agreement for Losses attributable to any
inaccuracy or breach of any representation or warranty of the Company or the
Holders which is contained in this Agreement or the Letter of Transmittal or any
Schedule or certificate delivered pursuant hereto or thereto or any breach or
nonfulfillment of, or any failure to perform, any of the covenants or
undertakings of the Company (which covenants, agreements or undertakings were to
be performed or complied with on or prior to the consummation of the Merger) or
the Holders which are contained in or made pursuant to this Agreement or the
Letter of Transmittal shall be against such Holder's pro rata share of the
Merger Shares, Option Shares and Warrant Shares held in escrow pursuant to the
Escrow Agreement. In lieu of depositing shares in escrow, within thirty days
after the Closing, any Holder of the Company Stock may post a bond reasonably
acceptable to Parent equal in value to the value (determined by reference to the
Closing Market Price) of such Holder's pro rata portion of the Escrow Shares, in
which event, upon posting such bond, the Holder's allocable portion of the
Escrow Shares shall be delivered to it. Notwithstanding anything herein to the
contrary, the Holders shall have no liability for indemnification pursuant to
this Article XI until the aggregate Losses to the Parent and the Company exceed
$75,000, at which point each Holder shall be liable only for his or its pro rata
share of the amount of such Losses in excess of $75,000.
11.6 No Contribution. Each Holder hereby waives, and acknowledges and
---------------
agrees that such Holder shall not 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 the Parent or the Company in connection with any
indemnification obligation or any other liability which such Holder may become
subject under or in connection with this Agreement or the Escrow Agreement.
11.7 Liability of Principal Shareholders. By virtue of signing this
-----------------------------------
Agreement, no Principal Shareholder is assuming liability for the
indemnification obligations contained in this Article XI which is greater than
the liability of any other Holder who has not signed this Agreement. No
Principal Shareholder shall be liable for any fraud committed by any other
Holder or the Company.
ARTICLE XII
REGISTRATION RIGHTS
12.1 Registration Rights. (a) Parent shall file with the SEC a
-------------------
registration statement on Form S-3 (or any successor form to Form S-3) for a
public resale offering of the shares of Parent Common Stock issuable to or on
behalf of Holders under Section 2.2(a) (other than the shares of
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Parent Common Stock which are subject to restrictions on transfer under the
Employment Agreements referred to in Section 8.5(i)) and the shares of Parent
Common Stock issuable upon exercise of the Warrants on the Closing Date
(provided that Parent shall not be required to register shares on behalf of any
Holder who has not timely performed its or his obligations hereunder, or under
the Letter of Transmittal, in which case Parent shall be permitted to delay the
registration of the shares held by such Holder until five business days after
the Holder has complied with such obligations) and shall use commercially
reasonable efforts to cause such registration statement to become and remain
effective for the period ending on the first to occur of (x) the date the resale
of all shares registered thereunder is complete or (y) the first anniversary of
the Closing Date. If for any reason Parent is not eligible to file such
registration statement on Form S-3 (or any successor form to Form S-3), Parent
shall effect such registration using such form as Parent is then eligible to
use.
(b) In the case of any registration pursuant to this Section 12.1,
Parent shall keep each person whose securities are to be registered thereunder
(a "Selling Shareholder") advised of the initiation and completion of such
registration. At its expense, except as provided in Section 12.1(b)(iv) below,
Parent will promptly:
(i) Prepare and file with the SEC the registration statement described
in Section 12.1(a) above and thereafter use commercially reasonable efforts to
cause such registration statement to become effective;
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectuses used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(iii) Furnish to the Selling Shareholders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the securities
covered by such registration statement;
(iv) Use commercially reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Selling Shareholders, provided that Parent shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions;
(v) Notify each Selling Shareholder covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to
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state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(vi) Cause all such shares of Parent Common Stock to be listed on each
securities exchange or market system on which similar securities issued by the
Parent are then listed; and
(vii) Provide a transfer agent and registrar for all such shares of
Parent Common Stock not later than the effective dates of such registration
statements.
(c) Each Selling Shareholder and the Company shall provide Parent with
all necessary and reasonable assistance in the preparation and filing of the
registration statement required to be prepared and filed by Parent and all other
obligations of Parent under this Section 12.1. Parent's obligations under this
Section 12.1 with respect to any Selling Stockholder are conditioned in all
respects on the provision of all necessary and reasonable assistance to Parent
by each Selling Stockholder.
(d) Parent shall pay the expenses incurred by it in complying with its
obligations under this Article XII, including, without limitation, all
registration and filing fees, exchange listing fees, fees and expenses of
counsel for Parent, and fees and expenses of accountants for Parent.
(e) Parent shall have the right, upon the advice of the Board of
Directors of Parent (the "Board"), upon giving written notice to each Selling
Stockholder of the exercise of such right, to require such Selling Shareholder
not to sell any shares pursuant to the registration statement filed pursuant to
Section 12.1(a) for a reasonable period (as determined in good faith by the
Board) from the date on which such notice is given (a "black-out period"), if
(i)(A) Parent is engaged in discussions or negotiations with respect to, or has
proposed or taken a substantial step to commence, or there otherwise is pending,
any merger, acquisition, other form of business combination, divesture, tender
offer, financing or other transaction, or there is an event or state of facts
relating to Parent, in each case which is material to Parent (as reasonably
determined by the Board) ( any such negotiation, step, event or state of facts
being herein called "Material Activity"), (B) in the reasonable judgment of the
Board, after consultation with and acting upon the written advice of outside
counsel, disclosure of such Material Activity would be necessary or advisable
under applicable securities laws and (C) such disclosure would, in the
reasonable judgment of the Board, be adverse to the interests of Parent, or (ii)
the Board, in its reasonable judgment, after consultation with and acting upon
the written advice of outside counsel, deems it necessary to file a post-
effective amendment to such registration statement or to prepare a supplement
to, or otherwise amend, the form of prospectus contained therein. During any
such black-out period, each Selling Shareholder agrees not to sell any
Registrable Shares under such registration statement for such period of time as
the Board, acting on the written advice of outside counsel, may in good faith
deem advisable; provided, however, that no single black-out period will be
longer than thirty (30) calendar days and, in the aggregate, all black-out
periods in
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any twelve (12) month period shall not include more than ninety (90) calendar
days; provided, further, however, that no black-out period may be imposed by
Parent during the first thirty calendar days after the effectiveness of the
registration statement filed pursuant to Section 12.1(a). The period of
effectiveness of any registration statement in effect at the time of a black-out
period and the termination period under Section 12.4(a) shall be extended for a
period equal to the black-out period.
12.2 Indemnification. (a) Parent agrees to indemnify and hold
---------------
harmless, to the extent permitted by law, each holder of Parent Common Stock
with rights under this Section 12, against all damages caused by any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to Parent by such holder expressly for use
therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after Parent
has furnished such holder with a sufficient number of copies of the same.
(b) In connection with any registration statement in which a holder of
Parent Common Stock with rights under this Section 12 is participating, each
such holder will furnish to Parent in writing such information as Parent
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, will indemnify and hold
harmless Parent, its directors and officers and each Person who controls Parent
(within the meaning of the Securities Act) against all damages resulting from
any untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, but only to the extent that such untrue statement or omission is
contained in any information or affidavit so furnished in writing by such holder
specifically for use in such registration statement; provided that the
obligation to indemnify will be several, not joint and several, among such
holders and the liability of each such holder will be in proportion to and
limited to the net amount received by such holder from the sale of Parent Common
Stock with rights under this Section 12, pursuant to such registration
statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any consent to the
entry of any judgment or any settlement made by the indemnified party without
its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will
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<PAGE>
not be obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling person of such
indemnified party and will survive the transfer of securities and the Merger.
12.3 Current Public Information. Until the earlier of the second
--------------------------
anniversary of the Closing Date or the date all shares of Parent Common Stock
subject to this Section 12 have been sold, Parent will timely file all reports
required to be filed by it under the Securities Act and the Securities Exchange
Act of 1934, as amended, and the rules and regulations adopted by the SEC
thereunder, and will take such further action as any holder or holders of Parent
Common Stock with rights under Section 12.1 may reasonably request, all to the
extent required to enable such holders to sell their shares pursuant to Rule 144
under the Securities Act and pursuant to Form S-3 or similar registration form
hereunder adopted by the SEC. Upon written request, Parent will deliver to such
holders a written statement as to whether it has complied with such
requirements.
12.4 Termination of Registration Rights. Notwithstanding the
----------------------------------
foregoing provisions of this Article XII, Parent's obligations pursuant to
Section 12.1 shall terminate upon (a) the first anniversary of the Closing Date,
or (b) if earlier, with respect to a given Holder, at the time such Holder may
sell all of his or her shares of Parent Common Stock in compliance with Rule 144
in a single 90 day period under the Securities Act.
12.5 Transferability of Registration Rights. The rights under this
--------------------------------------
Section 12 are not transferable except (a) a transfer by will or intestacy, (b)
estate planning transfers consisting of gifts to the spouse or issue of the
transferee and transfers to trusts for the benefit of the spouse or issue of the
transferee, (c) a transfer to the constituent partners of a Selling Stockholder
that is a partnership as part of a distribution of the shares of Parent Common
Stock held by such partnership so long as all such transferees appoint a single
representative as their attorney-in-fact for the purpose of receiving any
notices and exercising their rights under this Article XII, and each transferee
represents to Parent that it is an "accredited" investor as defined in Rule 501
promulgated under the Securities Act, or (d) with the written consent of Parent.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 Amendment. This Agreement may be amended by written agreement
---------
between the Company and the Parent prior to the Effective Time.
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13.2 Waiver of Compliance. Except as otherwise provided in this
--------------------
Agreement, any failure of any of the parties to comply with any obligation,
covenant or agreement contained herein may be waived only by a written notice
from the party or parties entitled to the benefits thereof. No failure by any
party hereto to exercise, and no delay in exercising, any right hereunder, shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or future exercise of that right by that
party.
13.3 Notices. All notices and other communications hereunder shall be
-------
deemed given if given in writing and delivered personally, by registered or
certified mail, return receipt requested, postage prepaid, or by overnight
courier to the party to receive the same at its respective address set forth
below (or at such other address as may from time to time be designated by such
party to the others in accordance with this Section 13.3):
(a) if to the Company or the Principal Shareholders, to:
WhoWhere? Inc.
1675 North Shoreline Boulevard
Mountain View, CA 94043
Attention: Dale Fuller
with copies to:
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Joshua Pickus, Esq.
(b) if to the Parent or Acquisition, to:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02541
Attention: Chief Financial Officer
with copies to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Michael J. Riccio, Jr., Esq.
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<PAGE>
(c) If to the Representative:
Anthony Sun
Venrock Associates
Suite A230
755 Page Mill Road
Palo Alto, CA 94304
All such notices and communications hereunder shall be deemed given when
received, as evidenced by the signed acknowledgment of receipt of the person to
whom such notice or communication shall have been personally delivered, the
acknowledgment of receipt returned to the sender by the applicable postal
authorities or the confirmation of delivery rendered by the applicable overnight
courier service.
13.4 Assignment. This Agreement and all of the provisions hereof
----------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors (or, in the case of the Principal Shareholders, their
respective heirs, administrators, executors and personal representatives) and
permitted assigns. Neither this Agreement nor any rights, duties or obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other parties hereto, except that vested rights to receive
payment or to initiate legal action with respect to causes of action that have
accrued hereunder shall be assignable by devise, descent or operation of law.
13.5 No Third Party Beneficiaries. Neither this Agreement or any
----------------------------
provision hereof nor any Schedule, certificate or other instrument delivered
pursuant hereto, nor any agreement to be entered into pursuant hereto or any
provision hereof, is intended to create any right, claim or remedy in favor of
any person or entity, other than the parties hereto and their respective
successors (or, in the case of the Principal Shareholders, their respective
heirs, administrators, executors and personal representatives) and permitted
assigns.
13.6 Public Announcements. No later than the second full business day
--------------------
after execution and delivery of this Agreement, the Parent and the Company shall
issue a press release in such form as they shall mutually agree. Thereafter,
and prior to the consummation of the Merger or the termination of this
Agreement, none of the parties hereto shall, except as mutually agreed by the
Parent and the Company, or except as may be required by law or applicable
regulatory authority (including, without limitation, the rules applicable to
Nasdaq National Market companies), issue any reports, releases, announcements or
other statements to the public relating to the transactions contemplated hereby.
13.7 Brokers and Finders. The Company and the Principal Shareholders
-------------------
represent and warrant that, except for Broadview, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission based on arrangements made by or on behalf of the Company. The
Company has previously delivered to the Parent a complete and correct copy
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of the agreement dated October 15, 1997, between the Company and Broadview, and
such agreement is the only agreement between such parties. The Parent and
Acquisition represent and warrant that, except for Credit Suisse First Boston,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission based on arrangements made by or on behalf of the
Parent. Except as otherwise contemplated herein, the Holders shall pay the fees
and expenses of any broker, finder or investment banker engaged by the Company
or any Holders.
13.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.9 Headings. The article and section headings contained in this
--------
Agreement are solely for convenience of reference, are not part of the agreement
of the parties and shall not be used in construing this Agreement or in any way
affect the meaning or interpretation of this Agreement.
13.10 Entire Agreement. This Agreement, and the Schedules,
----------------
certificates and other instruments and documents delivered pursuant hereto,
together with the other agreements referred to herein and to be entered into
pursuant hereto, embody the entire agreement of the parties hereto in respect
of, and there are no other agreements or understandings, written or oral, among
the parties relating to, the subject matter hereof, other than the
Confidentiality Agreements. This Agreement supersedes all prior agreements and
understandings, written or oral, between the parties with respect to such
subject matter, other than the Confidentiality Agreements.
13.11 Governing Law. The parties hereby agree that this Agreement, and
-------------
the respective rights, duties and obligations of the parties hereunder, shall be
governed by and construed in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of law thereunder. Each of the
parties hereby (i) irrevocably consents and agrees that any legal or equitable
action or proceeding arising under or in connection with this Agreement which is
commenced by such party shall be brought exclusively by such party in the
Federal or state courts sitting in the city and state where the principal
executive offices of the other party are located and any court to which an
appeal may be taken in any such litigation, and (ii) by execution and delivery
of this Agreement, irrevocably submits to and accepts, with respect to any such
action or proceeding, for itself and in respect of its properties and assets,
generally and unconditionally, the jurisdiction of the aforesaid courts, and
irrevocably waives any and all rights such party may now or hereafter have to
object to such jurisdiction.
13.12 Survival. The representations and warranties contained in
--------
Articles III, IV and V shall survive the Closing for a period of one (1) year.
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IN WITNESS WHEREOF, the Parent, Acquisition, the Company and the Principal
Shareholders named below have caused this Agreement to be duly executed and
delivered as of the date first above written.
LYCOS, INC.
By:____________________________________
Name: Edward M. Philip
Title: Chief Operating Officer
WHAT ACQUISITION CORP.
By:____________________________________
Name: Edward M. Philip
Title: President
WHOWHERE? INC.
By:_____________________________________________
Name: Dale Fuller
Title: President and Chief Executive Officer
PRINCIPAL SHAREHOLDERS:
VANTAGE POINT VENTURE PARTNERS 1996
By: Vantage Point Associates, LLC
Its: General Partner
By: _______________________________
Alan Salzman, Managing Member
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VENROCK ASSOCIATES
By: ________________________________
Its: ________________________________
VENROCK ASSOCIATES II, L.P.
By: ________________________________
Its: ________________________________
DALE FULLER
_____________________________________
_______________________________________
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EXHIBIT 20.1
TABLE OF CONTENTS
WHOWHERE? INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of the Independent Auditors..................................................... F-1
Balance Sheets at December 31, 1997 and 1996........................................... F-2
Statements of Operations for the year ended December 31, 1997 and 1996
and for the period from May 10, 1995 (Inception) through December 31, 1995.......... F-3
Statements of Stockholders' Equity for the year ended December 31, 1997 and 1996 and
for the period from May 10, 1995 (Inception) through December 31, 1995.............. F-4
Statements of Cash Flows for the year ended December 31, 1997 and 1996 and
for the period from May 10, 1995 (Inception) through December 31, 1995.............. F-5
Notes to Financial Statements.......................................................... F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
WhoWhere?, Inc.
We have audited the accompanying balance sheets of WhoWhere?, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (May 10,
1995) to December 31, 1995 and for each of the two years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WhoWhere?,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for the period from inception (May 10, 1995) to December 31, 1995 and
for each of the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 18, 1998
<PAGE>
WHOWHERE?, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,209 $ 2,033
Accounts receivable, net of allowance for doubtful accounts
of $ 223 at August 2, 1998, $10 at December 31, 1997
(none at December 31, 1996) 896 65
Note receivable from stockholder 2,650
Prepaid expenses and other current assets 198 38
------------------- -------------------
Total current assets 8,953 2,136
Property and equipment, net 1,353 444
Intangible assets, net 1,628
Notes receivable from founders, including interest 504
------------------- -------------------
$ 12,438 $ 2,580
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 840 $ 295
Accrued compensation 142 80
Other accrued liabilities 59 7
Current portion of capital lease obligations 159 68
Borrowings under bank line of credit 1,328
Current portion of long-term debt 1,380
------------------- -------------------
Total current liabilities 3,908 450
Non current portion of capital lease obligations 282 184
Long-term debt 1,747 -
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value, issuable in series, 10,000,000
shares authorized, aggregate liquidation preference of $13,636
at December 31, 1997, at amounts paid in
Series A convertible, 2,074,823 shares designated, 1,444,162
and 1,429,961 shares issued and outstanding at December 31,
1997 and 1996, respectively 3,687 3,650
Series B convertible, 5,750,000 shares designated, 5,223,683
shares issued and outstanding at December 31, 1997 (none in 9,884
1996)
Common stock, $0.001 par value; 40,000,000 shares authorized:
4,660,874 and 4,509,834 shares issued and outstanding at
December 31, 1997 and 1996, respectively 14 10
Accumulated deficit (7,084) (1,714)
------------------- -------------------
Total stockholders' equity 6,501 1,946
------------------- -------------------
Total liabilities and stockholders' equity $ 12,438 $ 2,580
=================== ===================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WHOWHERE?, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (MAY 10,
YEAR ENDED DECEMBER 31, 1995) TO
------------------------------------------ DECEMBER 31,
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues:
Advertising revenue $ 2,070 $ 162 $
Consulting and other revenue 11 242 160
------------------- ------------------- -------------------
Total revenues 2,081 404 160
Cost of revenues 748 164
------------------- ------------------- -------------------
Gross profit 1,333 240 160
Operating expenses:
Product development 1,197 625 114
Sales and marketing 2,749 697 1
General and administrative 1,606 626 67
In-process purchased technology 797
Amortization of intangibles 233
------------------- ------------------- -------------------
Total operating expenses 6,582 1,948 182
------------------- ------------------- -------------------
Operating loss (5,249) (1,708) (22)
Interest and other expense (201) (12) (3)
Interest income 80 31
------------------- ------------------- -------------------
Net loss $ (5,370) $ (1,689) $ (25)
=================== =================== ===================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WHOWHERE?, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK TOTAL
---------------------------------------- STOCKHOLDERS'
SERIES A SERIES B COMMON STOCK EQUITY
----------------------------------------------------------- ACCUMULATED NET CAPITAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (DEFICIT) DEFICIENCY
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Founders' investment - $ - - $ - 4,200,000 $10 $ - $ 10
Net loss - - - - - - (25) (25)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 - - - - 4,200,000 10 (25) (15)
Issuance of common stock to investors - - - - - - -
Issuance of Series A convertible preferred
stock 1,429,961 3,650 - - - - - 3,650
and warrants, net of issuance costs of $24
Issuance of common stock upon exercise
of employee stock options and other
issuances under the plan - - - - 289,834 - - -
Net loss - - - - - - (1,689) (1,689)
--------------------------------------------------------------------------------------
Balances at December 31, 1996 1,429,961 3,650 - - 4,509,834 10 (1,714) 1,946
Issuance of Series A convertible preferred
stock for services rendered 14,201 37 - - - - - 37
Issuance of Series B convertible preferred
stock for cash and conversion of notes
payable, net of issuance costs of $41 - - 5,223,683 9,884 - - - 9,884
Issuance of common stock upon exercise
of employee stock options - - - - 151,040 4 - 4
Net loss - - - - - - (5,370) (5,370)
--------------------------------------------------------------------------------------
Balances at December 31, 1997 1,444,162 $3,687 5,223,683 $9,884 4,660,874 $14 $(7,084) $ 6,501
======================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WHOWHERE?, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION> PERIOD FROM
INCEPTION (MAY
10, 1995)
YEAR ENDED YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,370) $(1,689) $ (25)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
In-process purchased technology 797 - -
Depreciation and amortization 602 65 7
Issuance of Series A preferred stock for services
rendered 36 - -
Accrued interest on notes receivable from founders (4) - -
Changes in operating assets and liabilities:
Accounts receivable (831) (51) (14)
Prepaid expenses and other current assets (160) (37) (1)
Notes receivable from founders (500) - -
Accounts payable 545 188 107
Accrued compensation 62 81 -
Other accrued liabilities 52 7 -
------------------- ------------------- -------------------
Cash (used in) provided by operating activities (4,771) (1,436) 74
------------------- ------------------- -------------------
INVESTING ACTIVITIES
Purchases of property and equipment (864) (161) (62)
Payments on acquisition of Angelfire, Inc. (211)
------------------- ------------------- -------------------
Cash used in investing activities (1,075) (161) (62)
------------------- ------------------- -------------------
FINANCING ACTIVITIES
Proceeds from founders - - 10
Payments on capital lease obligations (162) (42)
Proceeds from bank line of credit 1,328 - -
Proceeds from long-term debt 618 - -
Proceeds from issuance of notes receivable - - -
Proceeds from issuance of convertible notes payable 1,425 - -
Proceeds from issuance of Series A convertible
preferred stock and warrants, net of offering costs - 3,650 -
Proceeds from issuance of Series B convertible
preferred stock, net of offering costs 5,809 - -
Proceeds from issuance of common stock 4 - -
------------------- ------------------- -------------------
Cash provided by financing activities 9,022 3,608 10
------------------- ------------------- -------------------
Net increase in cash and cash equivalents 3,176 2,011 22
Cash and cash equivalents at beginning of period 2,033 22 -
------------------- ------------------- -------------------
Cash and cash equivalents at end of period $ 5,209 $ 2,033 $ 22
=================== =================== ===================
</TABLE>
<PAGE>
WHOWHERE?, INC.
STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (MAY
10, 1995)
YEAR ENDED YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
Equipment acquired under capital leases $ 353 $ 293 $
Note receivable from a stockholder in exchange for
issuance of Series B preferred stock $2,650 $ $
Conversion of convertible notes payable to Series B
convertible preferred stock $1,425 $ $
=================== =================== ===================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest $ 140 $ 12 $ 2
=================== =================== ===================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
WhoWhere?, Inc. ("WhoWhere" or the "Company"), formerly Parsec Communications,
was formed in 1995. The Company is a leading online global communications
directory of people and business information from around the world, including e-
mail address, telephone listings, business URLs and personal home-page listing
presented in English, French, and Spanish. The Company's goal is to develop and
offer network-based services that help people and businesses from across the
world find, communicate, and collaborate with one another on the World Wide Web.
The Company derives a substantial portion of its revenue from selling
advertisements on its Web Sites to customers in various industries.
The Company has incurred operating losses to date and incurred a net loss of
$5,370,000 for the year ended December 31, 1997. Management believes that
available resources will provide sufficient funding to enable the Company to
meet its obligations through at least December 31, 1998. If anticipated
operating results are not achieved, management has the intent and believes it
has the ability to delay or reduce expenditures so as not to require additional
financial resources if such resources were not available.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents. The
Company's cash and cash equivalents are primarily invested in money market
accounts with major financial institutions. The fair value of money market
accounts approximate their carrying value at December 31, 1997 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization and
depreciation. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the asset, generally three years. Leasehold
improvements and equipment purchased under capital leases are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset or
the lease term. Amortization on capital leases is included in depreciation
expense. Property and equipment, at cost, consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Computer hardware and software $1,068 $ 167
Furniture and fixtures 126 33
Leasehold improvements 23
Leased computer equipment 600 293
------------------- -------------------
1,794 516
Less accumulated depreciation and amortization (441) (72)
------------------- -------------------
$1,353 $ 444
=================== ===================
</TABLE>
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to continue to use the intrinsic value method of
accounting for stock-based compensation, as permitted by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), and thus recognizes no compensation expense for options granted with
exercise prices that are not less than the fair value of the Company's common
stock on the date of grant.
REVENUE RECOGNITION
Advertising revenues are derived principally from short-term advertising
contracts in which the Company guarantees a minimum number of impressions (a
view of an advertisement by a consumer) for a fixed fee. Advertising revenues
are recognized ratably over the term of the contract provided that the Company
does not have any significant remaining obligations and collection of the
resulting receivable is probable. To the extent minimum guaranteed impression
levels are not met, the Company defers recognition of the corresponding revenues
until guaranteed levels are achieved.
Advertising revenues are also derived from revenue sharing agreements for
advertising sold by third parties on cobranded Internet sites. Revenues from the
sale of certain advertising space are shared with third parties pursuant to the
terms of certain agreements. To date, amounts allocable to third parties have
not been significant.
Consulting and other revenues consist primarily of consulting revenue
generated by assisting other entities setting up web pages and consulting on
directory content and technology for those other entities. Consulting revenue is
recognized when the services are performed.
Revenues from customers representing 10% or more of total revenues were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
CUSTOMER:
A - 28% 61%
B - - 10%
C - 20% -
D - 27% -
E 15% - -
</TABLE>
ADVERTISING
Costs related to advertising are expensed as incurred. Advertising expense
for the years ended December 31, 1997 and 1996 was $557,900 and $143,300,
respectively (none for 1995). The Company has not incurred any significant
direct response advertising costs to date.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of trade receivables. The Company performs
ongoing evaluations of its customers' financial condition and generally does not
require collateral. The Company maintains reserves for credit losses, and such
losses have been within management's expectations. Revenues derived from
customers outside the Untied States have not been significant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, adoption in 1998 will have no impact on the Company's net loss or
stockholders' equity.
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION
In October 1997, the Company acquired certain net assets of Angelfire, Inc.
("Angelfire") for approximately $2,720,000 in cash and notes payable (see Note
4). Angelfire provides personal home page capabilities for Internet users. The
acquisition has been accounted for by the purchase method of accounting and
accordingly, the accompanying financial statements include the results of
Angelfire subsequent to the acquisition date.
The purchase included tangible net assets of $62,000 and in-process purchased
technology of $797,000 at fair market value. The remaining purchase price of
$1,861,000 is being amortized over the estimated useful lives of the intangible
assets acquired of two years. The Company determined the amounts to be allocated
to developed and in-process technology based on whether technological
feasibility had been achieved (as defined and utilized by the Company in
assessing software capitalization) and whether there was any alternative future
use for the technology. Other considerations included the time and cost to
complete each project, anticipated gross profit, and associated risks which
included the inherent difficulties and uncertainties in completing the project
and thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. The Company
concluded that the in-process technology had no alternative future use after
taking into consideration the potential for usage of the technology in different
products, resale of the technology and internal usage.
Pro forma information for periods prior to the acquisition have not been
presented, because the results of Angelfire's operations were not material to
the Company's historical results.
3. NOTES RECEIVABLE FROM STOCKHOLDERS
In November 1997, the Company received a secured full-recourse promissory
note from a stockholder for $2,650,000 in exchange for the issuance of 1,394,737
shares of Series B preferred stock (see Note 6). The note bears interest at 6%
per annum and was due in February 1998. The note was repaid in February 1998.
In December 1997, the Company made a loan to two of the Company's founders in
the amount of $250,000 each. The notes bear interest at a rate of 6% per annum,
and are secured by shares of common stock of the Company. The notes mature no
later than November 2001 and as early as 30 days after a change in control or
the consummation of an initial public offering.
4. BANK LINE OF CREDIT AND NOTES PAYABLE
In May 1997, the Company entered into a convertible note and warrant purchase
agreement with various investors which raised approximately $1,425,000. The
notes accrued interest at 8% per annum and were converted into 750,000 shares of
Series B convertible preferred stock in November 1997 at $1.90 per share (see
Note 6).
The Company has a line of credit with a bank that provides for working
capital advances up to $1,500,000 and expires in September 1998. A portion of
the borrowings under the line of credit are limited to specified percentages of
eligible accounts receivable, as defined, and are collateralized by
substantially all of the assets of the Company. Borrowings under the line of
credit bear interest at the bank's prime rate plus 0.5% (9.0% at December 31,
1997). Under the terms of the line of credit agreement, the Company is required
to maintain certain financial covenants. In addition, payment of cash dividends
is prohibited without the bank's consent when borrowings are outstanding. At
December 31, 1997, outstanding borrowings under the line of credit were
approximately $1,328,000. The Company was out of compliance with certain
covenants at the end of the year. The bank has waived these covenants during the
period the Company was out of compliance.
In October 1997, the Company entered into a $1,600,000 credit facility with a
leasing company to finance equipment purchases. Amounts outstanding under this
credit facility bear interest at an imputed rate of 15.7%, are repayable in 42
equal monthly installments and are collateralized by the underlying property and
equipment. At December 31, 1997, the Company has borrowed $618,000 under the
credit facility.
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
In connection with the Company's acquisition of Angelfire, the Company
entered into notes payable to the former stockholders in the aggregate principal
amount of $2,509,000. The notes earn interest at a rate of 7% compounded
annually and are subordinate to outstanding borrowings under the Company's
$1,500,000 line of credit with a bank. The principal and accumulated interest on
the notes is due in three installments as follows: $1,289,000, $1,000,000 and
$500,000 in 1998, 1999 and 2000, respectively.
5. COMMITMENTS
Capital Leases
The Company leases certain property and equipment under noncancelable lease
agreements that are accounted for as capital leases. Property and equipment at
December 31, 1997 and 1996 include assets under capital leases of approximately
$646,000 and $293,000, respectively. Accumulated amortization related to leased
assets at December 31, 1997 and 1996, was $88,264 and $27,800, respectively.
Operating Leases
The Company leases its corporate offices under a noncancelable lease that
expires December 31, 2002.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------------- -------------------
<S> <C> <C>
Years ending December 31:
1998 $194 $ 335
1999 175 351
2000 116 367
2001 12 383
2002 400
----------------- -----------------
Total minimum lease and
principal payments, respectively 497 $1,836
=================
Amount representing interest 56
-----------------
Present value of future lease payments 441
Current portion of capital lease obligations 159
-----------------
Noncurrent portion of capital lease obligations $282
=================
</TABLE>
Rent expense was approximately $168,000, $55,000 and $8,000 for 1997, 1996 and
1995, respectively.
6. STOCKHOLDERS' EQUITY
In connection with the formation of the Company, 4,200,000 shares of common
stock were issued to founders of the Company in exchange for $10,000. The
founders' shares contained a repurchase option in the event of a voluntary or
involuntary termination of employment for any reason. In May 1997, the Company
released its option to repurchase any of the founders' shares.
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has reserved shares of common stock for issuance at December 31,
1997 as follows:
<TABLE>
<S> <C>
Stock options 3,888,991
Warrants 1,555,082
Conversion of convertible preferred stock 8,100,741
-------------
13,544,814
=============
</TABLE>
CONVERTIBLE PREFERRED STOCK
Series A and B preferred stock is convertible into common stock of the
Company, at the option of the holder, at a conversion price of $1.29 and $1.90,
respectively, subject to adjustment for dilution, if any, resulting from future
stock issuances, stock splits or stock dividends. Shares of preferred stock
automatically convert into common stock in the event of an underwritten public
offering of the Company's common stock in which the aggregate net proceeds are
at least $20,000,000 and the price per share is at least $8.00, subject to
adjustment in the event of, among other things, stock splits and stock
dividends.
Each share of Series A and B preferred stock has a liquidation preference of
$2.57 and $1.90 per share, respectively, plus declared but unpaid dividends.
Thereafter, the remaining assets and funds, if any, shall be distributed ratably
on a per-share basis among the common stockholders and preferred stockholders,
on an as-converted basis. Series A and B preferred stockholders are respectively
entitled to noncumulative dividends at a rate of $0.257 and $0.190 per share,
per annum, if declared by the board of directors, in preference to common stock
dividends. No dividends have been declared to date. The holder of each share of
preferred stock has voting rights equivalent to the number of common shares
assuming conversion.
WARRANTS
In July 1996, the Company issued warrants for the purchase of a total of
608,774 shares of the Company's Series A preferred stock at a price of $2.90 per
share. These warrants, if unexercised, expire on May 15, 2002. The warrants
issued to investors were priced at $0.01 per warrant and total proceeds were
approximately $6,000.
In August 1996, in connection with capital leases, the Company issued warrants
to purchase 21,887 shares of Series A preferred stock at a price per share of
$2.57. These warrants, if unexercised, expire on August 30, 2003. The fair value
of these warrants was determined to be immaterial.
In May 1997, the Company issued warrants to investors for the purchase of
224,997 shares of the Company's Series B preferred stock at a price of $1.90 per
share, pursuant to a convertible note and warrant purchase agreement. These
warrants, if unexercised, expire on May 15, 2002. The fair value of these
warrants was determined to be immaterial.
In September 1997, in connection with a line of credit agreement with a bank,
the Company issued a warrant to purchase 31,578 shares of Series B preferred
stock at a price per share of $1.90. This warrant expires September 22, 2002.
The fair value of this warrant was determined to be immaterial.
In October 1997, in connection with a credit facility with a leasing company,
the Company issued a warrant to purchase 21,053 shares of Series B preferred
stock at a price per share of $1.90 and an additional number of shares on the
date the Company has borrowed in excess of $800,000 pursuant to the credit
facility. The additional number is determined by dividing 40,000 by the exercise
price in effect on the date the Company borrows in excess of $800,000. The
warrant expires on October 15, 2007 or on the fifth anniversary of the closing
of an underwritten public offering of the Company's common stock. The fair value
of this warrant was determined to be immaterial.
At December 31, 1997, the warrants outstanding have a weighted-average
exercise price of $2.59 and a weighted-average remaining contractual life of 4.3
years.
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
7. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"),
under which incentive stock options or nonqualified stock options to purchase
common stock may be granted to eligible participants. Under the Plan, options to
purchase common stock may be granted with exercise prices not less than 85% of
the fair value of the Company's common stock on the date of grant, as determined
by the board of directors. Options become exercisable as determined by the board
of directors (generally over 4 years) and expire after 10 years.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------
WEIGHTED-
SHARES NUMBER AVERAGE
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE
-----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 1,200,000 800,000 $ 0.0002
Additional shares authorized 500,865
Options granted (454,500) 454,500 $0.133278
Options exercised (289,834) $0.000204
Options canceled 396,000 (396,000) $0.006522
-----------------------------------------------------------------------
Balance at December 31, 1996 1,642,365 568,666 $0.099997
Additional shares authorized 1,829,000
Options granted (1,802,500) 1,802,500 $ 0.25
Options exercised (151,040) $ 0.228
Options canceled 194,542 (194,542) $ 0.0924
-----------------------------------------------------------------------
Balance at December 31, 1997 1,863,407 2,025,584 $ 0.23937
=======================================================================
</TABLE>
At December 31, 1997 and 1996, options to purchase 2,025,584 and 568,666 shares,
respectively, were exercisable at prices ranging from $0.0002 to $0.25. The
weighted-average contractual life of options outstanding at December 31, 1997
was approximately 9.25 years. The weighted-average estimated fair value of stock
options granted during 1997 and 1996 was $0.05 and $0.03, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The effect of applying the minimum value method of SFAS 123 to the Company's
stock option grants did not result in pro forma net loss that is materially
different from historical amounts reported. Therefore, such pro forma disclosure
information is not separately presented herein. Future pro forma net income/loss
and earnings/loss per share results may be materially different from actual
amounts reported.
The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividends, an expected life of four years, and a risk-free interest rate of 5.8%
for the years ended December 31, 1997 and 1996 and 5.3% for the period ended
December 31, 1995, respectively.
8. INCOME TAXES
As of December 31, 1997, the Company had federal and California net operating
loss carryforwards of approximately $6,000,000 and $2,900,000, respectively. The
net operating loss will expire at various dates beginning in 2000 through 2012,
if not utilized.
<PAGE>
WHOWHERE?, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the change in ownership provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,200,000 $ 700,000
Capitalized research and development 100,000
--------------------------------------
Total deferred tax assets 2,300,000 700,000
Valuation allowance (2,300,000) (700,000)
--------------------------------------
Net deferred tax assets $ - $ -
======================================
</TABLE>
The net deferred tax assets have been fully offset by a valuation allowance.
The net valuation allowance increased by $693,000 during the year ended December
31, 1996.
9. CONCENTRATIONS OF OTHER RISKS
The Company currently uses one vendor to supply customer activity information
that is required for timely revenue recognition and customer billing on certain
customer contracts. If this vendor were to experience supply constraints or
financial difficulties, the Company could experience difficulties in the timely
recognition of revenue and customer billing for certain contracts.
9. SUBSEQUENT EVENTS (UNAUDITED)
On August 7, 1998, Lycos, Inc., entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, What Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("WWAC"), WhoWhere?
Inc., a California corporation ("WhoWhere?"), and certain shareholders of
WhoWhere? providing for the merger of WWAC with and into WhoWhere? (the
"Merger"). On August 13, 1998, the Company completed the closing of the Merger
and WhoWhere? became a wholly-owned subsidiary of the Company.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated February 18, 1998, with respect to the
financial statements of WhoWhere?, Inc. as of December 31, 1997 and 1996 and for
the period from inception (May 10, 1995) to December 31, 1995 and for each of
the two years in the period ended December 31, 1997 included in the Current
Report (Form 8-K/A) of Lycos, Inc.
/s/ Ernst & Young LLP
Palo Alto, California
October 9, 1998
