<PAGE>
As filed with the Securities and Exchange Commission on May 20, 1999.
Registration No. 333-67995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 3
To
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
LYCOS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3277338
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
400-2 Totten Pond Road, Waltham, Massachusetts 02451
(781) 370-2700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Robert J. Davis
Lycos, Inc.
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(781) 370-2700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
copy to:
Mary Ellen O'Mara, Esq. Kenneth L. Guernsey, Esq.
Francis J. Feeney, Jr. Esq. Cydney S. Posner, Esq.
Laura S. Sarah, Esq. Jodie M. Bourdet, Esq.
Hutchins, Wheeler & Dittmar Cooley Godward LLP
A Professional Corporation One Maritime Plaza, 20th Floor
101 Federal Street San Francisco, California 94111
Boston, Massachusetts 02110 (415) 693-2000
(617) 951-6600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration shall become
effective on such date as the Commission, acting pursuant to Section 8(a) may
determine.
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- --------------------------------------------------------------------------------
<PAGE>
WIRED VENTURES, INC.
660 Third Street, Fourth Floor
San Francisco, California 94107
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 21, 1999
TO THE STOCKHOLDERS OF WIRED VENTURES, INC.:
Notice Is Hereby Given that a special meeting of stockholders of Wired
Ventures, Inc., a Delaware corporation, will be held at 9:00 a.m. local time on
Monday, June 21, 1999. The meeting will be held at the offices of Cooley
Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, California 94111.
The purpose of the meeting will be to approve the following proposal:
. approve and adopt the Agreement and Plan of Merger and Reorganization,
dated as of October 5, 1998 and amended and restated as of November 25,
1998 and May , 1999, among Ventures, Lycos, Inc., BF Acquisition Corp.,
and H. William Jesse, Jr., Louis Rossetto and Paul J. Salem, as
Stockholder Representatives; and
. approve the merger of BF Acquisition Corp., a wholly-owned subsidiary of
Lycos, with and into Ventures, through which Ventures will become a
wholly-owned subsidiary of Lycos and the outstanding shares of Ventures
capital stock will be converted into shares of Lycos common stock and
other rights.
Information on the above proposal is contained in the attached proxy
statement/prospectus. Stockholders of record at the close of business on May 7,
1999 are entitled to notice of, and to vote at, the meeting and any
adjournments or postponements of the meeting. Approval of the proposal
described above will require the affirmative vote of the holders of a majority
of the Ventures capital stock (assuming conversion of all Ventures preferred
stock) and a majority of the Ventures Series C preferred stock outstanding on
the record date.
By Order of the Board of Directors
Janelle Mitchell
Secretary
San Francisco, California
May 21, 1999
All stockholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please complete, date, sign
and return the enclosed proxy card as promptly as possible in order to ensure
your representation at the meeting. A postage-paid return envelope is enclosed
for that purpose. Even if you have given your proxy, you may still vote in
person if you attend the meeting.
Please note, however, that if your shares are held of record by the trustee
of the voting trust that was formed in March 1998, the voting trustee will vote
your shares. You are still cordially invited to attend the meeting.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement/prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This proxy +
+statement/prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Dear Stockholders:
As you may be aware, Wired Ventures, Inc. has entered into an agreement with
Lycos, Inc. providing for the acquisition of Ventures by Lycos. If the merger
is completed, Ventures will become a wholly-owned subsidiary of Lycos.
In the merger, the Ventures stockholders will receive Lycos common stock or,
under some circumstances, a combination of Lycos common stock and cash, in
exchange for their shares of Ventures capital stock and may receive up to an
additional $9.5 million in cash. The exact number of shares and amount of cash
to be paid by Lycos depends on a number of factors. Assuming that there is no
change in Ventures' outstanding stock from that outstanding as of May 1, 1999,
except for employee stock bonus grants, and that the Ventures' cash balance is
$25 million and paid by Lycos entirely in stock, the following examples, based
on assumed average closing stock prices of Lycos common stock, illustrate the
number of whole shares of Lycos common stock the Ventures stockholders would
receive in exchange for each 1,000 shares of Ventures stock:
<TABLE>
<CAPTION>
Lycos Average Closing Stock Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ventures Capital
Stock $20.64 or Less $42.86 $70.00 $90.00 $110.00
---------------- ---------------- ---------------- ---------------- ----------------
Common 80 Lycos shares 38 Lycos shares 36 Lycos shares 34 Lycos shares 27 Lycos shares
Series A preferred 164 Lycos shares 79 Lycos shares 90 Lycos shares 100 Lycos shares 109 Lycos shares
Series B preferred 968 Lycos shares 466 Lycos shares 405 Lycos shares 349 Lycos shares 286 Lycos shares
Series C preferred 556 Lycos shares 267 Lycos shares 235 Lycos shares 209 Lycos shares 197 Lycos shares
</TABLE>
Ventures has scheduled a special meeting of the Ventures stockholders to vote
on the matters described in this document. The special meeting will be held on
June 21, 1999 at 9:00 a.m., California time, at Cooley Godward llp, One
Maritime Plaza, 20th Floor, San Francisco, California. At the special meeting,
you will be asked to approve the merger agreement and the merger.
The merger cannot be completed unless the merger agreement and the merger are
approved by the holders of a majority of the outstanding Ventures capital
stock, assuming conversion of all Ventures preferred stock, and a majority of
the outstanding Ventures Series C preferred stock. The Ventures board of
directors has approved the merger agreement and the merger and recommends that
you approve the merger agreement and the merger. Your vote is very important.
If you are entitled to vote on the merger, a proxy card is enclosed for your
signature. Whether or not you plan to attend the special meeting, please take
the time to vote by completing and mailing this proxy card to us. If you sign,
date and mail your proxy card without indicating how you want to vote, your
proxy will count as a vote in favor of the merger agreement and the merger. You
may vote at the special meeting if you owned shares as of the close of business
on May 7, 1999 and did not place your shares in the Ventures voting trust that
was implemented in March 1998.
On behalf of the Ventures board of directors, I thank you for your support
and ask you to vote in favor of the merger agreement and the merger.
Sincerely,
Beth Vanderslice
President
The date of this proxy statement/prospectus is May , 1999.
Please read all of this proxy statement/prospectus
carefully, including the matters referred to beginning
on page 7 under the heading "Risk Factors," before
voting.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or
disapproved the Lycos common stock to be issued under
this proxy statement/prospectus or determined if this
proxy statement/prospectus is truthful or complete.
Any representation to the contrary is a criminal
offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY................................................................... 1
The Companies........................................................... 1
Reasons for the Merger; Recommendation to Ventures Stockholders......... 1
The Merger.............................................................. 2
RISK FACTORS.............................................................. 7
Risks Relating to the Merger............................................ 7
Risks Relating to Lycos................................................. 9
Risks Relating to Ventures.............................................. 18
WHERE YOU CAN FIND MORE INFORMATION....................................... 28
FORWARD-LOOKING STATEMENTS................................................ 30
SELECTED HISTORICAL FINANCIAL DATA........................................ 31
SELECTED PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA............ 33
COMPARATIVE PER SHARE DATA................................................ 34
PRICE RANGE OF COMMON STOCK............................................... 35
DIVIDEND POLICIES......................................................... 35
THE SPECIAL MEETING....................................................... 36
Date, Time and Place.................................................... 36
Purpose................................................................. 36
Record Date and Outstanding Shares...................................... 36
Vote Required........................................................... 36
Proxies................................................................. 36
Recommendation of Ventures Board of Directors........................... 36
THE MERGER................................................................ 37
General................................................................. 37
Effective Time of the Merger............................................ 37
Merger Consideration.................................................... 37
Method applicable if the 5-day average closing price of Lycos common
stock is $42.86 or less................................................ 38
Method applicable if the 5-day average closing price of Lycos common
stock is greater than $42.86 and less than or equal to $90.00.......... 39
Method applicable if the 5-day average closing stock price is greater
than $90.00............................................................ 40
Rights of Dissenting Stockholders....................................... 43
Conversion and Exchange of Share Certificates........................... 44
Background of the Merger................................................ 45
Ventures Reasons for the Merger......................................... 47
Lycos Reasons for the Merger............................................ 49
Opinion of Lazard Freres & Co. LLC...................................... 50
Other Interests of Officers and Directors in the Merger................. 55
Accounting Treatment.................................................... 56
Material Federal Income Tax Consequences................................ 56
Regulatory Approvals.................................................... 59
THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION....................... 59
Representations and Warranties.......................................... 59
Covenants............................................................... 60
Indemnification and Escrow.............................................. 60
Conditions to Consummation of the Merger................................ 61
Termination and Amendment............................................... 61
Fees and Expenses....................................................... 61
Directors and Officers.................................................. 61
VOTING AGREEMENTS ........................................................ 62
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF LYCOS AND VENTURES............ 63
Authorized Capital...................................................... 63
Directors and Classes of Directors; Removal of Directors................ 65
Special Meeting of Stockholders......................................... 65
Amendment of By-Laws.................................................... 65
Section 203 of Delaware Law............................................. 65
Antitakeover Provisions................................................. 66
BUSINESS OF LYCOS......................................................... 67
BUSINESS OF VENTURES...................................................... 68
Overview................................................................ 68
Online Properties....................................................... 68
Strategic Alliances..................................................... 69
Advertising and Other Sales............................................. 70
Marketing............................................................... 71
Competition............................................................. 71
Intellectual Property................................................... 71
Employees............................................................... 72
Facilities.............................................................. 72
VENTURES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 73
Overview................................................................ 73
Results of Operations for the Fiscal Years ended December 31, 1996, 1997
and 1998............................................................... 73
Gain on Sale of Print and Television Businesses......................... 75
Results of Operations for the Three Months Ended March 31, 1998 and
1999................................................................... 75
Liquidity and Capital Resources......................................... 76
Year 2000............................................................... 77
Quantitative and Qualitative Disclosures About Market Risk.............. 77
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS............... 78
DESCRIPTION OF LYCOS CAPITAL STOCK........................................ 84
Common Stock............................................................ 84
Preferred Stock......................................................... 84
Certain Certificate of Incorporation, By-Laws and Statutory Provisions
Affecting Stockholders................................................. 84
Transfer Agent and Registrar............................................ 85
SECURITY OWNERSHIP OF VENTURES............................................ 86
LEGAL MATTERS............................................................. 88
EXPERTS................................................................... 88
FINANCIAL STATEMENTS OF VENTURES.......................................... F-1
ANNEXES
Annex A--Agreement and Plan of Merger and Reorganization................ A-1
Annex B--Forms of Voting Agreement...................................... B-1
Annex C--Form of Escrow Agreement....................................... C-1
Annex D--Opinion of Lazard Freres & Co. LLC............................. D-1
Annex E--Section 262 of Delaware General Corporation Law................ E-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights some important information from this proxy
statement/prospectus, but may not contain all of the information that is
important to you. To understand the merger agreement and the merger fully, you
should carefully read this entire proxy statement/prospectus and the documents
attached to, or incorporated by reference in, this proxy statement/prospectus.
See "Where You Can Find More Information" on page 28.
The Companies
Wired Ventures, Inc.
660 Third Street, Fourth Floor
San Francisco, California 94107
(415) 276-8400
Ventures' business is conducted through its wholly-owned subsidiary, Wired
Digital, Inc. Wired Digital maintains a suite of Websites featuring original
content and search and navigation services. These sites include HotBot, Wired
News, HotWired, and Suck.com. Until June 1998, Ventures also published Wired
magazine through a separate, wholly-owned subsidiary. In June 1998, Ventures
sold its magazine, books and television businesses to Advance Magazine
Publishers Inc.
Lycos, Inc.
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(781) 370-2700
Lycos, "Your Personal Internet Guide," is a "New Generation Online Service"
that offers through the Web a network of online services and content including
community, chat, e-mail and online shopping. Lycos seeks to draw a large number
of viewers to its Websites by providing a one-stop destination for identifying,
selecting and accessing resources, services, content and information on the
Web. The Lycos network is dedicated to helping each individual user locate,
retrieve and manage information tailored to his or her personal interests.
Reasons for Merger; Recommendation to Ventures Stockholders
The Ventures board of directors has unanimously determined that the merger
agreement, as amended and restated, and the merger are fair to, and in the best
interests of, Ventures and its stockholders and recommends that you vote in
favor of approval and adoption of the merger agreement and approval of the
merger. See "The Special Meeting--Recommendation of Ventures Board of
Directors" on page 36. In reaching its decision, the Ventures board of
directors considered Ventures' strategy, the historical performance and future
prospects of Ventures and Lycos and other matters. In the months following the
execution of the original merger agreement, the stock prices of Internet
companies increased dramatically over the prices prevailing during the
negotiation of the original merger agreement in the third quarter of 1998. A
number of Ventures stockholders asserted that, in light of the increase in
Lycos' stock price, the allocation of the merger consideration among the
classes and series of Ventures capital stock was unfair. Discussions to resolve
the dispute continued over the next several months, resulting in the allocation
reflected in the merger agreement, as amended and restated as of May , 1999.
1
<PAGE>
The Merger
The merger agreement is attached as Annex A to this proxy
statement/prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger.
What Ventures Stockholders Will Receive
As a result of the merger, Lycos will pay Ventures stockholders a combination
of shares of Lycos common stock and, in some cases, cash in exchange for their
shares of Ventures capital stock.
. Lycos will issue in the merger Lycos common stock valued at $95 million.
In addition, Lycos will pay to the Ventures stockholders Lycos common
stock or, under some circumstances, cash or a combination of Lycos common
stock and cash, with a value equal to the amount of cash on Ventures'
balance sheet at closing, after specified adjustments. This amount is
referred to as the "Ventures cash balance." In each case, Lycos common
stock is valued based on the 20-day average closing stock price.
. In addition, Lycos may be obligated to pay up to approximately $9.5
million of additional cash in connection with the Advance escrow and
potential tax benefits described under the caption "The Merger--Merger
Consideration" beginning on page 37.
Stockholders will receive different amounts per share of Ventures stock held,
depending on the class or series. The dollar value assigned to each share of a
class or series is determined by a complex formula described in detail under
the caption "The Merger--Merger Consideration" beginning on page 37.
The parties will determine the precise total number of shares of Lycos common
stock to be issued for any dollar value by dividing that dollar value by the
"20-day average closing stock price." This price is determined by calculating
the average closing price for Lycos common stock over a period of 20 trading
days ending three trading days prior to the closing of the merger. Under the
merger agreement, however, this price is subject to a collar; that is, for the
purpose of calculating the number of Lycos shares to be issued that have a
value of $95 million, the 20-day average closing stock price may not be higher
than $42.86, which is the upper collar limit, or lower than $20.64, which is
the lower collar limit, even if, in fact, the actual 20-day average closing
price of Lycos common stock does exceed $42.86 or fall below $20.64. In
addition, if the 20-day average closing price is less than or equal to $20.64,
Lycos may pay the Ventures cash balance entirely in stock, entirely in cash or
in any combination of stock and cash. These provisions are designed to set a
minimum on the number of Lycos shares that Ventures stockholders will receive
and a maximum on the number of shares that Lycos will have to issue. In
addition, the allocation of Lycos shares among the Ventures classes and series
will in part depend on the average closing stock price for Lycos common stock
over a period of five trading days ending three trading days prior to the
closing of the merger, the "5-day average closing stock price." It is
anticipated that the closing of the merger will occur not later than three
business days after the special meeting.
We have included below a table designed to illustrate the number of whole
shares of Lycos stock that a holder of Ventures capital stock would receive,
per 1,000 shares, in the merger, given the assumptions listed below. The table
is based on the number of shares, options and warrants outstanding as of May 1,
1999 and the stock grants contemplated to be made before closing. For the
purposes of this table, we have assumed the following:
. That the 5-day average closing stock price and 20-day average closing
stock price, subject to the collar for the purpose of calculating the
number of Lycos shares to be issued, of Lycos common stock are seven
different prices: $15.00, $20.64, $31.75, $42.86, $70.00, $90.00 and
$110.00.
. That the Ventures cash balance is $25 million and is paid entirely in
stock.
. That the closing will occur on June 21, 1999.
2
<PAGE>
We have not included any amounts in the table related to up to $9.5 million
that may become payable for the Advance escrow or the tax refund.
Number of Shares of Lycos Common Stock
<TABLE>
<CAPTION>
Ventures Capital
Stock Lycos 5-day and 20-day Average Closing Stock Price
(per 1,000 ----------------------------------------------------------------------------
shares) $15.00 $20.64 $31.75 $42.86 $70.00 $90.00 $110.00
---------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common.................. 80 shares 80 shares 52 shares 38 shares 36 shares 34 shares 27 shares
Series A................ 164 shares 164 shares 106 shares 79 shares 90 shares 100 shares 109 shares
Series B................ 968 shares 968 shares 629 shares 466 shares 405 shares 349 shares 286 shares
Series C................ 556 shares 556 shares 361 shares 267 shares 235 shares 209 shares 197 shares
</TABLE>
This table is included for illustrative purposes only. The actual average
closing stock prices and the amount of the Ventures cash balance, as well as
many of the other variables, will not be known until just prior to the merger.
In the event of a stock split or similar transaction affecting Lycos common
stock, the merger consideration, allocation of shares, collar limits and
similar provisions will be appropriately adjusted. Differences between the 5-
day and 20-day average closing stock prices may affect the allocation of shares
in the table above.
The price of Lycos' common stock has been subject to extreme fluctuations.
Since October 5, 1998, the monthly high and low closing prices of Lycos' common
stock as reported on the Nasdaq National Market have been:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
October 1998.................................................... $ 42.94 $25.00
November 1998................................................... $ 65.25 $41.50
December 1998................................................... $ 63.75 $50.50
January 1999 ................................................... $137.00 $52.38
February 1999................................................... $137.00 $84.25
March 1999...................................................... $110.00 $83.88
April 1999 ..................................................... $108.81 $73.88
May 1999 (through May 17)....................................... $108.50 $89.00
</TABLE>
On October 2, 1998, the trading day immediately prior to the date of the
signing of the original merger agreement, Lycos common stock closed at $31.75
per share. The closing price for Lycos common stock on May 17, 1999 was
$108.50. You should check current market prices for Lycos common stock.
The market price of many Internet stocks has increased significantly since
October 1998, when the original merger agreement was signed. As is indicated in
the tables above, the collar provisions of the merger agreement set a minimum
and maximum number of shares of Lycos common stock which Lycos must issue in
the merger. However, once you receive your Lycos shares, if the Lycos stock
price is higher than $42.86 then you will receive the benefit of that increase
in value with respect to the shares you receive. We cannot predict what the
Lycos stock price will be when the payment to Ventures stockholders under the
merger agreement is calculated. There have been significant fluctuations in
Lycos' stock price since the date of the original merger agreement, and any
increase in Lycos' stock price since that date and prior to the time that you
receive your Lycos shares should not be viewed as representative of what the
stock price will be when you receive your shares. Furthermore, the changes in
Lycos stock price since the date of the original merger agreement should not be
viewed as directly comparable to the increase or decrease in the price of other
Internet stocks during the same period.
For additional information, see "The Merger--Merger Consideration" beginning
on page 37.
3
<PAGE>
Effect of the Merger on Ventures and its Stockholders
Upon completion of the merger, Ventures will become a subsidiary of Lycos.
Individuals who own stock in Ventures before the merger will own stock in Lycos
after the merger. Former Ventures stockholders will hold between approximately
6.1% and 11.8% of Lycos' common stock after the merger, based on 43,422,592
shares of Lycos common stock outstanding on May 7, 1999. The 6.1% figure
assumes that the 20-day average closing stock price is at the upper collar
limit and that 2,799,813 shares of Lycos common stock are issued in the merger.
The 11.8% figure assumes that the 20-day average closing stock price is at the
lower collar limit and that 5,813,953 shares of Lycos common stock are issued
in the merger. Both percentages assume that the Ventures cash balance is $25
million and paid entirely in stock.
Indemnification by Ventures and Escrow of Shares
At the closing, Lycos will deposit into an escrow fund 10% of the shares
payable to holders of Ventures capital stock as part of the merger
consideration, excluding Lycos shares that may be issued in exchange for the
Ventures cash balance. The purpose of this escrow fund is to compensate Lycos
for losses incurred as a result of false statements, if any, made by Ventures
in the merger agreement, or any failure by Ventures to perform obligations
included in the merger agreement, as well as for post-closing adjustments
related to cash, working capital shortfalls and related matters.
If the 5-day average closing stock price of Lycos common stock is above
$42.86, amounts will be contributed to the escrow fund on a pro rata basis
among the holders of all classes and series of Ventures capital stock,
including options and warrants. If the 5-day average closing stock price is
$42.86 or less, the escrowed shares will be contributed in the following
proportions:
. 10% from holders of Ventures common stock and options to acquire common
stock;
. 70.92% from holders of Ventures Series A preferred stock and warrants to
acquire Series A preferred stock, which is 78.8% of the 90% not
contributed by holders of Ventures common stock; and
. 19.08% from holders of Ventures Series C preferred stock, which is 21.2%
of the 90% not contributed by holders of Ventures common stock.
To the extent that the escrowed shares are not needed to compensate for
losses under the escrow, the shares will be distributed to the former Ventures
stockholders after one year from the closing date, in the proportions
contributed. The complete terms of the escrow arrangement can be found in the
escrow agreement attached to this proxy statement/prospectus as Annex C. See
"The Agreement and Plan of Merger and Reorganization--Indemnification and
Escrow" on page 60.
Opinion of Lazard Freres & Co. LLC
Lazard Freres has delivered to the Ventures board of directors an opinion
dated October 5, 1998, which states that, as of the date of the opinion, the
total amount of cash and stock that Lycos would pay to the Ventures
stockholders in the merger was fair to the holders of Ventures capital stock
considered as a whole, from a financial point of view. The full text of the
opinion of Lazard Freres is attached as Annex D to this proxy
statement/prospectus. See "The Merger--Opinion of Lazard Freres & Co. LLC"
beginning on page 50.
Vote Required
In order to complete the merger, the approval of the merger agreement and the
merger must be obtained from the following persons:
. the holders of a majority of the outstanding Ventures capital stock,
assuming conversion of all outstanding Ventures preferred stock; and
4
<PAGE>
. the holders of a majority of the outstanding Ventures Series C preferred
stock.
Affiliates of Ventures who hold a majority of the Ventures capital stock and
the Ventures Series C preferred stock have agreed to vote all of their Ventures
capital stock in favor of the merger. They have also appointed representatives
of Lycos as proxies to vote their Ventures capital stock in favor of the
merger. Because the vote of these stockholders is sufficient to approve the
merger, the approval of the merger is assured. See "Voting Agreements" on page
62.
Rights of Dissenting Stockholders
Stockholders of Ventures who do not vote in favor of the merger and who
otherwise comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to appraisal rights under Delaware law. These
rights entitle the stockholder to require Ventures to purchase the dissenting
shares for cash at their fair market value, excluding any appreciation or
depreciation as a result of the merger. Fair market value may be more or less
than the value of Lycos stock to be paid to other Ventures stockholders
according to the merger agreement. Lycos is not required to close the merger if
stockholders entitled to more than 5% of the total amount Lycos is paying in
this merger exercise these dissenters' rights. Dissenting Ventures stockholders
must precisely follow specific procedures to exercise this right, or the right
may be lost. These procedures are described in this proxy statement/prospectus,
and the relevant provisions of Delaware law are attached as Annex E. See "The
Merger--Rights of Dissenting Stockholders" beginning on page 43.
Material Federal Income Tax Consequences
The merger will be treated as a tax-free reorganization for federal income
tax purposes. Ventures stockholders will not recognize gain or loss in the
merger, except for taxes on cash received in the merger. The merger agreement
does not require the parties to obtain a ruling from the IRS as to the tax
consequences of the merger. As a condition to the closing of the merger, each
of Lycos and Ventures must receive opinions from its legal counsel that the
merger will be a tax-free reorganization for federal income tax purposes. See
"The Merger--Material Federal Income Tax Consequences" beginning on page 56.
Other Interests of Officers and Directors in the Merger
In considering the Ventures board's recommendation that you vote for the
merger, you should be aware that the executive officers of Ventures and Wired
Digital and the directors of Ventures have interests in the merger that are
different from, or in addition to, their rights as Ventures stockholders. For
information concerning the interests of executive officers and directors as
stockholders, see "Security Ownership of Ventures" starting on page 86.
. Before the merger is closed, the Ventures board will accelerate the
vesting of all outstanding options. Ventures expects that each of these
options, which cover an aggregate of approximately 1.4 million shares of
Ventures common stock, will be exercised prior to the merger. Beth
Vanderslice and Rick Boyce will benefit from this accelerated vesting.
Ms. Vanderslice is the President and a director of Ventures, and is the
President of Wired Digital. Mr. Boyce is an Executive Vice President of
Wired Digital.
. Before the merger is closed, the Ventures board will grant all remaining
shares of Ventures common stock available for grant under the Ventures
equity incentive plan, plus approximately 2.4 million additional shares
of Ventures common stock outside the plan, as stock bonuses to Wired
Digital employees. As of May 1, 1999, the Ventures equity incentive plan
had approximately 3.6 million shares available for grant. Beth
Vanderslice will receive approximately 1,629,495 shares as a stock bonus
and Rick Boyce will receive approximately 1,760,131 shares as a stock
bonus.
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. Beth Vanderslice and Rick Boyce will enter into employment agreements
with Lycos.
. If the merger occurs, Jane Metcalfe and Louis Rossetto, both of whom are
directors of Ventures, will receive all remaining severance benefits of
up to $1 million each under their separation agreements with Ventures,
assuming their compliance with the terms of these agreements, and a lump
sum cash payment of $500,000 each upon cancellation of their options.
. Janelle Mitchell, the Chief Financial Officer of Ventures, will receive a
$100,000 cash bonus upon closing of the merger.
The exercise of options and the receipt of stock bonus grants by officers,
employees and consultants of Wired Digital will result in the issuance of
approximately 7.4 million additional shares of Ventures common stock prior to
the merger and, therefore, significantly decrease the merger proceeds payable
on each share of Ventures common stock. Of this 7.4 million share increase in
the outstanding common stock of Ventures, approximately 6.6 million shares will
result from the acceleration of unvested stock options and the grant of stock
bonuses. The effect of these actions is that the six management employees who
will be entering into employment agreements with Lycos will receive
approximately 71.4% of the merger consideration allocated to the holders of
Ventures common stock, and non-management stockholders will receive the
remaining merger consideration allocated to the holders of Ventures common
stock. For a detailed description of these matters, see "The Merger--Other
Interests of Officers and Directors in the Merger" beginning on page 55.
Conditions to the Merger
The completion of the merger depends upon meeting a number of conditions,
including approval of the merger by the Ventures stockholders and the absence
of any injunction or other binding order preventing the occurrence of the
merger.
See "The Agreement and Plan of Merger and Reorganization--Conditions to
Consummation of the Merger" beginning on page 61.
Termination of the Merger Agreement
Either company may terminate the merger agreement without completing the
merger if, among other things, the merger is not completed on or before July
14, 1999. In addition, the merger agreement can be terminated by the mutual
consent of Ventures and Lycos. See "The Agreement and Plan of Merger and
Reorganization--Termination and Amendment" on page 61.
Accounting Treatment
Lycos intends to treat the merger as a purchase for accounting and financial
reporting purposes, which means that Lycos will treat Ventures as a separate
entity for periods prior to the closing and, thereafter, as a wholly-owned
subsidiary of Lycos. See "Risk Factors--Risks Relating to the Merger--Method of
accounting for the merger may delay profitability of Lycos" on page 7.
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RISK FACTORS
Risks Relating to the Merger
Successful integration of Lycos' and Ventures' operations uncertain.
Ventures and Lycos have entered into the merger agreement with the
expectation that the merger will result in benefits to both companies through
the integration of the companies' operations. If Lycos and Ventures fail to
integrate the two companies quickly and efficiently, the combined company's
business and results of operations could be impaired. The integration of
operations will require, among other things, that we integrate the various
Websites operated by Ventures into the Lycos Network and possibly combine the
companies' technical staffs and sales and marketing operations. The
difficulties of this integration may be increased by the geographical
separation of the two companies and their employees. This integration will
require the dedication of management resources that may temporarily distract
management's attention from the day-to-day business of the combined companies.
We cannot assure you that this integration will be achieved quickly or
efficiently.
Formula for determining purchase price and shares issuable may reduce value of
merger proceeds to Ventures stockholders.
The total purchase price to be paid in the merger is defined in terms of
dollars and the majority of the purchase price is to be paid in shares of Lycos
common stock. The value of the Lycos common stock may be limited as described
below, which would decrease the value of your merger proceeds. For purposes of
determining the total number of shares to be issued in the merger, the Lycos
common stock will be valued based on the average closing price of Lycos common
stock during the 20-day period ending three trading days prior to the merger.
However, if this average price is less than $20.64, the shares will be deemed
to be valued at $20.64 per share, regardless of the actual average price. If
the 20-day average closing stock price is so limited, the number of shares of
Lycos common stock that Ventures stockholders receive in the transaction would
be limited and the value of your merger proceeds would be decreased. For
example, if your portion of the merger proceeds were $100.00 according to the
merger agreement, but the actual Lycos stock price were $10.00, you would
receive the number of shares obtained by dividing $100.00 by $20.64, or 4.845
shares. These shares would be worth only $48.45 on the open market.
Method of accounting for the merger may delay profitability of Lycos.
The merger will be accounted for under the "purchase" method of accounting,
meaning that the purchase price for Ventures must be allocated to the acquired
assets and assumed liabilities of Ventures. The combined company's
profitability is expected to be delayed beyond the time frame in which Lycos or
Ventures, as independent entities, may have otherwise achieved profitability
because of the use of the purchase method of accounting. Any amount allocated
to goodwill, preliminarily estimated at $101.7 million, must be amortized
ratably over five years. Additionally, an in-process research and development
charge, preliminarily estimated to be between $1.0 million and $5.0 million,
will be recorded in the quarter the merger is consummated and will be deducted
from net revenues in determining the profitability of Lycos for that quarter.
Some of the Ventures directors will receive additional benefits as a result of
the merger.
The Ventures board of directors has determined that the merger agreement and
the merger are in the best interests of Ventures and all of its stockholders,
and is recommending that you approve the merger agreement and the merger at the
special meeting. In considering whether to vote in favor of the merger
agreement and the merger, you should consider that some of these directors have
separate interests in the merger that may differ from those of Ventures
stockholders as a group. First, Beth Vanderslice will receive approximately
1,629,495 shares of Ventures common stock in connection with the merger as a
stock bonus. Second, as a result of the merger, Jane Metcalfe and Louis
Rossetto will be entitled to acceleration of severance payments due from
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Ventures. In addition, Ventures stock options held by Ms. Metcalfe and Mr.
Rossetto will be exchanged for cash payments as a result of the merger. See
"The Merger--Merger Consideration--Treatment of Options" on page 42 and "The
Merger--Other Interests of Officers and Directors in the Merger" on page 55.
A majority of the Ventures directors who approved the merger may have
interests as representatives of the Ventures Series C preferred stock that
differ from the interests of Ventures stockholders as a whole.
A majority of the Ventures directors may be subject to potential conflicts of
interest as a result of their appointment to the Board as representatives of
the Series C preferred stockholders. Providence Equity Partners L.P. and
Providence Equity Partners II L.P. together have the right to appoint four of
Ventures' directors. Raptor Global Fund, L.P., Raptor Global Fund, Ltd., Tudor
Arbitrage Partners L.P. and Tudor BVI Futures, Ltd. together have the right to
appoint two of Ventures' directors. As a result, a majority of the Ventures
directors, including six of the nine directors who voted to approve the merger,
are principals of Providence Equity Partners and Tudor Investments, who own all
of the outstanding Ventures Series C preferred stock. The remaining directors
own Ventures Series A preferred stock or options to purchase Ventures common
stock. See "Security Ownership of Ventures" on page 86.
These directors may have been subject to potential conflicts of interest in
voting to approve the merger where their interests as stockholders or otherwise
may differ from the interests of Ventures stockholders as a whole. These
potential conflicts of interest may include conflicts regarding approval of the
proposed merger with Lycos, on the one hand, and a decision to remain
independent or to pursue a different corporate transaction on the other hand.
Similarly, there may have been potential conflicts regarding the amount and
allocation of the stock and cash to be received in the merger, as well as other
terms of the merger. Ventures believes, however, that its directors are guided
by their fiduciary obligations to Ventures' stockholders under Delaware law.
In addition, Lazard Freres has acted as investment banker to Ventures in
connection with the merger and rendered an opinion to the Ventures Board of
Directors which states that, as of the date of the opinion, the total
combination of stock and cash that Lycos would pay to the Ventures stockholders
in the merger was fair, when considered together, to the holders of Ventures
capital stock considered as a whole from a financial point of view.
Stockholders should be aware that two managing directors of Lazard Freres are
limited partners of funds controlled by Providence Equity Partners L.L.C., the
general partner of some significant stockholders of Ventures.
Issuance of additional shares of Lycos common stock in the merger may reduce
Lycos' stock price.
In connection with the merger, we estimate that between 2.7 million and 5.8
million newly-issued shares of Lycos common stock will be issued to current
Ventures stockholders. The issuance of Lycos common stock in the merger will
reduce Lycos' earnings per share, if any, or increase Lycos' loss per share.
This dilution could reduce the market price of Lycos common stock unless and
until the combined company achieves revenue growth or cost savings and other
business economies sufficient to offset the effect of this issuance. We cannot
guarantee you that we will achieve revenue growth, cost savings or other
business economies or that you will achieve greater returns as a Lycos
stockholder than as a Ventures stockholder. In addition, the immediate
availability of this substantial number of additional shares of Lycos common
stock for sale in the market could decrease the per share market price of Lycos
common stock.
If Ventures stockholders do not approve payments to Louis Rossetto, Jane
Metcalfe, Beth Vanderslice, Rick Boyce and other employees, the merger proceeds
to Ventures stockholders will be reduced.
If, prior to the merger, the Ventures stockholders do not approve the
payments to Louis Rossetto and Jane Metcalfe described on page 55 and to Beth
Vanderslice, Rick Boyce and other employees including those mentioned above
described on pages 42 and 55, some of the payments to these individuals may
constitute
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"excess parachute payments" under Section 280G of the Internal Revenue Code.
This would result, under the merger agreement, in a reduction of the merger
proceeds payable to the Ventures stockholders. The amount of the reduction
would be equal to the after-tax cost to Lycos and the payment recipients
resulting from failure to obtain stockholder approval. Ventures intends to try
to avoid this reduction by allowing recipients to subject their payments to
stockholder approval and circulating a stockholder disclosure and consent
seeking the requisite stockholder approval for any potential parachute payments
prior to closing. Ventures' ability to satisfy the stockholder vote exemption
depends upon (1) the recipients' agreeing to have their payments voted upon and
(2) the requisite number of Ventures stockholders approving the payments.
Ventures cannot assure you that it will be successful in satisfying the
requirements of the stockholder approval exemption.
Risks Relating to Lycos
Lycos has a limited operating history for Ventures stockholders to use in
evaluating Lycos.
Lycos was founded in June 1995. Accordingly, Lycos has a limited operating
history for you to use in evaluating Lycos and its prospects. You should
consider the risks, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies
operating in new and rapidly evolving markets. Lycos may not successfully
address these risks.
Lycos generated revenues of $22.3 million for the fiscal year ended July 31,
1997 and revenues of $56.1 million for the fiscal year ended July 31, 1998. Due
to Lycos' limited operating history, you should not take Lycos' recent revenue
growth as indicative of the rate of growth, if any, that you can expect in the
future.
As a strategic response to a changing competitive environment, Lycos may
choose to make pricing, service or marketing decisions or acquisitions that
could adversely impact its operations, and, therefore, its profitability. Due
to the nascent nature of the Internet industry, Lycos believes that period-to-
period comparisons of its operating results are not meaningful and that you
should not rely upon them as an indication of Lycos' future performance.
Lycos has a history of significant losses.
Lycos has incurred significant losses since its inception and may incur
losses in the future. As of July 31, 1998, Lycos had an accumulated deficit of
$108.7 million. Although Lycos was profitable in the six months ended January
31, 1998, Lycos reported a loss of $3.13 per share for the year ended July 31,
1998, representing a $0.12 loss per share before amortization and one-time
acquisition related charges. Lycos may not sustain revenue growth or return to
profitability in the future. Lycos currently expects that its operating
expenses will continue to increase significantly as Lycos' sales and marketing
operations are expanded and as Lycos funds further product development and
acquires complementary products and technologies. Lycos' potential inability to
keep short-term expense levels in line with revenues could adversely affect its
financial results for any given quarter. It is possible that in some future
quarter, Lycos' operating results may be below the expectations of analysts and
investors. This could reduce the price of Lycos' common stock.
Lycos' operating results can be affected by seasonality.
Lycos has experienced, and expects to continue to experience, seasonality in
its business. Historically, users have made a smaller number of visits to
Lycos' Websites and the Websites of its partners during the summer and the
year-end vacation and holiday periods, when usage of the Web and Lycos'
services typically declines.
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Lycos' stock price is volatile and is affected by factors relating to Lycos,
to the Internet industry and to the stock market.
The price of Lycos' common stock has been and may continue to be subject to
wide fluctuations in response to a number of events and factors. These events
and factors include but are not limited to:
. quarterly variations in results of operations;
. announcements of new technological innovations or new products, services
or Websites by Lycos or its competitors;
. changes in financial estimates and recommendations by securities
analysts;
. the operating and stock price performance of other companies that
investors may deem comparable to Lycos; and
. news relating to trends in Lycos' markets.
Also, the stock market in general, and the market prices for Internet-related
companies in particular, have experienced extreme volatility that often has
been unrelated to the operating performance of the companies. These broad
market and industry fluctuations may adversely affect the price of Lycos'
common stock, regardless of Lycos' operating performance. Additionally,
fluctuations in the market price of Lycos' common stock could result in
stockholder lawsuits, which potentially could impair Lycos' business.
Lycos may not be able to maintain advertising revenues if the Internet is not
adopted as an advertising medium.
Lycos earns a significant portion of its revenues by selling advertisements
on its Web pages. For the fiscal year ended July 31, 1998, advertising revenues
represented approximately 75% of Lycos' total revenues. Lycos will not be able
to sustain or increase its advertising revenues if the Internet does not
develop as an attractive and sustainable advertising medium. For example, users
may purchase "filter" software programs that limit or remove advertising from
the Web user's desktop. The widespread adoption of this software by users could
negatively impact the use of advertising on the Web. It is also difficult to
predict which method of pricing will be adopted by the industry or advertisers.
For example, Lycos' advertising revenues could decrease if advertising rates
are based on the number of users who access the advertiser's Website from a
Lycos network Website or seek additional information about a product or service
by "clicking" on the advertisement, rather than rates being based solely on the
number of times an advertisement is displayed. Lycos' strategy is to continue
to develop advertising and other methods of generating revenues through the use
of its products and services. In order to maintain and increase advertising
revenues, Lycos must develop a large base of users of Lycos' products and
services possessing demographic characteristics attractive to advertisers.
Additionally, Lycos may be required to expand its advertising sales force.
Lycos may not be able to deliver or measure the delivery of advertisements
reliably.
The process of reliably delivering and tracking advertising placements within
large Websites like Lycos' is an increasingly important and complex task, and
currently available software programs and other tracking methods are rapidly
evolving. Lycos licenses an advertising management system from a third party.
To the extent that Lycos encounters system failures or material difficulties in
the operation of this system, or the software fails to keep pace with Lycos'
informational needs, Lycos could be unable to deliver and track advertising
placements reliably on its network of Websites. Any extended failure of, or
other material difficulties with, Lycos' advertising management system may
require Lycos to provide free advertising to its customers. In addition,
advertising clients may not advertise on Lycos' Websites or may pay less for
advertising if they do not perceive Lycos' measurements to be accurate or
reliable.
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Lycos competes with a variety of competitors both to attract Internet users
to visit its Websites and to attract advertisers and sponsors to place
content on its Websites.
The market for Internet products and services, including those which Lycos
offers to Internet users, is highly competitive. Lycos competes with other
providers both to attract Internet users and to attract advertisers and
sponsors. A number of companies offer competitive products in Lycos' target
markets. For example, Lycos competes with search program services that allow a
user to search the databases maintained by Lycos and its competitors
simultaneously. Lycos also competes indirectly with database vendors that offer
information search and retrieval capabilities with their core database
products. Lycos' community-based Websites Tripod and Angelfire.com compete with
other community-based Websites, including GeoCities, Inc.
Additional competition may come from a variety of companies that have
announced their intention to offer services similar to those currently offered
by Lycos. For example, many large media companies have announced that they are
contemplating developing Internet navigation services and are attempting to
become "gateway" or "portal" sites through which users may enter the Web,
similar to the sites maintained by Lycos and its competitors. If these
companies develop these "portal" sites, Lycos could lose a substantial portion
of its users. These competitors could take actions that make it more difficult
for viewers to find and use Lycos' products and services. Additionally,
companies may acquire competitors of Lycos, including the recently announced
acquisition of Netscape by America Online, or may enter into joint ventures
and/or licensing arrangements involving competitors of Lycos.
A number of companies offering Internet products and services, including
direct competitors of Lycos, recently have begun to integrate multiple features
within their products and services, including search and retrieval features.
For example, the Web browsers offered by Netscape and Microsoft, which are the
two most widely-used browsers and substantial sources of users for Lycos, may
incorporate and promote information search and retrieval capabilities in future
releases or upgrades. This integration of search and retrieval capabilities
could make it more difficult for Internet viewers to find and to use Lycos'
products and services.
Lycos also competes with traditional off-line media, including print and
television, for a share of advertising budgets.
If Lycos' competitors are more successful than Lycos in attracting users,
then Lycos' attractiveness to advertiser will be diminished. Lycos believes
that the principal competitive factors in attracting users include, but are not
limited to:
.name recognition;
.distribution arrangements;
.performance;
.ease of use;
.a variety of value-added services;
.the ability to continually improve and upgrade products and services; and
.quality of support.
Lycos receives a majority of its revenue from selling advertising space on
its Websites and allowing third parties to provide sponsored services and
placements on Lycos' Websites under sponsorship agreements with Lycos. There is
fluid and intense competition based on price in the sale of advertising on the
Internet which makes it difficult to project future advertising revenues.
Lycos may not be able to compete successfully against its current or future
competitors. Although Lycos believes that the Internet market will provide
opportunities for more than one supplier of products and services similar to
those of Lycos, it is possible that a single supplier may dominate one or more
market segments.
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Lycos may incur costs in connection with its arrangements with advertisers
and sponsors.
Lycos sells advertising space on its Websites and allows third parties to
provide sponsored services and placements on Lycos' Websites under agreements
with advertisers and sponsors which expose it to potentially significant
financial risks. In connection with these arrangements, Lycos provides and
sometimes guarantees a minimum number of times that an advertisement is
displayed or a minimum number of user requests for additional information made
by clicking on the advertisement or promotional hyperlink. Lycos may receive
sponsorship fees as well as a portion of transaction revenues received by these
third-party sponsors from users originated through Lycos' Websites. These
sponsorship arrangements expose Lycos to potentially significant financial
risks, including the risk that Lycos may fail to deliver the required number of
advertisement displays or user requests for additional information. If Lycos
fails to deliver these minimums, typically either the parties decrease the fees
payable to Lycos or Lycos provides the sponsorship services to the sponsor for
free for a limited "make good" period. Lycos' contracts with advertisers and
sponsors typically have short terms and are terminable on relatively short
notice. Third-party sponsors may not renew the sponsorship agreements at the
end of their terms. Some of these arrangements also require Lycos to integrate
sponsors' content with Lycos' services. Lycos must dedicate resources and
significant programming and design efforts to accomplish this integration.
Lycos may not be able to attract additional sponsors or renew existing
sponsorship agreements when they expire. In addition, Lycos has granted
exclusivity provisions to some of its sponsors, and may in the future grant
additional exclusivity provisions. These exclusivity provisions may prevent
Lycos, for the duration of these exclusivity agreements, from accepting
advertising or sponsorship agreements within a particular subject matter in
Lycos' Websites or across Lycos' entire service.
Lycos is heavily dependent on third-party relationships for distribution and
content.
Distribution
Lycos depends on a number of third-party relationships, including those
described below, to attract users to its Websites and consequently to generate
revenues. Lycos requires these third-parties to provide users with access to
Lycos' products and services. If Lycos is unable to attract users to Lycos'
Websites, advertising revenues would be impaired, advertisers and sponsors may
terminate agreements with Lycos, advertisers may not be willing to pay as much
as they currently pay to appear on the Lycos Network and Lycos may be required
to supply its services under agreements with advertisers for free.
Browser services like Netscape and Microsoft. Lycos depends on arrangements
relating to the positioning of Lycos' products and services on Web
browsers, including those offered by Netscape and Microsoft. If a Web
browser grants an exclusive arrangement for positioning on its Web browser
to a competitor of Lycos, then Lycos' business may be impaired.
Although each of the Microsoft agreement and the Netscape agreement may
be terminated only under particular limited circumstances, if Lycos is
unable to continue as a premier provider for either Microsoft or Netscape,
Lycos' Websites could lose a material portion of their users, the level of
use on competing services could substantially increase, and Lycos' Websites
could otherwise become less attractive to advertisers, resulting in harm to
Lycos' revenues.
Netscape has entered into a two-year agreement with Excite, Inc. Netscape
has committed 50% of its search exposures during the first year of the
agreement to Excite's search services and Netscape's own branded search
service. Netscape's branded search service will be powered by Excite.
Netscape has committed 75% of its search exposures during the second year
of the agreement to Netscape's branded search service and Excite's search
services. This agreement will limit the number of Netscape search exposures
available to other providers of search services, including Lycos, in the
future.
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Other Third-Party Distribution Relationships. Lycos depends on Website
operators that provide links to Lycos' Websites or otherwise use its
services to attract users to Lycos' Websites. Additionally, Lycos has
entered into distribution agreements with computer manufacturers and
internet service providers (ISPs). Lycos believes that some of its third-
party relationships are important to its ability to attract users and
advertisers. Any errors, failures or delays experienced in connection with
these third-party technologies and information services could alienate
Lycos' users and adversely affect Lycos' brand and its business. Although
Lycos views these relationships as important, most of Lycos' arrangements
do not include minimum commitments to use Lycos' services or to provide
access or links to Lycos' products or services in the future, are not
exclusive and generally have a term of only one to three years. In
addition, Lycos' partners may not regard their relationship with Lycos as
important to their own respective businesses and operations. These partners
may reassess their commitment to Lycos' products or services at any time in
the future, or may develop their own competitive products or services.
Lycos' existing relationships may not result in sustained business
partnerships, successful product or service offerings or the generation of
significant revenues for Lycos. The failure of one or more of Lycos'
partnering relationships to achieve or maintain market acceptance or
commercial success, or the termination of one or more successful partnering
relationships, could have a material adverse effect on Lycos' business.
Content
Lycos relies on content development by third parties. Lycos licenses various
technologies, databases and services, including chat, street mapping, stock
quotes and similar services, from third parties in connection with the
operation of its Websites. Lycos believes that this third party content is an
important element in attracting users to Lycos' Websites. Failure of these
third party content providers to develop and maintain high quality products and
services could impair Lycos' ability to attract users and advertisers.
Lycos depends on the development of an infrastructure for providing Internet
access and services. The Internet may not develop the necessary
infrastructure and the current infrastructure may not support a significant
increase in the number of users and level of use.
The use of Lycos' products and services depends in large part upon the
development by others of an infrastructure for providing Internet access and
services. Because global commerce and online exchange of information on the
Internet and other similar open wide-area networks are new and evolving, it is
difficult to predict whether the Internet will develop the necessary
infrastructure, including a reliable public telecommunications network and
acceptable security technologies, or timely develop and commercialize
performance improvements, including high speed modems.
In addition, the Internet infrastructure may not continue to be able to
support the demands placed upon it by significant growth in the number of users
and the level of use. The performance or reliability of the Web may be reduced
by this continued growth. In addition, the Internet could lose its commercial
viability due to delays in the development or adoption of new standards and
protocols including the next generation Internet Protocol to handle increased
levels of Internet activity. Lycos cannot assure you that the infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace will be developed. If the necessary infrastructure or complementary
services or facilities are not developed, Lycos may not be profitable.
Internet security concerns could hinder commercial transactions conducted
over the Internet.
The need to securely transmit confidential information over the Internet has
been a significant barrier to commercial transactions conducted over the
Internet and communications over the Web. Any well-publicized compromise of
security could deter more people from using the Web or from using it to conduct
transactions that involve transmitting confidential information, like stock
trades or purchases of goods or services. Because
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many of Lycos' advertisers seek to advertise on Lycos' Websites to encourage
people to use the Web to purchase goods or services, Lycos' business could be
adversely affected by security violations of its or its commerce partners'
Websites. Lycos may also incur significant costs to protect against the threat
of security violations or to alleviate problems caused by these violations.
Lycos is subject to concerns regarding privacy of personal information about
users of its Websites and services.
Lycos maintains a privacy policy which is displayed on each of its Websites.
Lycos policy is not to disclose willfully any individually identifiable
information about any user of its products or services to a third party without
the user's consent. This policy and user choices regarding the dissemination of
personal information collected on Lycos' Websites, which may include personal
identification information, demographic profile data, user preferences and
Website behavioral data, are accessible to users of Lycos personalized services
when they initially register. Despite this policy, however, if third persons
were able to penetrate Lycos' network security or otherwise misappropriate
users' personal information, Lycos could be subject to liability claims. These
could include claims for unauthorized purchases, impersonation or other similar
fraud claims, as well as claims for other misuses of personal information, for
example for unauthorized marketing purposes. These claims could result in
litigation. In addition, the Federal Trade Commission and several states have
been investigating some Internet companies regarding their use of personal
information. Lycos could incur additional expenses if new regulations regarding
the use of personal information are introduced or if they chose to investigate
Lycos' privacy practices.
Lycos' systems may fail to function or may not have adequate capacity which
would impair Lycos' ability to attract advertisers and users.
A key element of Lycos' strategy is to attract a high volume of users to its
products and services. Accordingly, the performance of Lycos' products and
services and of third-party service providers including Web browsers and
Internet and online service providers is critical to (a) Lycos' reputation, (b)
its ability to attract advertisers to Lycos' Websites and (c) the market
acceptance of these products and services. Any system failure that causes
interruptions in the availability, or increases response time, of Lycos'
products and services could result in fewer users of Lycos' Websites. If these
interruptions or increases in response time are sustained or repeated, they
could reduce the attractiveness of Lycos' products and services to advertisers
and partners. An increase in the volume of searches conducted through Lycos'
products and services could strain the capacity of the software or hardware
used by Lycos or the capacity of Lycos' network infrastructure. This strain
could lead to slower response time or system failures. Any failure to expand
the capacity of Lycos' hardware or network infrastructure on a timely basis or
on commercially reasonable terms could diminish Lycos' business. In addition,
as the number of Web pages and users increases, Lycos' products and services
may not be able to increase proportionately.
Lycos is also dependent on hardware suppliers for prompt delivery,
installation and service of servers and other equipment and services used to
provide its products and services. Substantially all of Lycos' hardware
operations are located at its computer facility in Pittsburgh, Pennsylvania and
in the Santa Clara, California and Waltham, Massachusetts sites of Exodus
Communications. Lycos also outsources a portion of its hardware operations to
third parties. A system failure at any of these locations may harm the
performance of Lycos' products and services. This system is vulnerable to
damage from fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events. Despite the implementation of network security
measures by Lycos, its servers are also vulnerable to computer viruses, break-
ins and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays or halts
in service to users of Lycos' products and services. The occurrence of any of
these risks could harm Lycos' business.
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Lycos must be able to adapt to technological change and to develop new
products to remain competitive.
The market for Internet products and services is characterized by rapidly
changing technology, evolving industry standards and customer demands, and
frequent new product introductions and enhancements. These market
characteristics are exacerbated by the emerging nature of this market and by
the fact that many companies are expected to introduce new competitive Internet
products in the near future. To be successful, Lycos must continually improve
the performance, features and reliability of the Lycos search and navigation
services. In addition, a key element of Lycos' business strategy is the
development, introduction and integration of new products that capitalize on
the increasing use of the Internet. Lycos cannot assure you that it will be
successful in developing or integrating these products or services or that
these products and services will meet with market acceptance. In addition, new
product releases by Lycos may contain undetected errors that require
significant design modifications, resulting in a loss of customer confidence in
Lycos' products and services and, consequently, viewer support, which will
diminish the use of Lycos' products and services.
The acquisitions and investments that Lycos has made and may make in the
future may not be successful and may create unanticipated problems for Lycos.
Lycos has completed acquisitions of companies, technologies or assets that
complement Lycos' business. Lycos may not be able to identify additional
suitable acquisition candidates available for sale at reasonable prices or to
complete any desired acquisitions. In addition, Lycos may not be able to
successfully integrate any or all of the businesses it acquires, including
Tripod, WiseWire, GuestWorld and WhoWhere?, into Lycos' operations. In order to
pay for future acquisitions, Lycos may have to:
. issue equity securities, which would decrease the ownership interest of
all Lycos stockholders;
. incur additional debt;
. write-off in-process research and development or software acquisition and
development costs; and/or
. amortize goodwill and other intangible assets.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, services, products and personnel of the
acquired company. Lycos' systems, procedures or controls may not be able to
support Lycos' operations. Acquisitions also divert management's attention from
other business concerns. Lycos also encounters risks by entering markets in
which it has little or no experience. Problems with an acquired business could
impair the performance of Lycos. Lycos has made investments in companies
involved in the development of technologies or services that are complementary
or related to Lycos' operations. Lycos may make investments of this type in the
future. Lycos invested in companies that are in an early stage of development
and may be expected to incur substantial losses. Lycos cannot assure you that
any investments in these companies will result in any return, nor can there be
any assurance as to the timing of any return.
Lycos plans to expand its business into international markets. This expansion
may not be profitable and may impose costs on Lycos.
International sales, primarily from licensing Lycos' products and services,
accounted for less than 10% of Lycos' revenues for the fiscal year ended July
31, 1998. As part of its business strategy, Lycos plans to expand its products
and services into international markets. In marketing its products and services
internationally, however, Lycos will face new competitors. In addition,
international markets will require Lycos to create customized versions of its
products and services for those markets. Lycos cannot assure you that it will
be successful in creating customized versions of its products and services for
those markets or marketing or distributing its products abroad. Even if Lycos
is successful, its international revenues may not offset the expense of
establishing and maintaining international operations. To date, Lycos has
limited experience in marketing and distributing its products internationally.
Additional difficulties and risks inherent in doing business on an
international level include but are not limited to:
. export controls relating to technology, tariffs and other trade barriers;
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. protection of intellectual property rights;
. political instability; and
. fluctuations in currency exchange rates.
Lycos is dependent on intellectual property and Lycos' methods of protecting
its intellectual property rights may not be adequate.
Lycos' success depends significantly upon its owned technology. If Lycos is
unable to use its technology and to keep others from using it, then Lycos may
not be profitable. Lycos currently relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its intellectual property rights. Lycos has registered
and applied for registration of some key service marks and trademarks, and will
continue to evaluate the registration of additional service marks and
trademarks, as appropriate. In addition, Carnegie Mellon University has
licensed a patent issued in the United States relating to Lycos' search and
indexing technology to Lycos on a perpetual basis. Other parties may challenge
this patent. If any challenges are brought, the patent may be invalidated.
Also, Lycos cannot assure you that it will develop products or technologies
that are patentable, that any issued patent will provide Lycos with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have a material adverse effect on Lycos' ability to
do business. Despite Lycos' efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy aspects of Lycos' products or
services or to obtain and use information that Lycos regards as property. The
laws of some foreign countries do not protect intellectual property rights to
as great an extent as do the laws of the United States. Lycos does not
currently have any patents or patent applications pending in any foreign
country. Lycos' means of protecting its intellectual property rights may not be
adequate. Additionally, Lycos' competitors may independently develop similar
technology, duplicate Lycos' products or design around intellectual property
rights of Lycos.
Lycos may become involved in intellectual property litigation. This litigaton
could be expensive and could impair Lycos' ability to conduct its business.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property rights. Lycos may become involved in claims and
counterclaims with third parties regarding infringement with respect to current
or future products or trademarks or other intellectual property rights. Any
claims or counterclaims of this kind could impair Lycos' business because they
could:
. be time-consuming;
. result in costly litigation;
. divert management's attention;
. cause product release delays; or
. require Lycos to redesign its products or require Lycos to enter into
royalty or licensing agreements that may not be available on terms
acceptable to Lycos, or at all.
Lycos could be subject to new government regulations, and legal uncertainties
could be resolved in a way that impairs Lycos' business.
Lycos is not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally. There are currently
few laws or regulations directly applicable to access to, or commerce on, the
Web. However, due to the increasing popularity and use of the Web, it is
possible that a number of laws and regulations may be adopted with respect to
issues including user privacy, pricing and characteristics and quality of
products and services that may decrease the growth of the Web. This decrease
could in turn decrease the demand for Lycos' services and products or increase
Lycos' cost of doing business.
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States or foreign countries may claim that Lycos' business is subject to
their laws, including tax laws. They could take action to enforce these laws
against Lycos.
Due to the global nature of the Web, it is possible that, although
transmission of Lycos' services originates from its operations centers in New
Jersey, Pennsylvania, California and Massachusetts, the governments of other
states and foreign countries might attempt to regulate Lycos' transmissions or
to prosecute Lycos for violations of their laws. Violations of local laws may
be alleged or charged by state or foreign governments. Lycos might
unintentionally violate these laws and these laws may be modified, or new laws
enacted, in the future. It is also possible that states or foreign countries
may seek to impose sales taxes on out of state companies that engage in
commerce over the Internet. In the event that states or foreign countries
succeed in imposing sales or other taxes on Internet commerce, the growth of
the use of the Internet for commerce could slow substantially.
Lycos may be liable for information retrieved from the Internet, including
obscene information, because Lycos provides access to this information.
Because material may be downloaded by the online or Internet services
operated or facilitated by Lycos or the Internet access providers with which
Lycos has relationships, and be subsequently distributed to others, it is
possible that claims will be made against Lycos on the basis of defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of these materials. These claims could be based on Lycos'
providing access to obscene, lascivious or indecent information. Although Lycos
carries general liability insurance, Lycos' insurance may not cover potential
claims of this type, or may not be adequate to indemnify Lycos for all types of
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could impair Lycos'
business.
Lycos' system may experience difficulties related to Year 2000 computer
problems.
The codes of many currently installed computer systems and software products
accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. Many companies' software and
computer systems, including those of Lycos and the companies Lycos depends on,
may need to be upgraded or replaced so that they will be able to distinguish
21st century dates from 20th century dates in order to comply with these year
2000 requirements and therefore be year 2000 compliant.
Lycos' state of Year 2000 readiness. Lycos is currently evaluating the
year 2000 readiness of the hardware and software products it sells, the
information technology systems it uses and its non-information technology
systems, like building security, voice mail and other systems. Lycos
currently anticipates that this evaluation will include the following
phases:
. identification of all hardware and software products it sells and
information technology systems and non-information technology systems
it uses;
. assessment of repair or replacement requirements;
. repair or replacement;
. testing;
. implementation; and
. creation of contingency plans in the event of year 2000 failures.
Lycos has completed its assessment of all current versions of the
hardware and software products it sells and believes that they are year
2000 compliant. However, whether a complete system or device that uses
hardware or software sold by Lycos will process 21st century dates depends
on other components that are supplied by parties other than Lycos. The
supplier of Lycos' current financial and accounting software
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has informed Lycos that this software is year 2000 compliant. Further,
Lycos relies, both domestically and internationally, upon various service
providers that are outside of its control including:
. various vendors;
. governmental agencies;
. utility companies;
. telecommunications service companies;
. delivery service companies; and
. other service providers.
These third parties may suffer a year 2000 business disruption caused by
inability of various systems to process 21st century dates that could
hinder Lycos' ability to conduct its business.
During the first half of 1999, Lycos intends to:
. conduct an internal review of the year 2000 compliance of all prior
versions of the hardware and software it sells; and
. circulate a questionnaire to vendors and customers with whom it has
material relationships to obtain information about their year 2000
compliance.
Lycos will not be able to evaluate whether any remediation efforts will
be required, except as described above, until it receives this information.
To the extent that Lycos' fails to identify and remedy any non-compliant
internal or external Year 2000 problems, or the Year 2000 phenomenon
creates a systemic failure beyond Lycos' control, like a prolonged
telecommunications or electrical failure or a prolonged failure of third-
party software on which Lycos relies, Lycos could be prevented from
operating its business and permitting users access to its Websites.
Costs of Year 2000 compliance to Lycos. To date, Lycos has not incurred
any material expenditures in connection with identifying or evaluating year
2000 compliance issues. Most of its expenses thus far relate to the
opportunity cost of time spent by Lycos employees evaluating this software,
the current versions of the hardware and software sold by Lycos and year
2000 compliance matters generally. At this time, Lycos can not estimate the
potential impact of year 2000 issues relating to its business. This impact,
including the effect of a year 2000 business disruption, could impair
Lycos' financial condition.
Status of Lycos' contingency plan. Lycos has not yet developed a year
2000-specific contingency plan. If Lycos discovers year 2000 compliance
issues, then it will evaluate the need for contingency plans relating to
these issues.
Risks Relating to Ventures
Ventures has a limited operating history for stockholders to use in
evaluating whether to approve the merger.
Ventures' online business was founded in early 1994 and did not commence
generating revenues until October 1994. Accordingly, Ventures has a limited
operating history for you to use in evaluating Ventures' online business and
its prospects. Ventures' online business generated revenues of approximately
$4.3 million in 1996, $12.4 million in 1997, and $23.5 million in 1998. Due to
Ventures' limited operating history, you should not take Ventures' recent
revenue growth as indicative of the rate of growth, if any, that can be
expected in the future. You should consider the risks, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies operating in new and rapidly evolving
markets like the Internet. Ventures cannot assure you that its business
strategy will be successful or that it will
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successfully address these risks. As they apply to Ventures, these risks,
expenses and difficulties include but are not limited to the risks described
below and elsewhere in this "Risk Factors" section:
. the ability to continue to develop or acquire desirable content, and to
improve and upgrade Ventures' Websites and strengthen user loyalty;
. the reduction in market prices for Web-based advertising as a result of
competition or otherwise; and
. the ability to attract, retain and motivate qualified personnel.
Ventures has a history of significant losses.
Ventures' online business has incurred significant losses since its
inception. As of December 31, 1998, Ventures' online business had an
accumulated deficit of approximately $17.2 million. Ventures expects to
continue to incur significant operating and capital expenditures and, as a
result, will need to generate significant revenues to achieve and maintain
profitability. Although Ventures' online revenues have grown in recent
quarters, Ventures cannot assure you that it will achieve sufficient revenues
for profitability. Even if Ventures does achieve profitability, it cannot
assure you that it can sustain or increase profitability on a quarterly or
annual basis in the future. If revenues grow more slowly than Ventures
anticipates, or if operating expenses exceed Ventures' expectations or cannot
be adjusted accordingly, its business, results of operations and financial
condition will be materially and adversely affected.
Ventures has a limited ability to reduce short-term expenses.
As a result of Ventures' limited operating history, Ventures does not have
historical financial data for any significant period of time to use in planning
operating expenses. Ventures bases its expense levels in part on its
expectations as to future revenues and in part on fixed expenses. Because
Ventures' expense levels are based in part upon anticipated levels of use of
its Websites and advertising revenues, which are difficult to forecast,
Ventures may not be able to quickly reduce its spending to compensate for any
unexpected shortfall in advertising inventory or revenues. Accordingly, if
Ventures has lower levels of use of its Websites or advertising revenues than
expected for any given fiscal quarter, this shortfall would affect that
quarter's financial results.
In addition, in the future, leading Websites, browser providers and other
potential marketing and distribution channels for Ventures' products and
services may require Ventures to pay for providing access to Ventures' products
and services, similar to its referral arrangements with Yahoo!, Microsoft,
Earthlink and other high-user Web portal and Internet access providers today.
To the extent that these expenses precede or are not subsequently followed by
increased revenues, these expenses could impair Ventures' profitability.
Ventures' business is seasonal and can suffer from significant fluctuations
caused by factors which may be beyond Ventures' control.
Ventures' operating results can be affected by a variety of factors, some of
which are outside of Ventures' control. These factors include but are not
limited to:
. the level of Web and online services usage;
. the level of use of Ventures' Websites, including Ventures' ability to
both attract and retain users;
. the demand for online advertising and commerce transacted over the
Internet on Ventures' Websites as well as on the Web in general;
. changes in rates paid for Web advertising resulting from competition or
other factors;
. the timing and uncertainty of advertising sales cycles, as well as the
advertising budgeting cycles of individual advertising clients;
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. the addition or loss of advertisers on Ventures' Websites, including
electronic commerce partners;
. capital expenditures and other costs relating to the maintenance and
expansion of Ventures' operations;
. the introduction of new products or services by Ventures or its
competitors;
. technical difficulties or system downtime affecting the Web generally or
the operation of Ventures' Websites, including operation of the services
provided by its key search technology partner, Inktomi Corporation;
. the amount and timing of Ventures' costs relating to its marketing and
distribution efforts and other strategic initiatives; and
. economic conditions specific to the Internet industry as well as general
economic conditions.
Due to the factors noted above and the other risks and uncertainties
discussed in this section, Ventures believes that period-to-period comparisons
of its operating results are not meaningful and that you should not rely upon
them as an indication of Ventures' future performance.
Ventures also has experienced, and expects to continue to experience,
seasonality and cyclicality in its Internet advertising revenues. Historically,
Ventures has experienced lower advertising revenues in the first calendar
quarter each year and lower use of Ventures' Websites and the Websites of its
partners during the summer and the year-end vacation periods, when use of the
Web and Ventures' services typically declines. Further, the level of use of
Ventures' search and news Websites typically fluctuates with the occurrence of
significant news events, which could cause rapid changes in audience size. Due
to all of the foregoing factors and others that Ventures cannot predict, it is
possible that in some future quarter, Ventures' operating results may be below
the expectations of analysts and investors.
Ventures depends heavily on its relationship with Inktomi, from which
Ventures licenses important technology.
Ventures' search and navigation site, HotBot, is based in significant part on
technology licensed from Inktomi Corporation. Therefore, the success of HotBot
is dependent, in part, on Ventures' relationship with Inktomi. If Ventures were
required to replace the core technology underlying HotBot, Ventures' business,
financial condition and results of operations could be adversely affected. The
license agreement may be terminated by Inktomi under various circumstances,
including if Ventures materially fails to meet its payment or other obligations
under the agreement. The agreement may also be terminated for convenience by
Ventures by delivery of a specified number of months' prior written notice to
Inktomi. The agreement expires on March 31, 2001 if not extended by the
parties.
Similarly, HotBot's operation is dependent on access to Inktomi's searchable
Web database. In the event Inktomi's database is not working or is otherwise
unavailable, HotBot users may be unable to complete general Web searches. Any
extended failure of, or material difficulties with, Inktomi's database could
result in a decrease in HotBot use, which could adversely affect Ventures'
advertising revenues.
Ventures needs to establish and maintain marketing and distribution
relationships with third parties.
Ventures depends in significant part on arrangements relating to the
promotion, positioning and distribution of Ventures' products and services on
third parties' Websites, products and services in order to attract users to
Ventures' Websites and consequently generate revenues. The termination of
Ventures' placement on key third-party Websites and services, if not replaced,
could significantly reduce the level of use of Ventures' Websites, which would
impair Ventures' revenues. Additionally, if a third party grants an exclusive
arrangement for positioning on its Website, product or service to a competitor
of Ventures, then Ventures' business may be impaired. These third-party sources
of user referrals to Ventures' Websites include
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high-user Web "portals" like Yahoo! and the Lycos Network, Web search and
navigation centers like Netscape's NetSearch page, and Internet access services
like Earthlink and Mindspring. User-generating promotion and referrals are
typically provided to Ventures under agreements with terms of one year or less
and are generally delivered in exchange for fees or the value of promotion of
the other party's Website based on the number of referrals generated by the
placement, although some referral arrangements require minimum commitments on
the part of Ventures or both parties.
Ventures may not be able to maintain advertising revenues if the Internet is
not adopted as an advertising medium.
Ventures derives a substantial portion of its revenues from selling
advertising and promotional placements on its Websites and expects to continue
to do so for the foreseeable future. Accordingly, if the market for Internet
advertising develops more slowly than Ventures expects, then Ventures'
business, results of operations and financial condition could be materially and
adversely affected. The Internet advertising market is new and rapidly
evolving, and Ventures cannot yet gauge its effectiveness compared to
traditional advertising media, including television, radio and print. No
standards have been widely accepted to measure the effectiveness of Web
advertising. If these standards do not develop, existing advertisers may not
continue their current levels of Web advertising. Furthermore, advertisers that
have traditionally relied upon other advertising media or that already have
invested substantial resources in other advertising methods may be reluctant to
advertise on the Internet. Many of Ventures' current and potential advertising
customers have limited experience using the Internet for advertising purposes
and have set aside only a limited portion of their marketing budgets for
Internet advertising.
Different methods of pricing are used to sell advertising on the Web. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to project Ventures' future advertising rates and revenues.
For example, advertising revenues which are based on the number of times that
an advertisement is displayed comprise a substantial portion of Ventures'
current advertising revenues. Therefore, advertising rates based on the number
of requests for additional information or times users access advertisers'
Websites by "clicking" on the advertisement or an appropriate link, instead of
rates based solely on the number of times that an advertisement is displayed,
could adversely affect Ventures' revenues. Ventures' advertising revenues could
be adversely affected if it is unable to adapt to new forms of Web advertising.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to a Web user's computer are available. Widespread adoption of
this software could adversely affect the commercial viability of Web
advertising, so that Ventures may not be successful in generating significant
future advertising revenues.
Ventures' advertising sponsorship and other commercial agreements may result
in costs to Ventures.
In addition to traditional banner advertising, third parties provide services
and placements on selected areas of Ventures' Websites under sponsorship and
other commercial arrangements with Ventures. In connection with many of these
arrangements, Ventures provides a minimum number of times that an advertisement
is displayed or number of user requests for additional information and may
receive sponsorship fees as well as a portion of revenues received by third-
party sponsors from users originated through Ventures' Websites. These
arrangements are often of longer duration and involve larger potential revenues
than individual banner advertising placements and expose Ventures to
potentially significant financial risks, including the risk that Ventures may
fail to deliver required minimum levels. If Ventures fails to deliver these
minimum levels, typically either the parties decrease the fees payable to
Ventures or Ventures provides "make good" periods when services are provided
for free. Additionally, third-party sponsors or commerce partners may choose
not to renew the arrangements at the end of their terms.
Some of these arrangements also have required Ventures to integrate sponsors'
content or services with Ventures' content and services. Ventures must dedicate
resources and significant programming and design efforts to accomplish this
integration, which may not be recouped in all cases. Ventures may not be able
to
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attract additional sponsors or renew existing arrangements when they expire. In
addition, Ventures has granted category or product exclusivity to some of its
sponsors and commerce partners, and may in the future grant additional
exclusivity provisions. These exclusivity provisions may prevent Ventures, for
the duration of the
exclusivity arrangements, from accepting other advertising within a particular
advertising subject matter or a designated area within Ventures' Websites.
Ventures may not be able to deliver or measure the delivery of advertisements
reliably.
The process of reliably delivering and tracking advertising placements within
large Websites like Ventures' is an increasingly important and complex task,
and currently available software programs and other tracking methodologies are
rapidly evolving. Ventures licenses an advertising management system from a
third party. To the extent that Ventures encounters system failures or material
difficulties in the operation of this system, or the software fails to keep
pace with Ventures' informational needs, Ventures could be unable to deliver
and track advertising placements reliably on its network of Websites. Any
extended failure of, or other material difficulties with, Ventures' advertising
management system may expose Ventures to "make good" obligations to provide
free advertising to its customers, which obligations would reduce revenues by
displacing advertising inventory. And advertising clients may not advertise on
Ventures' Websites or may pay less for advertising if they do not perceive
Ventures' measurements to be accurate or reliable.
Ventures may not be able to attract sufficient users to be competitive.
The number of Websites and Internet services competing for the attention and
spending of users and advertisers has increased rapidly and Ventures expects it
to continue to increase. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
adversely affect Ventures' business. For example, Relevant Knowledge has
reported that, from April 1998 to August 1998, the number of domestic unique
visitors to Ventures' Websites declined by 26.4%. Ventures competes for
advertisers, users and specialty content and service providers with the
following types of companies:
. Internet retrieval and other Web "portal" companies, including Infoseek
Corporation, Lycos, Inc., Excite, Inc., Netscape Communications
Corporation and Yahoo! Inc.;
. general purpose online service providers, including America Online and
Microsoft Network;
. online content publishers, including Time Warner's Pathfinder, C/net and
Salon magazine; and
. publishers and distributors of traditional media, including television,
radio and print, like CNN, CNBC and Reuters.
Competition is likely to continue to intensify as new companies enter the
Internet market, which presents few barriers to entry, and current competitors
expand their services and establish alliances. For example, several large media
companies and several large Internet browser and technology companies have
developed or have announced that they are contemplating developing Internet
navigation services and are attempting to become "gateway" sites through which
users may enter the Web. Many of these potential competitors are likely to
enjoy substantial competitive advantages, including: larger technical staffs;
greater name recognition; larger customer bases; and substantially greater
financial, marketing, technical and other resources than Ventures. Ventures'
competitors may offer Internet products and services that are superior to those
of Ventures or that achieve greater market acceptance. To be competitive,
Ventures must respond promptly and effectively to the challenges of
technological change, evolving standards and its competitors' innovations by
continuing to enhance its services, as well as develop its sales and
distribution channels and key brands. Ventures may not be able to compete
successfully against its current or future competitors.
Ventures must be able to adapt to technological change and develop new
products to remain competitive.
The market for Internet products and services is characterized by rapidly
changing technology, evolving industry standards and customer demands, and
frequent new product introductions and enhancements. To be
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successful, Ventures must effectively integrate the various software programs
and tools required to manage its business and continually improve the
performance, features and reliability of the Ventures' suite of products and
services. Ventures' HotBot search and navigation service, for example, has
undergone numerous redesigns and technological enhancements since its launch in
1996, many of which required dedicated resources including significant
programming and design efforts. Ventures cannot assure you that it will be
successful in timely developing or integrating these new or improved products
or services or that its products and services will meet the requirements of its
current and prospective users and achieve market acceptance. In addition, new
product releases by Ventures or its technology partners may contain undetected
errors that require significant design modifications, resulting in a loss of
customer confidence in Ventures' products and services and, consequently, user
support, which could diminish the use of Ventures' products and services.
Ventures could also incur substantial costs if Ventures needs to modify its
services or infrastructures to adapt to rapid technological changes.
Ventures depends on the development of an infrastructure for providing
Internet access and services. The Internet may not develop the necessary
infrastructure and the current infrastructure may not support a significant
increase in the number of users and level of use.
The Internet market is new and rapidly evolving. Ventures' business would be
adversely affected if Internet usage does not continue to grow and the Internet
does not timely develop the infrastructure or complementary services required
to make it a viable commercial marketplace for products and services including
those offered by Ventures. A number of factors may inhibit Internet usage and
the Internet's development as a viable medium for advertising and commercial
transactions, including inadequate network infrastructure, security concerns,
inconsistent quality of service, and lack of availability of cost-effective,
high-speed telecommunications services.
If Internet usage continues to grow rapidly, the Internet infrastructure may
not be able to support the demands placed on it by this growth and its
performance and reliability may decline. Websites have experienced
interruptions in their service as a result of outages and other delays
occurring throughout the Internet network infrastructure. If these outages or
delays frequently occur in the future, Internet usage, as well as the usage of
Ventures' Websites and services, could grow more slowly or decline.
Internet security concerns could hinder commercial transactions conducted
over the Internet.
The need to securely transmit confidential information over the Internet has
been a significant barrier to commercial transactions conducted over the
internet and communications over the Web. Any well-publicized compromise of
security could deter more people from using the Web or from using it to conduct
transactions that involve transmitting confidential information, including
stock trades or purchases of goods or services. Because many of Ventures'
advertisers seek to advertise on Ventures' Websites to encourage people to use
the Web to purchase goods or services, Ventures' business could be adversely
affected by security violations of its or its commerce partners' Websites.
Ventures may also incur significant costs to protect against the threat of
security violations or to alleviate problems caused by these violations.
Ventures is subject to concerns regarding privacy of personal information
about users of its websites and services.
Ventures maintains a privacy policy which is displayed on each of its
Websites. Ventures policy is to not willfully disclose any individually
identifiable information about any user of its products or services to a third
party without the user's consent. This policy and user choices regarding the
dissemination of personal information collected on Ventures' Websites, which
may include personal identification information, demographic profile data, as
well as user preferences and Website behavioral data, are accessible to users
of Ventures personalized services when they initially register. Despite this
policy, however, if third persons were able to penetrate Ventures' network
security or otherwise misappropriate users' personal information, Ventures
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could be subject to liability claims. These could include claims for
unauthorized purchases, impersonation or other similar fraud claims, as well as
claims for other misuses of personal information, including claims for
unauthorized marketing purposes. These claims could result in litigation. In
addition, the Federal Trade Commission and several states have been
investigating a number of Internet companies regarding their use of personal
information. Ventures could incur additional expenses if new regulations
regarding the use of personal information are introduced or if they chose to
investigate Ventures' privacy practices.
Ventures' systems may fail to function or may not have adequate capacity,
which would impair Ventures' ability to attract advertisers and users.
An element of Ventures' strategy is to attract a high volume of users to its
products and services, some of which require or deliver frequently updated
information, like the HotBot and Wired News services. Ventures makes these
products and services available free of charge to users of the Internet. Any
system failure that causes interruptions in the availability, or increases
response time, of Ventures' products and services could result in less use of
Ventures' Websites and impair Ventures' reputation and the market acceptance of
Ventures' products and services. If these interruptions or increases are
sustained or repeated, they could reduce the attractiveness of Ventures'
products and services to advertisers and strategic partners. A significant
increase in the volume of use of or searches conducted through Ventures'
products and services could strain the capacity of the software or hardware
used by Ventures or the capacity of Ventures' network infrastructure. This
strain could lead to slower response time or system failures. Ventures'
Websites have in the past and may in the future experience slower response
times for a variety of reasons. Any failure to expand the capacity of Ventures'
hardware or network infrastructure on a timely basis or on commercially
reasonable terms could adversely affect Ventures' business.
Ventures is dependent upon Web browsers and online service providers for
providing Internet users access to its products and services. Ventures is also
dependent on hardware suppliers for prompt delivery, installation and service
of servers and other equipment and services used to provide its products and
services. Substantially all of Ventures' commercial hardware operations are
located at the Santa Clara, California site of Exodus Communications. A system
failure at this location may harm the performance of Ventures' products and
services. This system is vulnerable to damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events. Despite
the implementation of network security measures by Ventures, its servers are
also vulnerable to computer viruses, break-ins and similar disruptive problems.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or halts in service to users of Ventures'
products and services. The occurrence of any of these risks could harm
Ventures' business.
Ventures requires strong brand recognition to be competitive.
Ventures believes that the creation and maintenance of strong brand
recognition for its products and services is a critical aspect of its efforts
to attract and expand its audience in a crowded, competitive Internet market.
Promotion and enhancement of Ventures' key brands, including the HotBot,
HotWired, Wired News, Webmonkey and Suck.com brands, will depend largely on
Ventures' ability to provide consistently high-quality products and services,
which success cannot be assured. Ventures may find it necessary to increase
substantially its financial commitment to developing and maintaining several
distinct brand loyalties among consumers. If Ventures is unable to provide
consistently high-quality, reliable products and services to consumers or
promote and maintain its key brands, Ventures' business, operating results, and
financial condition would be materially impaired.
Ventures is dependent on intellectual property, and Ventures' methods of
protecting its intellectual property rights may not be adequate.
Trademarks and other intellectual property rights are important to Ventures'
success and competitive position. Ventures currently relies on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect its intellectual property rights. However,
24
<PAGE>
Ventures' means of protecting its intellectual property rights may not be
adequate, and Ventures cannot assure you that it will be able to establish or
maintain its rights in all jurisdictions. Ventures generally enters into
confidentiality agreements with its employees, consultants and partners.
Ventures has registered and applied for registration of some key service marks
and trademarks in the United States and in selected foreign countries, but it
does not currently pursue registration in every country in which its products
and services are available via the Internet. Ventures will continue to evaluate
the registration of additional service marks and trademarks and monitor and
seek to prevent unauthorized or potentially infringing uses of its marks, as
appropriate. Despite Ventures' efforts to protect its intellectual property
rights, unauthorized parties may attempt to use or copy aspects of Ventures'
products or services or to obtain and use information that Ventures regards as
property. The laws of some foreign countries do not protect intellectual
property rights to as great an extent as do the laws of the United States.
Ventures licenses several key Website and search technologies from third
parties, some of which are generally commercially available but some of which
are licensed under individualized arrangements. While Ventures creates much of
its original Website content, it also depends on third parties, including both
individual contributors and corporate providers of specialty content such as
stock data, to supply content for Ventures' products and services. In addition,
most of the "Wired"-based trademarks, service marks and logos used in Ventures'
business, including the Wired News brand, are licensed from Advance Magazine
Publishers Inc. for use in digital media on a royalty-free basis under an
arrangement that, among other things, restricts Ventures' use of its own
"HotWired" mark for the duration of the license agreement. See "Business of
Ventures--Intellectual Property" on page 71. The inability of Ventures to
maintain or replace these relationships with key third-party intellectual
property suppliers on terms acceptable to Ventures could materially impair its
business.
Ventures may become involved in intellectual property litigation. This
litigation could be expensive and could impair Ventures' ability to conduct
its business.
There have been substantial amounts of litigation in the computer and related
industries regarding intellectual property rights. Ventures has been involved
in the past and may become involved in the future in claims and counterclaims
with third parties regarding infringement with respect to current or future
products or trademarks or other intellectual property rights. Any claims or
counterclaims of this nature could impair Ventures' business because they
could: be time-consuming; result in costly litigation; divert management's
attention; cause product release delays; or require Ventures to redesign its
products or require Ventures to enter into royalty or licensing agreements. Any
required royalty or licensing agreements may not be available on terms
acceptable to Ventures, or at all.
Ventures could be subject to new government regulations, and legal
uncertainties could be resolved in a way that impairs Ventures' business.
There are currently few laws or regulations directly applicable to Internet
communications, commerce and advertising on the Web. However, due to the
increasing popularity and use of the Web, it is anticipated that a number of
laws and regulations may be adopted in the foreseeable future. The most recent
session of the United States Congress resulted in Internet laws regarding
children's privacy, copyrights and taxation. The adoption of laws or
regulations may increase Ventures' cost of doing business and potentially
hinder the growth of the Web. Any decrease could in turn decrease the demand
for Ventures' services and products.
States or foreign countries may claim that Ventures' business is subject to
their laws, including tax laws. They could take action to enforce these laws
against Ventures.
Although Ventures' transmissions originate from California, the governments
of other states and foreign countries might attempt to regulate Ventures'
transmissions, levy sales or other taxes relating to its activities, or
prosecute Ventures for violations of their laws. The European Union recently
enacted its own privacy regulations that may result in limits on the collection
and use of particular user information. The laws
25
<PAGE>
governing the Internet, however, remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws including those governing intellectual property, privacy,
libel and taxation apply to the Internet and Internet advertising. In addition,
the growth and development of the market for Internet commerce may prompt calls
for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business
over the Internet. In the event governmental authorities adopt or modify laws
or regulations relating to the Internet, the growth of the use of the Internet
for commerce could slow substantially, and Ventures' business, results of
operations and financial condition could be adversely affected.
Ventures may be subject to liability for information retrieved from the
Internet, including obscene information, because Ventures provides access to
this information.
Because material may be downloaded by the online or Internet services
operated or facilitated by Ventures or the Internet access providers with which
Ventures has relationships, and be subsequently distributed to others, it is
possible that claims will be made against Ventures on the basis of defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of these materials. These claims could be based on Ventures
providing access to obscene, lascivious or indecent information. Ventures also
offers e-mail services, which may subject the company to potential risks,
including liabilities or claims resulting from unsolicited e-mail which is
sometimes referred to as spamming, lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service. Although
Ventures carries general liability and communications liability insurance,
Ventures' insurance may not cover potential claims of this type, or may not be
adequate to indemnify Ventures for all types of liability that may be imposed.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could impair Ventures' business.
Ventures must manage its growth, establish informal effective systems and
procedures and hire and retain additional personnel.
Ventures has experienced and may in the future experience periods of
significant growth which strain its managerial and operational resources. To
manage its growth, Ventures must continue to implement and improve its
operational and financial systems and controls. Additionally, Ventures must
expand, train and manage its employee base and manage multiple relationships
with various customers, strategic partners and other third parties. Ventures
cannot assure you that it has made adequate allowances for the costs and risks
associated with this potential expansion and transition. Ventures' systems,
procedures or controls may not be adequate to support Ventures' operations.
Ventures' future operating results will also depend on many factors, including
its ability to expand its advertising sales and business development
organizations and to expand its support organization along with the growth of
its business. If Ventures is unable to manage potential future growth
effectively, its business could be materially adversely affected.
Loss of key personnel would impair Ventures' business.
Ventures' performance is substantially dependent on the continued performance
of Wired Digital's senior management and other key employees, all of whom have
worked together for under five years. Ventures currently has employment
agreements with some but not all of its senior managers and key employees.
Ventures does not maintain "key person" life insurance policies on any of its
employees. The loss of the services of one or more of its senior managers or
other key employees could impair Ventures' business and prospects. Ventures
depends upon its ability to attract, retain and motivate skilled technical and
managerial personnel. Ventures' future success also depends on its continuing
ability to identify, hire, train and retain other highly qualified technical
and managerial personnel. Competition for qualified personnel in Ventures'
industry and geographical region is intense. If Ventures does not succeed in
attracting new personnel or retaining and motivating its current personnel,
Ventures' business will be adversely affected.
26
<PAGE>
Ventures systems may experience difficulties related to Year 2000 computer
problems.
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00", which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations. Computer
systems and software products that have not been developed or enhanced recently
may need to be upgraded or replaced to comply with Year 2000 requirements. If
Ventures discovers any Year 2000 errors or defects in its internal systems or
in the third-party systems on which it relies, Ventures could incur substantial
costs in making repairs or obtaining replacements and could incur disruptions
in its operations, which could damage its business and impair its financial
condition. To the extent that Ventures' assessment is finalized without fully
identifying and remedying any additional non-complaint internal or external
Year 2000 problems, or the Year 2000 phenomenon creates a systemic failure
beyond Ventures' control, including a prolonged telecommunications or
electrical failure or a prolonged failure of third-party software on which
Ventures relies, Ventures could be prevented from operating its business and
permitting users access to its Websites. In the event of a significant failure,
the primary business risks would include, but are not limited to, lost
advertising revenues and clients, increased operating costs, lost customers or
other business interruptions of a material nature.
Ventures recognizes the significance of these issues and has undertaken a
company-wide assessment of Year 2000 factors to ensure that its internal
technology systems are Year 2000 compliant, as well as an assessment of the
material third-party technology systems on which Ventures' business relies.
Ventures' assessment is ongoing and is partially completed at this time. Among
other ongoing aspects of its evaluation, Ventures is still waiting to receive
written confirmation of Year 2000 compliance from all material third-party
vendors whose products or services may raise Year 2000 compliance issues. The
results of Ventures' assessment will be taken into account in determining the
nature and extent of any contingency plan. Currently, Ventures does not have a
contingency plan in place.
To date, Ventures has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. Most of its
expenses thus far relate to the opportunity cost of time spent by Ventures
employees evaluating internal and external systems and communicating with
vendors and customers regarding Year 2000 compliance. At this time, Ventures
cannot estimate the potential impact of Year 2000 issues relating to its
business. It is possible that this impact, including the effect of a Year 2000
disruption in operations, could impair Ventures' business and financial
condition.
27
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Lycos files annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information Lycos files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Lycos'
SEC filings are also available to the public from commercial document retrieval
services and at the Website maintained by the SEC at www.sec.gov. Lycos has
filed a registration statement to register with the SEC the Lycos common stock
to be issued to Ventures stockholders in the merger. This proxy
statement/prospectus is part of that registration statement. As allowed by SEC
rules, this proxy statement/prospectus does not contain all of the information
you can find in the registration statement or the exhibits to the registration
statement.
Some of the important business and financial information that you may want to
consider in deciding how to vote is not included in this proxy
statement/prospectus, but rather is "incorporated by reference" to documents
that have been filed by Lycos with the SEC. The information that is
incorporated by reference consists of:
. Lycos Current Reports on Form 8-K for the events reported on February 9,
1999, filed on February 11, 1999 and February 26, 1999, and for the
events reported on May 11, 1999, filed on May 14, 1999;
. Lycos' Annual Reports on Form 10-K/A for the year ended July 31, 1998,
filed on February 2, 1999 and on April 16, 1999;
. Lycos' Current Reports on Form 8-K/A for the events reported each of
February 2, 1998, April 30, 1998 and August 13, 1998, filed on February
2, 1999;
. Lycos' Quarterly Reports on Form 10-Q for the quarter ended October 31,
1998, filed on December 14, 1998, and for the quarter ended January 31,
1999, filed on March 16, 1999;
. Lycos' Quarterly Reports on Form 10-Q/A for the quarters ended October
31, 1998 and January 31, 1999, filed on April 16, 1999;
. Lycos' Annual Report on Form 10-K for the fiscal year ended July 31,
1998, filed on October 29, 1998;
. Lycos' Current Reports on Form 8-K filed on August 11, 1998; August 13,
1998 and October 20, 1998 and on Form 8-K/A filed on October 27, 1998;
and
. All documents filed by Lycos under the Securities Exchange Act of 1934
(e.g., Forms 10-Q and 8-K) after the date of this proxy
statement/prospectus and prior to the special meeting.
If there is any contrary information in a previously filed document that is
incorporated by reference, then you should rely on the information in this
proxy statement/prospectus.
If you are a stockholder, you can obtain any of the documents incorporated by
reference through Lycos or the SEC. Documents incorporated by reference are
available from Lycos without charge, excluding all exhibits. You may obtain
documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing to the following address or by telephone:
Lycos, Inc.
Attention: Investor Relations
400-2 Totten Pond Road
Waltham, Massachusetts 02451
(718) 370-2700
28
<PAGE>
If you would like to request documents from Lycos, please do so by June 11,
1999 to ensure that you receive them before the special meeting.
You should rely on the information contained or incorporated by reference in
this proxy statement/prospectus to vote on the merger agreement and the merger.
We have not authorized anyone to provide you with information that is different
from what is contained in this proxy statement/prospectus. You should not
assume that the information contained in the proxy statement/prospectus is
accurate as of any date other than , 1999. This proxy
statement/prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any securities, or the solicitation of a proxy, in any
jurisdiction in which, or to any person to whom, it is unlawful to make any
such offer or solicitation.
29
<PAGE>
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and of Section 21E of the Securities Exchange Act of
1934 in this document. Forward-looking statements include information
concerning the possible or assumed future results of operations of the combined
company as well as statements preceded by, followed by or that include words
such as "believes," "expects," "anticipates" or similar expressions. Certain
important factors, in addition to those discussed under the caption "Risk
Factors" and elsewhere in this document and in the documents that Lycos has
incorporated by reference, could affect the future results of the combined
company and could cause those results to differ materially from those expressed
in our forward-looking statements. In addition, we do not have any intention or
obligation to update forward-looking statements after we distribute this
document, even if new information, future events or other circumstances have
made them incorrect or misleading.
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of Lycos and Ventures has
been derived from their respective historical financial statements, and should
be read in conjunction with such financial statements and the notes thereto,
included elsewhere or incorporated by reference in this proxy
statement/prospectus. The Lycos selected historical financial data as of and
for the years ended July 31, 1998, 1997 and 1996 and as of July 31, 1995 and
for the period from Inception (June 1, 1995) to July 31, 1995 has been derived
from the financial statements of Lycos, which have been audited by KPMG LLP,
independent certified public accountants. The Lycos selected historical
financial data as of January 31, 1999 and for the six months ended January 31,
1999 and 1998 has been derived from the unaudited financial statements of
Lycos, which have been prepared on the same basis as the other financial
statements of Lycos. The net loss of Lycos includes a gain on the sale of
investments of approximately $10,120,000 in the six months ended January 31,
1999. All periods presented for Lycos reflect the effect of a two-for-one stock
split by Lycos in August 1998.
Ventures' selected historical financial data as of and for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 has been derived from the
consolidated financial statements of Ventures, which have also been audited by
KPMG LLP, independent certified public accountants. The Ventures selected
historical financial data as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 has been derived from the unaudited financial
statements of Ventures. The operating loss of Ventures includes a write-off of
intangible assets of approximately $23,708,000 in the year ended December 31,
1996. The selected historical financial data should not be considered to be
indicative of future results and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included or incorporated by reference elsewhere in this proxy
statement/prospectus.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Ended January 31, Year Ended July 31, Inception
------------------- -------------------------- (June 1, 1995)
1999 1998 1998 1997 1996 to July 31, 1995
--------- -------- -------- ------- ------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data--Lycos
Net revenues........... $ 55,336 $ 21,906 $ 56,060 $22,273 $ 5,257 $ 5
In process research
and development....... -- -- 17,280 -- 452 --
Amortization of
intangible assets..... 23,413 204 7,614 540 360 --
Operating loss......... (30,980) (696) (31,491) (8,750) (5,802) (105)
Net income (loss)...... (17,349) 409 (28,439) (6,619) (5,088) (105)
Net income (loss) per
share:
Basic................ $ (0.41) $ 0.01 $ (0.92) $ (0.24) $ (0.21) $ (0.01)
Diluted.............. (0.41) 0.01 (0.92) (0.24) (0.21) (0.01)
Weighted average
shares used in
computing net income
(loss) per share:
Basic................ 42,433 28,350 30,933 27,589 23,985 22,026
Diluted.............. 42,433 29,416 30,933 27,589 23,985 22,026
</TABLE>
<TABLE>
<CAPTION>
July 31,
January 31, -------------------------------
1999 1998 1997 1996 1995
----------- -------- ------- ------- ------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data--Lycos
Working capital.............. $147,597 $146,922 $38,129 $39,974 $ 329
Total assets................. 464,915 317,235 65,419 53,661 1,317
Long-term portion of deferred
revenue..................... 27,839 26,160 5,100 -- --
Long-term portion of notes
payable..................... 1,220 -- -- -- --
Total stockholders' equity... 385,216 237,164 37,647 44,106 1,145
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- -------- -------- -------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data--Ventures
Net revenues........... $ 6,503 $ 3,459 $ 23,455 $ 12,405 $ 4,312 $ 1,942 $ 348
Operating loss......... (9,733) (2,865) (21,582) (16,297) (41,092) (2,096) (32)
Loss from continuing
operations............ (5,528) (2,869) (12,989) (16,302) (40,250) (1,575) (32)
Loss from discontinued
operations............ -- (1,039) (2,455) (2,632) (10,991) (4,930) (3,425)
Gain on sale of
discontinued
operations............ -- -- 66,834 -- -- -- --
Net income (loss)...... (5,528) (3,908) 51,390 (18,934) (51,241) (6,505) (3,457)
Loss per share from
continuing
operations:
Basic and diluted.... $(48.61) $(74.41) $(189.54) $(511.16) $(67,139) $ (787,500) $ (16,000)
Income (loss) per
share from
discontinued
operations:
Basic and diluted.... -- $(15.30) $ 736.67 $ (82.53) $(18,334) $(2,465,000) $(1,712,500)
Net income (loss) per
share:
Basic and diluted.... $(48.61) $(89.71) $ 547.13 $(593.69) $(85,473) $(3,252,500) $(1,728,500)
Weighted average
shares used in
computing net income
(loss) per share:
Basic and diluted.... 124 68 87 32 (a) (a) (a)
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
March 31,
1999 1998 1997 1996 1995 1994
----------- --------- -------- -------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data--
Ventures
Working capital
(deficit)............. $30,153 $ 35,389 $(16,022) $(13,290) $5,350 $ (797)
Total assets........... 43,877 53,751 9,198 9,221 8,643 5,112
Long-term obligations.. 751 710 -- 1,443 6,397 --
Redeemable convertible
preferred stock....... 25,052 24,558 20,983 3,900 -- --
Total stockholders'
equity (deficit)...... 7,844 13,845 (34,398) (15,948) (141) (153)
</TABLE>
- --------
(a) There were 600 common shares outstanding in 1996 and two common shares
assumed outstanding in 1995 and 1994 which were used in calculating basic
and diluted historical loss per share.
32
<PAGE>
SELECTED PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA
The following selected pro forma unaudited combined condensed financial data
of Lycos and Ventures is derived from the pro forma combined condensed
financial statements and should be read in conjunction with such pro forma
statements and the notes thereto, which are included elsewhere in this proxy
statement/prospectus. For pro forma purposes, the financial statements of
Ventures for the twelve months ended June 30, 1998 have been combined with the
financial statements of Lycos for the year ended July 31, 1998. For the six-
month period ended January 31, 1999, the financial statements of Lycos have
been combined with the financial statements of Ventures for the six months
ended December 31, 1998. The pro forma data is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the merger had been consummated,
nor is it necessarily indicative of future operating results or financial
position. See "Pro Forma Unaudited Combined Condensed Financial Statements" on
page 78.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
------------------- -------------------
(in thousands, except per share data)
<S> <C> <C>
Statements of Operations Data
Net revenues....................... $ 70,025 $ 79,263
Amortization of intangible assets.. 58,085 108,321
Operating loss..................... (77,161) (153,249)
Net loss........................... (63,529) (150,398)
Basic and diluted loss per share... $ (1.40) $ (3.95)
Shares used in computing basic and
diluted loss per share............ 45,518 38,112
</TABLE>
<TABLE>
<CAPTION>
January 31,
1999
-----------
<S> <C>
Balance Sheet Data
Working capital..................................................... $178,376
Total assets........................................................ 860,775
Long-term portion of deferred revenue............................... 27,840
Long-term portion of notes payable.................................. 1,220
Redeemable Convertible Preferred Stock.............................. 24,558
Total stockholders' equity.......................................... 741,170
</TABLE>
33
<PAGE>
COMPARATIVE PER SHARE DATA
The following table includes selected historical per share data and the
corresponding unaudited pro forma per share amounts for Lycos common stock and
Ventures capital stock for the periods indicated, giving effect to the merger.
The data presented are based upon the financial statements and related notes of
each of Lycos and Ventures appearing elsewhere in, or incorporated by reference
into, this proxy statement/prospectus and the unaudited pro forma combined
condensed balance sheet and statements of operations, including the related
notes thereto, appearing elsewhere in this proxy statement/prospectus. This
information is only a summary and should be read in conjunction with the
historical and unaudited pro forma combined condensed financial statements and
related notes thereto. The assumptions used in the preparation of this table
appear under "Selected Pro Forma Unaudited Combined Condensed Financial Data"
on page 33. The comparative per share data does not necessarily indicate the
results of the future operations of the combined organization or the actual
results that would have occurred if the merger had occurred at the beginning of
the periods indicated.
Lycos
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
January 31, July 31,
1999 1998
----------- ----------
<S> <C> <C>
Historical Per Common Share Data:
Basic and diluted loss from continuing operations...... $(0.41) $(0.92)
Book value............................................. 9.08 7.67
Pro Forma Per Common Share Data:(a)
Basic and diluted loss from continuing operations...... $(1.40) $(3.95)
Book value............................................. 16.28 15.86
</TABLE>
Ventures
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Historical Per Common Share Data:
Basic and diluted loss from continuing
operations...................................... $(189.54)(c) $(511.16)
Book value....................................... 122.33 (564.80)
Pro Forma Equivalent Per Common Share Data:(b)
Basic and diluted loss from continuing
operations...................................... $ (0.09) $ (0.27)
Book value....................................... 1.10 1.07
</TABLE>
- --------
(a) See "Selected Pro Forma Unaudited Combined Condensed Financial Data" on
page 33.
(b) Represents pro forma equivalent Ventures amounts calculated by multiplying
the Lycos pro forma per common share data by the ratio of common shares
issued to acquire Ventures (based on an assumed Lycos 20-day average
closing stock price at the upper collar limit) to the total pro forma
common shares outstanding.
(c) Earnings per common share reflects the accretion of $3,575,000 of dividends
on redeemable convertible preferred stock through December 31, 1998.
34
<PAGE>
PRICE RANGE OF COMMON STOCK
Shares of Lycos' common stock are listed on the Nasdaq National Market under
the symbol "LCOS." The shares of Lycos common stock issued in connection with
the merger will also be listed on the Nasdaq National Market. The table below
provides, for the fiscal quarters indicated, the reported high and low trading
prices of Lycos common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal
Year Fiscal Quarter Ended High Low
------ -------------------- ------ ------
<C> <S> <C> <C>
1999 October 31, 1998..................................... $44.50 $20.06
January 31, 1999..................................... 145.38 41.25
April 30, 1999....................................... 110.50 69.00
1998 October 31, 1997..................................... 21.00 8.13
January 31, 1998..................................... 21.00 12.63
April 30, 1998....................................... 39.57 17.60
July 31, 1998........................................ 53.63 24.16
1997 October 31, 1996..................................... 6.38 2.88
January 31, 1997..................................... 9.38 4.75
April 30, 1997....................................... 11.37 6.00
July 31, 1997........................................ 9.63 5.60
1996 April 30, 1996 (commencing April 2, 1996)............ 14.63 7.00
July 31, 1996........................................ 9.63 2.94
</TABLE>
On October 5, 1998, the full trading day prior to the public announcement of
the proposed merger, Lycos stock closed at $31.94 per share. On May 17, 1999,
Lycos stock closed at $108.50 per share. As of January 31, 1999, Lycos had 865
stockholders of record.
Ventures is a privately-owned company, and, therefore, no market value
information on its stock is available. As of May 7, 1999, Ventures had, after
giving effect to the operation of the voting trust, 58 holders of record of
common stock and 99 holders of record of preferred stock including six holders
of record of Series C preferred stock.
Because the market price of Lycos common stock changes, the market value of
the shares to be issued in the merger may increase or decrease at any time. See
"Risk Factors--Risks Relating to Lycos--Lycos stock price is volatile and is
affected by factors relating to Lycos, to the Internet industry and to the
stock market" beginning on page 10.
DIVIDEND POLICIES
Neither Lycos nor Ventures has ever declared or paid cash dividends on its
shares of capital stock. Ventures' certificate of incorporation provides for
the accumulation of dividends on its Series C preferred stock, none of which
has been paid to date. Those dividends will be paid as part of the merger
consideration. Lycos currently intends to retain all of its earnings to finance
the development and expansion of its business and therefore does not intend to
declare or pay cash dividends on its common stock in the foreseeable future.
Lycos' board of directors, in its discretion, will determine whether to declare
and pay dividends in the future. Any future declaration and payment of
dividends will depend upon:
. Lycos' results of operations;
. earnings, financial condition;
. contractual limitations;
. cash requirements;
. future prospects;
. applicable law; and
. other factors deemed relevant by Lycos' board of directors.
35
<PAGE>
THE SPECIAL MEETING
Date, Time and Place
Ventures' board of directors is soliciting the enclosed proxy to be used at a
special meeting of stockholders to be held on June 21, 1999, at 9:00 a.m. local
time, or at any adjournment or postponement of the meeting. The proxy will be
used for the purposes described in this proxy statement/prospectus and in the
accompanying notice of special meeting. The meeting will be held at the offices
of Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco,
California 94111. Ventures intends to mail this proxy statement/prospectus and
accompanying notice of special meeting and proxy card on or about May 21, 1999
to all stockholders entitled to vote at the meeting. The costs of soliciting
proxies will be borne by Ventures, subject to the provisions of the merger
agreement relating to the payment of expenses.
Purpose
The purpose of the meeting is to vote upon a proposal to approve and adopt
the merger agreement as amended and restated and to approve the merger.
Record Date and Outstanding Shares
Only holders of record of Ventures capital stock at the close of business on
May 7, 1999 will be entitled to notice of and to vote at the meeting. At the
close of business on that date, Ventures had outstanding and entitled to vote
141,838 shares of common stock, 15,199,794 shares of Series A preferred stock,
625,000 shares of Series B preferred stock and 3,762,760 shares of Series C
preferred stock. Each record holder of common stock, Series A preferred stock
and Series B preferred stock on that date will be entitled to one vote for each
share held. Each record holder of Series C preferred stock on that date will be
entitled to approximately 1.3126 votes for each share held.
Vote Required
Approval and adoption of the merger agreement and approval of the merger will
require the affirmative vote of the holders of a majority of the Ventures
capital stock, assuming conversion of all Ventures preferred stock, and a
majority of the Ventures Series C preferred stock outstanding on the record
date. The persons named as proxy holders on the proxy card will vote your
shares as you indicate on the card. If you do not specify on the proxy card how
to vote your shares, the proxy holders will vote your shares in favor of the
merger agreement and the merger. If your shares are held of record by the
voting trust, the trustee will vote your shares. The inspector of election
appointed for the meeting will separately tabulate affirmative and negative
votes and abstentions. Abstentions will have the same effect as negative votes.
Directors and executive officers of Ventures, including for this purpose Beth
Vanderslice and Rick Boyce, together with stockholders of Ventures, including
the voting trust, who own 5% or more of any class or series of Ventures capital
stock, own 89.7% of the outstanding Ventures capital stock, assuming conversion
of all Ventures preferred stock, and 100% of the Ventures Series C preferred
stock.
Due to the existence of the voting trust and voting agreements that have been
executed by the trust and other Ventures stockholders and after giving effect
to the grant of proxies to vote in favor of the merger, we are assured of
receiving the requisite vote at the special meeting.
Proxies
You may revoke your proxy before it is voted by filing with Ventures'
corporate secretary a written notice of revocation or a duly executed proxy
bearing a later date. You may also revoke your proxy by attending the meeting
and voting in person. Attending the meeting will not, by itself, revoke a
proxy.
Recommendation of Ventures Board of Directors
The Ventures board of directors has unanimously approved the merger
agreement, as amended and restated, and the transactions contemplated by the
merger agreement and has determined that the merger is fair to, and in the best
interests of, Ventures and its stockholders. After careful consideration, the
Ventures board of directors recommends that you vote in favor of approval and
adoption of the merger agreement and approval of the merger.
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<PAGE>
THE MERGER
This section contains detailed information regarding the companies' reasons
for the merger, the events leading up to the execution of the merger agreement
and the terms of the merger agreement. The merger agreement and its key
exhibits are attached to this proxy statement/prospectus as Annexes A, B and C.
Please note that the following description of the merger is a summary only.
You should read the following summary and the merger agreement, as amended and
restated, for a full understanding of the terms of the merger.
General
At the effective time of the merger, BF Acquisition Corp., a newly formed
Delaware corporation and a wholly-owned subsidiary of Lycos, will be merged
into Ventures. As a result, the separate corporate existence of BF will cease,
and Ventures will continue as the surviving corporation under Delaware law. As
the surviving corporation, Ventures will be a wholly-owned subsidiary of Lycos.
Effective Time of the Merger
The merger will take effect when the certificate of merger has been filed
with the Secretary of State of the State of Delaware in accordance with
Delaware law. This time is referred to as the "effective time."
The merger agreement provides that the merger and the other transactions
contemplated by the merger agreement will be completed within three business
days of the waiver or satisfaction of all of the conditions to the obligations
of Lycos, BF and Ventures to complete the merger. The merger agreement may be
terminated by either Lycos or Ventures if the merger has not occurred on or
before July 14, 1999. See "The Agreement and Plan of Merger and
Reorganization--Termination and Amendment" on page 61.
Merger Consideration
As a result of the merger, at the effective time, the outstanding shares of
Ventures capital stock, other than Ventures dissenting shares, and warrants to
acquire Ventures capital stock will be converted into and exchanged for the
right to receive a portion of the merger consideration, as described below. In
the event of a stock split or similar transaction affecting Lycos common stock,
the merger consideration, allocation of shares, escrow shares, collar limits
and similar provisions will be appropriately adjusted.
Total Merger Consideration. As a result of the merger, Lycos will pay
Ventures stockholders a combination of shares of Lycos common stock and, in
some cases, cash in exchange for their shares of Ventures capital stock.
Ventures stockholders will receive, in the aggregate, the following
consideration for their shares in the merger:
(1) Lycos common stock valued, based on the 20-day average closing stock
price, at $95 million.
(2) Lycos common stock with a value, based on the 20-day average closing
stock price, equal to the amount of cash and cash equivalents shown on
Ventures' balance sheet at closing, net of exclusions for specified
compensation and other identified expenses. This amount is referred to as
the "Ventures cash balance." However, if the 20-day average closing stock
price is less than or equal to $20.64, then Lycos may pay the Ventures cash
balance in cash, Lycos common stock or any combination of cash and Lycos
common stock. There will also be adjustments for borrowings, working
capital shortfalls and similar items. Ventures estimates that the net
amount of the Ventures cash balance will be approximately $25 million.
(3) Up to $4.5 million in cash plus interest from Lycos, contingent upon
receipt by Ventures after the closing of distributions from an escrow fund
established in connection with Ventures' sale of its magazine, books and
television businesses to Advance Magazine Publishers Inc. in June 1998. The
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<PAGE>
amount of the Advance escrow fund distributed will depend on the amount of
the fund used to satisfy claims by Advance. Lycos will distribute cash
equal to such Advance distributions in June 1999, if these distributions
are received by Lycos.
(4) Up to $5 million in cash, contingent upon receipt by Lycos after
closing of specified federal and state income tax benefits related to
Ventures' pre-merger business. If and to the extent any such refunds are
received, Lycos will distribute cash equal to such refunds over the two-
year period following the closing of merger.
The parties will determine the precise number of shares of Lycos common stock
to be issued for any dollar value by dividing that dollar value by the "20-day
average closing stock price." This price is determined by calculating the
average closing price for Lycos common stock over a period of 20 trading days
ending three trading days prior to the closing of the merger. Under the merger
agreement, however, this price is subject to a collar; that is, for the
purposes of calculating the number of Lycos shares to be issued, the average
closing stock price may not be higher than $42.86 or lower than $20.64 even if,
in fact, the actual 20-day average closing price of Lycos common stock does
exceed $42.86 or fall below $20.64. Ten percent of the shares described in
paragraph (1) will be held in escrow for one year following the closing date,
except for amounts that may be withheld for a longer period to satisfy
unresolved claims for indemnification made prior to that date. See "The
Agreement and Plan of Merger and Reorganization--Indemnification and Escrow" on
page 60.
Merger Consideration to be Received By Class Or Series. Stockholders of
Ventures will receive different amounts per share of Ventures capital stock
held, depending on the class or series. Moreover, there are three different
methods for allocating the merger consideration among the Ventures classes and
series, depending on the 5-day average closing stock price of Lycos common
stock. Each holder of a share of a class or series will receive a pro rata
portion of the aggregate amount allocated to that class or series. Therefore,
the amounts received in exchange for a share of any class or series depend in
part on the number of shares of that class or series outstanding at the
effective time of the merger.
Method applicable if the 5-day average closing stock price of Lycos common
stock is $42.86 or less
Common Stock. The holders of Ventures common stock will receive in the
aggregate that number of shares of Lycos common stock with a value equal to
$12,538,700, based on the 20-day average closing stock price. The portion of
the merger consideration to be paid to the holders of Ventures common stock is
referred to as the "Common Amount."
Series A Preferred Stock. The holders of Ventures Series A preferred stock
and warrants to purchase Ventures Series A preferred stock will receive in the
aggregate that number of shares of Lycos common stock, calculated based on the
20-day average closing stock price with a value equal to 78.8% of the "Residual
Share Value." The Residual Share Value is equal to $95 million minus the
following:
. the amounts payable to the holders of Ventures common stock
($12,538,700);
. the amounts payable to the holders of Ventures Series B preferred stock
($12,500,000); and
. amounts payable to the holders of Ventures Series C preferred stock
(estimated to be approximately $29,298,230, assuming a closing date of
June 21, 1999).
The holders of Ventures Series A preferred stock will also receive cash
equal to 78.8% of any amounts paid in respect of the Advance escrow and tax
refund. The portion of the merger consideration to be paid to the holders of
Series A preferred stock is referred to as the "Series A Amount."
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<PAGE>
Series B Preferred Stock. The holders of Ventures Series B preferred stock
will receive in the aggregate that number of shares of Lycos common stock with
a value, calculated based on the 20-day average closing stock price, equal to
$20.00 multiplied by the number of shares of Ventures Series B preferred stock
outstanding at the effective time. The portion of the merger consideration to
be paid to the holders of Series B preferred stock is referred to as the
"Series B Amount."
Series C Preferred Stock. The holders of Ventures Series C preferred stock
will receive in the aggregate that number of shares of Lycos common stock, with
a value, calculated based on the 20-day average closing stock price, equal to:
. 21.2% of the Residual Share Value;
. plus the amount of all dividends accrued for the benefit of the holders
of Ventures Series C preferred stock (will be approximately $4,449,930 at
June 21, 1999);
. plus 26.903553% of the amount to be paid to the holders of the Series B
preferred stock (approximately $3,362,940); and
. plus $5.71 times the number of shares of Series C preferred stock
outstanding at the effective time (approximately $21,485,360).
In addition, the holders of Ventures Series C preferred stock will receive
cash equal to 21.2% of any amounts paid in respect of the Advance escrow and
tax refund. The portion of the merger consideration to be paid to the holders
of Series C preferred stock is referred to as the "Series C Amount."
Stockholders should note that the values to be paid in Lycos common stock
described above could vary if the actual average price of Lycos common stock is
below the $20.64 collar limit described above. In that event, the number of
shares to be issued does not increase any further and, as a result, the actual
"value" of the shares in the market would be correspondingly lower. See "Risk
Factors--Formula for determining purchase price and shares issuable may reduce
value of merger proceeds to Ventures stockholders" on page 7.
Indemnification and Escrow. If the 5-day average closing stock price of Lycos
common stock is at or below $42.86, contributions to the escrow fund will be
made as follows:
. 10% from the holders of Ventures common stock and options to acquire
common stock;
. 70.92% from the holders of Ventures Series A preferred stock, which is
78.8% of the 90% not contributed by the holders of common stock; and
. 19.08% from the holders of Ventures Series C preferred stock, which is
21.2% of the 90% not contributed by the holders of common stock.
See "Indemnification and Escrow" on page 60.
Method applicable if the 5-day average closing stock price of Lycos common
stock is greater than $42.86 and less than or equal to $90.00
If the 5-day average closing stock price exceeds $42.86 but is less than or
equal to $90.00, the merger consideration will be allocated in three separate
components:
. Lycos shares with a value equal to $95 million, calculated based on the
20-day average closing stock price, referred to as the "base component";
. Lycos shares with a market value, calculated based on the 5-day average
closing stock price of Lycos common stock, equal to the Ventures cash
balance, plus cash payable with respect to the Advance escrow and tax
refund, referred to as the "pass-through component"; and
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<PAGE>
. Lycos shares equal to the difference between the number of shares payable
by Lycos with respect to the Ventures cash balance and the number of
shares payable as part of the pass-through component for the Ventures cash
balance, referred to as the "premium component."
For each $1.00 increase in the 5-day average closing stock price above $42.86
but below $90.00, the merger consideration payable in total to each class or
series will be increased or decreased from the levels payable at $42.86, with
dividends to the Ventures Series C preferred stock set at the amount payable at
May 31, 1999:
<TABLE>
<CAPTION>
Base
Component
(Increase Pass-Through
or Component Premium
(decrease) (Increase or Component
in # of (decrease) in (% of
shares) % of $ value) shares)
Ventures Capital Stock ----------- ------------- ---------
<S> <C> <C> <C>
Common..................................... (1,383.1559) .217586 % --
Series A preferred......................... 8,514.6003 (.570087)% 78.8%
Series B preferred......................... (2,067.3308) .185855 % --
Series C preferred......................... (5,064.1135) .166646 % 21.2%
</TABLE>
For example, if the 5-day average closing stock price were $70.00 and if the
Ventures cash balance were $25 million and the Advance escrow and the tax
refund totaled $9.5 million, the merger consideration would be allocated by
class or series as follows:
<TABLE>
<CAPTION>
Pass-
Through
Base Component Premium Total
Component ($ value of Component ($ value of
($ value of cash and ($ value of cash and
shares) shares) shares) shares)
Ventures Capital Stock ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Common......................... $17,850,792 $ 2,037,322 -- $ 19,888,114
Series A preferred............. $68,646,076 $21,848,105 $12,474,522 $102,968,703
Series B preferred............. $16,487,791 $ 1,740,215 -- $ 18,228,006
Series C preferred............. $52,171,665 $ 8,874,358 $ 3,356,090 $ 64,402,113
</TABLE>
Indemnification and Escrow. If the 5-day average closing stock price is more
than $42.86 and equal to or less than $90.00, contributions to the escrow fund
will be made on a pro rata basis among all holders of Ventures capital stock,
including options and warrants.
Method applicable if the 5-day average closing stock price is greater than
$90.00
If the 5-day average closing stock price is greater than $90.00, the dollar
value of the base component and the percentage of the pass-through and premium
components payable in total to holders of each Ventures class and series are
fixed at the $90.00 level, except that the holders of Series A and Series C
preferred stock will share in the incremental increase in the dollar value of
the base component over the $90.00 5-day average closing stock price of Lycos
common stock.
<TABLE>
<CAPTION>
Increase in
Base Pass-
Base Component Through Premium
Component Value Over Component Component
($ value of $90.00 (% of $ (% of
shares) (% of shares) value) shares)
Ventures Capital Stock ------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Common........................... $ 20,461,337 -- 10.2570% --
Series A preferred............... $103,585,221 78.8% 51.9261% 78.8%
Series B preferred............... $ 17,477,392 -- 8.7612% --
Series C preferred............... $ 57,962,451 21.2% 29.0557% 21.2%
</TABLE>
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<PAGE>
In addition, at certain 5-day average closing stock prices, a specified
number of Lycos shares will be reallocated from the holders of Ventures Series
C preferred stock to the holders of Ventures Series A preferred stock. The
dollar value of the reallocated shares, calculated based on the 5-day average
closing stock price is:
. Zero if the 5-day average closing stock price is less than $105.00;
. $1,000,000 if the 5-day average closing stock price is greater than or
equal to $105.00, but less than $115.00;
. $2,000,000 if the 5-day average closing stock price is greater than or
equal to $115.00, but less than $125.00;
. $3,000,000 if the 5-day average closing stock price is greater than or
equal to $125.00, but less than $135.00;
. $4,000,000 if the 5-day average closing stock price is greater than or
equal to $135.00, but less than $145.00; and
. $5,000,000 if the 5-day average closing stock price is greater than or
equal to $145.00.
For example, if the 5-day average closing stock price were $110.00 and if the
consideration payable for the Ventures cash balance were $25 million and the
Advance escrow and tax refund totaled $9.5 million, the merger consideration
would be allocated by class or series as follows:
<TABLE>
<CAPTION>
Pass- Premium
Through Reallocation
Base Component Premium ($ value of Total
Component ($ value of Component increase or ($ value of
($ value of cash and ($ value of (decrease) cash and
shares) shares) shares) in shares) shares)
Ventures Capital Stock ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Common.................. $ 20,461,338 $ 3,538,665 -- -- $ 24,000,003
Series A preferred...... $138,517,858 $17,914,505 $30,859,963 $ 1,000,000 $188,292,326
Series B preferred...... $ 17,477,393 $ 3,022,614 -- -- $ 20,500,007
Series C preferred...... $ 67,360,491 $10,024,217 $ 8,302,427 $(1,000,000) $ 84,687,135
</TABLE>
The pass-through component will be paid in the same proportions of cash and
stock to all classes and series.
Indemnification and Escrow. If the 5-day average closing stock price of Lycos
common stock is greater than $90.00, contributions to the escrow fund will be
made on a pro rata basis among all holders of Ventures capital stock, including
options and warrants.
Per Share Merger Consideration. At the effective time of the merger, each
share of Ventures capital stock, except for dissenting shares, will
automatically be converted into Lycos common stock and, if applicable, the
right to receive cash as follows:
. Each share of Ventures common stock will be converted into that fraction
of a share of Lycos common stock and the right, if applicable, to receive
cash equal to the portion of the merger consideration allocated in total
to the shares of common stock divided by the number of shares of Ventures
common stock outstanding at the effective time (estimated to be
approximately 7,524,399 shares after option exercises and stock bonus
grants).
. Each share of Ventures Series A preferred stock (including shares subject
to warrants) will be converted into that fraction of a share of Lycos
common stock and the right to receive cash equal to the portion of the
merger consideration allocated in total to the shares of Series A
preferred stock divided by the number of shares of Ventures Series A
preferred stock outstanding at the effective time (estimated to be
approximately 15,249,794 shares, including warrants).
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<PAGE>
. Each share of Ventures Series B preferred stock will be converted into
that fraction of a share of Lycos common stock and the right, if
applicable, to receive cash equal to the portion of the merger
consideration allocated in total to the shares of Series B preferred
stock divided by the number of shares of Ventures Series B preferred
stock outstanding at the effective time (estimated to be approximately
625,000 shares).
. Each share of Ventures Series C preferred stock will be converted into
that fraction of a merger share and the right to receive cash equal to
the portion of the merger consideration allocated in total to the shares
of Series C preferred stock divided by the number of shares of Ventures
Series C preferred stock outstanding at the effective time (estimated to
be approximately 3,762,760 shares).
For an illustration of the calculation of the amount each share of Ventures
capital stock would receive in the merger based on a variety of assumptions,
see "Summary--The Merger--What Ventures Stockholders Will Receive" beginning on
page 2.
Cancellation of Warrants. At the effective time, warrants to purchase 50,000
shares of Series A preferred stock will be canceled and converted into the
right to receive the number of shares of Lycos common stock into which the
shares of Series A preferred stock subject to such warrants would have been
converted if such warrants had been exercised in their entirety immediately
prior to the effective time, rounded down to the nearest whole share of Lycos
common stock, minus the per share exercise price of the warrants.
Treatment of Options. Ventures expects substantially all outstanding options
to be exercised prior to the closing.
Option Exercises and Stock Bonuses. As of May 1, 1999, there were options
outstanding under the Ventures' equity incentive plan to purchase 1,376,913
shares of Ventures common stock, assuming cancellation of the founder options
as described below. Each of these options has an exercise price of $1.00 per
share. The Ventures board will take action to cause each of these options to
become fully vested prior to the closing.
As of May 1, 1999, the Ventures equity incentive plan had approximately 3.6
million shares available for grant. The Ventures board will grant all of these
remaining plan shares, plus approximately 2.4 million additional shares of
Ventures common stock authorized for issuance outside of the plan, as stock
bonuses to Wired Digital employees prior to the closing. The Ventures equity
incentive plan was approved by the Ventures stockholders. No additional
stockholder approval is necessary for the Ventures board to make these stock
bonus grants, and the holders of Series C preferred stock have approved the
issuance of the additional shares outside of the plan.
In order to receive the benefits of accelerated vesting or to receive a stock
bonus, each employee will be required to agree that he or she will not sell
more than 50% of the Lycos common stock acquired in the merger in exchange for
the option or bonus shares for six months following the merger. This six-month
"lockup" provision will be extended to three years following the merger if the
employee leaves Lycos during the first year following the merger, subject to
some specific limitations.
The exercise of options and stock bonus grants will significantly increase
the number of shares of Ventures common stock outstanding immediately prior to
the merger and, therefore, significantly decrease the merger proceeds that
would otherwise be payable for each share of Ventures common stock.
Cancellation of Founder Options. Options to purchase 354,000 shares of
Ventures common stock held by Louis Rossetto, a co-founder and director of
Ventures, and options to purchase 304,000 shares of Ventures common stock held
by Jane Metcalfe, a co-founder and director of Ventures, will not be
accelerated or exercised prior to the closing of the merger. Under the terms of
separation agreements between Ventures and these founders, these options will
be canceled in exchange for $500,000 in cash to each co-founder, to be paid
after closing of the merger.
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<PAGE>
Fractional Shares. No fractional shares of Lycos common stock will be issued
in connection with the merger. Instead of receiving a fractional share, a
stockholder who would otherwise be entitled to a fractional share will receive
an amount of cash, rounded to the nearest whole cent, equal to the product of
(1) the fraction and (2) the average closing stock price.
Rights of Dissenting Stockholders
Stockholders of Ventures who do not vote in favor of the merger and who
otherwise comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to appraisal rights under Delaware law. Such
rights entitle the stockholder to require Ventures to purchase the dissenting
shares for cash at their fair market value, excluding any appreciation or
depreciation as a result of the merger. The following is a summary description
of the provisions of the applicable Delaware law. This summary is complete in
all material respects but should be read with the full text of the applicable
law, a copy of which is attached hereto as Annex E. Any holder of Ventures
capital stock intending to exercise statutory appraisal rights is urged to
review Annex E carefully and to consult with legal counsel so as to assure
strict compliance with its provisions.
A vote in favor of the merger agreement and the merger will constitute a
waiver of your right to demand appraisal of your Ventures capital stock.
Who May Exercise Statutory Appraisal Rights. Under Section 262 of the
Delaware General Corporation Law, holders of Ventures capital stock who follow
the procedures set forth in such law will be entitled to have their Ventures
capital stock appraised by the Delaware Court of Chancery and to receive
payment in cash of the "fair value" of such shares, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, if any, as determined by such court. Stockholders
considering seeking appraisal should be aware that the fair value of their
Ventures capital stock under Section 262 could be more than, less than or equal
to the merger consideration otherwise to be received by such holder.
Procedure for Exercising Statutory Appraisal Rights. A holder of Ventures
capital stock wishing to exercise statutory appraisal rights must (1) deliver
to Ventures prior to the vote on the merger agreement at the special meeting a
written demand for appraisal of such holder's Ventures capital stock and (2)
not vote in favor of the merger agreement. A holder of Ventures capital stock
wishing to exercise such rights must be the record holder of such shares on the
date the written demand is made and must continue to hold such shares of record
through the effective time. Accordingly, a holder of the Ventures capital stock
who is a record holder on the date that the demand is made but who subsequently
transfers such shares prior to the effective time will lose such holder's right
to appraisal with respect to the shares transferred.
A demand for appraisal should be executed by or on behalf of the holder of
record, as such holder's name appears on the stock certificate. If the shares
of Ventures capital stock in question are held in a fiduciary or representative
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity. If the shares are owned of record by more than
one person, as in a joint tenancy or a tenancy in common, the demand should be
executed by or on behalf of all joint owners. An authorized agent, including
one or more joint owners, may execute a demand for appraisal on behalf of a
holder of record; however, the agent must identify the record owner or owners
and expressly disclose the fact that, in executing the demand, the agent is
agent for such owner or owners. All demands for appraisal must be in writing
and must be sent or delivered to Ventures at 660 Third Street, Fourth Floor,
San Francisco, California 94107, Attention: Janelle Mitchell, Secretary.
Any holder of Ventures capital stock who has demanded an appraisal in
compliance with Section 262 will not, from and after the effective time, be
entitled to vote the Ventures capital stock subject to the demand for any
purpose or be entitled to the payment of future dividends or other distribution
on the Ventures capital stock.
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<PAGE>
Within ten days after the effective time, Ventures will be required to notify
each stockholder who has complied with the provisions of Section 262 and who
has not voted in favor of the merger agreement and the merger of the date that
the merger became effective. Within 120 days after the effective time, any
stockholder who has complied with the requirements for exercise of statutory
appraisal rights will be entitled, upon written request, to receive from
Ventures a statement setting forth the aggregate number of shares of Ventures
capital stock not voted in favor of the merger agreement and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such Ventures capital stock. Such statements must be mailed within
ten days after a written request therefor has been received by Ventures or
within ten days after the expiration of the period for delivery of demands,
whichever is later.
Determination of Fair Value; Venue For Filing Appraisal Petition. Within 120
days after the effective time, Ventures or any stockholder who has complied
with the statutory requirements described above may file a petition in the
Delaware Chancery Court demanding a determination of the fair value of the
Ventures capital stock. Ventures is under no obligation to and does not
currently intend to file a petition with respect to the appraisal of the fair
value of the Ventures capital stock. Accordingly, it will be the obligation of
the stockholders to initiate all necessary action to perfect statutory
appraisal rights with respect to their Ventures capital stock within the time
periods prescribed by Section 262.
If a petition for appraisal is timely filed, stockholders entitled to
statutory appraisal rights may receive notice of the time and place of a
hearing on the petition. After such hearing, the Delaware Court of Chancery
will determine the stockholders entitled to statutory appraisal rights and the
"fair value" of their Ventures capital stock, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid thereon. The Delaware Supreme Court
has stated that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in determining fair value in an
appraisal proceeding. The Delaware Supreme Court has further stated that in
determining fair value in an appraisal proceeding, the court must consider
market value, dividends, earnings prospects, the nature of the enterprise and
any other facts which could be ascertained as of the date of the merger that
throw any light on the future prospects of the merger corporation. In
Weinberger v. UOP, Inc., the Delaware Supreme Court held that the "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered" in determining fair value.
Costs of Appraisal Action. The costs of an appraisal action may be determined
by the Court of Chancery and taxed upon the parties as it deems equitable. The
Chancery Court may also order that all or a portion of the expenses incurred by
any stockholder in connection with appraisal, including, reasonable attorneys'
fees and the fees and expenses of experts utilized in the appraisal proceeding,
be charged pro rata against the value of all of the shares of Ventures capital
stock entitled to appraisal.
Loss of Appraisal Rights. If any stockholder who properly demands appraisal
of his or her Ventures capital stock under Section 262 fails to perfect, or
effectively withdraws or loses his or her right to appraisal, as provided under
Delaware law, such stockholder's shares will be converted into the right to
receive the consideration specified in the merger agreement. A stockholder will
fail to perfect statutory appraisal rights, or effectively lose or withdraw his
or her right to appraisal if, among other things, no petition for appraisal is
filed within 120 days after the effective time or if the stockholder delivers
to Ventures a written withdrawal of his or her demand for appraisal and
acceptance of the merger. Any such attempt to withdraw an appraisal demand more
than 60 days after the effective time will require written approval of
Ventures.
Conversion and Exchange of Share Certificates
At the effective time, the Ventures stock and warrants issued and outstanding
immediately prior to such time, other than Ventures dissenting shares, will
automatically be converted into the right to receive the merger consideration
from Lycos.
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At the effective time, Lycos will (1) authorize its exchange agent, Boston
EquiServe Limited Partnership, to make the merger shares available (2)
authorize Boston EquiServe to deliver the shares to be held in escrow to State
Street Bank and Trust Company as escrow agent and (3) deliver to Boston
EquiServe cash in an amount sufficient for payments of any cash payments to be
made for the Ventures cash balance and in lieu of fractional shares. Holders of
Ventures stock and warrants who properly complete and validly execute and
surrender letters of transmittal and certificates representing Ventures stock
and warrants to Lycos prior to the effective time will have certificates
representing the shares of Lycos common stock and any cash payment to which
they are entitled mailed to them by Boston EquiServe no later than ten days
after the closing date. Holders of Ventures stock and warrants who properly
complete and validly execute and surrender letters of transmittal and
certificates representing Ventures stock and warrants to Lycos after the
effective time will be entitled to receive the shares of Lycos common stock and
any cash payment to which they are entitled following surrender of these
documents. Surrendered Ventures stock and warrants will be canceled.
Until surrendered as provided above, (1) each outstanding certificate that
prior to the merger represented Ventures stock and warrants, other than
certificates for dissenting shares, will for all corporate purposes evidence
only the right to receive the portion of the merger consideration to which such
holder is entitled pursuant to the merger agreement, and (2) each outstanding
certificate evidencing Ventures dissenting shares will evidence only the right
of the holders to pursue such holder's remedies as a dissenting stockholder as
provided by Delaware law.
Background of the Merger
As part of its regular review and planning process, Ventures' management and
board of directors regularly review Ventures' strategic direction and explore a
variety of financing alternatives, including public and private offerings of
securities, strategic alliances and business combinations with other companies.
Prior to 1998, Ventures' operations were financed principally through private
placements of equity securities, the latest of which was an approximately $21.5
million equity financing in December 1996, as well as through debt financing.
In mid-1997, Ventures' management and board of directors reviewed the company's
business and financial plans and concluded that significant additional capital
would be required to pay off debt incurred and to fund its operations to the
point at which it operated on a cash flow break-even basis. To address these
funding needs, in September 1997, Ventures engaged Lazard Freres to undertake a
broad marketing process to seek offers for a significant investment in or
strategic alliance with Ventures or, alternatively, for an acquisition of the
company. From October 1997 through March 1998, Lazard Freres initiated contacts
with 33 companies and six private equity investment firms with interests either
in magazine publishing or Internet properties. Management of Ventures also
engaged in a number of discussions with potential strategic partners. Those
companies either declined to submit formal offers or submitted offers only for
either Wired Digital or Wired Magazine Group (Ventures' magazine subsidiary),
but not for Ventures as a whole. This process led to Ventures' sale of its
magazine, books and television businesses and related brands to Advance
Magazine Publishers Inc. in June 1998.
Following the sale to Advance, Ventures continued its Internet business
operations, funded in part by the proceeds of that sale. At a meeting in late
May 1998, the Ventures board of directors considered at length Ventures' long-
term strategy and prospects, both as an independent company with the eventual
goal of a successful initial public offering and as part of a larger combined
company created through a merger or acquisition. Following that meeting, the
Ventures' board of directors directed management to conduct exploratory
discussions with investment banks with respect to the possibility of an initial
public offering. At the same time, the Ventures' board of directors directed
Lazard Freres to approach a list of a number of media and Internet companies to
determine their interest in a possible business combination or other strategic
transaction with Ventures. As part of that process, Lazard Freres engaged in
preliminary discussions with 13 companies, including Lycos.
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As part of its regular business, Lycos' management and board of directors
regularly review potential strategic acquisitions. On June 24, 1998, Lazard
Freres, on behalf of Ventures, entered into a non-disclosure agreement with
Lycos in connection with Lycos' evaluation of a potential transaction with
Ventures. In early July 1998, members of the management teams of Lycos and
Ventures held their first meeting to discuss the possible benefits of a
strategic alliance or other business combination. Preliminary due diligence
continued over the next several weeks.
Initial price discussions began in mid-July. At a meeting on July 23, 1998,
the Lycos board of directors discussed a potential transaction with Ventures
and, on July 28, 1998, Lycos submitted a written proposal to Ventures outlining
the terms of a possible acquisition of Ventures. Under this proposal, Lycos
would pay to Ventures stockholders approximately $140 million in cash and Lycos
shares, exclusive of any amounts to be paid by Lycos for the Ventures cash
balance and the Advance escrow. A tax refund payment was not a component of
that proposal. At a meeting on August 6, 1998, in the San Francisco office of
Cooley Godward LLP, Ventures' legal counsel, Ventures management,
Lycos management and advisors to the companies discussed specific terms of the
proposed transaction, including Lycos' requirement that Ventures be precluded
in the definitive agreement from "shopping" Ventures or accepting any other
offer to acquire Ventures. This requirement and the other terms of the Lycos
proposal were discussed extensively with some of the members of Ventures' board
of directors later that day. Lycos and Ventures, together with their respective
legal counsel and investment bankers, then began a series of discussions
concerning the terms of the proposed transaction and the definitive agreement,
as well as the potential long-term strategic benefits of the transaction.
On August 18, 1998, the board of directors of Ventures met again by telephone
to review and discuss the terms of the proposed transaction and to consider
alternative strategies, including a potential minority equity investment by Oak
Investment Partners of $11 million, plus warrants to acquire additional shares
valued at $5 million, following a required recapitalization to eliminate
significant preferences of the outstanding Ventures preferred stock. Ventures'
legal counsel and investment bankers were also present. Following extensive
discussion of the proposed terms of the transaction with Lycos, as well as
potential alternative strategies, Ventures' board of directors determined to
continue discussions with Lycos, while continuing to explore
other alternatives.
In light of the increased stock market volatility in late August and early
September 1998 and the decline in the market price of Lycos shares during that
period, negotiations between the parties came to a temporary standstill.
Discussions resumed during the week of September 14, with Lycos offering to
Ventures a reduced price of approximately $95 million, exclusive of any amounts
to be paid by Lycos for the Ventures cash balance, the Advance escrow and tax
refunds. This amount reflected, Lycos maintained, the reduced market valuations
attributable to Internet companies generally. Negotiations also resumed with
respect to the definitive agreement, with issues centering on, among other
things, the extent of the Ventures stockholders' escrow and indemnification
obligations. In addition, Lycos required that Ventures enter into a separate
"no-shop" agreement.
On September 23, 1998, the Lycos board of directors met to review and discuss
the terms of the proposed transaction. Lycos engaged the firm of Hambrecht &
Quist to serve as a financial advisor in connection with the proposed
acquisition of Ventures.
On September 24, 1998, Ventures' board of directors held a special telephonic
meeting to consider, with its legal counsel and investment bankers present, the
revised terms proposed by Lycos. The Ventures board of directors considered at
length both the Lycos proposal and the prospects for pursuing alternative
strategies, including the prospects for remaining independent and seeking
additional investments in Ventures. After extensive discussion, the Ventures
board of directors directed Ventures' advisors to continue negotiations, with
the goal of realizing the highest price possible. The board also authorized
Ventures' management to enter into a short-term no-shop agreement with Lycos,
which was signed on September 25, 1998.
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Intense negotiations over the terms of the transaction and the definitive
agreement continued over the next two weeks. During this period, Ventures'
legal counsel and investment bankers communicated to Lycos Ventures' concerns
regarding, among other things, the latest proposed price and related pricing
terms. Over the entire course of negotiations, Jane Metcalfe and Louis
Rossetto, two directors of Ventures, expressed concern that the proposed
purchase price of $95 million was not adequate.
On September 30, 1998, Ventures' board of directors held a regular telephonic
meeting, during which both Ventures' legal counsel and investment bankers were
present. The Ventures board of directors again discussed the proposed Lycos
transaction, including Ventures' inability to obtain significant concessions
from Lycos on price and related pricing terms. At a meeting on September 30,
1998, the Lycos board of directors heard a report from Hambrecht & Quist
regarding the fairness of the proposed transaction and approved the terms of
the definitive agreement.
On October 2, 1998, Ventures' board of directors held a special telephonic
meeting to consider the proposed merger and the terms and conditions of the
definitive agreement. At the meeting, Lazard Freres presented its financial
analysis of the terms and conditions of the merger and delivered its oral
opinion confirmed by a written opinion dated as of October 5, 1998, to the
effect that, as of such date, based upon and subject to the various
considerations set forth therein, the merger consideration was fair in the
aggregate to the Ventures stockholders, taken as a whole, from a financial
point of view. Following the presentation and discussion, the Ventures' board
of directors determined that the merger was in the best interests of Ventures
and its stockholders, approved the terms of the definitive agreement and the
merger and resolved to recommend that the Ventures stockholders approve the
definitive agreement and the merger. Jane Metcalfe and Louis Rossetto, members
of the Ventures board of directors, abstained from the vote.
On October 5, 1998, Lazard Freres reconfirmed its opinion by delivering a
written fairness opinion to the Ventures board of directors dated October 5,
1998, and the definitive agreement was executed. See "--Opinion of Lazard
Freres & Co. LLC" beginning on page 50. A press release announcing the
execution of the merger agreement was issued on October 6, 1998. The merger
agreement was subsequently amended on November 25, 1998 and ratified by the
Lycos and Ventures boards of directors on December 3, 1998.
On April 6, 1999, Lazard Freres received a letter from Looksmart, Ltd., a
privately-held Internet directory company, proposing a business combination
between Looksmart and Ventures in which the stockholders of Ventures would
receive restricted stock representing a minority interest in the combined
entity. Looksmart represented, based on its projections of market valuation,
that its proposal would provide the Ventures stockholders with significantly
greater value than the value offered in the merger with Lycos. Ventures advised
Looksmart that, because of the "no-shop" provisions of the merger agreement,
Ventures was precluded from having any discussions or negotiations relating to
the proposal. Ventures has received no further communications from Looksmart.
In the months following execution of the original merger agreement, the stock
prices of Internet companies increased dramatically over the prices prevailing
during the negotiation of the agreement. A number of Ventures stockholders
asserted that, in light of the increase in Lycos' stock price, the allocation
of the merger consideration among the classes and series of Ventures capital
stock was unfair. Discussions to resolve the dispute continued over the next
several months, resulting in the allocation set forth in the merger agreement,
as amended and restated in May 1999. This amended and restated agreement was
unanimously approved by the Ventures Board on May 14, 1999 and by the Lycos
Board on May , 1999.
Ventures Reasons for the Merger
At a telephonic meeting held on October 2, 1998, the board of directors of
Ventures concluded that the merger was in the best interests of Ventures and
its stockholders and determined to recommend that the
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stockholders of Ventures approve the merger agreement and the merger. The
merger agreement, as amended and restated, was approved by the Ventures board
on May 14, 1999. In reaching these conclusions and recommendations, the board
considered a number of factors, including:
. The fact that, by receiving immediately tradeable shares of Lycos common
stock as consideration in the merger, Ventures stockholders would have
the opportunity either (1) to obtain liquidity by selling their Lycos
shares in the public market, subject to "lockup" restrictions on employee
shares, or (2) to participate as Lycos stockholders in the potential
long-term benefits that the board believed could result from the merger.
. The uncertainty of Ventures' ability to attract the capital necessary for
the execution of its long-term strategy, including the possibility of
completing an initial public offering, particularly in light of the
unfavorable conditions then prevailing in the stock market generally, the
uncertain prospects for improved conditions and Ventures' own historical
experience with the public equity markets.
. The fact that Ventures did not have the financial resources of many of
its Internet competitors to devote to the marketing of its products,
which could adversely affect its ability to attract advertising customers
over the long term.
. The recognition that the recent trend toward industry consolidation had
(1) led to intensified competition for advertising revenues, raising the
threshold of user levels needed to attract top advertisers, and (2)
adversely affected Ventures' leverage in purchasing or licensing rights
to technology or seeking to negotiate strategic alliances with corporate
partners.
. The recent entry into the Internet navigation service market of
Microsoft, Netscape, NBC and several other companies, most of which have
significantly greater resources and more established advertiser and media
relationships than Ventures, and at least two of which use the same
underlying Web search technology as Ventures' HotBot search engine.
. The risk that technological advances being pursued by Ventures might not
be successfully developed or, if developed, might not add sufficient
value to Ventures' products and services to maintain Ventures in the
highest tier of Internet navigation service providers.
. Ventures' prospects as an independent company for achieving the scale and
level of audience use necessary to remain competitive with the top tier
of Internet companies in attracting advertising revenues.
. The intense competition among Internet companies for talented employees
and the risk of loss of key employees absent a significant strategic
transaction or other development leading to a widespread perception of
improved momentum in Ventures' business.
. The historical and prospective business of Lycos, including its
competitive position, recent financial and stock performance, financial
condition, experienced management team, long-term strategic plan and
prospects for the future.
. The fact that Lycos had recently completed a number of acquisitions to
diversify its business, increase the level of use of its Website and
expand its reach.
. The fact that the merger would provide Ventures, as part of the Lycos
Network, with access to the Lycos Network's diversified resources,
infrastructure, services and technologies, offering Ventures an expanded
opportunity for increasing user visits to its properties, generating
advertising revenues and developing technology.
. The probability that the combined company would sustain levels of
audience use competitive with other Internet market leaders.
. The board's belief that, in view of the substantial efforts by Ventures
and Lazard Freres since October 1997 to contact other parties about a
potential transaction with Ventures, it was likely that any party
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potentially interested in submitting a proposal to acquire Ventures, and
financially able to do so, had already been afforded the opportunity to
make an offer.
. A review of the possible alternatives to the merger, including the
possibility of continuing to operate Ventures as an independent entity,
the impediments to pursuing those alternatives, the range of possible
values to Ventures' stockholders of such alternatives and the potential
timing of the realization of those values, and the likelihood of
accomplishing those alternatives.
. The presentation of Lazard Freres and its oral opinion, subsequently
confirmed in writing, to the effect that the consideration to be received
by the stockholders of Ventures in the merger was fair in the aggregate
to the stockholders of Ventures, taken as a whole, from a financial point
of view.
The board also considered a variety of potentially negative factors in its
deliberations concerning the merger, including:
. The fact that the merger agreement does not permit Ventures to engage in
discussions or enter into agreements with third parties regarding an
acquisition of or investment in Ventures, even if a third-party proposal
were superior to the merger.
. The fact that Lycos required that holders of shares representing a
majority of the outstanding capital stock and of the Series C preferred
stock enter into agreements to vote in favor of the merger.
. The transaction value of the merger as compared with recent comparable
precedent transactions, although recognizing that the precedent
transactions occurred in periods of less market volatility.
. The risk that the value of Lycos common stock might decline below the
$20.64 floor established in merger agreement, with the result that the
value of the consideration delivered to Ventures' stockholders would, at
the time of the merger, be less than anticipated.
. The risk of management and employee disruption associated with the
merger, including the risk that key personnel might not continue with the
combined company.
. The risk that the merger could adversely affect Ventures' relationships
with some of its advertising customers and strategic partners.
. The risk that the merger might not be consummated, even if approved by
Ventures' stockholders.
. The risk that the potential benefits of the merger might not be realized.
The board concluded, however, that, on balance, the benefits to Ventures and
its stockholders of the merger outweighed the risks associated with the
foregoing negative factors. The foregoing discussion of the information and
factors considered by Ventures' board in connection with its evaluation of the
merger is not intended to be exhaustive. In view of the variety of factors
considered by the board, the directors did not find it practical to, and did
not, quantify or otherwise assign relative weights to the factors considered.
The board of directors of Ventures has determined that the merger is fair to
and in the best interests of Ventures and its stockholders, unanimously
approved the merger agreement, as amended and restated, and the merger and
recommends that the stockholders approve and adopt the merger agreement and the
merger.
Lycos Reasons for the Merger
In assessing the transaction, Lycos considered its strategic positioning and
plans, the past performance and future potential of Ventures and Ventures'
lines of business and services. Lycos authorized the merger for numerous
reasons including:
. Ventures' navigation and content Websites will complement and expand
Lycos' Internet offerings.
. The acquisition presents significant opportunities to increase Lycos'
existing sales and advertising revenues by increasing weekly page
impressions and therefore increasing available inventory. Additionally,
the Ventures user base may utilize other Lycos properties providing
additional revenues.
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. The combination of the properties of Lycos and Ventures will strengthen
Lycos' long-term growth strategy of establishing a network presence of
premiere Websites.
Opinion of Lazard Freres & Co. LLC
On October 2, 1998, Lazard Freres delivered its oral opinion to the board of
directors of Ventures, which was reconfirmed by delivery of its written opinion
dated October 5, 1998, to the effect that, as of October 5, 1998, based upon
and subject to the various considerations set forth in the opinion, the merger
consideration was fair in the aggregate to the stockholders of Ventures, taken
as a whole, from a financial point of view.
A copy of the full text of the Lazard Freres opinion, which sets forth, among
other things, the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken in connection with rendering
such opinion, is attached to this proxy statement/prospectus as Annex D. This
summary discussion of such opinion of Lazard Freres is qualified in its
entirety by reference to the full text of such opinion. The engagement of
Lazard Freres and its opinion are for the benefit of the board of directors of
Ventures, and its opinion was rendered to the board of directors of Ventures in
connection with its consideration of the merger. The Lazard Freres opinion is
directed only to the fairness of the merger consideration in the aggregate from
a financial point of view to the stockholders of Ventures, taken as a whole,
and does not address any other aspects of the merger. The opinion is not
intended to, and does not constitute, a recommendation to any stockholder of
Ventures as to how such holder should vote with respect to the merger. Holders
of Ventures capital stock are urged to, and should, read the Lazard Freres
opinion carefully and in its entirety in conjunction with this proxy
statement/prospectus.
In connection with rendering the Lazard Freres opinion to the board of
directors of Ventures, Lazard Freres:
. reviewed the financial terms and conditions of the merger agreement,
which were determined by negotiation between the companies;
. analyzed historical business and financial information relating to
Ventures and Lycos;
. reviewed various internal financial forecasts and other financial and
operating data provided to Lazard Freres by Ventures relating to its
business and financial performance;
. reviewed analysts' financial forecasts regarding Lycos with Lycos in
order to elicit Lycos' view of its future financial performance, Lycos
not having provided Lazard Freres with a current forecast following a
request by Lazard Freres;
. held discussions with members of the senior managements of Ventures and
Lycos with respect to the past and current business operations and
financial condition and the prospects of Ventures and Lycos, Ventures'
competitive position and the strategic objectives of each, possible
strategic, financial and operating benefits that may be realized
following the merger;
. reviewed the pro forma impact of the merger on the earnings per share of
Lycos;
. reviewed the historical stock prices and trading volumes of the Lycos
common stock;
. reviewed publicly available commentary of the research analysts following
Lycos and the Internet sector generally;
. participated in discussions with the Ventures board of directors and its
legal and other advisors; and
. considered such other financial studies, analyses and investigations as
Lazard Freres deemed appropriate.
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Lazard Freres relied, with the consent of Ventures, upon the accuracy and
completeness of the foregoing information, and did not assume any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of
Ventures or Lycos, or concerning the solvency or fair value of either Ventures
or Lycos. With respect to financial forecasts, Lazard Freres assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates in the case of Ventures and judgments of the managements of Ventures
and Lycos as to the future financial performance of Ventures and Lycos,
respectively. Lazard Freres assumed no responsibility for and expressed no view
as to such forecasts or the assumptions on which they were based.
The Lazard Freres opinion was necessarily based on economic, monetary, market
and other conditions as in effect on, and the information made available to it
as of, October 2 and October 5, 1998. In rendering its opinion, Lazard Freres
took into account Ventures' commercial assessment regarding the timing of a
transaction and Ventures' ability to access the capital markets.
In rendering its opinion, Lazard Freres assumed that:
. the merger would be consummated on the terms described in the merger
agreement, without any waiver of any material terms or conditions by
Ventures;
. obtaining the necessary regulatory approvals for the merger would not
have a material adverse effect on Ventures or Lycos;
. the merger consideration will not be reduced as a result of the
adjustment, indemnification or escrow provisions of the merger agreement;
and
. cash equal to the full amount of the estimated tax refund would be paid
to security holders of Ventures.
In addition, Lazard Freres expressed no opinion as to (1) the prices at which
the Lycos common stock may trade following the date of the Lazard Freres
opinion or (2) the manner in which the merger consideration would be allocated
among the different classes of Ventures capital stock or among the different
holders of such securities.
The following is a brief summary of the financial and comparative analyses
performed by Lazard Freres in connection with providing its opinion to the
Ventures board of directors and reviewed with the Ventures board of directors
at its meeting on October 2, 1998. These summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses used by Lazard Freres, the tables must be read together
with the text of each summary. The tables alone do not constitute a complete
description of the financial analyses.
Discounted Cash Flow Analysis of Ventures and Lycos. Based upon forecasts
provided by the management of Ventures, Lazard Freres estimated the net present
value of the future free cash flows of Ventures. For this analysis, Lazard
Freres used discount rates ranging from 20% to 40% and multiples of estimated
earnings before interest, taxes, depreciation and amortization, referred to as
"EBITDA," in 2001 ranging from 10x to 14x for the business of Ventures. This
analysis indicated a net present equity value reference range of Ventures
ranging from approximately $44 million to $125 million.
In addition, based upon publicly available analysts' financial forecasts for
Lycos, Lazard Freres estimated the net present value of the future free cash
flows of Lycos. For this analysis, Lazard Freres used discount rates ranging
from 17% to 21% and multiples of estimated EBITDA in 2003 ranging from 11x to
15x. This analysis indicated a net present equity value reference range per
share of Lycos common stock ranging from approximately $27.99 to $42.00.
Comparable Publicly Traded Companies Analysis of Lycos. Lazard Freres
reviewed and compared actual and estimated financial, operating and stock
market information of companies in lines of business believed to
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be generally comparable to those of Lycos. Lazard Freres noted that, although
there were no public companies with precisely the same mix of business and
financial condition as Lycos, Lazard Freres believed that the most relevant
comparable companies were Yahoo! Inc. and Excite, Inc., referred to as the
"selected comparables." The analysis indicated the following ranges of equity
value of the selected comparables as a multiple of the indicated parameters:
<TABLE>
<CAPTION>
Low Median High
----- ------ -----
<S> <C> <C> <C>
Estimated 1998 Revenue............................ 13.7x 38.9x 64.0x
Estimated 1999 Revenue............................ 8.3x 24.3x 40.3x
Unique Users...................................... 112.8x 264.9x 416.9x
Daily Pageviews................................... 42.5x 68.6x 94.7x
</TABLE>
Based upon the foregoing data and other data deemed relevant for the selected
comparables and on publicly available analysts' financial forecasts for Lycos,
Lazard Freres' analysis indicated approximate equity value reference ranges per
share of Lycos common stock as follows:
<TABLE>
<CAPTION>
Approximate Equity
Value Reference
Parameter Range
--------- ------------------
<S> <C>
Estimated 1998 Revenue................................ $30.24-$128.07
Estimated 1999 Revenue................................ $31.01-$136.29
Unique Users.......................................... $51.01-$178.63
Daily Pageviews....................................... $29.56-$ 61.47
</TABLE>
Contribution Analysis. Lazard Freres evaluated the potential contribution of
each of Wired Digital and Lycos to the 1997 actual revenues, 1998 estimated
revenues, August 1998 unique visitors and July 1998 average daily pageviews of
the pro forma combined company using Ventures management estimates, publicly
available analysts' financial forecasts for Lycos and publicly available market
data. Earnings contributions were not meaningful due to Wired Digital's losses
during the relevant period. This analysis indicated the following Wired Digital
approximate contributions, in each case as compared to the pro forma equity
ownership of the current Ventures stockholders ranging from approximately 6% to
13%:
<TABLE>
<CAPTION>
Approximate
Wired Digital
Parameter Contribution
--------- -------------
<S> <C>
1997 Revenue................................................ 22%
Estimated 1999 Revenue...................................... 19%
August 1998 Unique Users.................................... 20%
July 1998 Daily Pageviews................................... 14%
</TABLE>
Pro Forma Merger Analysis. Lazard Freres considered the effect that the
merger could have on the earnings per share of the combined company, compared
with the projected earnings per share of Lycos on a stand-alone basis. Based
upon forecasts for Ventures provided by the management of Ventures and on
publicly available analysts' forecasts for Lycos and upon an assumption
regarding the goodwill from the merger, but assuming the realization of no cost
savings or other synergies, the analysis indicated that the merger would be
significantly dilutive to the projected stand-alone earnings per share in 1999
(61%) and 2000 (20%). For the purposes of this analysis Lazard Freres estimated
that Lycos may be able to assign a portion of the purchase price to identified
intangibles and in-process research and development. Without the benefit of a
valuation audit, Lazard Freres estimated goodwill at 50% of the difference
between the purchase price and book equity and amortized this amount over a
period of five years. The Lazard Freres' estimate of the amount of goodwill to
be amortized is lower than the amount Lycos currently anticipates, which will
result in greater dilution than the above analysis indicated. Please see "Pro
Forma Unaudited Combined Condensed Financial Statements--Notes to the Pro Forma
Unaudited Combined Condensed Financial Statements--Pro Forma Adjustments and
Assumptions."
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Other Considerations. Lazard Freres also reviewed public information with
respect to some of the other companies in the Internet sector and reviewed the
financial terms, to the extent publicly available, of some of the business
combinations involving companies in the Internet sector, but there was no such
company or transaction that Lazard Freres considered comparable to Ventures or
the merger. No public Internet company comparables existed primarily due to the
absence of Wired Digital's user critical mass and unsuccessful historic
experience with the public equity markets. As a result, Ventures did not become
the beneficiary of valuations conferred upon the small number of established,
public Internet companies. No business combination involving companies in the
Internet sector was considered comparable for the reasons described in the
immediately preceding sentences and because of the wide variation in the
multiples which transaction valuations represented as a function of financial
and traffic parameters and the prevalence of other transactions in this sector
occurring during favorable markets for Internet stocks, in contrast to the
timing of the signing of the merger agreement.
Despite Lazard Freres' belief that no comparable companies or transaction
existed, it did provide to the Ventures board, for illustrative purposes only,
the results of performing these traditional valuation analyses using companies
and transactions in the sector. Lazard Freres informed the Ventures board that
it did not believe that the results of these analyses were indicative of
Ventures' value, that such belief was strengthened by the results of the
extensive market check performed by Ventures and Lazard Freres and that the
results of these analyses were not part of the analysis underlying Lazard
Freres fairness opinion.
The companies upon which a traditional analysis of publicly traded Internet
companies was based were Yahoo! Inc., Excite, Inc., Lycos, Inc. and CNET. This
analysis resulted in the following multiples for the publicly traded Internet
Companies and spans the application of such multiples to the relevant
parameters of Ventures, which were not believed by Lazard Freres to be
indicative of Ventures' value:
<TABLE>
<CAPTION>
Median Ranges
(multiple and (multiples and
implied implied
enterprise enterprise
Enterprise Value as Multiple of valuation) valuation)
------------------------------- ------------- --------------
<S> <C> <C>
1998 estimated revenues....................... 13.7x 10.9x - 14.1x
$270M $214M - $279M
1999 estimated revenues....................... 7.9x 7.4x - 8.3x
$321M $298M - $337M
Unique users.................................. 84.0x 62.0x - 112.8x
$363M $268M - $488M
Daily page views.............................. 42.7x 42.5x - 92.5x
$213M $212M - $462M
</TABLE>
These values compared to a proposed transaction value of $95 million (based
on Lycos' closing stock price of $29.69 on October 1, 1998).
The transactions upon which a traditional analysis of recent precedent
transactions was based were (in reverse chronological order of announcement):
. Lycos/WhoWhere?
. Amazon.com Inc./PlanetAll
. NBC/CNET Inc./Snap!
. America Online/Mirabilis
. Walt Disney/Infoseek
. Walt Disney/Starwave
. Microsoft/Firefly
. Lycos/WiseWire
. Go2net/Silicon Investor
. Excite/Classifieds2000
. Lycos/Tripod
. Excite/Matchlogic
. Microsoft/Hotmail
. Yahoo!/Four11
. Microsoft/WebTV Networks
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This analysis resulted in the following data, multiples for the precedent
transactions and, upon the application of such multiples to the relevant
parameters of Ventures, implied transaction valuations for Ventures, which were
not believed by Lazard Freres to be indicative of Ventures' value:
<TABLE>
<CAPTION>
Median Ranges
(multiple and (multiples and
implied implied
transaction transaction
Transaction Value as Multiple of valuation) valuation)
-------------------------------- ------------- ---------------
<S> <C> <C>
Latest twelve months revenues................ 37.5x 8.9x - 138.5x
$505M $120M - $1,865M
Monthly users................................ 83.3x 17.3x - 187.5x
$360M $75M - $811M
</TABLE>
These values and multiples compared to a transaction value of $95 million
(based on Lycos' closing stock price of $29.69 on October 1, 1998), which
represented multiples of 7.0x latest twelve months revenues and 22.0x monthly
users,
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above without considering the
analyses as a whole, could create an incomplete or misleading view of the
process underlying the Lazard Freres opinion. No company involved in any
transaction used in the above analysis as a comparison is identical to Lycos.
The analyses were prepared solely for the purpose of Lazard Freres providing
its opinion to the board of directors of Ventures in connection with its
consideration of the merger and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually maybe sold, which
may be significantly more or less favorable than as set forth in these
analyses. Similarly, any estimate of values or forecast of future results
contained in the analyses is not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses.
In performing its analyses, Lazard Freres made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties
or their respective advisors, none of Ventures, Lazard Freres, or any other
person assumes responsibility if future results or actual values are materially
different from those forecasts or estimates contained in the analyses.
Although, in connection with the delivery of its opinion, Lazard Freres also
analyzed Lycos, the Lazard Freres opinion is not a valuation of Lycos and does
not represent Lazard Freres' view as to what the value of the Lycos common
stock will be prior to or after consummation of the merger. The Lazard Freres
opinion was one of many factors taken into consideration by the board of
directors of Ventures in making its determination to approve the merger
agreement.
Lazard Freres is an internationally recognized investment banking and
advisory firm. Lazard Freres, as part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
leveraged buyouts, and valuations for estate, corporate and other purposes.
Lazard Freres was selected to act as investment banker to the board of
directors of Ventures because of its qualification, expertise and reputation in
investment banking and mergers and acquisitions. In the ordinary course of its
business, Lazard Freres and its affiliates may actively trade in the securities
of Lycos for their own account and for the account of their customers and,
accordingly, may at anytime hold a long or short position in such securities.
As the Ventures board of directors knows, two managing directors of Lazard
Freres are limited partners of funds controlled by Providence Equity
Partners L.L.C., the general partner of some significant stockholders of
Ventures.
Ventures has agreed to pay a fee to Lazard Freres for its investment banking
services in connection with the merger, including among other things, rendering
the Lazard Freres opinion described above. Ventures has
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agreed to pay to Lazard Freres a fee ranging from 0.9% to 1.2% of the aggregate
value of the transaction if the merger is consummated. Ventures also has agreed
to reimburse Lazard Freres for its reasonable out-of-pocket expenses (including
reasonable fees and expenses of its legal counsel). In addition, Ventures has
agreed to indemnify Lazard Freres, its affiliates and other persons against
some liabilities and expenses. In the past, Lazard Freres has provided
investment banking services to Ventures, for which it expects to receive
customary fees.
Other Interests of Officers and Directors in the Merger
Some of the executive officers and directors of Ventures and Wired Digital
have interests in the merger that are different from those of the Ventures
stockholders generally. The Ventures board of directors has considered these
interests in approving the merger agreement and the merger. Ventures
stockholders should consider these interests carefully before voting.
Stock Option Acceleration and Stock Bonus Grants. Beth Vanderslice, an
executive officer and director of Wired Digital and an executive officer and
director of Ventures, currently holds options to purchase 427,068 shares of
Ventures common stock, 290,536 of which were vested as of May 1, 1999, and will
be receiving an additional stock bonus grant of 1,629,495 shares of common
stock prior to closing. Rick Boyce, an executive officer of Wired Digital,
currently holds outstanding options to purchase 100,401 shares of Ventures
common stock, 47,796 of which were vested as of May 1, 1999, and will be
receiving an additional stock bonus grant of 1,760,131 shares of common stock
prior to closing. All of Ms. Vanderslice's and Mr. Boyce's options will be
accelerated on the terms described in "The Merger--Merger Consideration--
Treatment of Options" beginning on page 42.
Employee Bonus. Janelle Mitchell, an executive officer of Ventures, will be
receiving a cash bonus of $100,000 upon the closing of the merger.
Employment Agreements. Beth Vanderslice, Rick Boyce and four other employees
will enter into one-year employment agreements with Lycos upon the closing of
the merger. Under these agreements, each employee will receive salary, bonus
compensation, options to purchase Lycos common stock and other employee
benefits. These employment agreements provide that 50% of the Lycos stock
acquired by the employee as a result of the merger may not be resold until the
first anniversary of the merger. However, these agreements also provide that in
the event the employee's employment with Lycos is terminated (1) without good
cause, (2) due to death or disability or (3) by the employee because the
employee's job responsibilities have been materially reduced, this "lockup"
provision will cease to apply. If the employee voluntarily terminates his or
her employment during the first year after the merger for a reason other than
material reduction in job responsibilities, or is terminated during such year
for good cause, then the employee will be obligated to pay Lycos liquidated
damages in the amount and on the terms specified in the employment agreement.
Separation Agreements with Co-Founders. Louis Rossetto and Jane Metcalfe, who
are members of the Ventures board of directors and co-founders of Ventures,
have entered into separation agreements with Ventures. These agreements govern
the terms upon which Mr. Rossetto's and Ms. Metcalfe's employment with Ventures
and its subsidiaries were terminated. Mr. Rossetto and Ms. Metcalfe ceased to
be employed by Ventures and its subsidiaries on June 15, 1998 but each is still
a director of Ventures.
These agreements provide that Mr. Rossetto and Ms. Metcalfe are each entitled
to $1,000,000 in cash, paid over a 12-month period beginning with the date
their employment terminated, assuming compliance with the terms of these
agreements. However, upon the closing of the merger, Mr. Rossetto and Ms.
Metcalfe will be entitled to have any remaining cash amounts paid to them
immediately, instead of on a monthly basis, subject to their compliance with
their severance agreements. In addition, upon closing of the merger, they will
be entitled to receive $500,000 each in exchange for cancellation of their
Ventures stock options. See "The Merger--Merger Consideration--Treatment of
Options" beginning on page 42.
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Accounting Treatment
Lycos intends to treat the merger as a purchase for accounting and financial
reporting purposes, which means that Lycos will treat Ventures as a separate
entity for periods prior to the closing and, thereafter, as a wholly-owned
subsidiary of Lycos. See "Risk Factors--Risks Relating to the Merger--Method of
accounting for the merger may delay profitability of Lycos" on page 7.
Material Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
consequences of the merger that are generally applicable to holders of Ventures
capital stock. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended, existing and proposed United States
Treasury Regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to the Ventures
stockholders, as described in this section.
Ventures stockholders should be aware that this discussion does not deal with
all federal income tax consequences that may be relevant to particular
stockholders in light of their particular circumstances, including the tax
consequences which may differ from those described in this tax discussion for
the following types of stockholders:
. dealers in securities, banks or insurance companies;
. those subject to the alternative minimum tax provisions of the Internal
Revenue Code;
. foreign persons;
. tax-exempt entities;
. taxpayers holding stock as part of a conversion, straddle, hedge or other
risk reduction transaction; or
. those who acquired their shares in connection with stock option or stock
purchase plans or in other compensatory transactions.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, state or local tax laws. The following discussion
only applies to Ventures stockholders who hold shares of Ventures capital stock
as capital assets. Accordingly, all stockholders are urged to consult their own
tax advisors as to the specific consequences of the merger to them, including
the applicable federal, state, local and foreign tax consequences of the merger
in their particular circumstances.
Neither Lycos nor Ventures has requested, or will request, a ruling from the
Internal Revenue Service with regard to any of the federal income tax
consequences of the merger. Lycos has received an opinion from Hutchins,
Wheeler & Dittmar, A Professional Corporation, counsel to Lycos, and Ventures
has received an opinion from Cooley Godward LLP, counsel to Ventures, that the
merger will constitute a reorganization pursuant to Section 368(a) of the
Internal Revenue Code (a "Reorganization").
The tax opinions assume and are conditioned upon:
. the truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement, in the tax representations
received from Lycos, BF and Ventures to support the tax opinions and in
all other instruments and documents related to the formation,
organization and operation of Lycos, BF and Ventures examined by and
relied upon by Hutchins Wheeler and Cooley Godward in connection with the
merger;
. that original documents submitted to such counsel are authentic,
documents submitted to such counsel as copies conform to the original
documents, and that all such documents have been (or will be by the
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effective time) duly and validly executed and delivered where due
execution and delivery are a prerequisite to the effectiveness of such
documents;
. that all covenants contained in the merger agreement and the tax
representations, described above, are performed without waiver or breach
of any material provision of such covenants; and
. that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
The discussion below has been prepared by Hutchins Wheeler and Cooley
Godward, and in their opinion, to the extent such description relates to
statements of law, it is correct in all material respects. Subject to the
limitations and qualifications referred to in this description and in the tax
opinions, and assuming the merger is treated in accordance with the tax
opinions, the following federal income tax consequences will result:
1. A stockholder of Ventures will recognize gain in an amount not to
exceed the lesser of (1) the amount of cash received by such stockholder in
the merger, including any cash received as part of the merger consideration
and any cash received instead of a fractional share of Lycos common stock,
and (2) such stockholder's total gain in the merger. A stockholder's total
gain in the merger is generally equal to the difference between the sum of
the fair market value of the Lycos common stock and any cash received by
the stockholder in the merger, less such stockholder's basis in his, her or
its Ventures capital stock surrendered in the merger. A stockholder's
recognized gain should be capital gain so long as the payment is neither
essentially equivalent to a dividend within the meaning of Section 302 of
the Internal Revenue Code nor has the effect of a distribution of a
dividend within the meaning of Section 356(a)(2) of the Internal Revenue
Code. If a loss, rather than a gain, results from the application of the
stockholder's cost basis for the Ventures capital stock surrendered against
the total merger consideration received by such stockholder, that loss will
not be recognized.
2. The merger agreement anticipates that holders of Ventures capital
stock may receive cash payments after the close of the taxable year in
which the merger occurs. As a result, any taxable gain realized by these
stockholders, other than dissenting stockholders, resulting from the
exchange of his, her or its shares must be reported under the installment
method, unless the stockholder affirmatively elects out of or is otherwise
ineligible for installment method treatment, as discussed below.
3. The aggregate tax basis of the Lycos common stock received by a
Ventures stockholder in the merger, including any fractional share deemed
received as described in paragraph 5 below, generally should be equal to
the aggregate adjusted basis of the Ventures capital stock surrendered in
the merger, less any cash received in the merger plus any gain recognized
by such stockholder in the merger.
4. The holding period of the Lycos common stock so received in the merger
by each Ventures stockholder will include the period for which the Ventures
capital stock surrendered in the merger was considered to be held.
5. Cash payments received by holders of Ventures capital stock instead of
a fractional share of Lycos common stock will be treated as if such
fractional share had been issued in the merger and then redeemed by Lycos.
A Ventures stockholder receiving such cash will generally recognize gain or
loss upon such payment. Such gain or loss will generally be equal to the
difference, if any, between the amount of cash received and the basis in
such fractional share.
6. A holder of Ventures capital stock who exercises appraisal rights with
respect to a share of Ventures capital stock and receives a cash payment
for such share generally should recognize capital gain or loss. Such gain
or loss will generally be equal to the difference between the stockholder's
basis in such share and the amount of cash received, provided that such
payment is not considered a dividend as discussed above in paragraph 1. A
sale of shares pursuant to an exercise of appraisal rights generally will
not be considered a dividend if, as a result of such exercise, the
stockholder owns no shares of capital stock of Lycos, either actually or
constructively within the meaning of Section 318 of the Internal Revenue
Code, immediately after the merger.
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7. Neither Lycos nor Ventures will recognize gain solely as a result of
the merger.
Installment Method. The following discussion of the installment method
applies to the holders of Ventures capital stock who may receive cash payments
after the close of the taxable year in which the merger occurred. Generally,
under the installment method, a portion of each payment of the merger
consideration is taxable as gain in the year of receipt and a portion
represents a tax-free recovery of the holder's basis in the Ventures capital
stock. The taxable gain for any year is calculated by multiplying the principal
amount of any payment, which does not include Lycos common stock, received in
the year by a "gross profit ratio." The gross profit ratio is equal to the
"adjusted gross profit" divided by the "total selling price" of the holder's
Ventures capital stock. For this purpose, the total selling price does not
include the value of any Lycos common stock received in the merger. The
adjusted gross profit is equal to the selling price less the sum of (1) the
holder's adjusted basis in the Ventures capital stock and (2) the value of the
Lycos common stock received in the merger less the holder's basis in such Lycos
common stock immediately after the merger. As mentioned above, the total gain
to be realized by each stockholder will not exceed the fair market value of the
non-Lycos common stock portion of such stockholder's portion of the merger
consideration. In addition, a portion of any merger consideration payments that
are received after the close of the taxable year in which the merger occurs
will be treated as interest income. Such interest income will be taxable at
ordinary income tax rates when received by such holders under the Internal
Revenue Code's original issue discount rules and will reduce the amount of gain
(or increase the amount of loss) otherwise recognizable.
The installment method does not apply to holders of Ventures capital stock
who will recognize a loss in the merger or who elect out of installment method
treatment. Such stockholders may elect out of the installment method by timely
filing the appropriate form with his, her or its tax return for the tax year in
which the merger occurs. This tax discussion does not address the tax treatment
to stockholders who elect out of or who are ineligible for installment method
treatment. Stockholders considering making such an election or who are
ineligible for installment method treatment are urged to consult their own tax
advisors concerning the consequences of such an election or such ineligibility.
Tax Consequences of the Escrow. The following discussion applies only to
stockholders who will contribute shares to the escrow fund. Under the merger
agreement, 10% of the aggregate number of shares of Lycos common stock to be
received by Ventures stockholders in the merger, excluding any stock paid for
the Ventures cash balance, will be placed in escrow. The return of any escrow
shares to Lycos in satisfaction of an indemnifiable claim should not result in
the recognition of gain or loss to the holders of escrow shares. The return of
any escrow shares should be characterized as an adjustment to the exchange
terms of the merger agreement. Accordingly, the basis of each share of Lycos
common stock received in the merger would be adjusted. Moreover, if any escrow
shares are returned to Lycos, holders of Ventures capital stock who forfeit
shares could be required to redetermine the amount and timing of interest and
any gain recognized under the installment method, discussed above. The holders
of Ventures capital stock and Lycos are urged to consult their respective tax
advisors regarding the tax consequences to them of the transfer of the escrow
shares.
Consequences of IRS Challenge. A successful IRS challenge to the
Reorganization status of the merger would result in significant tax
consequences. Ventures stockholders would recognize gain or loss with respect
to each share of Ventures capital stock surrendered in the merger. Such gain or
loss would be equal to the difference between the stockholder's basis in such
share and the sum of the fair market value, as of the effective time, of the
Lycos common stock received in the merger and cash received as part of the
merger consideration, including cash received instead of a fractional share of
Lycos common stock. In such event, a stockholder's aggregate basis in the Lycos
common stock so received would equal its fair market value as of the effective
time and the stockholder's holding period for such stock would begin the day
after the merger is consummated.
Even if the merger qualifies as a Reorganization, a recipient of Lycos common
stock would recognize income to the extent that, for example, any such shares
were determined to have been received in exchange for
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services, to satisfy obligations or in consideration of anything other than the
Ventures capital stock surrendered. Generally, such income is taxable as
ordinary income upon receipt. In addition, to the extent that Ventures
stockholders were treated as receiving, directly or indirectly, consideration
other than Lycos common stock in exchange for such stockholder's Ventures
capital stock, gain or loss would have to be recognized.
This discussion does not address the tax consequences of the merger to
holders of Ventures warrants and stock options. Holders of such securities
should consult their tax advisors with respect to such tax consequences.
Regulatory Approvals
Under the Hart-Scott Rodino Antitrust Improvements Act of 1976, referred to
as the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission, some acquisition transactions may not be completed unless (1) the
parties give notice and furnish required information to the Antitrust Division
of the Department of Justice and the Federal Trade Commission and (2) specified
waiting period requirements have been satisfied. Lycos and Ventures each filed
the required information on October 22, 1998. The waiting period under the HSR
Act terminated on November 21, 1998. At any time before or after the effective
time, the Federal Trade Commission or the Antitrust Division could take action
under the antitrust laws that it deems necessary or desirable in the public
interest, including seeking to enjoin the merger or seeking the divesture of
Ventures by Lycos, in whole or in part, or the divestiture of substantial
assets of Lycos, Ventures or their respective subsidiaries. State attorneys
general and private parties may also bring legal actions under federal or state
antitrust laws in some circumstances.
Additionally, in order to complete the merger, the parties must file a
certificate of merger with the Secretary of State of the State of Delaware.
THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
Please note that the following description of the merger agreement is a
summary only. You should read the following summary and the merger agreement
attached as Annex A for a full understanding of the merger agreement. The
merger agreement is incorporated by reference into this proxy
statement/prospectus. All material elements of the merger agreement are
described in this proxy statement/prospectus.
Representations and Warranties
In the merger agreement, Lycos, BF and Ventures made certain customary and
other representations and warranties relating to, among other things:
. their respective organizations and similar corporate matters;
. their respective authorizations and the enforceability of the merger
agreement against each of them;
. their respective capital structures;
. their compliance with law; and
. the absence of material litigation.
In addition, Ventures made representations and warranties regarding, among
other things:
. the accuracy of financial information disclosed to Lycos;
. the absence of changes or events since August 31, 1998;
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. business statistics regarding the level of use of Ventures' Website;
. the status of operations of Ventures, including its employees and
principal customers; and
. the status of various assets of Ventures, including properties,
contracts, intellectual property and accounts receivable.
The representations and warranties of the parties will remain in full force
and effect until the first anniversary of the closing date. See "--
Indemnification and Escrow" below.
Covenants
Lycos, BF and Ventures have agreed to several covenants. Ventures has agreed,
among other things, to carry on its business in the ordinary course until the
closing date. Lycos and BF have agreed, among other things, to hold in
confidence all documents and information received about Ventures, to offer
employees of Ventures at-will employment after the closing date, to designate
the Ventures stockholders' representatives as agents to take specified actions
concerning the Advance escrow and to distribute cash in the amount of the tax
refund as required under the merger agreement. Lycos, BF and Ventures have
agreed to carry out a specified marketing program that is beyond the scope of
Ventures' ordinary marketing programs.
Ventures also has agreed not to (1) solicit or knowingly encourage submission
of any proposal for any business combination, equity or debt financing,
disposition of any substantial portion of Ventures' intellectual property
rights or similar transactions involving Ventures or any of its material
subsidiaries or (2) participate in any negotiations with, or disclose any non-
public information concerning, Ventures to any person, entity or group, other
than Lycos, with respect to any of the foregoing.
Indemnification and Escrow
Under the merger agreement, the former Ventures stockholders will indemnify
and hold Lycos and its affiliates harmless from any and all losses, net of
insurance proceeds actually realized or to be realized by Lycos, arising out
of, based upon or resulting from:
. any inaccuracy in or breach of any representation and warranty of
Ventures that is contained in the merger agreement or any schedule or
certificate delivered pursuant to the merger agreement;
. any breach or failure to perform any of the covenants, agreements or
undertakings of Ventures (to the extent that such covenants, agreements
or undertakings were to be performed or complied with on or prior to the
effective time);
. any losses of Lycos, Ventures or Ventures' subsidiaries to the extent
arising out of Ventures' obligations to provide indemnification in excess
of the amount of the Advance escrow resulting from or relating to the
operation or the sale of the magazine, books and television businesses;
or
. any losses resulting from a delay in filing a form related to a Ventures
employee benefit plan.
To secure payment of these indemnification obligations, 10% of the shares
delivered as merger consideration, other than shares representing the Ventures
cash balance, will be delivered to State Street Bank and Trust Company, as
escrow agent. Generally, the shares will be held for a period ending on the
first anniversary of the closing date. Escrow shares may, however, be withheld
after this date to satisfy claims for indemnification that are made prior to
that date. In addition, prior to termination of the escrow, at the discretion
of the stockholder representatives under the escrow agreement, the escrow
shares may be sold at per share prices equal to or greater than the 20-day
average closing stock price and a portion of the sales proceeds may be
distributed to the Ventures stockholders who contributed to the escrow.
The former Ventures stockholders will have liability for indemnification only
for the aggregate losses to Lycos in excess of a $500,000 deductible. However,
the deductible will not apply to inaccuracies in specified representations or
warranties relating to corporate power and authority to enter into the merger
agreement, execution of the merger agreement, Ventures' ownership of its
subsidiaries, Ventures' tax matters and
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Ventures' use of brokers in this transaction. The deductible will also not
apply to any losses arising out of Ventures' obligations to provide
indemnification to Advance in excess of the amount of the Advance escrow or
otherwise resulting from or relating to the operation or the sale of the
magazine, books and television businesses, or any losses resulting from
specified disclosed delayed form filings.
Lycos and Ventures, as the surviving corporation, will indemnify and hold
former Ventures stockholders harmless from any and all losses, net of any
insurance proceeds recoverable and net of any tax benefit, actually suffered by
them as a direct result of the failure of a representation or warranty made by
Lycos or BF to have been true in all material respects when made.
Conditions to Consummation of the Merger
The obligations of Lycos, BF and Ventures are subject to the satisfaction or
waiver of customary and other conditions, including:
. the accuracy of the representations and warranties contained in the
merger agreement in all material respects;
. the performance in all material respects of all obligations under the
merger agreement;
. the receipt of necessary corporate approvals;
. the demand of appraisal rights by holders of Ventures capital stock
entitled to no more than 5% of the merger consideration;
. the receipt of legal opinions by each of Lycos and Ventures from its
legal counsel that the merger will be a tax-free reorganization for
federal income tax purposes;
. the absence of any injunction or other legal restraint preventing the
occurrence of the merger; and
. the receipt of all required approvals, authorizations and consents of
governmental and regulatory authorities.
Each condition may be waived by the company entitled to assert it.
Termination and Amendment
The merger agreement may be terminated at any time prior to the effective
time by the mutual agreement of Lycos and Ventures or by either party if the
effective time has not occurred by July 14, 1999. However, a party can not
terminate the merger agreement unilaterally for failure to close by July 14,
1999 if the action of that party has been a principal cause of or resulted in
the failure of the merger to occur by such date.
The merger agreement may be amended or modified by written consent of the
party against which enforcement of such amendment or modification is sought.
Fees and Expenses
If the merger is consummated, the parties will pay their own costs and
expenses incidental to the merger and the transactions contemplated by the
merger agreement. However, for purposes of determining the Ventures cash
balance, Ventures will receive a credit for all such costs and expenses paid
prior to the closing, up to a maximum credit of $2.5 million. If the merger is
not consummated because Lycos is the cause of the failure to close, then Lycos
must pay its expenses, plus the expenses of Ventures up to $200,000. If the
merger is not consummated because Ventures is the cause of the failure to
close, then Ventures must pay its expenses, plus the expenses of Lycos up to
$200,000.
Directors and Officers
The officers of Ventures after the merger will be Edward M. Philip, Thomas E.
Guilfoile and Jeffrey M. Snider. The sole director of Ventures after the merger
will be Edward M. Philip.
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VOTING AGREEMENTS
Please note that the following description of the voting agreements is a
summary only. The voting agreements attached as Annex B contain the complete
terms of the voting agreements.
In connection with the execution of the merger agreement, some of the
directors and holders of Ventures capital stock, all of whom are affiliates of
Ventures, who together own a majority of the Ventures capital stock and the
Ventures Series C preferred stock, each agreed to vote all shares of Ventures
capital stock held by such holders in favor of the merger. The general effect
of the voting agreements is to ensure that stockholder approval of the merger
will be obtained.
Each of the parties to the voting agreements, except the trustee of the
voting trust, has agreed to vote (1) in favor of the merger, the adoption of
the merger agreement and the approval of the terms thereof and (2) against the
following actions, other than the merger and the transactions contemplated by
the merger agreement:
. any business combination involving Ventures or its subsidiaries;
. any sale of a material amount of assets of Ventures or its subsidiaries;
. any change in a majority of the board of directors of Ventures;
. any amendment to Ventures' certificate of incorporation other than a
change necessary or desirable in connection with the merger and
acceptable to Lycos; or
. any other action that requires the approval of Ventures' stockholders
that is intended, or could reasonably be expected, to interfere with the
completion of the merger or the transactions contemplated by the merger
agreement or the voting agreements.
The trustee of the voting trust has agreed to vote (1) in favor of the
merger, the adoption of the merger agreement and the approval of the terms
thereof and (2) against any business combination involving Ventures or its
subsidiaries or any sale of a material amount of assets of Ventures or its
subsidiaries (other than the merger and the transactions contemplated by the
merger agreement).
Each of the parties to the voting agreements has irrevocably granted to, and
appointed, BF and the President and Treasurer of BF, in their respective
capacities as officers of BF, such party's proxy and attorney-in-fact to vote
or act by written consent with respect to its, his or her Ventures capital
stock solely with respect to the matters set forth above.
Each of the parties to the voting agreements has agreed, among other things,
(1) not to solicit, including by way of furnishing information, or respond to
any inquiries or the making of any proposal by any person (other than Lycos or
BF and other than advising such person or entity of the existence of the voting
agreement) with respect to Ventures that constitutes or could reasonably be
expected to lead to an acquisition transaction and (2) not to:
. except pursuant to the terms of the merger agreement, take any action to
sell, transfer or otherwise dispose of any or all of the party's Ventures
capital stock;
. except as contemplated by the voting agreement, grant any proxies or
powers of attorney or enter into a voting agreement with respect to the
Ventures capital stock; or
. take any action that would make any representation or warranty contained
in the voting agreements incorrect or have the effect of preventing or
disabling the party from performing its, his or her obligations under the
voting agreements.
The voting agreements terminate upon the completion of the merger or the
termination of the merger agreement in accordance with its terms.
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COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF LYCOS AND VENTURES
As stockholders of Lycos, your rights will be governed by the Delaware
corporate law and by Lycos' restated certificate of incorporation and amended
and restated by-laws. Following is a summary of some of the differences between
the rights of Ventures stockholders and Lycos stockholders. This summary covers
only the primary differences; it is not a complete discussion of the rights of
Lycos and Ventures stockholders.
Ventures and Lycos are both organized under the laws of the state of
Delaware. Any differences, therefore, in the rights of holders of Ventures
capital stock and Lycos common stock generally arise from differences in their
respective certificates of incorporation and by-laws and the application of
California law as described below.
Authorized Capital
Ventures. The total number of authorized shares of Ventures capital stock is
75,000,000 shares with a par value of $.001 per share, consisting of 45,000,000
shares of common stock and 30,000,000 shares of preferred stock. The Ventures
preferred stock has been designated into four series: 15,300,000 shares of
Series A preferred stock; 700,000 shares of Series B preferred stock; 3,800,000
shares of Series C preferred stock; and 50,000 shares of Series D preferred
stock.
Each series of Ventures preferred stock has a number of rights, preferences
and privileges that will be eliminated in the merger. These rights, preferences
and privileges include:
. Dividend Rights. The holders of Ventures Series C preferred stock are
entitled to receive cumulative dividends at the rate of 8% per year,
compounded annually. As of June 21, 1999, these compounded dividends will
be approximately $4,449,930. The holders of Ventures Series B preferred
stock and Ventures Series A preferred stock are entitled to noncumulative
dividends at the rate of 8% per year. The Ventures board of directors has
never declared any dividends on the Ventures Series B preferred stock or
the Ventures Series A preferred stock, and has no intention to do so in
the future.
. Special Voting Rights. Several actions may not be taken by Ventures
without the approval of a majority of the holders of the Ventures Series
C preferred stock. These actions include amendments to Ventures'
certificate of incorporation or bylaws, authorizations of securities
ranking on a parity with or senior to the Ventures Series C preferred
stock, declarations of dividends, mergers and acquisitions, incurrences
of significant amounts of indebtedness and issuances of equity
securities. In addition, some actions may not be taken by Ventures
without the approval of a majority of the holders of the Ventures Series
B preferred stock. These actions include amendments to Ventures'
certificate of incorporation or bylaws and authorizations of securities
ranking on a parity with or senior to the Ventures Series B preferred
stock.
. Liquidation Preferences. In the event of a liquidation of Ventures,
including an acquisition of Ventures, the proceeds of such liquidation
are first distributed to the holders of Ventures preferred stock before
any proceeds are distributed to the holders of Ventures common stock. The
proceeds are distributed as follows:
. First, proceeds are allocated so that the holders of Ventures Series C
preferred stock receive an amount equal to their original purchase
price plus accrued but unpaid dividends.
. Second, proceeds are allocated 21.2% to the holders of Ventures Series
C preferred stock and 78.8% to the holders of Ventures Series B
preferred stock until the holders of Ventures Series B preferred stock
have received their original purchase price plus accrued but unpaid
dividends.
. Third, proceeds are allocated 21.2% to the holders of Ventures Series C
preferred stock and 78.8% to the holders of Ventures Series A preferred
stock until the holders of Ventures Series A preferred stock have
received their original purchase price plus accrued but unpaid
dividends.
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. Fourth, any remaining proceeds would be allocated to the holders of
Ventures common stock and Ventures Series C preferred stock on an as-
if-converted to common stock basis.
. Conversion Rights. Each share of Ventures preferred stock is convertible
into Ventures common stock at any time at the election of the
stockholder. The conversion rate for each series of Ventures preferred
stock is adjusted for stock splits, consolidations, stock dividends and
the like. In addition, the conversion rate for the Ventures Series C
preferred stock and Ventures Series B preferred stock is adjusted upward
if Ventures sells equity securities for an amount less than that
originally paid by the holders of Ventures Series C preferred stock and
Ventures Series B preferred stock for such stock, subject to exclusions
contained in Ventures' certificate of incorporation. Finally, the
conversion rate for the Ventures Series C preferred stock is adjusted if
financial performance tests included in Ventures' certificate of
incorporation are not met. The conversion rate for the Ventures Series A
preferred stock and Ventures Series B preferred stock is, and always has
been, 1 for 1. Because Ventures failed the financial performance tests
included in Ventures' certificate of incorporation, the conversion rate
for the Ventures Series C preferred stock is 1 for 1.3126.
Each share of Ventures Series C preferred stock automatically converts
into Ventures common stock upon the occurrence of any of the following:
. the vote of holders of a majority of the outstanding Series C preferred
stock;
. the closing of Ventures' initial public offering of common stock, if the
offering is of a specified size; or
. the closing of a sale of all or substantially all of Ventures' equity
securities or a sale of all or substantially all of Ventures' assets, in
either case where the holders of Ventures Series C preferred stock then
outstanding would receive, if the Ventures Series C preferred stock is
converted into Ventures common stock at such closing, at least $60
million in cash.
Upon any such automatic conversion, Ventures would be required to pay the
accrued but unpaid dividends on the Ventures Series C preferred stock.
The merger with Lycos will not trigger the automatic conversion of the
Ventures Series C preferred stock because the holders of Ventures Series
C preferred stock would not under any circumstances receive at least $60
million in cash.
Each share of Ventures Series B and Series A preferred stock
automatically converts into Ventures common stock upon any of the
following:
. the vote of holders of a majority of the outstanding Ventures Series B
preferred stock or Ventures Series A preferred stock, as applicable;
. the automatic conversion of the Ventures Series C preferred stock; or
. the closing of Ventures' initial public offering of common stock.
Because there will be no automatic conversion of the Ventures Series C
preferred stock upon the closing of the merger, there will likewise be no
automatic conversion of the Ventures Series B and Series A preferred
stock upon the closing of the merger.
. Redemption Rights. Each outstanding share of Ventures Series C preferred
stock is redeemable, at the option of the stockholder, at any time after
December 31, 2001 or earlier if any of the other tests contained in
Ventures' certificate of incorporation is met. The redemption price is
the amount that would be received for one share of Ventures Series C
preferred stock, pursuant to the terms of Ventures' certificate of
incorporation, if Ventures were sold for fair market value on the
redemption date.
Lycos. The total number of authorized shares of Lycos capital stock is
105,000,000 shares with a par value of $.01 per share, consisting of
100,000,000 shares of common stock and 5,000,000 shares of preferred stock.
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Directors and Classes of Directors; Removal of Directors
Ventures. The Ventures certificate of incorporation provides that the number
of directors is 11. The Series C preferred stockholders are entitled to elect
six of the 11 directors so long as 100,000 shares of Series C preferred stock
are outstanding. Providence Equity Partners L.P. and Providence Equity Partners
II L.P. are together entitled to elect four of these six directors. These
stockholders own 81.4% of the Ventures Series C preferred stock. Raptor Global
Fund, L.P., Raptor Global Fund, Ltd., Tudor Arbitrage Partners L.P. and Tudor
BVI Futures, Ltd. are together entitled to elect the other two of these six
directors. These stockholders own the remaining 18.6% of the Ventures Series C
preferred stock, and also own 16.0% of the Ventures Series B preferred stock
and 0.43% of the Ventures Series A preferred stock. The remaining directors are
elected by the common stockholders and the Series A, Series B and Series C
preferred stockholders, voting together. The Series A, Series B and Series C
preferred stockholders are entitled to the number of votes that they would have
if they converted their stock to common stock. The Ventures board of directors
is not divided into classes.
One or more directors may be removed from office with cause by a majority
vote of the Ventures stockholders, subject to the rights of preferred
stockholders to elect directors. One or more directors may be removed from
office without cause by a 66 2/3% vote of the Ventures stockholders, subject to
the rights of preferred stockholders to elect, and therefore remove, directors.
Lycos. The number of directors of Lycos is set by the Lycos board of
directors. Directors are elected by all of the stockholders entitled to vote.
The Lycos board of directors is divided into three equal classes, consisting as
nearly as possible of equal numbers of directors. At each annual meeting of
stockholders, successors to the class of directors whose term expires at the
annual meeting are elected for a three-year term.
One or more directors may be removed from office with cause by a majority
vote of the Lycos stockholders. Directors may not, however, be removed without
cause.
Special Meetings of Stockholders
Ventures. Special meetings of Ventures stockholders may be called by the
Chief Executive Officer, Chair of the board of directors, by a majority of the
board of directors or by stockholders entitled to cast at least 10% of the
votes at such meeting.
Lycos. Special meetings of Lycos stockholders may only be called by the
President, the Chairman of the board of directors or the board of directors.
Stockholders of Lycos may not call a special meeting of stockholders.
Stockholders may bring proposals before the stockholders of Lycos at annual or
special meetings if they provide Lycos with written notice that complies with
the time and content requirements of the Lycos by-laws and other applicable
regulatory requirements.
Amendment of By-Laws
Ventures. The Ventures by-laws may be altered or amended or new by-laws
adopted by the Ventures board of directors or by the affirmative vote of at
least 66 2/3% of the voting power of all then-outstanding shares.
Lycos. The Lycos by-laws may be altered or amended or new by-laws adopted by
the Lycos board of directors or by a majority in interest of the voting power
of all then-outstanding stock, provided, however, that either the approval of
at least 80% of the voting power or the approval of the entire Lycos board of
directors is required to alter, amend, repeal or adopt any provision regarding:
meetings of stockholders; the number, election and term of directors; the
removal of directors; and amendments of the Lycos by-laws.
Section 203 of Delaware Law
Lycos has elected to be subject to the "business combination" statute of the
Delaware General Corporation Law, Section 203. In general, this statute
prohibits a publicly-held Delaware corporation from
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engaging in various "business combination" transactions with any "interested
stockholder" for three years after the date that the person became an
"interested stockholder" unless specified requirements are met. A "business
combination" includes mergers, asset sales and other transactions that result
in a financial benefit to the stockholder. An "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the past
three years did own, 15% or more of the corporation's voting stock. This
statute could prohibit or delay mergers or other takeover or change in control
attempts and may discourage parties from attempting to acquire Lycos.
Ventures is not subject to Section 203 of the Delaware General Corporation
Law because it is a privately-held corporation.
Anti-Takeover Provisions
Some of the provisions of Delaware law and the Lycos certificate of
incorporation and by-laws described above may have the effect of delaying Lycos
stockholder actions and the election of new Lycos directors. These and other
provisions could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding Lycos voting stock, discourage a
hostile bid, or delay, prevent or deter a merger, acquisition or tender offer,
in which Lycos stockholders could receive a premium for their shares, or a
proxy contest for control of Lycos. These provisions include:
. the classification of the Lycos board and the provisions regarding
removal of directors;
. the application of Section 203 of the Delaware General Corporate Law to
Lycos; and
. the restriction that only the President, the Chairman of the board of
directors, or the board of directors may call meetings of the Lycos
stockholders.
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BUSINESS OF LYCOS
Lycos, "Your Personal Internet Guide," is a "New Generation Online Service"
that offers through the Web a network of online services and content including
community, chat, e-mail and on-line shopping. Lycos seeks to draw a large
number of viewers to its Websites by providing a one-stop destination for
identifying, selecting and accessing resources, services, content and
information on the Web. The Lycos network is dedicated to helping each
individual user locate, retrieve and manage information tailored to his or her
personal interests. Lycos' recent acquisitions of Tripod and Angelfire allow it
to offer Internet users the ability to create personal homepages and join
interest-based communities.
Since its inception in June 1995, Lycos has rapidly expanded into a global
Internet resource used daily by millions of people throughout the world. Lycos
is one of the leading online media services in terms of level of use of its
Website, revenues and user reach, serving millions of information requests per
day. According to Media Metrix, Lycos' Websites attracted approximately 38.3%
of all Web users during September, 1998. Lycos generates revenues primarily
through selling advertising and sponsorships, electronic commerce and by
licensing its products and technology. Lycos' Websites have become a widely
accepted advertising medium for several prominent companies, including Coca-
Cola, Disney, General Motors, Hilton, IBM, Proctor and Gamble and Visa. Lycos
has established electronic commerce and sponsorship relationships with several
companies, including AT&T, Barnes & Noble, Fleet Bank and Preview Travel. In
addition, Lycos has established strategic licensing and technological alliances
with some of the world's leading corporations, including such companies as
Bertelsmann, Sumitomo, Microsoft and Viacom.
Lycos' ability to easily adapt its technology in a variety of languages has
made its service a popular global Internet destination, easily accessible to
users throughout the world. In order to expand the international distribution
of Lycos' services, in May 1997, Lycos entered into a joint venture with
Bertelsmann AG to launch local versions of the Lycos service throughout Europe,
and, in March 1998, Lycos entered into a joint venture with Sumitomo Corp. and
Internet Initiative Japan, Inc. to offer a localized version of the Lycos
service in Japan. Lycos currently offers localized versions of the Lycos
service in Austria, Belgium, France, Germany, Italy, Japan, Luxembourg, the
Netherlands, Spain, Sweden, Switzerland and the United Kingdom.
See "Where You Can Find More Information" on page 28.
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BUSINESS OF VENTURES
Overview
Ventures' business is conducted through its wholly-owned subsidiary, Wired
Digital, Inc. Wired Digital maintains a suite of Websites featuring original
content and search and navigation services. Until June 1998, Ventures also
published Wired magazine through a separate wholly-owned subsidiary. In June
1998, Wired magazine and some of the other businesses conducted by Ventures
were sold to Advance Magazine Publishers Inc.
Online Properties
Wired Digital's branded online properties, which are provided to users free
of charge, include the following:
Search and Navigation Services--HotBot. HotBot (www.hotbot.com) is one of the
most popular search and navigation sites on the World Wide Web, hosting over
6.7 million unique users in January 1999, as reported by Relevant Knowledge.
"Unique users" are users 12 years of age or older who visited a site over the
course of a particular reporting period. HotBot provides a range of search
technologies and services to its users. HotBot offers one of the largest
searchable databases of Websites with an index of over 110 million documents as
well as an extensive set of features to help users refine and target their
searches. Since its launch in June 1996, HotBot has been recognized as the
Web's best search site by PC Magazine, PC Computing, PC World and SmartMoney
magazines and has received numerous awards for its site design and user
interface.
The HotBot service enables users to search the Web for information based on a
number of search criteria, including key words, date of posting, language,
presence of types of files, such as audio, video and graphic image, and type of
domain, such as ".com" or ".org". Wired Digital licenses the principal
technology employed by users for HotBot searches from Inktomi Corporation. The
fee charged to Wired Digital is based on a fixed fee per search query. In
addition, Wired Digital has enhanced HotBot's search functionality through new
technology intended to assist consumers in finding the information they are
seeking faster and more efficiently. These technologies are primarily developed
by and licensed from third parties. For example, HotBot has recently
implemented a new search technology that classifies search results according to
popularity of the sites based on the behavior of previous users. HotBot also
features a variety of specialty search services, covering information sources
such as yellow and white pages, classified advertisements and job listings,
Usenet postings and Internet domain names, offered through strategic alliances
with other information providers. These specialty search services are also
available to users through links featured on HotBot.
HotBot users also may browse through a set of channel guides for information
related to broad subject categories, such as Stay Informed, Manage Your Money,
Make a Purchase and Use Technology. These channels were developed to mimic how
consumers use the Web to stay informed about current events, to manage their
investments, career and education and to learn about technology. Each channel
includes a topical list of preferred sites selected by Wired Digital's
editorial staff as well as a more extensive list of related sites users can
access from each channel guide through hyperlinks.
HotBot also recently introduced HotBot-branded e-mail addresses and home
pages. These free services, like the other features of HotBot, are intended to
attract users, encourage repeat visits to the site and build loyalty to the
HotBot brand. In order to use these services, users must register for
membership by providing information about themselves. The e-mail address and
home page services are based on technology provided by WhoWhere? Inc., which
was recently acquired by Lycos. WhoWhere? sells the advertising for these
services and shares a percentage of the resulting advertising revenues
generated by Wired Digital.
News and Editorial Content.
Wired News. Wired News (www.wired.com) is one of the Web's most popular
sources for daily analysis of how technology impacts business, politics and
culture with approximately 1.3 million unique visitors in January 1999 as
reported by RelevantKnowledge. Content updates to the Wired News site are
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published six to eight times every weekday with original content written by
staff reporters and commissioned editors and, to a lesser extent, content from
major news services. Stories are generally categorized into the following
topics: business, culture, technology and politics. Wired News also provides
general news, a daily news overview and a weekly news summary. In addition,
Wired News provides stock market information, including stock quotes, indexes,
graphing capabilities and portfolio management tools. These features are
provided through an arrangement with Ethos Corporation (dba StockPoint). Wired
Digital shares some advertising revenues with Ethos.
Consumers can access Wired News either directly or by subscribing to a
service that delivers Wired News content via e-mail. Wired Digital has made
arrangements with Internet service providers and other distribution partners to
provide this e-mail delivery service. Generally, these Internet service
providers are compensated based on a varying fixed fee per referral.
HotWired. HotWired (www.hotwired.com) was the first commercial Website to
publish original content focused on technology and culture. HotWired features a
network of original content sites focused on innovative Web technology and
culture. HotWired sites such as RGB Gallery and the recently-launched Animation
Express animation channel, which showcase emerging Web technologies, are
designed to demonstrate to users the power and possibilities of the Web. One of
the largest and most popular sites within HotWired is Webmonkey
(www.hotwired.com/webmonkey). Webmonkey features tips and tricks, appropriate
for both novice and experienced Web users, for learning the language of the Web
as well as information and online resources on how to build Websites.
HotWired has been recognized by the digital community with numerous awards,
including "Best Design" from I.D. Magazine Interactive Media in 1997; "Top
Websites" from TIME in 1996; "Still Cool Site of the Year" from Internet
Community in 1996; "Best Website of the Year" from Digital Hollywood in 1996;
"Website Design of the Year" from SF Focus in 1996; "Best Arts and
Entertainment Site" by NII in 1995; "Best Online Publication" from Computer
Press in 1995; and "Online Magazine of the Year" from Ad Age in 1994.
Suck.com. Suck.com (www.suck.com) features witty humor and clever commentary
on new media. This daily column is colorfully written and offers insights into
the Internet and media industries.
Strategic Alliances
A key element of Wired Digital's business strategy is to enter into alliances
with other Internet service, access and technology providers and other third-
party content providers. These alliances include:
Marketing and Distribution Relationships. Wired Digital has an agreement with
Netscape Corporation pursuant to which HotBot is promoted as a "distinguished
provider" on Netscape's U.S. English-language NetSearch page, which attracts
users to HotBot. Wired Digital has entered into similar agreements with
Microsoft for the promotion of Wired Digital's branded content on some
Microsoft Websites and products. In addition, Wired Digital maintains numerous
similar promotional arrangements with ISPs such as Earthlink and other Websites
and portals to promote its services and content via promotional links and via
content emails delivered directly to subscribers. Such promotion is typically
delivered in exchange for fees based on the number of referrals or overall site
visits generated by the promotion and sometimes in exchange for advertising and
other cross-promotional activities on the Wired Digital properties. See "Risk
Factors--Ventures needs to establish and maintain marketing and distribution
relationships with third parties" on page 20.
In addition, in exchange for online promotion and license fees, Wired Digital
has licensed some of its branded content and Website design to Nippon Telegraph
& Telephone Corporation and its affiliates in Japan and to Internet
Technologies China, Inc. in Beijing for the creation of localized Japanese- and
Chinese-language "mirror" sites showcasing Wired Digital's content properties
in Asia.
Key Technology and Content Alliances. HotBot's core Web search and retrieval
technology is provided through a license with Inktomi Corporation in exchange
for fees generally payable on a per-query basis.
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Ancillary specialty search and directory services, such as yellow pages, white
pages, Usenet postings and classified ads, and various subject-specific search
services, including stock market data, music catalogs and comparison shopping
tools, are provided on HotBot and on other Wired Digital properties. These
services are provided through licenses with third-party data and technology
providers, typically in exchange for a per-query fee or fees based on
advertising revenues generated by usage of such specialty services and
sometimes as part of larger promotional arrangements with Wired Digital's
advertising clients. In addition, Wired Digital has forged several technology
development relationships with third parties pursuant to which Wired Digital
licenses and develops applications to better anticipate and refine users'
queries and improve the relevance of search results. An example is the license
and development relationship with Direct Hit Technologies, Inc., whose
technology tracks and applies aggregate user behavior data to help filter
search results.
Advertising and Other Sales
Wired Digital currently derives revenues principally from the sale of
advertisements, and to a lesser extent, from sponsorships of programs or pages.
Advertising revenues constituted 96% of Wired Digital's net revenues in 1997
and 1998. During the year ended December 31, 1998, Wired Digital had over 660
advertisers.
Wired Digital sells a variety of advertising packages to clients, including
advertising banners, promotional hypertext links, sponsorships, and targeted
and direct response advertising units that are featured prominently on the
pages of content delivered on Wired Digital's online properties. Currently,
Wired Digital's advertising revenues are derived from short-term advertising
contracts, averaging one to two months, in which Wired Digital guarantees a
minimum number of impressions for a fixed fee per 1,000 impressions delivered,
commonly referred to as "CPM." Advertising revenues are recognized ratably in
the period in which the advertisement is displayed, provided that no
significant Wired Digital obligations remain and collection of the resulting
receivable is probable. Some of Wired Digital's advertising arrangements,
particularly those with its electronic commerce merchant advertisers, are
structured to compensate Wired Digital partly on a CPM basis and partly on a
cost-per-click basis. On a cost-per-click basis, a merchant advertiser pays
Wired Digital a small fee each time a user accesses the merchant's Website by
"clicking" on a hyperlink or an advertising banner from one of Wired Digital's
properties.
Wired Digital offers advertisers a variety of advertising programs that
enable advertisers to target and meet their particular needs and objectives.
Advertisers can purchase untargeted advertisements that rotate on a random
basis throughout one or more sites. This type of advertisement provides
frequent exposure to advertisers and may appeal to advertisers seeking to build
general brand recognition.
Targeted advertisements are designed to appeal to selected segments of a
consumer market. An advertiser can purchase a program combining banners and
sponsorships across properties targeting different segments of the online
market. For instance, an advertiser can designate that a specific number of
advertising units be placed on a particular site or portion of a site. On
HotBot, an advertiser also can purchase impressions generated from a list of
specific search terms input by the user, known as "key words." Wired Digital is
able to charge premium rates for such targeted advertising.
Sponsorships allow an advertiser to sponsor a particular Wired Digital
program, or particular section or page of a site, for a fixed period of time.
During the sponsorship, the advertiser's name or product will be promoted on
the designated area, usually on an exclusive basis. While sponsorships
typically provide a less targeted approach to online advertising, they afford
the advertiser the opportunity to have its name or products associated more
closely with a particular Wired Digital property or service.
Wired Digital also derives revenues from licensing its content to other
online content and service providers. Wired Digital licenses some of its
branded news and editorial content to Nippon Telegraph and Telephone and to
Internet Technologies China. Content is generally licensed in exchange for a
fixed distribution fee and a percentage of the revenues generated from the
online distribution networks.
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Wired Digital's direct sales force and advertising operations group consists
of 46 employees as of February 28, 1999, who are located in the Wired Digital's
offices in San Francisco, New York, Chicago and Los Angeles.
Marketing
Wired Digital's strategy is to generate a high volume of traffic across all
of its online properties by providing high-quality content and services to
users free of charge. Wired Digital relies in part on its high-quality content
and services to generate positive word-of-mouth marketing. Wired Digital also
cross-promotes all of its sites and services by providing textual links and
promotions designed to drive users from one Wired Digital online property to
another. Wired Digital is also building its online brands through a combination
of online and traditional media marketing campaigns as well as through
distribution arrangements that send traffic to Wired Digital's online
properties. For example, Wired Digital recently launched a television marketing
campaign aimed at increasing traffic to its HotBot site, which Wired Digital
expects will ultimately increase traffic to its other online properties through
strategically placed links.
Competition
Wired Digital operates in the dynamic and rapidly expanding market of
Internet content and service providers. The market for Internet services and
products, particularly Internet advertising and Internet search and retrieval
services and products, is intensely competitive. Since there are few barriers
to entry to this market, the competition for advertisers is increasing as the
number of online content and service providers increases. Ventures believes
that the critical factors for Wired Digital's success include:
. Providing high-quality, easy-to-use products and services;
. Maintaining a large base of regular users; and
. Creating strong brand recognition for its products and services.
Wired Digital's primary competitors include the major search and navigation
sites: Lycos, Yahoo!, Excite, Infoseek, NBC's Snap!, Compaq's AltaVista,
Netscape's NetCenter and Microsoft's MSN. These sites have become gateways to
the Internet for many consumers by offering a combination of search tools,
informational content and a range of online utilities, including e-mail, home
page building tools and online shopping. Yahoo!, Snap!, MSN and other search
and navigation service competitors each license the technology from Inktomi
that is the basis of HotBot. Wired Digital also competes with sites that
produce technology information and news such as Cnet's news.com and Ziff-Davis'
ZDNet. Many of Wired Digital's existing competitors, as well as a number of
potential new competitors, have greater financial, sales and marketing
resources, larger customer bases and databases and may have longer, more
established advertiser and media relationships.
Wired Digital also competes with traditional advertising media, such as
print, television and radio, for a share of advertisers' total advertising
budgets. To the extent that the Internet is not an effective advertising
medium, advertisers may be reluctant to devote a significant portion of their
advertising budget to media other than traditional media. In addition, Ventures
expects that larger, traditional media companies will continue to enter into
the Internet medium. These traditional media companies may gain a competitive
advantage by leveraging their traditional media outlets to promote their online
properties.
Intellectual Property
Ventures aggressively protects its brand names and marks by seeking trademark
registration for such names and marks and by monitoring and seeking to prevent
unauthorized use of such names and marks. Wired Digital also seeks copyright
protection for its original content. Ventures also enters into confidentiality
agreements or license agreements with its employees, consultants and key
contributors, and generally controls access to and distribution of its
proprietary content and information.
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Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use Ventures' or its subsidiaries' products or technology
without authorization. In addition, effective copyright, trademark and trade
secret protection may be unavailable or limited in some foreign countries, and
the global nature of the Internet makes it virtually impossible to control the
ultimate destination of the Company's products. Ventures' success depends
significantly upon its ability to prevent unauthorized reproduction or use of
its trade names, products and services. See "Risk Factors--Risks Relating to
Ventures--Ventures is dependent on intellectual property, and Ventures' methods
of protecting its proprietary rights may not be adequate" on page 24.
Wired Digital licenses several key Website and search technologies from third
parties, some of which technologies are generally commercially available but
some of which are licensed pursuant to highly-negotiated or individualized
arrangements. For instance, Wired Digital licenses the core Web search database
and retrieval technology for its HotBot search service from Inktomi Corporation
pursuant to an information services agreement that expires in March 2001 if not
renewed on mutually acceptable terms. The agreement with Inktomi may be
terminated prior to its expiration date by either party if the other party
fails to cure a material breach of its obligations upon the other party's
insolvency. The current agreement also provides for termination by Wired
Digital for convenience upon delivery of a specified number of months' prior
written notice to Inktomi. See "Risk Factors--Risks Relating to Ventures--
Ventures relies heavily on its relationship with Inktomi from which Ventures
licenses important technology" on page 20.
Although Ventures owns rights in "HotBot," "Webmonkey," "Suck" and several
other of its brands, most of the "Wired"-based trademarks, service marks and
logos used in its business including, "Wired News," are licensed from Advance
Magazine Publishers Inc., which purchased Ventures' magazine, books and
television businesses and related brands in June 1998. Under the agreement with
Advance, Ventures has a royalty-free license to use the "Wired"-based marks and
other marks in digital media on an exclusive basis and for marketing purposes
in all media on a non-exclusive basis in perpetuity, subject to adherence to
specified quality-control standards. For the duration of the license agreement
with Advance covering Ventures' use of the "Wired" marks, Ventures' use of its
own mark "HotWired" will be similarly restricted by contract to uses primarily
in the digital media domain and subject to specified quality-control standards.
Pursuant to a separate collaboration agreement that continues through the
duration of the trademark license agreement, Ventures and Advance also have
mutual obligations to cooperate regarding the use and protection of the
licensed marks and regarding the parties' participation in conferences and
trade shows under the licensed "Wired" marks.
Employees
As of March 31, 1999, Ventures and Wired Digital had 161 full-time employees,
including 50 in sales and advertising operations, 14 in administration and
finance, 13 in marketing, 24 in engineering and infrastructure and 60 in
design, editorial and production. From time to time, Ventures and Wired Digital
also employ independent contractors to support its engineering, infrastructure,
sales, marketing and administrative functions. None of Ventures' or Wired
Digital's employees is represented by a collective bargaining agreement.
Ventures believes that its and Wired Digital's relationships with their
employees are good.
Facilities
Ventures' and Wired Digital's executive offices are located in a leased
facility consisting of approximately 40,000 square feet in San Francisco,
California. The lease expires in July 2006 with an additional five-year option
to renew. Ventures believes the space will be adequate through that period and,
if required, suitable space is available nearby. Wired Digital also leases
offices for its sales force in New York, Chicago and Los Angeles.
Some of Ventures' communications and computer hardware are located at a
leased facility in Santa Clara, California. A system failure at this location
could adversely affect the performance of Wired Digital's services.
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VENTURES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Ventures operates its business through its wholly-owned subsidiary, Wired
Digital. In October 1994, Ventures launched HotWired, a collection of Web-based
online content sites. HotBot, its search and navigation service, was launched
in June 1996, and Wired News, its online daily news and analysis service, was
launched in November 1996 to capitalize on the Wired brand and existing
network. In May 1997, Ventures renamed its online division Wired Digital to
more effectively leverage the Wired brand. In May 1998, Wired Digital added
commerce transacted over the Internet known commonly as "e-commerce," to its
HotBot site with the launch of its online shopping directory.
Wired Digital derives its revenues principally from selling advertising space
on its branded content and search and navigation Websites. These revenues are
derived principally from short-term advertising contracts in which Wired
Digital guarantees a minimum level of impressions (a view of an advertising
banner or other promotional unit by the site user) for a fixed fee. Advertising
revenues are recognized ratably in the period in which the advertisement is
displayed, provided that no significant obligations remain for Wired Digital.
E-commerce revenues, which were introduced in 1998, generally represent longer
term contracts with online vendors, with fees based on a combination of
guaranteed impression levels and fixed percentages of commerce transactions.
The fixed percentage revenue component of a commerce transaction is recognized
in the period the user conducts the transaction at the vendor's site. Wired
Digital is notified of a commerce transaction, or purchase of merchandise at
the vendor's site by the redirected user, by the vendor through daily or weekly
reporting. These revenues are not subject to subsequent adjustments for user
returns or other sale allowances. For the year ended December 31, 1998, e-
commerce revenues represented 19% of total net revenues.
In addition to advertising revenues, Wired Digital derives revenues from
licensing its branded content to other online providers. These licenses are
based primarily on a fixed fee plus a variable component based on the
provider's net revenues. These revenues are recognized ratably over the terms
of the contract. The variable component of the license fees, which to date has
been insignificant, is recognized when the online provider reports its net
revenues, generally on a quarterly basis. Subsequent debits received from
providers relating to license fees have not been material to date. For the
years ended December 31, 1997 and 1998, license revenues represented 8% and 3%,
respectively, of total online revenues.
Ventures has entered into agreements to exchange advertising on Wired
Digital's Web properties for advertisements on the Web sites of other companies
or, to a lesser extent, for equipment. Barter revenues and expenses are
recorded at the fair market value of services provided or received. Revenue
from barter transactions is recognized as income when the advertisements are
delivered on Ventures' Web sites. Barter expense is recognized when Ventures'
advertisements are run on the other company's Web site, which is typically in
the same period when the barter revenue is recognized.
Prior to June 1998, Ventures also published Wired magazine through a separate
wholly-owned subsidiary. In June 1998, Ventures sold its magazine, books and
television businesses and some of its brands to Advance Magazine Publishers
Inc. for approximately $90.0 million. Ventures used the proceeds to pay off
short-term debt and liabilities of approximately $25.0 million and to partially
fund Wired Digital operations. The results of the discontinued magazine, books
and television operations are reflected as discontinued operations in the
accompanying consolidated financial statements. The gain recognized on the sale
of the print and television assets is reflected in the consolidated financial
statements for the year ended December 31, 1998.
Results of Operations for the Fiscal Years ended December 31, 1996, 1997 and
1998
Online Revenues. Online revenues began in 1995 and consist of advertising,
licensing and transaction revenues that are generated from Wired Digital's
network of Websites. Online revenues grew from $4.3 million in 1996 to $12.4
million in 1997 to $23.5 million in 1998. The increase in revenues was
primarily attributable to an increase in pageviews and thus increased capacity
for advertising during those periods.
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Barter revenues and expenses were approximately $965,000, $1,732,000 and
$3,500,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Online Production and Development Costs. Online production and development
costs consist primarily of personnel costs associated with developing,
producing, designing and delivering content, news and search services on the
Company's online Web properties and licensing fees for the use of a third-party
search technology. Online production and development costs were $7.5 million in
1996, $10.4 million in 1997 and $10.9 million 1998. Online production and
development costs increases for these periods were attributable to the
increased staffing of the editorial, design, copy, production and engineering
departments of Wired Digital, undertaken to expand Wired Digital's online
programming, news and search services. Online licensing fees, paid primarily to
an external search technology provider, were based on a fixed, negotiated
percentage of net search revenues during 1996 and 1997. Search provider fees
have decreased as a percentage of search online revenues due to Wired Digital's
renegotiation in 1998 of its agreement to base license fees on a fixed cost-
per-search query versus a fixed percentage of total search online revenues.
Licensing fees were $0.9 million in 1996, $2.4 million in 1997 and $2.5 million
in 1998.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of compensation and benefits expenses, commissions paid to sales
representatives, consulting fees and advertising and promotional expenses.
Sales and marketing expenses increased from $6.2 million in 1996 to $8.7
million in 1997 and to $17.0 million in 1998. The increase in sales and
marketing expenditures was primarily attributable to increases in the sales and
advertising production staffs to sell the increased capacity for advertising as
well as the expanded efforts by Wired Digital to promote and market its brands,
principally through online marketing branding campaigns and a national
television marketing campaign broadcast in 1998.
General and Administrative Expenses. General and administrative expenses
consist of compensation and benefit costs for executive management, finance,
legal, human resources, business development and administrative personnel,
professional fees, facilities costs and other general corporate expenses.
General and administrative expenses were $8.1 million in 1996, $9.6 million in
1997 and $12.3 million in 1998. These increases were primarily attributable to
growth in executive management and administrative support personnel, increases
in professional fees, financing fees, facilities expenses and increased
investments in internal systems and staffing to support the expanded business.
In addition, the increase in general and administrative expenses from 1997 to
1998 was also attributable to approximately $1.0 million of bonuses paid to
employees who provided direct support for the sale of Ventures' magazine, books
and television businesses.
In 1996, Ventures recognized $23.7 million of operating losses attributable
to the write-off of intangible assets, primarily in-process research and
development, surrounding Ventures' purchase of the minority interest in
HotWired Ventures LLC in exchange for Series A Preferred stock.
Restructuring and Other Non-recurring Charges. The $4.8 million restructuring
and other non-recurring charges primarily represent approximately $4.3 million
of severance and termination benefits expenses. The severance amount recorded
in the year ended December 31, 1998 represents costs related to the termination
of 10 Ventures' employees. These Ventures' employees did not have direct
responsibilities or association with either the operations of Wired Digital or
Wired Magazine Group and they were not deemed essential to the ongoing
management team or cost structure of Ventures subsequent to the sale of the
print and television businesses.
Operating Losses. Operating losses before discontinued operations were
$41.1 million in 1996, $16.3 million in 1997 and $20.0 million in 1998. The
decrease in operating losses from 1996 to 1997 was primarily attributable to
the one-time write-off of intangible in-process research and development costs
in 1996. The improvements, excluding the one-time write-off in 1996 and
restructuring and magazine-sale bonus charges in 1998, from 1996 to 1997 and
1997 to 1998 were primarily due to significant revenue growth coupled with
improvements in gross margin due to increased efficiencies in the editorial,
production and design staffs and decreased license fees as a percentage of net
revenues.
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The loss from discontinued operations reflects the activities of Ventures'
print and television businesses that were sold in June 1998. The losses from
discontinued operations were $11.0 million, $2.6 million and $2.5 million for
the years ended December 31, 1996, 1997 and 1998, respectively. The decrease in
the loss from discontinued operations from 1996 to 1997 was primarily
attributable to a reduction in Ventures' development of its foreign print and
television businesses. The decrease from 1997 to 1998 was primarily
attributable to the difference in the number of periods included in
discontinued operations in 1998 as a result of the sale in June 1998.
During the year ended December 31, 1998, Ventures recorded tax benefits of
approximately 7.0 million related to the loss from continuing operations in the
current period. The beginning of the year tax loss carryforwards that
previously have not been recognized have been recorded as a tax benefit and a
reduction of the tax expense on the loss from discontinued operations and the
gain on sale of discontinued operations. At December 31, 1997, Ventures had tax
loss carryforwards that had not previously been recognized because the deferred
tax assets were offset by valuation allowances. The tax benefit of Ventures'
use of these tax loss carryforwards has been recorded as a tax benefit and a
reduction of the tax expense on the loss from discontinued operations and the
gain on sale of discontinued operations, respectively, during the year ended
December 31, 1998, because those benefits would not otherwise have been
recognized. Based upon available information, which includes Ventures'
historical operating losses from continuing operations and the uncertainties
regarding future results of operations of Ventures, Ventures has provided a
full valuation allowance against its net deferred tax assets as of December 31,
1998 as it was determined that it was more likely than not that the deferred
tax assets would not be realized.
Income tax expenses recorded during 1996 and 1997 represent state minimum
franchise taxes. Based upon available information, which includes Ventures'
historical operating losses and the uncertainties regarding future results of
operations of Ventures, Ventures has provided a full valuation allowance
against its net deferred tax assets during each of these periods, as it was
determined that it was more likely than not that the deferred tax assets would
not be realized.
Gain on Sale of Print and Television Businesses
On June 15, 1998, Ventures sold substantially all of the assets of its
magazine, books and television businesses to Advance Magazine Publishers Inc.
and recorded a gain on sale of discontinued operations of $66.8 million, net of
estimated federal and state income taxes.
Results of Operations for the Three Months ended March 31, 1998 and 1999
Online Revenues. Online revenues were $3.5 million for the three months ended
March 31, 1998 and $6.5 million for the three months ended March 31, 1999. The
increase in online revenues was primarily attributable to growth in Wired
Digital pageviews and, therefore, increased advertising capacity and
advertising on Wired Digital properties. In addition, the increase was
attributable to the increase in HotBot's e-commerce revenues in 1999. E-
commerce revenues represented 34% of total online revenues for the three-month
period ended March 31, 1999.
Online Direct Costs. Online direct costs were $2.1 million for the three
months ended March 31, 1998 and $3.6 million for the three months ended March
31, 1999. Online direct costs as a percentage of revenues, exclusive of third-
party license fees paid to a search technology provider, have decreased from
the 1998 period to the 1999 period due to Wired Digital's ability to leverage
its existing cost structure over its Web properties. Search provider license
fees have decreased as a percentage of search online revenues due to Wired
Digital's renegotiation of its agreement to base the license fees on a fixed
cost-per-search query versus a fixed percentage of total search online
revenues.
Sales and Marketing Expenses. Sales and marketing expenses were $2.0 million
for the three months ended March 31, 1998 and $10.5 million for the three
months ended March 31, 1999. The period-to-period increase in sales and
marketing expenses was primarily attributable to the expansion of Wired
Digital's regional television and radio advertising, as well as increased sales
and advertising production staff.
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General and Administrative Expenses. Total general and administrative
expenses were $2.2 million for the three months ended March 31, 1998 and $2.1
million for the three months ended March 31, 1999.
Operating Losses. Operating losses from continuing operations were $2.9
million for the three months ended March 31, 1998 and $9.7 million for the
three months ended March 31, 1999. The increase in operating losses was
primarily attributable to sharply increased sales and marketing expenses in
1999 partially offset by increased gross margins.
The loss from discontinued operations reflects the activities of Ventures'
print and television business that were sold in June 1998. The loss was $1.0
million for the three months ended March 31, 1998. All activities from
discontinued operations ceased in 1998.
During the three-month period ended March 31, 1999, Ventures recorded tax
benefits of approximately $3.8 million (an approximately 41% benefit rate)
related to the loss from continuing operations in the current period.
Liquidity and Capital Resources
From inception through June 1998, Ventures has financed its operations and
its capital expenditure requirements primarily from private placements of
equity securities and secured debt totaling approximately $67 million. In June
1998, as a result of the sale of the print and television businesses to Advance
Magazine Publishers Inc., Ventures repaid all existing debt and partially
funded Wired Digital's operations and capital expenditure requirements with
proceeds from the sale.
At March 31, 1999, Ventures had outstanding cash and cash equivalents of
$22.7 million. Ventures invests these amounts in short-term interest-bearing
money market funds.
Operating activities used cash of approximately $14.4 million for the three
months ended March 31, 1999. The net cash used during this period was primarily
due to the net loss and the payment of income taxes. Investing activities used
cash of approximately $78,000 in the three-month period ended March 31, 1999
due to capital expenditures. Financing activities used cash of approximately
$85,000 for the 1999 period primarily from the repayment of capital lease
obligations.
Operating activities used cash of approximately $33.2 million for the year
ended December 31, 1998. The net cash used during this period was primarily due
to cash used by discontinued operations to pay certain liabilities associated
with the sale of the discontinued operations. Investing activities generated
cash of approximately $84.5 million in the year ended December 31, 1998,
primarily due to the proceeds received from the sale of Ventures' print and
television businesses. Financing activities used cash of approximately $14.8
million for the year ended December 31, 1998 primarily for the repayment of all
of Ventures' outstanding debt.
Capital expenditures have been primarily for computer equipment to support
expansion of the Company's operations and management information systems. As of
March 31, 1999, Ventures' principal commitments for capital expenditures
consisted of obligations under capital leases of $1.5 million.
Ventures believes that its current cash and cash equivalents will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditure requirements for at least the next 12 months. If existing cash
balances and cash generated from operations are insufficient to satisfy
Ventures' liquidity requirements, Ventures may seek to sell additional equity
or debt securities or to obtain a credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to
Ventures' stockholders. The incurrence of indebtedness would result in
increased fixed obligations of Ventures and could result in operating
convenants that would restrict Ventures' operations. Ventures cannot assure you
that additional funding will be available on favorable terms, if at all.
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Year 2000
The potential for software failures due to processing errors arising from
calculations using the year 2000 date is a known risk. Ventures recognizes the
need to ensure that its operations, products and services will not be adversely
impacted by Year 2000 software failures. Ventures has partially completed an
assessment of its internal and external third-party computer systems. At this
point in its assessment, Ventures is not aware of any Year 2000 problems
relating to systems operated by Ventures or by third parties that would have a
material effect on its business, results of operations or financial condition,
without taking into account Ventures efforts to avoid such problems. There can
be no guarantee, however, that systems on which Ventures relies will be able to
handle all Year 2000 problems. Ventures has not received written confirmation
of Year 2000 compliance from all material third-party vendors.
Although no assurance can be given, based on its assessment to date, Ventures
does not anticipate that costs associated with any Year 2000 problems will be
material.
To the extent that Ventures' assessment is finalized without identifying and
remedying any additional material non-compliant internal or external Year 2000
problems, or the Year 2000 date creates a systemic failure beyond Ventures'
control, such as a prolonged telecommunications or electrical failure or a
prolonged failure of third-party software on which Ventures relies, Ventures
could be prevented from operating its business and permitting users to access
its Websites. In the event of such failure, the primary business risks would
include, but are not limited to, lost advertising revenues, increased operating
costs, lost customers or other business interruptions of a material nature.
As discussed above, Ventures is engaged in an ongoing Year 2000 assessment.
The results of this assessment will be taken into account in determining the
nature and extent of any contingency plan. Currently, Ventures does not have a
Year 2000 contingency plan in place.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
The following discussion about Ventures' market risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. Ventures is exposed to market risk related to
changes in interest rates and foreign currency exchange rates. Ventures does
not have derivative financial instruments for hedging, speculative or trading
purposes.
Interest Rate Sensitivity
Ventures maintains a short-term investment portfolio consisting of mainly
fixed-income securities with an average maturity of less than one year. These
available-for-sale securities are subject to interest rate risk and will fall
in value if market interest rates increase. The financial instrument holdings
at year-end were analyzed to determine their sensitivity to interest rate
changes. The fair values of these instruments were determined by using net
present values. In our sensitivity analysis, the same change in interest rate
was used for all maturities. All other factors were held constant. If interest
rates changed by 10%, the expected effect on results of operations related to
Ventures' financial investments would be immaterial.
Foreign Currency Risk
Ventures believes that its exposure to currency exchange fluctuation risk is
insignificant because Ventures' transactions with international vendors are
generally denominated in US dollars, which is considered to be the functional
currency of Ventures and its subsidiaries.
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PRO FORMA UNAUDITED COMBINED
CONDENSED FINANCIAL STATEMENTS
The following pro forma unaudited combined condensed financial statements
give effect to the merger of Lycos and Ventures, to be accounted for under the
purchase method of accounting. For pro forma purposes the financial statements
of Ventures for the twelve months ended June 30, 1998 have been combined with
the financial statements of Lycos for the years ended July 31, 1998. For the
six months ended January 31, 1999, the financial statements of Lycos have been
combined with the financial statements of Ventures for the six months ended
December 31, 1998. The pro forma unaudited combined condensed balance sheet
presents the combined financial position of Lycos and Ventures as of January
31, 1999 assuming that the merger had occurred as of January 31, 1999. The pro
forma unaudited combined condensed statements of operations present the
combined financial results of Lycos, WhoWhere? and Ventures assuming that the
proposed mergers had occurred as of August 1, 1997. Such pro forma information
is based on the historical financial statements of Lycos, WhoWhere? and
Ventures and should be read in conjunction with the historical financial
statements and notes thereto of Lycos and Ventures included elsewhere or
incorporated by reference in this proxy statement/prospectus. The pro forma
financial statements are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial position that
would have occurred if the mergers had been consummated as of the assumed dates
nor are they necessarily indicative of future operating results or financial
position.
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LYCOS, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
1/31/99 12/31/98 Pro forma Pro forma
Lycos Ventures Adjustments as adjusted
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents........ $135,167 $37,252 $172,419
Escrow receivable................ 4,610 (4,610)(g)
Accounts receivable, less
allowance....................... 14,573 7,535 22,108
License fees receivable.......... 32,179 32,179
Other current assets............. 16,290 630 16,920
-------- ------- -------- --------
Total current assets......... 198,209 50,027 (4,610) 243,626
Property and equipment, less
accumulated depreciation........ 5,734 3,569 9,303
Intangible assets, net........... 215,697 346,719 (a) 562,416
Other assets..................... 45,275 155 45,430
-------- ------- -------- --------
Total assets................. $464,915 $53,751 $342,109 $860,775
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
Accounts payable and accruals.... $ 14,734 $13,905 $ 28,639
Deferred revenues................ 34,485 80 34,565
Other current liabilities........ 1,393 653 2,046
-------- ------- --------
Total current liabilities.... 50,612 14,638 65,250
Notes payable--long-term......... 1,220 1,220
Long term portion of deferred
revenues........................ 27,840 27,840
Other non-current liabilities.... 27 710 737
Redeemable convertible preferred
stock........................... 24,558 24,558
Stockholders' equity............. 385,216 13,845 346,719 (a) 741,170
(4,610)(g)
-------- ------- -------- --------
Total liabilities and
stockholders' equity........ $464,915 $53,751 $342,109 $860,775
======== ======= ======== ========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements.
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LYCOS, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------------------
Pro forma
1/31/99 12/31/98 Pro forma as
Lycos Ventures Adjustments adjusted
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues.......... $ 55,336 $ 14,689 $ 70,025
Cost of revenues........ 11,740 6,050 17,790
---------- --------- --------- ----------
Gross profit........ 43,596 8,639 52,235
Operating expenses
Research and
development.......... 11,359 11,359
Sales and marketing... 34,217 12,686 46,903
General and
administrative....... 5,588 7,461 13,049
Amortization of
intangible assets.... 23,413 34,672 (a) 58,085
---------- --------- --------- ----------
Total operating
expenses........... 74,577 20,147 34,672 129,396
Operating loss.......... (30,981) (11,508) (34,672) (77,161)
Interest income, net.... 3,512 3,512
Gain on sale of
investments............ 10,120 10,120
---------- --------- --------- ----------
Net loss................ $ (17,349) $ (11,508)(d) $ (34,672) $ (63,529)
========== ========= ========= ==========
Basic and diluted net
loss per share......... $ (0.41) $ (1.40)(b)
========== ==========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 42,433,178 3,084,674 (c) 45,517,852
========== ========= ==========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements.
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LYCOS, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Twelve Months Ended
-------------------------------------------------------------
7/31/98 7/31/98 6/30/98 Pro forma Pro forma
Lycos WhoWhere? Ventures Adjustments as adjusted
---------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 56,060 $ 6,984 $ 16,219 $ 79,263
Cost of revenues........ 12,513 2,041 10,515 25,069
---------- ------- -------- --------- ----------
Gross profit........ 43,547 4,943 5,704 54,194
Operating expenses
Research and
development.......... 9,478 2,729 12,207
In process research
and development...... 17,280 797 18,077
Sales and marketing... 35,035 5,497 8,619 49,151
General and
administrative....... 5,631 4,226 9,830 19,687
Amortization of
intangible assets.... 7,614 69,344 (a) 108,321
31,363 (e)
---------- ------- -------- --------- ----------
Total operating
expenses........... 75,038 13,249 18,449 100,707 207,443
Operating loss.......... (31,491) (8,306) (12,745) (100,707) (153,249)
Interest income, net.... 3,052 (201) 2,851
---------- ------- -------- --------- ----------
Net loss................ $ (28,439) $(8,507) $(12,745)(d) $(100,707) $ (150,398)
========== ======= ======== ========= ==========
Basic and diluted net
loss per share......... $ (0.92) $ (3.95)
========== ==========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 30,932,982 7,179,272 (f) 38,112,254 (g)
========== ========= ==========
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Combined Condensed Financial
Statements.
81
<PAGE>
LYCOS, INC.
NOTES TO THE PRO FORMA UNAUDITED COMBINED CONDENSED
FINANCIAL INFORMATION
Pro Forma Adjustments and Assumptions
(a) The pro forma unaudited combined condensed financial statements reflect
the acquisition of Ventures for approximately $365.6 million, including costs
of acquisition, of which approximately $251.7 million was allocated to
intangible assets. Assuming, for pro forma purposes that the merger was
consummated on January 31, 1999, the purchase price per class of Ventures
capital stock would have been comprised of the following approximate
components:
<TABLE>
<CAPTION>
Number of shares Value of
Ventures class of stock Lycos common stock Lycos common stock
----------------------- ------------------ ------------------
<S> <C> <C>
Common Stock and common stock options 206,763 shares $ 24.3 million
Series A preferred stock 1,889,779 shares 222.9 million
Series B preferred stock 176,610 shares 20.7 million
Series C preferred stock 812,522 shares 94.4 million
</TABLE>
Each class of Ventures stock will convert into Lycos common stock at the
effective time of the merger, as discussed on page 37. All options to purchase
Ventures common stock are expected to be exercised prior to the closing of the
merger. The exercise of all oustanding Ventures options will increase Ventures
cash balance by approximately $1.5 million prior to the merger, with no impact
to the pro forma financial statements at January 31, 1999. The purchase price
also consists of $3.3 million of merger related costs incurred by Lycos. The
merger related costs consist primarily of investment banker, legal and
accounting fees directly related to the merger. Intangible assets will be
amortized over a period of five years. The pro forma adjustments reflect twelve
months of amortization expense for the year ended July 31, 1998, assuming the
transaction had occurred on August 1, 1997. Based on preliminary estimates,
approximately $1 million to $5 million of the purchase price will be allocated
to acquired in-process research and development, which will be charged to
operations during the quarter in which the merger is consummated. For the
purpose of the following presentation and the pro forma unaudited combined
condensed financial statements, $5 million was used as the amount of acquired
in-process research and development. The number of shares of Lycos common stock
assumed issued in the pro forma financial statements is approximately 3.1
million. This amount assumes a 20-day average closing stock price of Lycos
common stock at the upper collar limit, which represents the maximum share
price subject to the collar contained in the merger agreement. This amount also
assumes that the Ventures cash balance will be paid by Lycos in stock which is
also subject to the upper collar limit. The actual number of shares of Lycos
common stock to be issued will be determined at the effective date of the
merger based on the average closing stock price as defined by the merger
agreement.
The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of Ventures
at December 31, 1998, and is for illustrative pro forma purposes only. Actual
fair values will be based on financial information as of the acquisition date.
The actual purchase price will be determined based on an average closing price
of Lycos' common stock over a few days prior to consummation of the merger. Had
the merger closed on May 14, 1999, the purchase price would be approximately
$327.4 million based upon an average Lycos stock price of $105.06 per share.
Additionally an 1/8th percent fluctuation in the price of Lycos common stock
used in preparing the pro forma financial statements would increase or decrease
pro forma amortization of intangible assets and pro forma net loss by $15,000
for the six months ended January 31, 1999 and $29,000 for the year ended July
31, 1998, with no material impact on pro forma net loss per share for either
period. Assuming the transaction had occurred on January 31, 1999, the
allocation would have been as follows (in thousands):
82
<PAGE>
<TABLE>
<CAPTION>
Ventures
--------
<S> <C>
Assets acquired:
Cash and cash equivalents........................................ $ 37,252
Accounts receivable, net......................................... 7,535
Property and equipment........................................... 3,569
Other assets..................................................... 5,395
In-process research and development.............................. 5,000
Developed technology, goodwill and other intangible assets....... 346,719
Liabilities assumed:
Accounts payable and accrued expenses............................ (13,905)
Deferred revenues................................................ (80)
Other liabilities................................................ (1,363)
Redeemable convertible preferred stock........................... (24,558)
--------
Purchase price................................................... $365,564
========
</TABLE>
The pro forma adjustments reconcile the historical balance sheet of Ventures
at December 31, 1998 to the allocated purchase price assuming the transaction
had occurred on January 31, 1999.
(b) The pro forma basic net loss per common share is computed by dividing the
net loss by the weighted average number of common shares outstanding. The
calculation of the weighted average number of shares outstanding assumes that
all shares of Lycos' common stock issued in its acquisitions were outstanding
for the entire period. Pro forma diluted net loss per common share equals basic
net loss per common share.
(c) The pro forma adjustment assumes the conversion of shares of Ventures
capital stock upon acquisition of Ventures by Lycos.
(d) Does not include results from discontinued operations or any tax amounts
recorded or assumed to be recoverable by Ventures.
(e) Lycos acquired WhoWhere? Inc. for approximately $158.2 million in August
1998, including costs of acquisition, of which approximately $156.8 million was
allocated to intangible assets. Goodwill and other intangible assets and
developed technology are amortized over a period of five 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 following represents the allocation of the purchase price over the
historical net book values of the acquired assets and liabilities of WhoWhere?
at July 31, 1998, and is for illustrative pro forma purposes only. Actual fair
values were based on financial information as of the acquisition date of August
13, 1998. Assuming the transaction had occurred on July 31, 1998, the
allocation would have been as follows (in thousands):
<TABLE>
<CAPTION>
WhoWhere?,
Inc.
----------
<S> <C>
Assets acquired:
Cash and cash equivalents...................................... $ 2,004
Accounts receivable, net....................................... 2,472
Property and equipment......................................... 3,129
Other assets................................................... 2,156
Developed technology, goodwill and other intangible assets..... 156,813
Liabilities assumed.............................................. (8,392)
--------
Purchase price................................................. $158,182
========
</TABLE>
(f) The pro forma adjustment assumes the conversion of shares of WhoWhere?
common stock and Ventures common stock upon acquisition of WhoWhere? and
Ventures by Lycos.
(g) In accordance with the merger agreement, subject to certain exceptions
Lycos will distribute any cash that may be received from the Ventures' escrow
receivable back to Ventures.
83
<PAGE>
DESCRIPTION OF LYCOS CAPITAL STOCK
The authorized shares of Lycos capital stock consist of 100,000,000 shares of
common stock and 5,000,000 shares of preferred stock.
The following is a summary of certain provisions of the common stock and
preferred stock terms. This summary only summarizes the major terms; it is not
a complete discussion of the terms of the Lycos capital stock.
Common Stock
Lycos common stockholders have one vote per share on matters on which they
may vote. There are no cumulative voting rights. If the Lycos board of
directors declares dividends, then the Lycos common stockholders receive
ratable dividends, subject to the preferential rights of any outstanding Lycos
preferred stock. If Lycos is liquidated or dissolved, then the Lycos common
stockholders will share ratably in Lycos' assets that are distributed to its
stockholders, subject to the preferential rights of any outstanding Lycos
preferred stock. The shares of Lycos common stock outstanding upon the
effective date of this proxy statement/prospectus are, and the shares offered
under this proxy statement/prospectus will be, fully paid and nonassessable
when issued and paid for. The rights, preferences and privileges of Lycos
common stockholders are subject to, and may be adversely affected by, the
rights of holders of shares of any preferred stock that Lycos may issue in the
future. As of May 7, 1999, Lycos had 43,422,592 shares of issued and
outstanding common stock.
Preferred Stock
The Lycos board of directors may issue up to 5,000,000 shares of preferred
stock without further stockholder approval. The Lycos board of directors may
issue one or more series of preferred stock and may fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions of each
series of preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series. Lycos' ability to issue preferred stock provides desirable
flexibility in connection with possible acquisitions and other corporate
purposes. However, if Lycos issues preferred stock, this could delay, defer or
prevent a change in control of Lycos or discourage bids for Lycos' common stock
at a premium over the market price of the common stock and may decrease the
market price of the Lycos common stock. Additionally, the issuance of preferred
stock could adversely affect the voting and other rights of the holders of the
Lycos common stock. No shares of Lycos preferred stock are outstanding or will
be outstanding after the merger. Lycos has no present plans to issue any shares
of preferred stock.
Certain Certificate of Incorporation, By-laws and Statutory Provisions
Affecting Stockholders
Classified Board and Other Matters. Lycos' board of directors is divided into
three classes. Each class serves for three years, and one class is elected each
year. Under the Delaware General Corporation Law, unless a corporation's
certificate of incorporation provides otherwise, stockholders may remove a
director only for cause if the corporation's board of directors is divided into
classes. Therefore, Lycos stockholders may only remove a director for cause. If
a stockholder wishes to nominate a person for an election of directors or to
bring any other matter before a meeting of stockholders, then such person must
inform Lycos' secretary of this intent within the time periods specified in
Lycos' amended and restated by-laws. Lycos' certificate of incorporation
provides that only the board of directors, the chairman of the board of
directors or the president of Lycos may call special meetings of Lycos
stockholders. The certificate of incorporation also provides that no action
required or permitted to be taken at any annual or special meeting of the Lycos
stockholders may be taken without a meeting, unless the consent of all of the
Lycos stockholders entitled to vote on such action is obtained. The affirmative
vote of the holders of at least 80% of the combined voting power of then
outstanding
84
<PAGE>
voting stock of Lycos, voting together as a single class, is required to alter,
amend or repeal the provisions described above. The classification of the board
of directors, stockholder written consent requirements and the limitations on
the removal of directors and the filing of vacancies could make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, control of Lycos.
Section 203 of Delaware Law. See "Comparison of the Rights of Stockholders of
Lycos and Ventures--Section 203 of Delaware Law" on page 65.
Directors Liability. The certificate of incorporation of Lycos provides that
no director will be personally liable to Lycos or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for:
. any breach of the director's duty of loyalty to Lycos or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct;
. acts or omissions in respect of certain unlawful dividend payments or
stock redemptions or repurchases; or
. any transaction from which such director derives improper personal
benefit.
This provision eliminates the rights of Lycos and its stockholders, through
stockholders' derivative suits on behalf of Lycos, to recover monetary damages
against a director for breach of the fiduciary duty of care as a director,
including breaches resulting from negligent or grossly negligent behavior,
except in the situations described above. However Lycos or its stockholders may
seek non-monetary based remedies, such as an injunction or rescission, against
a director for breach of his fiduciary duty. The limitations summarized above
do not limit liability under the federal securities laws. Lycos' amended and
restated by-laws provide that Lycos will, to the full extent permitted by the
Delaware General Corporation Law as currently in effect, indemnify and advance
expenses to each of its currently acting and former directors, officers,
employees and agents arising in connection with their acting in such
capacities.
Some of the provisions described above may delay stockholder actions with
respect to business combinations and the election of new members to the board
of directors. As such, the provisions could have the effect of discouraging
open market purchases of Lycos' common stock because a stockholder who desires
to participate in a business combination or elect a new director may consider
them disadvantages. The existence of these provisions may depress the market
price of the Lycos common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the Lycos common stock is Boston
EquiServe Limited Partnership.
85
<PAGE>
SECURITY OWNERSHIP OF VENTURES
The following table sets forth specific information as of May 1, 1999 with
respect to the ownership of Ventures capital stock. The persons listed below
include the following:
. each director of Ventures;,
. each executive officer of Ventures, which includes for this purpose two
executive officers of Wired Digital;
. each stockholder that beneficially owns more than 5% of any class or
series of Ventures' outstanding capital stock; and
. the executive officers and directors of Ventures as a group, which
includes for this purpose two executive officers of Wired Digital.
Beneficial ownership prior to the merger does not include the stock bonus
grants Ventures expects to make prior to completion of the merger or founders'
stock options that will be canceled upon closing of the merger.
In March 1998, Ventures borrowed $5 million from the holders of its Series C
preferred stock. As part of that transaction, the holders of 8,782,950 shares
of Ventures Series A preferred stock and 350,000 shares of Ventures Series B
preferred stock placed such shares in a voting trust. The trustee of the voting
trust has the sole ability to vote such shares with respect to the merger
agreement and the merger, but has no investment power with respect to the
shares. The trustee of the voting trust is also an employee of Providence
Equity Partners L.L.C.
Proxies to vote in favor of the merger and the merger agreement, as amended
and restated, have been granted to Lycos by the holders of approximately two
shares of Ventures common stock, 13,912,239 shares of Ventures Series A
preferred stock, 450,000 shares of Ventures Series B preferred stock and
3,762,760 shares of Ventures Series C preferred stock.
<TABLE>
<CAPTION>
Number of Ventures Shares
Beneficially Owned Beneficial Ownership of
(Percentage of Series/Class Lycos Common Stock
Beneficially Owned) After the Merger(8)
------------------------------------- ---------------------------
Series A Series B Series C Percentage
Common Preferred Preferred Preferred Number of Common
Name Stock Stock Stock Stock of Shares Stock(8)
---- ------ --------- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
The Voting Trust(1)...... -- 8,782,950 350,000 -- -- --
Raymond M. Mathieu,
Trustee (57.6%) (56.0%)
c/o Providence Equity
Partners, L.P.
50 Kennedy Plaza
Fleet Center, 9th Floor
Providence, RI 02903
Providence Equity
Partners L.L.C.(2)...... -- -- -- 3,062,235 644,492 1.4%
901 Fleet Center (81.4%)
50 Kennedy Plaza
Providence, RI 02903
John Paul Tudor II(3).... -- 115,986 100,000 700,525 194,198 *
c/o Tudor Investment
Corporation (0.76%) (16.0%) (18.6%)
40 Rowes Wharf, Second
Floor
Boston, MA 02110
Orca Bay Capital
Corporation(4).......... -- 131,930 250,000 -- 101,030 *
999 Third Avenue (0.87%) (40.0%)
Suite 4600
Seattle, WA 98104
Nippon Telegraph and
Telephone
Corporation(5).......... -- -- 150,000 -- 52,665 *
c/o NTT Corporation (24.0%)
3-19-2, Nishi-Shinjuku
Shinjuku-ku, Tokyo 163-
19 Japan
Kumquat-Gatehall LLC(4).. -- -- 50,000 -- 17,555 *
4 Gatehall Drive (8.0%)
Parsippany, NJ 07054
Louis Rossetto........... 1 2,771,524 -- -- 278,438 *
1732 La Vereda * (18.2%)
Berkeley, CA 94702
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Number of Ventures Shares Beneficially
Owned Beneficial Ownership of
(Percentage of Series/Class Beneficially Lycos Common Stock
Owned) After the Merger(8)
------------------------------------------- ---------------------------
Series A Series B Series C Percentage
Common Preferred Preferred Preferred Number of Common
Name Stock Stock Stock Stock of Shares Stock(8)
---- -------- ---------- --------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jane Metcalfe(4)........ 1 2,677,662 -- -- 269,009 *
1732 La Vereda * (17.6%)
Berkeley, CA 94702
Advance Magazine
Publishers Inc.(4)..... -- 2,043,056 50,000 -- 222,809 *
350 Madison Avenue,
14th Floor (13.4%) (8.0%)
New York, NY 10017
Jackson Living Trust dtd
July 15, 1992........... -- 1,336,368 -- -- 134,257 *
c/o Clopine Hinkle &
Associates (8.8%)
6046 Cornerstone Court
West, Suite 2201
San Diego, CA
Nicholas Negroponte(4).. -- 1,210,239 -- -- 121,585 *
c/o MIT Research (7.9%)
20 Ames Street
Cambridge, MA 02139
H. William Jesse,
Jr.(4)(6).............. -- 827,603 -- -- 83,144 *
c/o Jesse Hansen & Co. (5.4%)
222 Sutter Street
San Francisco, CA
94108
Alex Evans(2)........... -- -- -- 3,062,235 644,492 1.4%
(81.4%)
Robert Forlenza(3)...... -- 115,986 100,000 700,525 194,198 *
(0.76%) (16.0%) (18.6%)
Mark Masiello(2)........ -- -- -- 3,062,235 644,492 1.4%
(81.4%)
Mark Pelson(2).......... -- -- -- 3,062,235 644,492 1.4%
(81.4%)
Paul Salem(2)........... -- -- -- 3,062,235 644,492 1.4%
(81.4%)
Carmen Scarpa(3)........ -- 115,986 100,000 700,525 194,198 *
(0.76%) (16.0%) (18.6%)
Elizabeth
Vanderslice(7)......... 296,442 20,057 -- -- 72,090 *
(67.9%) (0.13%)
Lawrence Wilkinson(7)... 68,365 16,255 -- -- 4,063 *
(32.8%) (0.1%) --
Rick Boyce(7)........... 49,775 24,598 -- -- 65,867 *
(26.2%) (0.2%) --
All executive officers
and directors as a
group (13 persons)
(2)(3)(4)(5)(6)(7)..... 414,584 6,453,685 100,000 3,762,760 1,611,301 3.5%
(74.7%) (42.3%) (16.0%) (100.0%)
</TABLE>
- --------
*Less than 1%.
(1) The voting trust will terminate upon the closing of the merger and will not
beneficially own or control shares of Lycos common stock.
(2) Includes shares held by Providence Equity Partners II L.P. and Providence
Equity Partners L.P. The general partner of these funds, Providence Equity
Partners L.L.C., has investment and voting control over these shares.
Messrs. Evans, Masiello, Pelson and Salem are officers of Providence Equity
Partners L.L.C. and are directors of Ventures.
87
<PAGE>
(3) Includes shares held by Raptor Global Fund, L.P., Raptor Global Fund, Ltd.,
Tudor Arbitrage Partners, L.P. and Tudor BVI Futures, Ltd. and assumes
exercise of warrants to purchase 50,000 shares of Series A preferred stock
held by these entities. Mr. Jones has investment and voting control over
these shares. Mr. Forlenza, a director of Ventures, is an officer and
director of Tudor Investment Corporation. Mr. Scarpa, a director of
Ventures, is an officer of Tudor Investment Corporation.
(4) All shares of Ventures Series A preferred stock and Ventures Series B
preferred stock beneficially owned by this stockholder are owned of record
by the voting trust unless otherwise noted.
(5) Includes shares held by Nippon Telephone and Telegraph Corporation, and its
majority-owned subsidiaries, NTT Advertising, Inc. and NTT Learning Systems
Corporation.
(6) Includes shares held by Jesse Capital Management, Inc., a company
controlled by Mr. Jesse, and by Pensco Pension Services in an investment
for the benefit of Mr. Jesse. Of these shares held by Mr. Jesse, 188,995
shares are not subject to the voting trust.
(7) Reflects 296,442, 68,365 and 49,775 shares subject to options held by Ms.
Vanderslice, Mr. Wilkinson and Mr. Boyce that are exercisable within 60
days of the date of this table. The percentages reflect application of SEC
rules that require us to assume that the option is exercised, but that no
other options are exercised. Does not reflect the acceleration of vesting
of outstanding options that is expected to occur prior to the closing of
the merger.
(8) Ventures expects that all outstanding options will be exercised in full
following acceleration of vesting and that approximately 6.0 million shares
of Ventures common stock will be issued as stock bonuses prior to closing,
resulting in approximately 7,524,399 shares of Ventures common stock being
outstanding at closing. In addition, following acceleration, Ms.
Vanderslice will beneficially own 427,068 shares of Ventures common stock,
Mr. Wilkinson will beneficially own 71,338 shares of Ventures common stock,
Mr. Boyce will beneficially own 100,401 shares of Ventures common stock,
and all executive officers and directors as a group will beneficially own
598,809 shares of Ventures common stock. Ms. Vanderslice will receive
approximately 1,629,495 additional shares of Ventures common stock and Mr.
Boyce will receive approximately 1,760,131 additional shares of Ventures
common stock as stock bonuses prior to the closing of the merger.
Beneficial ownership after the merger is based on estimates only and
assumes at the closing of the merger that Ventures will have issued and
outstanding (a) 7,524,399 shares of common stock, (b) 15,249,794 shares of
Series A preferred stock, including warrants (c) 625,000 shares of Series B
preferred stock and (d) 3,762,760 shares of Series C preferred stock.
Calculations also assume that, the 5-day average closing stock price of
Lycos common stock is $89.50, the closing price for Lycos common stock on
May 7, 1999, and that the Ventures cash balance is $25 million. Changes to
those amounts could significantly affect beneficial ownership after the
merger. Lycos beneficial ownership percentages are based on an estimated
46,222,405 shares of Lycos common stock outstanding immediately following
the merger.
LEGAL MATTERS
The legality of the shares of Lycos common stock offered by this proxy
statement/prospectus will be passed upon for Lycos by Hutchins, Wheeler &
Dittmar, A Professional Corporation.
Hutchins, Wheeler & Dittmar, A Professional Corporation, counsel for Lycos,
and Cooley Godward LLP, counsel for Ventures, have delivered opinions
concerning material federal income tax consequences of the merger. Some of the
attorneys with Cooley Godward LLP own, through an investment partnership,
75,267 shares of Ventures Series A preferred stock. See "The Merger--Material
Federal Income Tax Consequences" on page 51.
EXPERTS
The consolidated financial statements of Lycos incorporated by reference into
this proxy statement/ prospectus have been audited by KPMG LLP, independent
public accountants, as stated in their report appearing in such incorporated
documents. Lycos' consolidated financial statements are incorporated in this
proxy statement/prospectus in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Ventures included in this proxy
statement/prospectus have been audited by KPMG LLP, independent public
accountants, as stated in their report appearing elsewhere herein. Ventures'
consolidated financial statements are included in this proxy
statement/prospectus in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
88
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
WIRED VENTURES, INC.:
Independent Auditors' Report ........................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)... F-4
Consolidated Statements of Minority Interest and Stockholders' (Deficit)
Equity ................................................................ F-5
Consolidated Statements of Cash Flows .................................. F-6
Notes to Consolidated Financial Statements ............................. F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Wired Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Wired Ventures,
Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of operations and
comprehensive income (loss), minority interest and stockholders' (deficit)
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wired Ventures,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
San Francisco, California
February 26, 1999
F-2
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------
March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 827 $ 37,252 $22,685
Escrow receivable from Advance Magazine
Publishers Inc. ............................. -- 4,610 4,655
Accounts receivable, net of allowance for re-
turns and doubtful accounts of $254, $763 and
$852 in 1997, 1998 and 1999, respectively.... 3,197 7,535 8,755
Prepaid expenses and other current assets..... 289 630 4,288
Net assets of discontinued operations.......... 2,278 -- --
-------- -------- -------
Total current assets........................ 6,591 50,027 40,383
Property and equipment, net.................... 2,413 3,569 3,339
Other assets................................... 194 155 155
-------- -------- -------
$ 9,198 $ 53,751 $43,877
======== ======== =======
Liabilities, Redeemable Convertible Preferred
Stock, and Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable.............................. $ 231 $ 542 $ 262
Accrued expenses.............................. 6,471 9,613 9,262
Taxes payable................................. -- 3,750 --
Lease obligations............................. -- 653 706
Deferred revenue.............................. 1,028 80 --
Notes payable and line of credit.............. 14,883 -- --
-------- -------- -------
Total current liabilities................... 22,613 14,638 10,230
Long-term lease obligations.................... -- 710 751
-------- -------- -------
Total liabilities........................... 22,613 15,348 10,981
Redeemable convertible preferred stock:
Series C: $0.001 par value; 3,800,000 shares
authorized; 3,762,760 shares issued and
outstanding in 1997, 1998 and 1999........... 20,983 24,558 25,052
Stockholders' (deficit) equity:
Preferred stock:
Series A preferred stock; $0.001 par value;
15,300,000 shares authorized as of 1997,
1998 and 1999; 15,209,904, 15,199,794 and
15,199,794 shares issued and outstanding in
1997, 1998 and 1999, respectively............ 15 15 15
Series B preferred stock, $0.001 par value;
700,000 shares authorized as of 1997, 1998
and 1999; 625,000 shares issued and out-
standing as of 1997, 1998 and 1999........... 1 1 1
Series D and undesignated preferred stock;
$0.001 par value, 10,200,000 shares autho-
rized as of 1997, 1998 and 1999; -0- issued
and outstanding.............................. -- -- --
Common stock, $0.001 par value; 45,000,000
shares authorized as of 1997, 1998 and 1999;
60,903, 113,180 and 139,316 shares issued and
outstanding in 1997, 1998 and 1999,
respectively................................. -- -- --
Additional paid-in capital.................... 30,929 30,981 31,002
Deferred compensation......................... (376) -- --
Accumulated deficit........................... (64,967) (17,152) (23,174)
-------- -------- -------
Total stockholders' (deficit) equity........ (34,398) 13,845 7,844
-------- -------- -------
$ 9,198 $ 53,751 $43,877
======== ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended March 31,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Total online revenues.... $ 4,312 $ 12,405 $ 23,455 $ 3,459 $ 6,503
-------- -------- -------- ------- -------
Costs and expenses:
Online production and
development........... 7,463 10,401 10,933 2,117 3,617
Sales and marketing.... 6,151 8,716 17,031 2,038 10,486
General and
administrative........ 8,082 9,585 12,267 2,169 2,133
Write-off of
intangibles .......... 23,708 -- -- -- --
Restructuring and other
non-recurring
charges............... -- -- 4,806 -- --
-------- -------- -------- ------- -------
Total costs and
expenses............ 45,404 28,702 45,037 6,324 16,236
-------- -------- -------- ------- -------
Operating loss....... (41,092) (16,297) (21,582) (2,865) (9,733)
Interest income, net..... -- -- 1,588 -- 439
-------- -------- -------- ------- -------
Loss before taxes.... (41,092) (16,297) (19,994) (2,865) (9,294)
Income tax benefit
(expense)............... (4) (5) 7,005 (4) 3,766
Minority interest, net of
taxes................... 846 -- -- -- --
-------- -------- -------- ------- -------
Loss from continuing
operations.......... (40,250) (16,302) (12,989) (2,869) (5,528)
-------- -------- -------- ------- -------
Loss from discontinued
operations including
tax expense of $5, $4
and $246 in 1996, 1997
and 1998, respectively,
and $5 in the three
months ended March 31,
1998.................... (10,991) (2,632) (2,455) (1,039) --
Gain on sale of
discontinued operations
(net of taxes of
$14,835)................ -- -- 66,834 -- --
-------- -------- -------- ------- -------
Net income (loss) ... $(51,241) $(18,934) $ 51,390 $(3,908) $(5,528)
======== ======== ======== ======= =======
Other comprehensive
income (loss), net of
tax:
Foreign currency
translation
adjustments........... (318) 69 -- -- --
Reclassification
adjustment for foreign
currency translation
adjustment included in
gain on sale of
discontinued
operations............ -- -- 199 -- --
-------- -------- -------- ------- -------
Comprehensive income
(loss).............. $(51,559) $(18,865) $ 51,589 $(3,908) $(5,528)
======== ======== ======== ======= =======
Loss per share from
continuing operations:
Basic and diluted...... $(67,139) $(511.16) $(189.54) $(74.41) $(48.61)
======== ======== ======== ======= =======
Income (loss) per share
from discontinued
operations:
Basic and diluted...... $(18,334) $ (82.53) $ 736.67 $(15.30) $ --
======== ======== ======== ======= =======
Net income (loss) per
share:
Basic and diluted...... $(85,473) $(593.69) $ 547.13 $(89.71) $(48.61)
======== ======== ======== ======= =======
Shares used in basic and
diluted per share
calculations............ 600 31,892 87,392 67,892 123,892
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
Consolidated Statements of Minority Interest and Stockholders' (Deficit)
Equity
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Preferred Deficit Total
stock Common stock Additional accumulated stockholders'
Minority -------------- ------------- paid-in Deferred prior to Accumulated (deficit)
interest Shares Amount Shares Amount capital compensation recapitalization deficit equity
-------- ------ ------ ------ ------ ---------- ------------ ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1995............ $1,366 14,105 $14 -- $ -- $ 9,643 -- $(11,214) -- $(1,557)
Net loss
accumulated
prior to
recapitalization.. (846) -- -- -- -- -- -- (5,208) -- (5,208)
Recapitalization.. -- -- -- -- -- (16,422) -- 16,422 -- --
Acquisition of
minority
interest in
HotWired
Ventures LLC.... (520) 1,242 1 -- -- 24,852 -- -- -- 24,853
Series B
preferred stock
private
placement....... -- 625 1 -- -- 12,299 -- -- -- 12,300
Issuance of
Series A
preferred
stock........... -- 79 -- -- -- 790 $(790) -- -- --
Amortization of
deferred
compensation
expense......... -- -- -- -- -- -- 257 -- -- 257
Series A
preferred stock
repurchase...... -- (176) -- -- -- (296) -- -- -- (296)
Proceeds from
exercise of
employee stock
options......... -- -- -- 2 -- 4 -- -- -- 4
Series A
preferred stock
forfeiture...... -- (3) -- -- -- -- -- -- -- --
Net loss
following
recapitalization.. -- -- -- -- -- -- -- -- $(46,033) (46,033)
------ ------ --- --- ---- ------- ----- -------- -------- -------
Balances,
December 31,
1996............ -- 15,872 16 2 -- 30,870 (533) -- (46,033) (15,680)
Amortization of
deferred
compensation
expense......... -- -- -- -- -- -- 157 -- -- 157
Proceeds from
exercise of
employee stock
options......... -- -- -- 59 -- 59 -- -- -- 59
Series A
preferred stock
repurchase...... -- (37) -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (18,934) (18,934)
------ ------ --- --- ---- ------- ----- -------- -------- -------
Balances,
December 31,
1997............ -- 15,835 16 61 -- 30,929 (376) -- (64,967) (34,398)
Amortization of
deferred
compensation
expense ........ -- -- -- -- -- -- 376 -- -- 376
Proceeds from
exercise of
employee stock
options ........ -- -- -- 52 -- 52 -- -- -- 52
Series A
preferred stock
repurchase ..... -- (10) -- -- -- -- -- -- -- --
Accretion of
Series C
redemption value
................ -- -- -- -- -- -- -- -- (3,575) (3,575)
Net income ..... -- -- -- -- -- -- -- -- 51,390 51,390
------ ------ --- --- ---- ------- ----- -------- -------- -------
Balances,
December 31,
1998 ........... -- 15,825 16 113 -- 30,981 -- -- (17,152) 13,845
Proceeds from
exercise of
employee stock
options
(unaudited) .... -- -- -- 26 -- 21 -- -- -- 21
Accretion of
Series C
redemption value
(unaudited) .... -- -- -- -- -- -- -- -- (494) (494)
Net loss
(unaudited) .... -- -- -- -- -- -- -- -- (5,528) (5,528)
------ ------ --- --- ---- ------- ----- -------- -------- -------
Balances, March
31, 1999
(unaudited) .... $ -- 15,825 $16 139 $ -- $31,002 $ -- $ -- $(23,174) $ 7,844
====== ====== === === ==== ======= ===== ======== ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended March 31,
------------------------------ -----------------------
1996 1997 1998 1998 1999
--------- --------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ (51,241) $ (18,934) $ 51,390 $(3,908) $ (5,528)
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities:
Discontinued
operations............ 10,991 2,632 (64,379) 1,039 --
Minority interest...... (846) -- -- -- --
Accretion of note
payable............... 109 104 -- -- --
Depreciation and
amortization.......... 420 1,123 1,520 294 508
Amortization of
deferred
compensation.......... 257 157 376 7 --
Loss on disposal of
property and
equipment............. 39 -- -- -- --
Equipment acquired in
exchange for
advertising........... (119) -- (252) -- --
Accrual for closure of
Wired UK operations... 715 -- -- -- --
Write-off of
intangibles........... 23,708 -- -- -- --
Changes in operating
assets and
liabilities:
Escrow receivable..... -- -- (100) -- (45)
Accounts receivable,
net.................. (992) (1,770) (4,338) (268) (1,220)
Prepaid expenses and
other current
assets............... (105) (116) (341) (834) (3,658)
Accounts payable and
accrued expenses..... 5,637 420 2,838 776 (4,381)
Deferred revenue...... 357 429 (948) 463 (80)
--------- --------- -------- ------- --------
Net cash used in
continuing
operations.......... (11,070) (15,955) (14,234) (2,431) (14,404)
Net cash used in
discontinued
operations.......... (10,852) (8,845) (18,978) 8 --
--------- --------- -------- ------- --------
Net cash used in
operating
activities.......... (21,922) (24,800) (33,212) (2,423) (14,404)
--------- --------- -------- ------- --------
Cash flows from
investing activities:
Proceeds from sale of
discontinued
operations............ -- -- 85,490 -- --
Capital expenditures... (2,174) (1,034) (1,061) (394) (78)
Other assets........... (35) (11) 39 22 --
--------- --------- -------- ------- --------
Net cash provided by
(used in) continuing
operations ......... (2,209) (1,045) 84,468 (372) (78)
Net cash used in
discontinued
operations.......... (1,274) (192) -- -- --
--------- --------- -------- ------- --------
Net cash provided by
(used in) investing
activities.......... (3,483) (1,237) 84,468 (372) (78)
--------- --------- -------- ------- --------
Cash flows from
financing activities:
Repurchase of Series A
preferred stock....... (296) -- -- -- --
Issuance of Series B
preferred stock, net.. 12,300 -- -- -- --
Issuance of Series C
preferred stock, net.. 3,900 17,083 -- -- --
Proceeds from exercise
of employee stock
options............... 4 59 52 14 21
Proceeds from note
payable and line of
credit................ 7,199 8,425 6,369 6,369 --
Repayment of note
payable and line of
credit................ -- (3,639) (21,252) -- (106)
--------- --------- -------- ------- --------
Net cash provided by
(used in) financing
activities.......... 23,107 21,928 (14,831) 6,383 (85)
--------- --------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ (2,298) (4,109) 36,425 3,588 (14,567)
Cash and cash
equivalents, beginning
of period.............. 7,234 4,936 827 827 37,252
--------- --------- -------- ------- --------
Cash and cash
equivalents, end of
period................. $ 4,936 $ 827 $ 37,252 $ 4,415 $ 22,685
========= ========= ======== ======= ========
Supplemental disclosure
of cash flow
information -- Cash
paid for interest...... $ 359 $ 1,223 $ 109 $ 9 $ 33
========= ========= ======== ======= ========
Supplemental disclosure
of cash flow
information -- Cash
paid for taxes......... -- -- $ 4,300 $ -- $ 3,700
========= ========= ======== ======= ========
Noncash investing and
financing activities:
Acquisition of minority
interest in HotWired
Ventures LLC for
preferred stock........ $ 24,852 -- -- -- --
========= ========= ======== ======= ========
Capital lease
obligations........... -- -- $ 1,363 -- 200
========= ========= ======== ======= ========
Accretion of preferred
stock redemption
value................. -- -- $ 3,575 2,183 494
========= ========= ======== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(1) The Company
Wired Ventures, Inc. ("Wired" or the "Company") is a diversified media
company that produces and distributes branded content and search and navigation
services on the World Wide Web through its wholly owned subsidiary, Wired
Digital, Inc. Prior to its sale in June 1998 (see note 2) the Company's wholly
owned subsidiary, Wired Magazine Group, Inc., owned and published Wired
Magazine. The Company's print and television businesses, which were also sold
in June 1998, have historically not been significant.
The Company (a Delaware C corporation) was recapitalized in May 1996 such
that the ownership interests of Wired Holdings Inc. (previously a California S
corporation), Wired USA Ltd., and Wired Ventures, Ltd. were contributed to the
Company and approximately 14,000,000 shares of the Company's Series A preferred
stock were issued to the owners of such entities. The effective ownership
percentage of each respective equity holder in the Company after the
recapitalization is the same as their respective interests in the operating
assets and liabilities of the Company prior to the recapitalization, and there
was no change in control as a result of the recapitalization. Thus, all
indirect and direct ownership interests in Wired Ventures, Ltd. have been
converted to direct ownership interests in Wired. The consolidated financial
statements reflect the accounting for this transaction as a combination of
companies under common control.
The Company's businesses were historically conducted in partnership and
limited liability company form, beginning with Wired Partners in 1992, and
continuing through Wired USA Ltd., a California limited partnership (from its
formation in January 1993 to January 1994) and Wired Ventures, Ltd., a
California limited partnership (from its formation in January 1994 to May
1996). From January 1994 to May 1996, all businesses were conducted by Wired
Ventures, Ltd. Wired (via Wired Ventures, Ltd.) maintained a majority interest
in HotWired Ventures LLC, a California limited liability company (from its
formation in January 1995 through May 1996), and in May 1996 acquired the
remaining minority interest (see note 5). Wired Holdings Inc. and Wired USA
Ltd. had no operations, operating assets, or operating liabilities.
(2) Discontinued Operations
In June 1998, the Company sold substantially all of the assets and
liabilities of its print and television businesses to Advance Magazine
Publishers Inc. for approximately $90,000,000 (of which $4,500,000 was placed
in a one-year, interest-bearing escrow). Accordingly, operating results of the
Company's print and television operations have been reclassified and reported
as discontinued operations in the accompanying consolidated financial
statements.
The following table reconciles the proceeds received from the sale of these
discontinued operations to the gain on sale of the discontinued operations, net
of tax (in thousands):
<TABLE>
<S> <C>
Sale proceeds......................................................... $ 90,000
Net assets of discontinued operations as of disposal date........... (1,241)
Transaction-related expenses........................................ (7,090)
Estimated tax liability on gain..................................... (14,835)
--------
Gain on sale of discontinued operations............................... $ 66,834
========
</TABLE>
F-7
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
Summary operating results of discontinued print and television businesses are
as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Total revenues.................................... $ 33,504 $34,850 $ 14,669
Loss before income taxes.......................... (10,986) (2,628) (2,209)
Income tax expense................................ (5) (4) (246)
-------- ------- --------
Net loss........................................ $(10,991) $(2,632) $ (2,455)
======== ======= ========
</TABLE>
Assets and liabilities of discontinued print and television businesses as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Accounts receivable, net............................................. $ 4,747
Deferred production costs............................................ 1,526
Prepaid expenses and other current assets............................ 47
Acquired subscribers list intangibles................................ 4,247
-------
Total current assets............................................... 10,567
Noncurrent assets:
Property and equipment, net.......................................... 894
Other assets......................................................... 101
Foreign currency translation adjustment.............................. 199
-------
Total noncurrent assets............................................ 1,194
-------
Total assets....................................................... $11,761
=======
Current liabilities:
Accounts payable..................................................... $ 961
Accrued expenses..................................................... 2,586
Deferred revenue..................................................... 5,812
-------
Total current liabilities.......................................... 9,359
Long-term liabilities:
Deferred revenue..................................................... 124
-------
Total long-term liabilities........................................ 124
-------
Total liabilities.................................................. 9,483
=======
Net assets of discontinued operations.............................. $ 2,278
=======
</TABLE>
F-8
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(3) Summary of Significant Accounting Policies
(a) Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. Minority interest represents
the minority participants' share of the equity of HotWired Ventures LLC through
May 1996.
All material intercompany balances and transactions have been eliminated in
consolidation.
(b) Revenue Recognition
Online advertising revenue consists of revenue from selling advertisements,
which are placed in content or search and navigation services web pages.
Revenue from the sale of online advertising is recognized over the period
advertisements are displayed, provided that collection of the resulting
receivable is probable. Company obligations typically include guarantees of
minimum number of pageviews, or times that the page containing the
advertisement is viewed by users. To the extent minimum guaranteed pageviews
are not met, the Company defers recognition of the corresponding revenues until
guaranteed pageview levels are achieved. Cash received in advance for online
advertising is classified as deferred revenue and is recognized as revenue over
the time the advertisements are displayed.
(c) Stock-Based Compensation
The Company has elected to use the intrinsic value-based method of Accounting
Principles Board (APB) Opinion No. 25, as allowed under Statement of Financial
Accounting Standards SFAS No. 123, Accounting for Stock-Based Compensation, to
account for all of its employee stock-based compensation plans. Therefore, the
Company has made in note 9 the required pro forma net income (loss) and pro
forma net income (loss) per share disclosure as if the fair value method
defined in SFAS No. 123 had been applied to measure employee stock-based
compensation.
(d) Cash and Cash Equivalents
Cash and cash equivalents includes investments in money market accounts and
in highly liquid debt securities with insignificant interest rate risk and
remaining maturities of 90 days or less when acquired. As of December 31, 1998
and March 31, 1999, the Company had approximately $37.3 million and $22.6
million, respectively held in money market accounts, classified as cash
equivalents. As of December 31, 1997 and 1998 and March 31, 1999, the Company
had no significant cash investments subject to the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
(e) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist of cash and cash equivalents and accounts
receivable. The Company holds cash in deposit accounts with various major
banks. The Company performs ongoing credit evaluations of its customers, who
are primarily trade advertisers. The Company generally does not require
collateral from its customers.
F-9
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line basis over an estimated useful life of 3 years for equipment and
up to 10 years for leasehold improvements. Maintenance and repairs are charged
to expense as incurred.
(g) Nonmonetary Transactions
Agreements to exchange advertising in the Wired Digital network of online
sites for equipment or services, primarily online advertising services, are
recorded at the estimated fair value of the equipment or service upon the
completion of both parties' obligations. Total barter revenues of approximately
$965,000, $1,732,000, and $3,500,000 were recorded in 1996, 1997 and 1998,
respectively. Total barter revenues for the three months ended March 31, 1998
and 1999 were approximately $628,000 and $0, respectively.
(h) Comprehensive income (loss)
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires reclassification of
financial statements for earlier periods to be provided for comparative
purposes. Wired adopted SFAS No. 130 on January 1, 1998.
(i) Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost to sell.
(j) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities as the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Income Taxes
Wired accounts for income taxes under the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in income in the period that includes the
enactment date.
F-10
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
Prior to the recapitalization discussed in Note 1, Wired consisted of an S
corporation and several partnerships and limited liability companies for
federal income tax purposes. As such, income was taxed at the individual
stockholder or partner level.
(l) Per Share Information
Basic and diluted net income (loss) per share are computed using the weighted
average number of outstanding shares of common stock. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
for nominal consideration are included in the calculation of basic and diluted
per share results as if they were outstanding for all periods presented. To
date, the Company has not had any issuances or grants for nominal
consideration. Total per share results and results from continuing operations
for 1998 and the three months ended March 31, 1999 reflect the accretion of
$3,575,000 and $494,000, respectively, of dividends on redeemable convertible
preferred stock.
Per share results for the year ended December 31, 1997 do not include the
effect of approximately 19,600,000 shares of convertible preferred stock
outstanding and stock options and warrants outstanding to purchase 3,563,000
shares of common stock with weighted average exercise prices of $1.00 per
share, because their effects are anti-dilutive with respect to the loss from
continuing operations.
Per share results for the year ended December 31, 1998 do not include the
effect of approximately 19,600,000 shares of convertible preferred stock
outstanding and stock options and warrants outstanding to purchase
approximately 2,212,000 shares of common stock with weighted average exercise
prices of $1.00 per share, because their effects are anti-dilutive with respect
to the loss from continuing operations.
Per share results for the three months ended March 31, 1999 do not include
the effect of approximately 19,600,000 shares of convertible preferred stock
outstanding and stock options and warrants outstanding to purchase
approximately 2,191,000 shares of common stock with weighted average exercise
prices of $1.00 per share, because their effects are anti-dilutive with respect
to the loss from continuing operations.
(m) Recent Accounting Pronouncements
The FASB recently issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. For a derivative not designated as a hedging instrument, changes
in the fair value of the derivative are recognized in earnings in the period of
change. The Company must adopt SFAS No. 133 by July 1, 1999. Management does
not believe the adoption of SFAS No. 133 will have a material effect on the
financial position or results of operations of the Company.
(4) Balance Sheet and Statement of Operations Components
(a) Current Assets
The $4.7 million escrow receivable recorded as of March 31, 1999 represents
the amount due to Wired from Advance Magazine Publishers Inc. as final payment
from the sale of its print and television assets in June 1998. The one-year
escrow is subject to certain standard representations and warranties made by
Wired's management in connection with the sale of its print and television
assets. Currently, no claims have been asserted against the escrow and Wired is
not aware of any pending claims. Payment of the escrow is expected in June
1999.
F-11
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(b) Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
March 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Leasehold improvements............................. $ 1,024 $ 1,138 $ 1,138
Computer and communications equipment.............. 2,638 5,163 5,359
Other.............................................. 533 417 500
------- ------- -------
4,195 6,718 6,997
Less accumulated depreciation and amortization..... (1,782) (3,149) (3,658)
------- ------- -------
$ 2,413 $ 3,569 $ 3,339
======= ======= =======
(c) Accrued Expenses
Accrued expenses consist of the following (in thousands):
<CAPTION>
December 31,
----------------
March 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Payroll-related.................................... $ 727 $ 1,642 $ 1,650
Professional services.............................. 450 1,180 1,254
License fees....................................... 1,810 2,229 1,978
Termination benefits............................... -- 2,000 1,827
Transaction-related expenses....................... -- 615 --
Other.............................................. 3,484 1,947 2,553
------- ------- -------
$ 6,471 $ 9,613 $ 9,262
======= ======= =======
</TABLE>
(d) Restructuring and Other Non-Recurring Charges
Restructuring and other non-recurring charges includes the following
components as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Termination benefits..................................................... $4,347
Miscellaneous exit costs................................................. 459
------
$4,806
======
</TABLE>
The $4.3 million termination benefits amount recorded in 1998 represents
costs related to the termination of 10 employees. The employees terminated were
employees of Wired Ventures, Inc. and, while not having direct responsibilities
and association with either the operations of Wired Digital or the Wired
Magazine Group, were not deemed necessary to the ongoing management team or
cost structure of Wired subsequent to the sale of its print and television
businesses in June 1998. During 1998, approximately $2.3 million of the
severance amounts was paid and approximately $1.8 million is payable as of
March 31, 1999.
F-12
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(5) Business Combinations
(a) Wired UK
Wired UK was formed in 1994. The Company contributed intellectual property in
exchange for a 50% interest in Guardian Media Group plc (Guardian), a United
Kingdom corporation, contributed cash of approximately $216,000 for its 50%
interest. Wired UK had no material results of operations prior to 1995. In July
1995, Wired purchased Guardian's 50% interest in Wired UK. The Company closed
the operation in 1997.
(b) HotWired Ventures LLC
In May 1996, the Company purchased the minority interest in HotWired Ventures
LLC in exchange for 1,242,000 shares of Series A preferred stock. The Company
has accounted for this transaction using the purchase method, and accordingly,
the operating results of HotWired Ventures LLC previously attributable to
minority interests have been included in the consolidated financial statements
from the date of acquisition.
The value of the stock was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net tangible assets acquired........................ $ 371
Research and development in-process............................... 20,500
Purchased technology and goodwill, net of deferred income taxes... 3,982
-------
$24,853
=======
</TABLE>
The reseach and development in-process was written off and charged to
operations in 1996. Approximately $774,000 in amortization of purchased
technology and goodwill was recognized in the year ended December 31, 1996. The
remaining $3,208,000 in purchased technology and goodwill was written off in
1996, primarily based on a reassessment of the pace of innovation in the online
industry and its impact on the recoverablility of purchased technology.
The following combined results of operations for the year ended December 31,
1996 is presented as if the business combination with HotWired Ventures LLC had
occurred at the beginning of 1996. The $20,500,000 charge associated with
research and development in-process has been reflected in the following
summary. The summary also reflects the acquisition of Wired UK (see above) as
if the acquisition had occurred in the beginning of 1996. The summary does not
necessarily reflect the results of operations as they would have been if the
Company and the minority interest in HotWired Ventures LLC and Wired UK had
constituted a single entity during 1996 (in thousands, except per share
amount).
<TABLE>
<S> <C>
Total revenues from continuing operations....................... $ 4,312
========
Loss from continuing operations................................. $(38,441)
========
Net loss........................................................ $(49,432)
========
Net loss per share--basic and diluted........................... $(82,387)
========
</TABLE>
F-13
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(6) Note Payable and Line of Credit
(a) Note Payable
The Company had a non-interest bearing note payable with a stated value of
(Pounds)1,000,000 (approximately U.S. $1,700,000) to Guardian, which was due in
July 1998. As of December 31, 1997, the note payable had an estimated present
value of approximately $1,500,000. It was payable on demand with a stated
interest rate of 5% in the event of certain changes in ownership or certain
transactions with Guardian. In the event that the Company entered into certain
joint venture transactions in Continental Europe, Guardian had the right to
convert its loan to equity of the new joint venture. During 1998, this note was
repaid in full.
(b) Line of Credit
As of December 31, 1997, the Company maintained a $14,975,000 line of credit
collateralized by all of the Company's tangible and intangible assets. The line
bore an interest rate of 18% and expired on September 30, 1998. The outstanding
balance on the line of credit was $13,424,500 as of December 31, 1997. As of
December 31, 1997, the Company was in compliance with all financial covenants
contained in the credit facility. During 1998, the line of credit was repaid
and was not renewed.
(c) Bridge Loan
On March 23, 1998, the Company obtained a $10,000,000 bridge loan from the
holders of Series C preferred stock bearing interest at 18%. Of the bridge
loan, $5,000,000 was available and drawn upon at the close. If the loan was not
repaid by December 1998, the debt may have been converted into Series D
redeemable preferred shares. These preferred shares would have similar features
and rights as Series C redeemable convertible preferred shares (see note 8),
except it would rank senior to Series C.
The drawings against the Bridge Loan triggered noncompliance with certain of
the financial covenants of the Series C redeemable convertible preferred stock
agreement. Due to the event of noncompliance the holders of the Series C
preferred stock exercised their right to appoint four additional board of
director members. In addition, the holders of Series C preferred stock have the
right to redeem the stock and any accrued cumulative dividends. The Company has
accrued cumulative dividends of approximately $4.1 million through March 31,
1999. During 1998, the bridge loan was repaid.
As of December 31, 1998 and March 31, 1999, the Company had no available or
unused credit facilities.
(7) Income Taxes
Prior to the recapitalization discussed in note 1, Wired consisted of an S
corporation and several partnerships and limited liability companies. As a
result of the recapitalization, Wired is now taxed as a C corporation.
F-14
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
Income tax expense (benefit) has been allocated to the following (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Continuing operations........................... $ 4 $ 5 $(7,005)
Discontinued operations......................... 5 4 246
Gain on sale of discontinued operations......... -- -- 14,835
-------- ------- -------
$ 9 $ 9 $ 8,076
======== ======= =======
During the year ended December 31, 1998, Ventures recorded tax benefits of
approximately $7.0 million related to the loss from continuing operations in
the current period. These benefits are realizable as a result of the gain on
sale of the discontinued operations. The tax benefit of Ventures' use of the
beginning of the year tax loss carryforwards that previously have not been
recognized (the deferred tax asset has been offset by a valuation allowance)
have been recorded as a tax benefit and a reduction of the tax expense on the
loss from discontinued operations and the gain on sale of discontinued
operations, respectively, during the year ended December 31, 1998, because
those benefits would not otherwise have been recognized.
Significant components of income tax expense (benefit) from continuing
operations include the following (in thousands):
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ -- $(6,017)
State......................................... 4 5 (988)
-------- ------- -------
Total current expense (benefit)................. 4 5 (7,005)
-------- ------- -------
Deferred:
Federal....................................... -- -- --
State......................................... -- -- --
-------- ------- -------
Total deferred.................................. -- -- --
-------- ------- -------
Total tax expense (benefit)..................... $ 4 $ 5 $(7,005)
======== ======= =======
The following tabulation reconciles the statutory corporate federal income
tax expense (benefit) (computed by multiplying the Company's results before
income taxes by the statutory rate) to the Company's income tax expense
(benefit) from continuing operations (in thousands):
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Expected income tax benefit..................... $(13,972) $(5,431) $(6,998)
Permanent differences........................... -- 37 358
State taxes, net of federal benefit............. 4 5 3
Write-off of intangibles........................ 8,061 -- --
Unutilized (utilized) net operating losses...... 5,890 5,394 (368)
Other........................................... 21 -- --
-------- ------- -------
$ 4 $ 5 $(7,005)
======== ======= =======
</TABLE>
F-15
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax assets as of December 31, 1997 and
1998 are presented below (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals...................................... $ 1,590 $ 1,228
State taxes................................................ 770 829
Net operating loss carryforwards........................... 15,266 --
Property and equipment..................................... 265 350
-------- -------
Total gross deferred tax assets.......................... 17,891 2,407
Valuation allowance........................................ (17,891) (2,407)
-------- -------
Net deferred tax assets.................................. $ -- $ --
======== =======
</TABLE>
Based upon available information, which includes Ventures' historical
operating losses from continuing operations and the uncertainties regarding
future results of operations of Ventures, Ventures has provided a full
valuation allowance against its net deferred tax assets as of December 31, 1998
as it was determined that it was more likely than not that the deferred tax
assets would not be realized.
As of December 31, 1997, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately $38.5
million and $19.5 million, respectively. As a result of the sale transaction
described in Note 2, the Company believes that all available federal and state
net operating loss carryforwards have been utilized at December 31, 1998.
(8) Redeemable Convertible Preferred Stock
The Company has authorized 30,000,000 shares of preferred stock, of which
3,800,000 are designated as $0.001 par value redeemable convertible Series C
preferred stock (Series C preferred stock). As of December 31, 1998 and March
31, 1999, 3,762,760 shares were issued and outstanding. In addition, the
Company issued 50,000 warrants in January 1997 to purchase Series A preferred
stock at a price of $0.01 per share in connection with the Series C preferred
stock issuance, and no significant value was assigned to the warrants.
The Series C preferred stock may be converted into common stock at the option
of the holder on a one-for-one basis, subject to antidilution provisions and
certain adjustments related to financial performance in 1997, 1998 and 1999.
Based on the lack of achievement of certain financial performance criteria in
1997, each share of Series C preferred stock is currently convertible into
1.312 shares of common stock. Conversion is automatic upon the closing of an
initial public offering of common stock in which the gross proceeds are at
least $25,000,000 and in which the offering price is not less than (i) 2.5
times the original purchase price of Series C preferred stock ($5.71) if the
offering is completed by December 6, 1998, or (ii) three times the original
purchase price if the offering is completed after December 6, 1998. Conversion
is also automatic upon a sale of the Company in which the holders of Series C
preferred stock, after converting into common stock, would receive cash in the
amount of $50,000,000 if the sale occurred before December 31, 1998 or
$60,000,000 if the sale occurs on or after January 1, 1999.
Holders of Series C preferred stock accrue cumulative dividends at 8% per
annum, compounded annually, which are payable in cash upon liquidation of the
Company, redemption of the Series C preferred stock, or
F-16
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
upon the closing of an initial public offering for the sale of common stock of
the Company in which the proceeds to the Company are less than $25,000,000. The
dividends are not payable in the event of an initial public offering which
results in proceeds to the Company of at least $25,000,000 or in the event of a
sale of the Company in which the cash amount payable to the holders of the
Series C preferred stock is equal to or exceeds $40,000,000.
The holders of Series C preferred stock may redeem the stock in the event of
(i) noncompliance with certain financial and nonfinancial covenants, (ii) after
December 6, 2001, or (iii) upon bankruptcy, reorganization, or liquidation of
the Company. The redemption price shall be equal to the original purchase price
($5.71) of the Series C preferred stock, plus accrued dividends thereon, plus
an amount that would be received per share of Series C preferred stock upon a
sale of the Company at fair market value in excess of the original purchase
price plus accrued dividends thereon.
The holders of Series C preferred stock are entitled to preemptive rights to
enable them to maintain their fully diluted percentage ownership in the Company
for each issuance by the Company of equity securities, other than the exercise
of employee stock options. In the event of a sale or disposition of any shares
by a stockholder of the Company owning 5% or more, the holders of Series C
preferred stock have co-sale rights. No holder of more than 2% of the Company's
equity or Series C preferred stock, nor any officer of the Company is entitled
to sell any of their equity without the consent of a majority of the holders of
Series C preferred stock.
The holders of Series C preferred stock have common stock voting rights on an
"as if converted" basis. The holders of Series C preferred stock have the right
to appoint two directors to the seven member Board of Directors of the Company
and to appoint one member to the audit committee and the compensation committee
of the Board of Directors. In the event of noncompliance with certain
covenants, the holders of Series C preferred stock have the right to elect an
additional four board members (see note 6), for a total of six out of eleven
board members, and the holders of Series C preferred stock, voting as a class,
shall have the right to require a sale of the Company.
In the event of liquidation, the holders of Series C preferred stock are
entitled to receive a liquidation preference equal to the original purchase
price of the Series C preferred stock ($5.71) plus accrued dividends thereon,
plus approximately 20% of any liquidation proceeds distributed to the holders
of Series A and B preferred stock until these holders have received their
liquidation preference ($20.00) (note 9), plus a pro rata share of any amount
distributed to the holders of common stock calculated as if the holders of
Series C preferred stock had converted their shares into common stock.
(9) Stockholders' (Deficit) Equity
(a) Reverse Stock Split
In September 1996, the Company's Board of Directors authorized, and in
October 1996 the stockholders approved, a one-for-two reverse split of all of
the Company's series of preferred and common stock. All references in the
accompanying consolidated financial statements to number of shares and per
share amounts have been retroactively restated to reflect the decreased number
of shares outstanding.
F-17
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(b) Series A and B Preferred Stock
Each share of Series A and B preferred stock is convertible into common stock
at the exchange rate in effect at the time of conversion and is subject to
appropriate adjustment for common stock splits, stock dividends, and similar
transactions. Conversion is automatic upon a majority vote of the holders of
preferred stock or upon the closing of a public offering of common stock. The
exchange ratio for the holders of Series A and B preferred stock is one-to-one.
Each holder of Series A and B preferred stock is entitled to the number of
votes equal to the number of shares of common stock into which such preferred
stock is convertible.
Each holder of preferred stock is entitled to receive, when and as declared
by the Board of Directors, noncumulative dividends at the annual rate of $1.60
per share of Series A preferred stock and $1.60 per share of Series B preferred
stock in preference and priority to any payment of any dividend on common
stock. Each holder of preferred stock will participate pro rata on dividends
paid on the common stock.
In the event of liquidation, the holders of Series B preferred stock are
entitled to a per share liquidation preference equal to $20.00, plus all
declared and unpaid dividends, after which all holders of Series A preferred
stock are entitled to a per share liquidation preference equal to $20.00, plus
all declared but unpaid dividends.
There are no redemption or sinking fund provisions applicable to preferred
stock.
In January 1996, the Company issued equity interests, which represented
approximately 79,000 shares of Series A preferred stock, to certain of its
employees and recorded deferred compensation expense of approximately $790,000,
based on the deemed fair value of the shares. This amount has been amortized
over the vesting period of the Company's repurchase rights to such shares,
which was based upon the employees' continuing employment with the Company.
As a result of the sale of its print and television businesses in June 1998,
the Company amortized the balance of its deferred compensation resulting in a
charge against gain from sale of discontinued operations of approximately
$361,000.
The Company repurchased approximately 176,000 shares of Series A preferred
stock in 1996 at a total cost of approximately $296,000. During 1997, the
Company repurchased approximately 37,000 shares of Series A preferred stock for
an insignificant amount. During the year ended December 31, 1998, the Company
repurchased approximately 10,000 shares of Series A preferred stock for an
insignificant amount.
(c) 1996 Equity Incentive Plan
In March and May 1996, the Board of Directors adopted, and the stockholders
approved, respectively, the 1996 Equity Incentive Plan (1996 Equity Plan) and
reserved 3,000,000 shares of common stock for issuance. In May 1996 and August
1997, the Board of Directors reserved an additional 1,250,000 and 1,500,000
shares, respectively of common stock for issuance under the 1996 Equity Plan.
The 1996 Equity Plan provides for the granting of stock options and stock
bonuses and the issuance of restricted stock by the Company to its employees,
officers, directors, and consultants.
During 1996, the Company issued options for the purchases of an aggregate of
approximately 1,800,000 shares of common stock pursuant to the 1996 Equity Plan
at prices varying between $11.90 and $20.00. In
F-18
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
September 1996, these options were canceled by the Company and reissued at
prices ranging from $10.00 to $12.00. In addition, the Company issued options
for the purchase of an aggregate of approximately 700,000 shares of common
stock outside of the 1996 Equity Plan at a price of $2.00. In December 1996,
substantially all of the outstanding options were repriced by the Company and
reissued within the 1996 Equity Plan at an exercise price of $1.00. Options
generally vest to the extent of 25% upon the first anniversary of the employee
hire date and an additional 1/36 of the unvested shares vest ratably over the
following 36 months.
(d) Deferred Compensation Expense
In 1996, the Company recorded approximately $9,100,000 in deferred
compensation expense for the
difference between the exercise price and the deemed fair value of the common
stock of $14.00 at the dates of grant. The deferred compensation was to be
amortized over the vesting period of the individual options, generally four
years. The Company recorded approximately $6,300,000 in amortization of
compensation expense related to such options in 1996.
As of December 31, 1996, the Company reevaluated the fair value of the common
stock for which options were granted and revised the fair value to $1.00.
Accordingly, as of December 31, 1996, the Company reversed the deferred
compensation of approximately $9,100,000 and the related amortization of
approximately $6,300,000.
(e) 1996 Nonemployee Director Stock Option Plan
Under the 1996 Nonemployee Director Stock Option Plan (1996 Director Plan),
adopted and approved in May and July of 1996, respectively, the Company may
grant options to its nonemployee directors for up to 50,000 shares of common
stock. No shares have been issued under the 1996 Director Plan.
(f) Accounting for Stock-Based Compensation
The Company applies the intrinsic value method in accordance with APB Opinion
No. 25 and related interpretations in accounting for its employee stock-based
compensation plans. Had compensation costs for the Company's stock-based
compensation plans been determined consistent with the fair value method
defined in SFAS No. 123, the Company's net income (loss) for 1996, 1997 and
1998 would have been as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Net income (loss)--as reported................. $(51,241) $(18,934) $51,390
Net income (loss)--pro forma................... $(51,399) $(19,239) $50,988
Basic and diluted net income (loss) per share--
as reported................................... $(85,473) $(593.69) $547.13
Basic and diluted net income (loss) per share--
pro forma..................................... $(85,736) $(603.25) $542.53
</TABLE>
The fair value of options granted during the year ended December 31, 1996,
1997 and 1998 for employee services were estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: risk-
free interest rate of 6.28%, 5.61% and 5.12% respectively, expected lives of
4.5 years, and no dividends.
The fair value of options granted during the year ended December 31, 1997,
for other than employee services, representing approximately 58,000 of the
total options granted, were estimated on the date of grant
F-19
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
using the Black-Scholes Pricing Model with the following weighted-average
assumptions: risk-free interest rate of 5.61%, expected life of 4.5 years,
expected volatility of 55%, and no dividends.
A summary of the status of the Company's fixed employee benefit plans are
presented below (shares in thousands):
<TABLE>
<CAPTION>
Weighted-
average
Options exercise price
------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1996.............. -- --
Granted..................................... 2,550 $12.74
Forfeited................................... (130) 12.97
Canceled September 1996..................... (1,767) 16.32
Regranted September 1996.................... 1,767 11.24
Canceled December 1996...................... (2,420) 8.81
Regranted December 1996..................... 2,420 1.00
------
Outstanding at December 31, 1996............ 2,420 1.00
======
Options vested at December 31, 1996......... 869 1.00
======
Weighted-average fair value of options
granted during the year at exercise price
equal to market price at grant date........ $ 0.19
======
Weighted-average remaining contractual life
........................................... 8.3 years
====== ======
Outstanding at January 1, 1997.............. 2,420 1.00
Granted..................................... 2,012 1.00
Canceled.................................... (860) 1.00
Exercised................................... (59) 1.00
------
Outstanding at December 31, 1997............ 3,513 1.00
======
Options vested at December 31, 1997......... 1,582 1.00
======
Weighted-average fair value of options
granted during the year at exercise price
equal to market price at grant date........ $ 0.17
======
Weighted-average remaining contractual
life....................................... 9.1 years
====== ======
Outstanding at January 1, 1998.............. 3,513 1.00
Granted..................................... 1,742 1.00
Canceled.................................... (3,041) 1.00
Exercised................................... (52) 1.00
------
Outstanding at December 31, 1998............ 2,162 1.00
======
Options vested at December 31, 1998......... 1,061 1.00
======
Weighted-average fair value of options
granted during the period at exercise price
equal to market price at grant date........ $ 0.16
======
Weighted-average remaining contractual life
........................................... 8.5 years
====== ======
Outstanding at January 1, 1999.............. 2,162 1.00
Granted (unaudited)......................... -- --
Canceled (unaudited)........................ -- --
Exercised (unaudited)....................... (26) 1.00
------
Outstanding at March 31, 1999 (unaudited)... 2,136 1.00
======
Options vested at March 31, 1999
(unaudited)................................ 1,206 1.00
======
Weighted-average remaining contractual
life....................................... 8.3 years
====== ======
</TABLE>
F-20
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(10) Employee Benefit Plans
The salary deferral 401(k) plan allows employees to defer up to 25% of their
salary subject to certain limitations. The Company may make discretionary
contributions to the plan, however, no employer contributions have been made
since inception.
(11) Commitments and Contingencies
(a) Lease Commitments
The Company leases certain office space, office and computer equipment under
noncancelable operating leases with terms exceeding one year. The Company also
leases certain equipment under capital leases. Future minimum lease payments as
of December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year ending December 31 Leases Leases
----------------------- --------- -------
<S> <C> <C>
1999..................................................... $ 792 $ 745
2000..................................................... 1,022 476
2001..................................................... 1,093 269
2002..................................................... 1,052 3
2003..................................................... 1,046 --
Thereafter............................................... 3,047 --
------ ------
Total minimum lease payments............................. $8,052 $1,493
------
Less amount representing imputed interest................ 130
------
Present value of minimum lease payment................... 1,363
Less current portion..................................... 653
------
Long term capital lease obligation....................... $ 710
======
</TABLE>
Continuing operations includes net rental expense under operating leases for
the years ended December 31, 1996, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 was approximately $499,500, $890,500, $745,000, 113,000
and $203,000, respectively.
(b) Legal Matters
Wired and its subsidiaries are involved in a number of claims arising in the
ordinary course of business. Wired and its subsidiaries believe these matters
will be resolved without material adverse effect on the Company's or its
subsidiaries' financial position, results of operations or cash flows.
F-21
<PAGE>
WIRED VENTURES, INC. AND SUBSIDIARIES
(A Delaware Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(Information as of and for the three months ended
March 31, 1998 and 1999 is unaudited)
(12) Segment Information
The Company has adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on
the way that management organizes the operating segments within the Company for
making operating decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's President. The President reviews financial information presented on a
consolidated basis for purposes of making operating decisions and assessing
financial performance. The consolidated financial information reviewed by the
President is identical to the information presented in the accompanying
consolidated statement of operations. Therefore, the Company operates in a
single operating segment: online content and search and navigation services on
the World Wide Web. No single customer accounted for greater than 10% of
revenues in any period presented and the Company does not have any significant
international operations or export revenues.
F-22
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
by and among
LYCOS, INC.,
a Delaware corporation,
BF ACQUISITION CORP.,
a Delaware corporation,
WIRED VENTURES, INC.,
a Delaware corporation,
and
H. William Jesse, Jr., Louis Rossetto and Paul J. Salem
AS STOCKHOLDER REPRESENTATIVES
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Table of Contents
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ARTICLE 1 DESCRIPTION OF TRANSACTION.................................. 1
1.1 Merger of Acquisition Sub into Ventures..................... 1
1.2 Effect of the Merger........................................ 1
1.3 Closing; Effective Time..................................... 1
Certificate of Incorporation and Bylaws; Directors and
1.4 Officers.................................................... 2
1.5 Merger Consideration........................................ 2
1.6 Effect on Capital Stock..................................... 7
Allocation of Merger Consideration--Actual Average Closing
Stock Price less than or equal to the Upper Collar Limit.... 9
Allocation of Merger Consideration--Actual Average Closing
Stock Price greater than the Upper Collar Limit but less
than or equal to $90.00..................................... 11
Allocation of Merger Consideration--Actual Average Closing
Stock Price greater than $90.00............................. 13
1.7 Dissenting Shares........................................... 14
1.8 Exchange of Certificates.................................... 15
1.9 Tax Consequences............................................ 16
1.10 Accounting Consequences..................................... 16
1.11 Further Action.............................................. 16
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF VENTURES.................. 17
2.1 Organization, Standing, Etc. ............................... 17
2.2 Wired Companies; Title to Wired Companies' Shares, Etc. .... 18
2.3 Capitalization of Ventures.................................. 18
2.4 Certificate of Incorporation and Bylaws..................... 18
2.5 Compliance with Other Instruments and Laws.................. 18
2.6 Governmental Authorizations and Consents.................... 19
2.7 No Violations............................................... 19
2.8 Financial Statements........................................ 19
2.9 Absence of Certain Changes or Events........................ 20
2.10 Title to Assets............................................. 21
2.11 Intellectual Property....................................... 21
2.12 Benefit Plans............................................... 22
2.13 Litigation.................................................. 25
2.14 Taxes....................................................... 26
2.15 Contracts................................................... 27
2.16 Insurance................................................... 28
2.17 Environmental Quality....................................... 28
2.18 Brokers..................................................... 29
2.19 Statements; Proxy Statement/Prospectus...................... 30
2.20 Governmental Permits........................................ 30
2.21 Major Customers............................................. 30
2.22 Traffic..................................................... 30
2.23 Accounts Receivable......................................... 31
2.24 Bank Accounts; Powers of Attorney........................... 31
2.25 Minute Books, Etc. ......................................... 31
2.26 Company Action.............................................. 31
2.27 Disclosure.................................................. 31
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND ACQUISITION SUB......................................... 32
3.1 Organization and Standing of Purchaser...................... 32
3.2 Charter and Bylaws.......................................... 32
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3.3 Capitalization of Purchaser................................ 32
3.4 Authorization.............................................. 32
3.5 Enforceability............................................. 32
3.6 Compliance with Other Instruments and Laws................. 33
3.7 Governmental Authorizations and Consents................... 33
3.8 Litigation................................................. 33
3.9 Brokers.................................................... 34
3.10 Public Filings............................................. 34
3.11 Statements; Proxy Statement/Prospectus..................... 34
3.12 Ownership of Ventures Stock................................ 35
3.13 Material Adverse Effect.................................... 35
ARTICLE 4 COVENANTS OF VENTURES...................................... 35
4.1 Conduct of Business........................................ 35
4.2 Access..................................................... 37
4.3 No-Shop Provision.......................................... 37
4.4 Meeting of Stockholders.................................... 38
4.5 Consent of Ventures' Stockholders to Certain Payments...... 38
ARTICLE 5 COVENANTS OF PURCHASER AND ACQUISITION SUB................. 38
5.1 Confidentiality............................................ 38
5.2 Investigation.............................................. 38
5.3 Employees.................................................. 39
5.4 Indemnification............................................ 39
5.5 Stock Options.............................................. 39
5.6 Nasdaq National Market..................................... 40
5.7 Advance Agreement.......................................... 40
5.8 Tax Refund Amount.......................................... 40
ARTICLE 6 COVENANTS OF ALL PARTIES................................... 41
6.1 Best Efforts; Further Assurances........................... 41
6.2 Certain Filings............................................ 41
6.3 Public Announcements....................................... 41
6.4 Tax Returns................................................ 42
6.5 Proxy Statement and Registration Statements................ 43
6.6 Tax-Free Reorganization.................................... 44
6.7 Tax Representation Letters................................. 44
6.8 Marketing Program Funding.................................. 44
ARTICLE 7 CONDITIONS TO OBLIGATIONS OF PURCHASER AND ACQUISITION SUB
TO CLOSE................................................... 45
7.1 Accuracy of Representations and Warranties................. 45
7.2 Performance................................................ 45
7.3 Certificate................................................ 45
7.4 Employment Agreements...................................... 45
7.5 No Injunction.............................................. 45
7.6 HSR Act.................................................... 45
7.7 Legal Opinion.............................................. 45
7.8 Stockholder Approval....................................... 45
7.9 Consents................................................... 46
7.10 Escrow Agreement........................................... 46
7.11 Resignations............................................... 46
7.12 Appraisal Rights........................................... 46
7.13 Termination of Agreements.................................. 46
7.14 Form S-4 Registration Statement............................ 46
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7.15 Tax Opinion................................................ 46
7.16 Quotation on Nasdaq National Market........................ 46
7.17 Consent of Ventures' Stockholders to Certain Payments...... 46
ARTICLE 8 CONDITIONS TO OBLIGATION OF VENTURES TO CLOSE.............. 47
8.1 Accuracy of Representations and Warranties................. 47
8.2 Performance................................................ 47
8.3 Certificate................................................ 47
8.4 No Injunction.............................................. 47
8.5 HSR Act.................................................... 47
8.6 Consents................................................... 47
8.7 Legal Opinion.............................................. 47
8.8 Stockholder Approval....................................... 47
8.9 Tax Opinion................................................ 48
8.10 Form S-4 Registration Statement............................ 48
8.11 Quotation on Nasdaq National Market........................ 48
ARTICLE 9 TERMINATION................................................ 48
9.1 Right to Terminate Agreement............................... 48
9.2 Effect of Termination...................................... 49
9.3 Failure to Close........................................... 49
ARTICLE 10 ADJUSTMENT PROCEDURES...................................... 49
10.1 Preparation of Final Closing Balance Sheet................. 49
10.2 Adjustment of Escrow Fund.................................. 51
ARTICLE 11 CERTAIN REMEDIES AND LIMITATIONS........................... 52
11.1 Expiration of Representations, Warranties and Covenants.... 52
11.2 Escrow Fund................................................ 52
11.3 Indemnification by Purchaser............................... 53
11.4 Defense of Third Party Actions............................. 53
11.5 Subrogation; No Contribution............................... 54
11.6 Exclusivity................................................ 55
11.7 Retention of Records....................................... 55
11.8 Notice as to Representations............................... 55
11.9 No Recission............................................... 55
ARTICLE 12 MISCELLANEOUS.............................................. 55
12.1 Material Adverse Effect.................................... 55
12.2 Knowledge of Ventures...................................... 56
12.3 Memorandum; Disclaimer of Projections...................... 56
12.4 Expenses................................................... 57
12.5 Notices.................................................... 58
12.6 Assignment................................................. 60
12.7 Entire Agreement; Amendment; Governing Law; etc. .......... 60
12.8 Counterparts............................................... 60
12.9 Venue...................................................... 60
12.10 Third-Party Rights......................................... 61
12.11 Titles and Headings........................................ 61
12.12 Exhibits and Schedules..................................... 61
12.13 Pronouns................................................... 61
12.14 Severability............................................... 61
12.15 Time of Essence............................................ 61
12.16 Interpretation............................................. 61
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TABLE OF EXHIBITS
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Exhibit Description
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A Forms of Voting Agreement
B Form of Tax Representation Letter of Ventures
C Form of Tax Representation Letter of Purchaser
D Form of Employment Agreement
E Form of Nondisclosure and Developments Agreement
F Opinion of Cooley Godward LLP
G Form of Escrow Agreement
H Opinion of Hutchins, Wheeler & Dittmar
</TABLE>
Certain Exhibits and Schedules have been ommitted but will be provided by Lycos
on request.
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AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This Agreement And Plan Of Merger And Reorganization (this "Agreement") is
entered into as of May , 1999 by and among Lycos, Inc., a Delaware
corporation ("Purchaser"), BF Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Purchaser ("Acquisition Sub"), Wired Ventures, Inc.,
a Delaware corporation ("Ventures"), and H. William Jesse, Jr., Louis Rossetto
and Paul J. Salem, as stockholder representatives (the "Stockholder
Representatives"). This Agreement amends and restates in its entirety that
certain Agreement and Plan of Merger and Reorganization, dated as of October 5,
1998, as amended and restated on November 25, 1998, among the parties hereto;
provided, however, that all representations and warranties will be deemed made
as of October 5, 1998 and all references to "as of the date of this Agreement"
or language of similar import will be deemed to refer to October 5, 1998.
Recitals
A. Purchaser, Acquisition Sub and Ventures intend to effect a merger of
Acquisition Sub into Ventures in accordance with this Agreement and applicable
laws (the "Merger"). Upon consummation of the Merger, Acquisition Sub will
cease to exist, and Ventures will become a wholly-owned subsidiary of
Purchaser.
B. The respective boards of directors of Purchaser, Acquisition Sub and
Ventures have adopted this Agreement and approved the Merger.
C. As a condition and inducement to Purchaser's willingness to enter into
this Agreement, certain stockholders of Ventures have, concurrently with the
execution of this Agreement, executed and delivered to Purchaser a Voting
Agreement in one of the forms attached hereto as Exhibit A, pursuant to which
such stockholders have agreed to vote their shares of Ventures' capital stock
in favor of the Merger and to grant Purchaser irrevocable proxies to vote such
shares.
Agreement
The parties to this Agreement, intending to be legally bound, agree as
follows:
ARTICLE I
DESCRIPTION OF TRANSACTION
1.1 Merger of Acquisition Sub into Ventures. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined
in Section 1.3), Acquisition Sub shall be merged with and into Ventures, and
the separate existence of Acquisition Sub shall cease. Ventures will continue
as the surviving corporation in the Merger (the "Surviving Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in this
Agreement and in the applicable provisions of the Delaware General Corporation
Law ("DGCL") and other applicable law.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, One Maritime Plaza, 20th Floor, San Francisco,
California, at 10:00 a.m. on a date to be agreed by Purchaser and Ventures (the
"Closing Date"), which shall be no later than the third business day after the
satisfaction or waiver of the conditions set forth in Articles 7 and 8.
Contemporaneously with the Closing, a properly executed agreement of merger or
certificate of merger conforming to the requirements of the DGCL shall be filed
with the Secretary of State of the State of Delaware. The Merger shall take
effect at the time such agreement of merger or certificate of merger is filed
with the Secretary of State of the State of Delaware (the "Effective Time").
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1.4 Certificate of Incorporation and Bylaws; Directors and Officers. Unless
otherwise agreed by Purchaser and Ventures prior to the Effective Time:
(a) the Certificate of Incorporation of Ventures, as amended by the
agreement of merger or the certificate of merger, as the case may be, shall
be the Certificate of Incorporation of the Surviving Corporation;
(b) the Bylaws of Acquisition Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation;
(c) the directors of the Surviving Corporation immediately after the
Effective Time shall be the individuals who are directors of Acquisition
Sub immediately prior to the Effective Time; and
(d) the officers of the Surviving Corporation immediately after the
Effective Time shall be the individuals who are officers of Acquisition Sub
immediately prior to the Effective Time.
1.5 Merger Consideration.
(a) The consideration to be paid by Purchaser in the Merger (the "Merger
Consideration") shall consist of the following components: the Merger
Shares (as hereinafter defined), the Cash Portion (as hereinafter defined),
the Tax Refund Amount (as hereinafter defined) and the Advance Escrow
Amount (as hereinafter defined).
(b) For purposes of this Agreement:
(1) The term "Merger Shares" shall mean a number of shares of Common
Stock of Purchaser, $.01 par value per share ("Purchaser Common Stock"),
equal to the sum of the Digital Shares and the Cash Balance Shares, where:
(i) the term "Digital Shares" means a number of shares of Purchaser
Common Stock, rounded to the nearest full share, equal to $95 million
divided by the Average Closing Stock Price (as hereinafter defined);
provided that, in no event shall the number of Digital Shares exceed
4,602,713; and
(ii) the term "Cash Balance Shares" means a number of shares of
Purchaser Common Stock, rounded to the nearest full share, equal to the
Cash Share Value (as hereinafter defined) divided by the Average
Closing Stock Price.
(2) The term "Cash Balance" shall mean the cash amount equal to (i) Wired
Cash at Closing, (ii) minus Wired Borrowings at Closing, (iii) minus Wired
Adjusted Working Capital Shortfall at Closing, (iv) minus the Closing
Expense Adjustment Amount (as such terms are hereinafter defined).
(3) The term "Cash Share Value" shall mean the Cash Balance; provided,
however, that: (i)
to the extent the Merger Shares would otherwise exceed 19.9% of the
outstanding capital stock of Purchaser as of the Closing Date, the Cash
Share Value shall be decreased and the Cash Portion shall be
correspondingly increased and (ii) if the Average Closing Stock Price
is less than or equal to the Lower Collar Limit (as hereinafter
defined), Purchaser shall have the option, in its sole discretion, to
decrease the Cash Share Value and to correspondingly increase the Cash
Portion. Notwithstanding any other provision of this Agreement to the
contrary, the Cash Share Value shall not be decreased and the Cash
Portion shall not be increased if and to the extent such decrease would
result in the Equity Cash Value (as hereinafter defined) exceeding
twenty percent (20%) of the Total Equity Value (as hereinafter
defined). For purposes hereof, "Equity Cash Value" shall mean the sum
of (A) the Cash Portion payable to the holders of Ventures Capital
Stock plus (B) $9,767,868 plus (C) the dollar amount of the cash to be
paid to the holders of Ventures Capital Stock with respect to
fractional shares pursuant to Section 1.6(d) plus (D) two multiplied by
the cash amount that would have been paid to the holders of Dissenting
Shares (as defined in Section 1.7) if such holders had not dissented
plus (E) two multiplied by the amount equal to (I) the number of shares
of Purchaser Common Stock that would have been issued to the holders of
Dissenting Shares if such holders had not dissented multiplied by (II)
the closing price of Purchaser Common Stock on
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the trading date immediately prior to the Effective Time. For purposes
hereof, "Total Equity Value" shall mean (x) the number of shares of
Purchaser Common Stock issued to the holders of Ventures Capital Stock
pursuant to Section 1.6A, 1.6B or 1.6C (other than to the holders of
Dissenting Shares and other than such shares as are placed in the
Escrow Fund on behalf of the holders of Ventures Capital Stock pursuant
to Section 1.6A(b), 1.6B(b) or 1.6C(b)) multiplied by the closing price
of Purchaser Common Stock on the trading date immediately prior to the
Effective Time plus (y) the Equity Cash Value, Notwithstanding any
other provision of this Agreement to the contrary, the Cash Share Value
shall not be decreased if and to the extent such decrease would result
in the Warrant Cash Value (as hereinafter defined) exceeding twenty
percent (20%) of the Total Warrant Value (as hereinafter defined). For
purposes hereof, "Warrant Cash Value" shall mean the sum of (A) the
Cash Portion payable to the holders of Warrants plus (B) $32,132 plus
(C) the dollar amount of the cash to be paid to Warrant holders with
respect to fractional shares pursuant to Section 1.6(d). For purposes
hereof, "Total Warrant Value" shall mean (x) the number of shares of
Purchaser Common Stock issued to the holders of Warrants pursuant to
Section 1.6 (other than such shares as are placed in the Escrow Fund on
behalf of Warrant holders pursuant to Section 1.6A(b), 1.6B(b) or
1.6C(b)) multiplied by the closing price of Purchaser Common Stock on
the trading date immediately prior to the Effective Time plus (y) the
Warrant Cash Value.
Immediately following the close of trading on the trading date immediately
prior to the Effective Time (or the business day immediately prior to the
Effective Time, if later), Purchaser will calculate the Cash Share Value
and provide such calculation to Ventures in writing.
(4) The term "Average Closing Stock Price" shall mean the average of the
closing prices of one share of Purchaser Common Stock for the twenty (20)
consecutive most recent days that Purchaser Common Stock has traded on the
Nasdaq National Market ("NNM") ending on the third trading day preceding
the Effective Time, as reported on the NNM; provided, however, that the
Average Closing Stock Price shall not be greater than $42.86 (the "Upper
Collar Limit") or less than $20.64 (the "Lower Collar Limit").
(5) The term "Actual Average Closing Stock Price" shall mean the average
of the closing prices of one share of Purchaser Common Stock for the five
(5) consecutive most recent days that the Purchaser Common Stock has traded
on the NNM ending on the third trading day preceding the Effective Time, as
reported on the NNM.
(6) The term "Advance Escrow Amount" shall mean any and all amounts that
are delivered to or for the benefit of Ventures at any time, or from time
to time, pursuant to the escrow arrangements (the "Advance Escrow")
established under Section 10.2(b) of that certain Asset Purchase Agreement
dated as of May 7, 1998 among Advance Magazine Publishers Inc., Ventures,
Wired Magazine Group, Inc., Wired Digital, Inc., Wired Books, Inc., Wired
Television, Inc. and The Chase Manhattan Bank, as Escrow Agent, as amended
(the "Advance Agreement"), less any portion of such amounts that is
required to be delivered to Purchaser pursuant to Section 10.2 below.
(7) The term "Cash Portion" shall mean the amount of Merger
Consideration, if any, to be paid in cash pursuant to the provisos to the
definition of Cash Share Value.
(8) The term "Common Share Value" shall mean $12,538,700.
(9) The term "Closing Expense Adjustment Amount" shall mean any amounts
in excess of $2.5 million paid or payable by Ventures at or prior to the
Closing pursuant to Section 12.4
(10) The term "Series A Share Value" shall mean 78.8% of the Residual
Share Value (as hereinafter defined).
(11) The term "Series B Share Value" shall mean $20.00 times the number
of shares of Ventures Series B Preferred Stock (as hereinafter defined)
outstanding immediately prior to the Effective Time.
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(12) The term "Series C Share Value" shall mean the sum of:
(i) $5.71 times the number of shares of Ventures Series C Preferred
Stock (as hereinafter defined) outstanding immediately prior to the
Effective Time (the "Series C Liquidation Value");
(ii) all Series C Accrued Dividends (as hereinafter defined);
(iii) 26.903553% of the Series B Share Value (the "Series C/B
Participation Value"); and
(iv) 21.2% of the Residual Share Value (as hereinafter defined).
(13) The term "Series C Accrued Dividends" shall mean the sum of (i)
$1,718,829 and (ii) $5,085.85 times the number of calendar days in the
period beginning January 1, 1998 and ending the day prior to the Closing
Date.
(14) The term "Residual Share Value" shall mean $95 million less the sum
of (i) the Common Share Value, (ii) the Series B Share Value, (iii) the
Series C Liquidation Value, (iv) the Series C Accrued Dividends and (v) the
Series C/B Participation Value.
(15) The term "Tax Refund Amount" shall mean the cash amount equal to the
federal and state tax refunds actually received by Purchaser with respect
to the Wired Companies' (as hereinafter defined) pre-Closing tax periods,
including without limitation refunds generated by the carryback of losses
of any of the Wired Companies following the Closing, less any fees and
expenses incurred by Purchaser in connection with the receipt of such
refunds by Purchaser; provided, however, that such net amount shall not
exceed $5 million. Notwithstanding the foregoing, the $5 million amount
shall be reduced by the tax effect on Purchaser or the Wired Companies of
the disallowance of any deduction claimed by Ventures or the Wired
Companies with respect to pre-Closing tax periods, but such amount shall
not constitute a Loss for purposes of Article 11 of this Agreement to the
extent of such reduction. The computation of refunds generated by the
carryback of losses of any of the Wired Companies following the Closing
shall include all refunds that would reasonably be available if Purchaser
had prepared its post-Closing tax returns and made its tax elections in a
manner so as to maximize the dollar value of such refunds, determined
solely with regard to the operations of the acquired Wired Companies on a
stand-alone basis.
(16) The term "Wired Cash at Closing" shall mean all cash and cash
equivalents of the Wired Companies as of the Closing (including any cash
held by Ventures that represents the exercise price of stock options
exercised for cash after the date hereof), as reflected on the Preliminary
Closing Balance Sheet (as hereinafter defined), minus an amount of cash
sufficient to fund Ventures' obligation to pay the amounts identified on
Schedule 1.5 (the "Cash Exclusions"); provided, however, that for purposes
of calculating Wired Cash at Closing, Ventures shall be deemed to hold an
incremental amount of cash equal to the sum of (A) the Marketing Program
Funding Amount described in Section 6.8, (B) any amounts paid by Ventures
at or prior to the Closing pursuant to Section 12.4, and (C) the aggregate
exercise price of all stock options presently held by or hereafter granted
to employees of the Wired Companies (but not non-employees), as described
in Schedule 2.3, and Warrants (as defined in Section 2.3) to the extent
such stock options and Warrants are either held unexercised at the Closing
Date or net-exercised between the date hereof and the Closing Date.
(17) The term "Wired Borrowings at Closing" shall mean all indebtedness
for borrowed money of the Wired Companies as of the Closing, as reflected
on the Preliminary Closing Balance Sheet. Obligations under capitalized
leases shall not constitute Wired Borrowings at Closing.
(18) The term "Wired Adjusted Working Capital Shortfall at Closing" shall
mean the absolute value of the difference between (i) $432,172 and (ii) the
adjusted working capital (i.e., current assets less current liabilities) of
the Wired Companies as of the Closing, as reflected on the Preliminary
Closing Balance Sheet; provided, however, that, for the purpose of
calculating Wired Adjusted Working Capital Shortfall at Closing only, Wired
Cash at Closing (together with the offsetting Cash Exclusions) and Wired
Borrowings at Closing shall be disregarded, and no amounts payable by
Ventures pursuant to Section 12.4 at or prior to the Closing shall be
deemed to be a current liability. Notwithstanding the foregoing, Wired
Adjusted Working Capital Shortfall at Closing shall be zero if the adjusted
working capital described in subparagraph (ii) above is $432,172 or
greater.
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(19) The term "Pass-Through Component" shall mean (i) the number of
shares of Purchaser Common Stock, rounded to the nearest full share, equal
to the Cash Balance divided by the Actual Average Closing Stock Price (the
"Cash Pass-Through Shares"), (ii) the Cash Portion, (iii) the Advance
Escrow Amount and (iv) the Tax Refund Amount.
(20) The term "Cash Premium Component" shall mean the number of shares of
Purchaser Common Stock, if any, by which the number of Cash Balance Shares
as determined under Section 1.5(b)(1)(ii) exceeds the number of Cash Pass-
Through Shares.
(21) The term "Series A Per Share Amount" shall mean what each share of
Ventures Series A Preferred Stock is automatically converted into pursuant
to Section 1.6A(a)(2), 1.6B(a)(2) or 1.6C(a)(2).
(22) The final result (but not interim results) of all calculations of
fractions, ratios and percentages shall be rounded to six (6) decimal
places.
(c) Not later than ten (10) business days prior to the Closing, Ventures
shall prepare in good faith and deliver to Purchaser an estimated consolidated
balance sheet of Ventures and the other Wired Companies as of the Closing Date
(the "Preliminary Closing Balance Sheet"). Except for the fact that it is based
on estimates and the absence of footnotes, the Preliminary Closing Balance
Sheet shall be prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") on a basis consistent with that used in the preparation of
the Financial Statements (as hereinafter defined). Based on the Preliminary
Closing Balance Sheet, Ventures shall calculate Wired Cash at Closing and Wired
Adjusted Working Capital Shortfall at Closing, and Ventures shall calculate
Wired Cash at Closing and Wired Adjusted Working Capital Shortfall at Closing,
and Ventures shall deliver such calculations to Purchaser with the Preliminary
Closing Balance Sheet. Within five (5) business days after such delivery,
Purchaser shall concur in such Preliminary Closing Balance Sheet and
calculations or deliver to Ventures is proposed alternatives thereto. If
Ventures and Purchaser cannot agree within two (2) business days on the
appropriate values for Wired Cash at Closing and Wired Adjusted Working Capital
Shortfall at Closing, then Ventures and Purchaser shall submit their respective
proposed values to Arthur Andersen LLP, who shall be asked to select, for each
of such items, either Ventures' or Purchaser's proposed value as the more
correct value in accordance with the standards set forth herein. If both values
proposed by one of the parties are selected, the other party shall pay the fees
and expenses of Arthur Andersen LLP; otherwise such fees and expenses shall be
shared equally between the parties. The conditions to Closing set forth in
Articles 7 and 8 shall be deemed not to have been met until after the
determination of Wired Cash at Closing and Wired Adjusted Working Capital
Shortfall at Closing.
1.6 Effect on Capital Stock.
(a) Capital Stock Ventures. At the Effective Time, by virtue of the
Merger and without any further action on the part of Purchaser, Acquisition
Sub, Ventures or any stockholder of Ventures or of Acquisition Sub all
outstanding shares of capital stock of Ventures, calculated on a fully-
diluted, fully-converted basis as though all convertible debt and equity
securities and options (whether vested or unvested) and warrants had been
converted or exercised immediately prior to the Effective Time, shall be
converted into, or exchanged for, the Merger Consideration. If the Actual
Average Closing Stock Price is less than or equal to the Upper Collar
Limit, the Merger Consideration shall be allocated as set forth in Section
1.6A. If the Actual Average Closing Stock Price is greater than the Upper
Collar Limit but less than or equal to $90.00, the Merger Consideration
shall be allocated as set forth in Section 1.6B. If the Actual Average
Closing Stock Price is greater than $90.00, the Merger Consideration shall
be allocated as set forth in Section 1.6C. In no case shall more than one
of either Section 1.6A, Section 1.6B or Section 1.6C apply.
(b) Stock Options and Warrants. At the Effective Time, all Options (as
defined in Section 2.3) will be assumed by Purchaser in accordance with
Section 5.5. Each Warrant issued and outstanding immediately prior to the
Effective Time will be canceled and extinguished and, with the consent of
the holder thereof, converted into the right to receive cash and stock in
amounts equal to the difference
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between (i) the product of the Series A Per Share Amount (as defined
herein) and the number of shares of Ventures Series A Preferred Stock
issuable upon full cash exercise of such Warrant and (ii) the aggregate
cash exercise price of such Warrant.
(c) Capital Stock of Acquisition Sub. At the Effective Time, each share
of Common Stock, $0.01 par value per share, of Acquisition Sub (the
"Acquisition Sub Common Stock") issued and outstanding immediately prior to
the Effective Time shall be converted into one validly issued, fully paid
and nonassessable share of Common Stock, $0.01 par value per share, of the
Surviving Corporation. At and after the Effective Time, each certificate
evidencing ownership of shares of Acquisition Sub Common Stock shall
evidence ownership of such shares of capital stock of the Surviving
Corporation.
(d) Fractional Shares. No fraction of a share of Purchaser Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Ventures Common Stock, Ventures Series A Preferred Stock,
Ventures Series B Preferred Stock or Ventures Series C Preferred Stock
(collectively, the "Ventures Capital Stock") or Warrants (after aggregating
all fractional shares of Purchaser Common Stock that otherwise would be
received by such holder) shall receive from Purchaser an amount of cash
(rounded to the nearest whole cent) equal to the product of (1) such
fraction and (2) the Average Closing Stock Price.
(e) Adjustments for Changes in Stock. If, between the date of this
Agreement and the Effective Time, the outstanding shares of Purchaser
Common Stock or Ventures Capital Stock (or any class or series thereof) are
changed into a different number or class of shares by reason of any stock
dividend, subdivision, reclassification, recapitalization, split-up,
combination or similar transaction, the exchange ratios for the Ventures
Capital Stock set forth in Sections 1.6A, 1.6B and 1.6C below and, in the
case of changes in the Purchaser Common Stock, the Upper Collar Limit, the
Lower Collar Limit and any other references to per share values of
Purchaser Common Stock shall be appropriately adjusted. With respect to the
Escrow Shares, if, between the Effective Time and the date of termination
of the Escrow Fund, the outstanding shares of Purchaser Common Stock are
changed into a different number or class of shares by reason of any stock
dividend, subdivision, reclassification, recapitalization, split-up,
combination or similar transaction, the number and type of Escrow Shares
shall be appropriately adjusted.
(f) Escrow. At the Closing, on behalf of the holders of the outstanding
Ventures Capital Stock, Options and Warrants and pursuant to Article 11,
Purchaser shall deposit with State Street Bank and Trust Company (the
"Escrow Agent"): (1) that number of shares of Purchaser Common Stock
representing 10% of the total number of shares of Purchaser Common Stock
issuable pursuant to Section 1.6A(a), 1.6B(a) or 1.6C(a), less 10% of that
number of shares obtained by dividing the amount of Wired Cash at Closing
by the Average Closing Stock Price; and (2) instruments or other
documentation representing Options to purchase 10% of the shares of
Purchaser Common Stock issuable upon the exercise of all Options
(collectively, the "Escrow Shares").
1.6A Allocation of Merger Consideration--Actual Average Closing Stock Price
less than or equal to the Upper Collar Limit.
(a) Conversion of Shares.
(1) Each share of Common Stock of Ventures, $0.001 par value per share
(the "Ventures Common Stock"), issued and outstanding immediately prior to
the Effective Time (other than any Dissenting Shares (as defined in Section
1.7)) will be canceled and extinguished and automatically converted into
that fraction of a share of the Purchaser Common Stock equal to the Common
Share Value divided by the product of (A) the total number of shares of
Ventures Common Stock outstanding on a fully-diluted, fully-converted basis
as though all convertible debt and equity securities (excluding Ventures
Series A Preferred Stock, Ventures Series B Preferred Stock and Ventures
Series C Preferred Stock) and options (whether vested or unvested) and
warrants (other than the Warrants) that are convertible into or exercisable
for Ventures Common Stock had been converted into or exercised for Ventures
Common Stock immediately prior to the Effective Time (the "Fully-diluted
Common Shares Outstanding") and
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(B) the Average Closing Stock Price. The term "Common Upper Collar
Fraction" shall refer to the greater of (i) that fraction of a share of
Purchaser Common Stock into which each share of Ventures Common Stock would
be converted pursuant to this Section 1.6A(a)(1) if the Average Closing
Stock Price were equal to $42.86 or (ii) if the Average Closing Stock Price
were less than $42.86, that fraction of a share of Purchaser Common Stock
into which each share of Ventures Common Stock would be converted pursuant
to this Section 1.6A(a)(1) at the Average Closing Stock Price.
(2) Each share of Series A Preferred Stock of Ventures, $0.001 par value
per share (the "Ventures Series A Preferred Stock"), issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into:
(i) that fraction of a share of Purchaser Common Stock equal to the
quotient obtained by dividing (A) the sum of the Series A Share Value
and the aggregate exercise price of all Warrants outstanding
immediately prior to the Effective Time by (B) the product of (1) the
total number of shares of Ventures Series A Preferred Stock outstanding
on a fully-diluted, fully-converted basis as though all convertible
debt and warrants which are convertible into or exercisable for
Ventures Series A Preferred Stock had been converted into or exercised
for Ventures Series A Preferred Stock immediately prior to the
Effective Time (the "Fully-diluted Series A Shares Outstanding") and
(2) the Average Closing Stock Price. The term "Series A Upper Collar
Fraction" shall refer to the greater of (i) that fraction of a share of
Purchaser Common Stock into which each share of Ventures Series A
Preferred Stock would be converted pursuant to this Section
1.6A(a)(2)(i) if the Average Closing Stock Price were equal to $42.86
and the Series C Accrued Dividends were equal to $4,343,130 or (ii) if
the Average Closing Stock Price were less than $42.86, that fraction of
a share of Purchaser Common Stock into which each share of Ventures
Series A Preferred Stock would be converted pursuant to this Section
1.6A(a)(2)(i) at the Average Closing Stock Price and if the Series C
Accrued Dividends were equal to $4,343,130;
(ii) that fraction of a share of Purchaser Common Stock equal to
78.8% of the Cash Share Value divided by the product of (A) the Fully-
diluted Series A Shares Outstanding and (B) the Average Closing Stock
Price;
(iii) the right to receive that fraction of the Advance Escrow Amount
equal to 0.788 divided by the number of Fully-diluted Series A Shares
Outstanding;
(iv) the right to receive that fraction of the Cash Portion equal to
0.788 divided by the number of Fully-diluted Series A Shares
Outstanding; and
(v) the right to receive that fraction of the Tax Refund Amount equal
to 0.788 divided by the number of Fully-diluted Series A Shares
Outstanding.
(3) Each share of Series B Preferred Stock of Ventures, $0.001 par value
per share (the "Ventures Series B Preferred Stock") issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into that
fraction of a share of Purchaser Common Stock equal to the Series B Share
Value divided by the product of (A) the total number of shares of Ventures
Series B Preferred Stock outstanding on a fully-diluted, fully-converted
basis as though all convertible debt and warrants which are convertible
into or exercisable for Ventures Series B Preferred Stock has been
converted into or exercised for Ventures Series B Preferred Stock
immediately prior to the Effective Time (the "Fully-diluted Series B Shares
Outstanding") and (B) the Average Closing Stock Price. The term "Series B
Upper Collar Fraction" shall refer to the greater of (i) that fraction of a
share of Purchaser Common Stock into which each share of Ventures Series B
Preferred Stock would be converted pursuant to this Section 1.6A(a)(3) if
the Average Closing Stock Price were equal to $42.86 or (ii) if the Average
Closing Stock Price were less than $42.86, that fraction of a share of
Purchaser Common Stock into which each share of Ventures Series B Preferred
Stock would be converted pursuant to this Section 1.6A(a)(3) at the Average
Closing Stock Price.
(4) Each share of Series C Preferred Stock, $0.001 par value per share
(the "Ventures Series C Preferred Stock"), issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into:
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(i) that fraction of a share of Purchaser Common Stock equal to the
Series C Share Value divided by the product of (A) the total number of
shares of Ventures Series C Preferred Stock outstanding on a fully-
diluted, fully-converted basis as though all convertible debt and
warrants which are convertible into or exercisable for Ventures Series
C Preferred Stock had been converted into or exercised for Ventures
Series C Preferred Stock immediately prior to the Effective Time (the
"Fully-diluted Series C Shares Outstanding") and (B) the Average
Closing Stock Price. The term "Series C Upper Collar Fraction" shall
refer to the greater of (i) that fraction of a share of Purchaser
Common Stock into which each share of Ventures Series C Preferred Stock
would be converted pursuant to this Section 1.6A(a)(4)(i) if the
Average Closing Stock Price were equal to $42.86 and the Series C
Accrued Dividends were equal to $4,343,130 or (ii) if the Average
Closing Stock Price were less than $42.86, that fraction of a share of
Purchaser Common Stock into which each share of Ventures Series C
Preferred Stock would be converted pursuant to this Section
1.6A(a)(4)(i) at the Average Closing Stock Price and if the Series C
Accrued Dividends were equal to $4,343,130;
(ii) that fraction of a share of Purchaser Common Stock equal to
21.2% of the Cash Share Value divided by the product of (A) the Fully-
diluted Series C Shares Outstanding and (B) the Average Closing Stock
Price;
(iii) the right to receive that fraction of the Advance Escrow Amount
equal to 0.212 divided by the number of Fully-diluted Series C Shares
Outstanding;
(iv) the right to receive that fraction of the Cash Portion equal to
0.212 divided by the number of Fully-diluted Series C Shares
Outstanding; and
(v) the right to receive that fraction of the Tax Refund Amount equal
to 0.212 divided by the number of Fully-diluted Series C Shares
Outstanding.
(b) Escrow Shares If this Section 1.6A governs the allocation of the Merger
Consideration, the portion of the Escrow Shares deemed to have been contributed
shall be determined as follows:
(1) Each of the holders of Ventures Common Stock (including holders of
Options to purchase Ventures Common Stock) shall be deemed to have
contributed 10% of the aggregate number of shares of Purchaser Common Stock
(including Purchaser Common Stock issuable upon exercise of such Options)
to which each such holder is entitled under Sections 1.6A(a) and 5.5.
(2) Of the balance of the Escrow Shares:
(i) 78.8% shall be deemed to have been contributed on behalf of the
holders of Ventures Series A Preferred Stock (including holders of
Warrants to purchase Ventures Series A Preferred Stock) in proportion
to the aggregate number of shares of Purchaser Common Stock (including
Purchaser Common Stock issuable upon exercise of such Warrants) to
which each such holder is entitled under Sections 1.6(b) and 1.6A(a);
and
(ii) 21.2% shall be deemed to have been contributed on behalf of the
holders of Ventures Series C Preferred Stock in proportion to the
aggregate number of shares of Purchaser Common Stock to which each such
holder is entitled under Section 1.6A(a).
1.6B Allocation of Merger Consideration--Actual Average Closing Stock Price
greater than the Upper Collar Limit but less than or equal to $90.00.
(a) Conversion of Shares.
(1) Each share of Ventures Common Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into (A) that
fraction of a share of Purchaser Common Stock equal to (i) the Common Upper
Collar Fraction minus (ii) for each $1.00 increase in the Actual Average
Closing Stock Price above the Upper Collar Limit, that fraction of a share
of the Purchaser Common Stock equal to 1,383.1559 (or the
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applicable portion for increases in the Actual Average Closing Stock Price
less than $1.00) divided by the Fully-diluted Common Shares Outstanding and
(B) for each $1.00 increase in the Actual Average Closing Stock Price above
the Upper Collar Limit, the right to receive that percentage of the Pass-
Through Component equal to .217586% (or the applicable portion for
increases in the Actual Average Closing Stock Price less than $1.00)
divided by the Fully-diluted Common Shares Outstanding.
(2) Each share of Ventures Series A Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be canceled and extinguished and automatically
converted into: (A) that fraction of a share of Purchaser Common Stock
equal to (i) the Series A Upper Collar Fraction plus (ii) for each $1.00
increase in the Actual Average Closing Stock Price above the Upper Collar
Limit, that fraction of a share of Purchaser Common Stock equal to
8,514.6003 (or the applicable portion for increases in the Actual Average
Closing Stock Price less than $1.00) divided by the Fully-diluted Series A
Shares Outstanding; (B) the right to receive that percentage of the Pass-
Through Component equal to (i) 78.8% minus for each $1.00 increase in the
Actual Average Closing Stock Price above the Upper Collar Limit, .570087%
(or the applicable portion for increases in the Actual Average Closing
Stock Price less than $1.00), (ii) divided by the Fully-diluted Series A
Shares Outstanding; and (C) the right to receive (i) 78.8% of the Cash
Premium Component (ii) divided by the Fully-diluted Series A Shares
Outstanding.
(3) Each share of Ventures Series B Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be canceled and extinguished and automatically
converted into (A) that fraction of a share of Purchaser Common Stock equal
to (i) the Series B Upper Collar Fraction minus (ii) for each $1.00
increase in the Actual Average Closing Stock Price above the Upper Collar
Limit, that fraction of a share of Purchaser Common Stock equal to
2,067.3308 (or the applicable portion for increases in the Actual Average
Closing Stock Price less than $1.00) divided by the Fully-diluted Series B
Shares Outstanding and (B) for each $1.00 increase in the Actual Average
Closing Stock Price above the Upper Collar Limit, the right to receive that
percentage of the Pass-Through Component equal to .185855% (or the
applicable portion for increases in the Actual Average Closing Stock Price
less than $1.00) divided by the Fully-diluted Series B Shares Outstanding.
(4) Each share of Ventures Series C Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be canceled and extinguished and automatically
converted into: (A) that fraction of a share of Purchaser Common Stock
equal to (i) the Series C Upper Collar Fraction minus (ii) for each $1.00
increase in the Actual Average Closing Stock Price above the Upper Collar
Limit, that fraction of a share of Purchaser Common Stock equal to
5,064.1135 (or the applicable portion for increases in the Actual Average
Closing Stock Price less than $1.00) divided by the Fully-diluted Series C
Shares Outstanding; (B) the right to receive that percentage of the Pass-
Through Component equal to (i) 21.2% plus for each $1.00 increase in the
Actual Average Closing Stock Price above the Upper Collar Limit, .166646%
(or the applicable portion for increases in the Actual Average Closing
Stock Price less than $1.00) (ii) divided by the Fully-diluted Series C
Shares Outstanding; and (C) the right to receive (i) 21.2% of the Cash
Premium Component (ii) divided by the Fully-diluted Series C Shares
Outstanding.
(b) Escrow Shares. If this Section 1.6B governs the allocation of the Merger
Consideration, the Escrow Shares shall be deemed to have been contributed on
behalf of the holders of Ventures Capital Stock, Options and Warrants ratably
in proportion to the percentage of the Merger Consideration received and
Options held by each such holder.
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1.6C Allocation of Merger Consideration--Actual Average Closing Stock Price
greater than $90.00.
(a) Conversion of Shares.
(1) Each share of Ventures Common Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into (A) that
fraction of a share of Purchaser Common Stock equal to (i) $20,461,337
divided by (ii) the product of the Actual Average Closing Stock Price and
the Fully-diluted Common Shares Outstanding and (B) the right to receive
that percentage of the Pass-Through Component equal to 10.257% divided by
the Fully-diluted Common Shares Outstanding.
(2) Each share of Venture Series A Preferred Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into:
(i) that fraction of a share of the Purchaser Common Stock equal to
(A) the sum of (i) $103,585,521 plus (ii) zero if the Actual Average
Closing Stock Price is less than $105, $1,000,000 if the Actual Average
Closing Stock Price is greater than or equal to $115 but less than
$115, $2,000,000 if the Actual Average Closing Stock Price is greater
than or equal to $115 but less than $115, $2,000,000 if the Actual
Average Closing Stock Price is greater than or equal to $115 but less
than $125, $3,000,000 if the Actual Average Closing Stock Price is
greater than or equal to $125 but less than $135, $4,000,000 if the
Actual Average Closing Stock Price is greater than or equal to $135 but
less than $145, or $5,000,000 if the Actual Average Closing Stock Price
is greater than or equal to $145 plus (iii) 78.8% of (1) 2,216,519
multiplied by the Actual Average Closing Stock Price minus
(2) $199,486,701 divided by (B) the product of the Actual Average
Closing Stock Price and the Fully-diluted Series A Shares Outstanding;
(ii) the right to receive that percentage of the Pass-Through
Component equal to 51.9261% divided by the Fully-diluted Series A
Shares Outstanding; and
(iii) the right to receive (A) 78.8% of the Cash Premium Component
(B) divided by the Fully-diluted Series A Shares Outstanding.
(3) Each share of Series B Preferred Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares)
will be canceled and extinguished and automatically converted into (A) that
fraction of a share of Purchaser Common Stock equal to (i) $17,477,392
divided by (ii) the product of the Actual Average Closing Stock Price and
the Fully-diluted Series B Shares Outstanding and (B) the right to receive
that percentage of the Pass-Through Component equal to 8.7612% divided by
the Fully-diluted Series B Shares Outstanding.
(4) Each share of Ventures Series C Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be canceled and extinguished and automatically
converted into:
(i) that fraction of a share of Purchaser Common Stock equal to (A)
the sum of (i) $57,962,541 minus (ii) zero if the Actual Average
Closing Stock Price is less than $105, $1,000,000 if the Actual Average
Closing Stock Price is greater than or equal to $105 but less than
$115, $2,000,000 if the Actual Average Closing Stock Price is greater
than or equal to $115 but less than $125, $3,000,000 if the Actual
Average Closing Stock Price is greater than or equal to $125 but less
than $135, $4,000,000 if the Actual Average Closing Stock Price is
greater than or equal to $135 but less than $145, or $5,000,000 if the
Actual Average Closing Stock Price is greater than or equal to $145
plus (iii) 21.2% of (1) 2,216,519 multiplied by the Actual Average
Closing Stock Price minus (2) $199,486,701 divided by (B) the product
of the Actual Average Closing Stock Price and the Fully-diluted Series
C Shares Outstanding:
(ii) the right to receive that percentage of the Pass-Through
Component equal to 29.0557% divided by the Fully-diluted Series C
Shares Outstanding; and
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(iii) the right to receive (A) 21.2% of the Cash Premium Component
(B) divided by the Fully-diluted Series C Shares Outstanding.
(b) Escrow Shares. If this Section 1.6C governs the allocation of the
Merger Consideration, the Escrow Shares shall be deemed to have been
contributed on behalf of the holders of Ventures Capital Stock, Options and
Warrants ratably in proportion to the percentage of the Merger
Consideration received and Options and Warrants held by each such holder.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Ventures Capital Stock who (1) has the right under
applicable law to demand dissenter's or appraisal rights for such shares, (2)
has demanded and perfected such rights under applicable law and (3) as of the
Effective Time, has not effectively withdrawn or lost such rights ("Dissenting
Shares"), shall not be converted into Purchaser Common Stock pursuant to
Section 1.6A(a), 1.6B(a) or 1.6C(a), but the holder thereof shall only be
entitled to such rights as are granted by applicable law.
(b) Notwithstanding the foregoing, if any holder of shares of Ventures
Capital Stock who has the right under applicable law to demand and who does
demand appraisal of such shares under applicable law shall effectively withdraw
or lost (through failure to perfect or otherwise) the right to appraisal, then,
as of the later of the Effective Time and the occurrence of such event, such
holder's shares shall automatically be converted into and represent only
Purchaser Common Stock in accordance with Section 1.6A(a), 1.6B(a) or 1.6C(a),
whichever is applicable.
(c) Ventures shall give Purchaser (1) prompt written notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served on Ventures pursuant to applicable law and (2) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under applicable law. Ventures will not voluntarily make any
payment with respect to any demands for appraisal and will not, except with the
prior written consent of Purchaser, settle or offer to settle any such demands.
It is understood and agreed that the obligation to make any payment under
applicable law shall be exclusively that of the surviving corporation and that
Purchaser (i) shall be under no obligation to perform and discharge any such
obligation or to reimburse or make any contribution to the capital of the
surviving corporation to enable it to perform or discharge any such obligation,
and (ii) shall have no recourse pursuant to Article 11 of this Agreement or
otherwise against the Wired Companies or their affiliates or stockholders with
respect to any such demands or obligation.
1.8 Exchange of Certificates.
(a) Boston EquiServe, Purchaser's transfer agent, shall serve as an exchange
agent in the Merger (the "Exchange Agent").
(b) At the Effective Time, Purchaser shall (1) authorize the Exchange Agent
to make available in accordance with this Article 1 the shares of Purchaser
Common Stock issuable pursuant to Section 1.6A(a), 1.6B(a) or 1.6C(a) in
exchange for outstanding shares of Ventures Capital Stock and (2) deliver to
the Exchange Agent cash in the amount of the Cash Portion plus cash in an
amount sufficient for payment in lieu of fractional shares pursuant to Section
1.6(d).
(c) No later than three (3) business days prior to the mailing date of the
notice of meeting of stockholders (or written consent of stockholders in lieu
of meeting), Purchaser shall provide Ventures with copies of the following
materials: (1) a letter of transmittal in customary form and (2) instructions
for use in effecting the surrender of Ventures certificates and (3) any other
documents required to be signed by a holder of a certificate or certificates
(the "Ventures Certificates") that immediately prior to the Effective Time
represented outstanding shares of Ventures Capital Stock or warrants that were
converted into shares of Purchaser Common Stock pursuant to Section 1.6A(a),
1.6B(a) or 1.6C(a) and cash in lieu of any fractional shares pursuant to
Section 1.6(d) in order to surrender such Ventures Certificates in exchange for
certificates representing the
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Purchaser Common Stock and portion of the Cash Portion pursuant to Section
1.6A(a), 1.6B(a) or 1.6C(a) and cash in lieu of any fractional shares pursuant
to Section 1.6(d). Holders of Ventures Certificates who complete and validly
execute and submit such documents in accordance with the instructions thereto,
together with such Ventures Certificates (or affidavit of loss and indemnity in
accordance with Section 1.8(e) below), to Purchaser at the Closing shall be
deemed to have effected a surrender of such Ventures Certificates to the
Exchange Agent for cancellation in accordance with the requirements of Section
1.8(d) below. Promptly after the Effective Time, but in no event later than ten
(10) business days thereafter, Purchaser shall cause the Exchange Agent to mail
to each such holder who has surrendered Ventures Certificates at the Closing
(i) certificates evidencing the number of full shares of Purchaser Common Stock
and portion of the Cash Portion into which the shares of Ventures Capital Stock
represented by the Ventures Certificates so surrendered by such holder were
converted pursuant to Section 1.6A(a), 1.6B(a) or 1.6C(a) and (ii) cash in lieu
of any fractional shares in accordance with Section 1.6(d).
(d) Promptly after the Effective Time, but in no event later than ten (10)
business days thereafter, Purchaser shall cause the Exchange Agent to mail to
each holder of record (as of the Effective Time) of Ventures Certificates that
did not surrender such Certificate pursuant to Section 1.8(c), the following
materials: (1) a letter of transmittal in customary form and (2) instructions
for use in effecting the surrender of the Ventures Certificates in exchange for
certificates representing the Purchaser Common Stock and portion of the Cash
Portion pursuant to Section 1.6A(a), 1.6B(a) or 1.6C(a) and cash in lieu of any
fractional shares pursuant to Section 1.6(d). Upon surrender of Ventures
Certificates for cancellation to the Exchange Agent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holders of such Ventures Certificates shall be
entitled to receive in exchange therefor certificates representing the number
of whole shares of Purchaser Common Stock and portion of the Cash Portion into
which their shares of Ventures Capital Stock were converted at the Effective
Time and payment in lieu of fractional shares that such holders have the right
to receive pursuant to Section 1.6(d). Until so surrendered, outstanding
Ventures Certificates will be deemed from and after the Effective Time, for all
corporate purposes, to evidence the ownership of the number of full shares of
Purchaser Common Stock and portion of the Cash Portion into which the shares of
Ventures Capital Stock represented thereby were so converted and the right to
receive an amount in cash in lieu of any fractional shares in accordance with
Section 1.6(d).
(e) In the event any Ventures Certificates have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Ventures Certificates, upon the making of an affidavit of that fact
by the holder thereof in a form reasonably acceptable to Purchaser,
certificates representing the shares of Purchaser Common Stock and portion of
the Cash Portion into which the shares of Ventures Capital Stock represented by
such Ventures Certificates were converted pursuant to Section 1.6A(a), 1.6B(a)
or 1.6C(a) and any cash for fractional shares pursuant to Section 1.6(d).
Purchaser may in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Ventures
Certificate to provide to Purchaser an indemnity agreement, reasonable in form
and substance, against any claim that may be made against Purchaser with
respect to the Ventures Certificate alleged to have been lost, stolen or
destroyed.
1.9 Tax Consequences. For federal income tax purposes, the Merger is intended
to constitute a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). The parties to this
Agreement hereby adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
1.10 Accounting Consequences. For financial reporting purposes, the Merger is
intended to be accounted for as a purchase.
1.11 Further Action. If, at any time after the Effective Time, any further
action is determined by Purchaser to necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full
right, title and possession of and to all rights and property of Acquisition
Sub and Ventures, the officers and directors of the Surviving Corporation and
Purchaser shall be fully authorized (in the name of Acquisition Sub, in the
name of Ventures and otherwise) to take such action.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF VENTURES
Except as set forth in the Disclosure Schedule attached hereto (the
"Disclosure Schedule"), of which the Schedules referred to below are a part,
and in the documents and other materials identified in the Disclosure Schedule,
the section numbers and letters of which correspond to the section and
subsection numbers and letters of this Agreement, Ventures represents and
warrants to Purchaser as follows:
2.1 Organization, Standing, Etc. of the Wired Companies; Corporate
Authorization; Enforceability.
(a) Each of the Wired Companies is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization and has all requisite corporate power and authority to carry on
its business as currently conducted and to own or lease and to operate its
properties. Each of the Wired Companies is qualified to do business and is in
good standing in each jurisdiction in which the property owned, leased or
operated by it, or the nature of the business conducted by it, makes such
qualification necessary and in which the failure to so qualify would have a
material adverse effect on the business, operations, financial condition or
results of operations of the Wired Companies, taken as a whole (a "Material
Adverse Effect on Wired"). With respect to each of the Wired Companies, the
jurisdiction in which it is organized and qualified to do business is listed in
Schedule 2.1.
(b) Ventures has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and all other documents and instruments executed
or to be executed by Ventures pursuant to this Agreement have been duly
authorized by all necessary corporate and other action on the part of Ventures.
This Agreement and all other documents and instruments executed or to be
executed by Ventures pursuant to this Agreement have been, or will have been,
at the time of their respective executions and deliveries, duly executed and
delivered by a duly authorized officer of Ventures.
(c) This Agreement and all other agreements executed or to be executed by
Ventures pursuant to this Agreement constitute, or will constitute, the valid
and legally binding obligations of Ventures, enforceable in accordance with
their respective terms, except as such enforceability may be limited by
equitable principles and by applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium or similar laws relating to or affecting the rights of
creditors generally.
2.2 Wired Companies; Title to Wired Companies' Shares, Etc. Schedule 2.2
contains a list of each corporation or other entity of which Ventures owns,
directly or indirectly, 50% or more of the outstanding equity interests
(collectively with Ventures, the "Wired Companies") and the capitalization and
ownership thereof. Except as set forth in Schedule 2.2, each of the equity
interests in the Wired Companies owned by Ventures is free and clear of any
lien, pledge, charge, adverse claim, security interest, encumbrance (including
any imposed by law in any jurisdiction), title retention agreement, option,
equity or right to purchase of any kind except for restrictions on transfer
imposed by applicable securities laws. Except as set forth in Schedule 2.2, the
Wired Companies do no own any shares of capital stock or other securities of,
or have an ownership interest in, any corporation, partnership, association or
other entity.
2.3 Capitalization of Ventures. The authorized capital stock of Ventures
consists of: (a) 30,000,000 shares of Preferred Stock, par value $0.001 per
share, of which 15,300,000 shares have been designated Series A Preferred
Stock, 700,000 shares have been designated Series B Preferred Stock, 3,800,000
shares have been designated Series C Preferred Stock and 50,000 shares have
been designated Series D Preferred Stock; and (b) 45,000,000 shares of Common
Stock. As of the date of this Agreement, the shares of Ventures Capital Stock
that are issued and outstanding consist of 15,199,794 shares of Ventures Series
A Preferred Stock, 625,000 shares of Ventures Series B Preferred Stock,
3,762,760 shares of Ventures Series C Preferred Stock, no shares of Ventures
Series D Preferred Stock and 96,223 shares of Ventures Common Stock. All of the
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issued and outstanding shares of Ventures Capital Stock are owned of record by
the persons set forth on Schedule 2.3. Each issued and outstanding share of
Ventures Capital Stock has been duly authorized and validly issued and is fully
paid and nonassessable. Except for warrants to purchase an aggregate of 50,000
shares of Ventures Series A Preferred Stock (the "Warrants") and options to
purchase an aggregate of 2,297,430 shares of Ventures Common Stock (the
"Options"), and except as set forth on Schedule 2.3, no subscriptions, options,
warrants, calls or rights of any kind, directly or indirectly to purchase or
otherwise acquire any shares of capital stock of any of the Wired Companies,
and no securities directly or indirectly convertible into or exchangeable for
any shares of capital stock of any of the Wired Companies are outstanding. The
Options are held by present or former directors, officers and employees of and
consultants to the Wired Companies, in the amounts and with the exercise prices
and vesting schedules set forth on Schedule 2.3.
2.4 Certificate of Incorporation and Bylaws. Copies of the certificate of
incorporation and bylaws or other organizational documents of each of the Wired
Companies have been made available to Purchaser, and each such copy is true,
correct and complete.
2.5 Compliance with Other Instruments and Laws. The execution and delivery of
this Agreement and all other documents and instruments executed or to be
executed by Ventures pursuant to this Agreement, and the consummation of the
transactions contemplated hereby, will not (A) conflict with or result in any
violation of or default under any provision of the charter or bylaws of any of
the Wired Companies, (B) breach, violate or constitute an event of default (or
an event which with the lapse of time or the giving of notice or both would
constitute an event of default) under any note, bond security agreement,
mortgage, indenture, trust, lease, partnership or other agreement or other
instrument, permit, concession, grant, franchise or license, or give rise to
any right of termination, cancellation, modification or acceleration under, or
require any consent or the giving of any notice under, any agreement or other
instrument or obligation to which any of the Wired Companies is a party, or by
which any of the Wired Companies or any of their properties or assets may be
bound, or result in the creation of any lien, claim or encumbrance or other
right of any third party of any kind whatsoever upon the properties or assets
of any of the Wired Companies pursuant to the terms of any such instrument or
obligation, the result of which (either individually or in the aggregate) would
have a Material Adverse Effect on Wired, or (C) violate or conflict with any
law, judgment, order, decree, statute, law, ordinance, rule or regulation, writ
injunction, decree or other instrument of any Federal, state, local or foreign
court or governmental or regulatory body, agency or authority applicable to any
of the Wired Companies or by which any of their properties or assets may be
bound, the result of which (either individually or in the aggregate) would have
a Material Adverse Effect on Wired. Ventures has complied with all of its
obligations under Section 1.5 of the Advance Agreement and Advance Magazine
Publishers Inc. ("AMP") has waived any rights under Section 1.5 to purchase
Ventures or Wired Digital, Inc.
2.5 Governmental Authorizations and Consents. Except as set forth on Schedule
2.6, no material consents, licenses, approvals or authorizations of, or
registrations or declarations with, any governmental authority, agency, bureau
or commission, or any third party, are required to be obtained or made by any
of the Wired Companies in connection with the execution, delivery, performance,
validity and enforceability of this Agreement or the Merger, other than (a) a
filing with the Federal Trade Commission and the Department of Justice under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (b) the approval of Ventures' stockholders in accordance with applicable
law, (c) filing the Certificate of Merger under the DGCL and (d) other
consents, licenses, approvals, authorizations, registrations or declarations,
where the failure to obtain such would not have a Material Adverse Effect on
Wired.
2.7 No Violations. None of the Wired Companies is in violation of any term of
its certificate of incorporation or bylaws or other charter documents or any
note, bond, security agreement, mortgage, indenture, instrument or agreement
relating to indebtedness for borrowed money or of any judgment, decree or order
which names such entity, or of any term of any other instrument, contract or
agreement, which violation either individually or when aggregated with all
other such violations, would have a Material Adverse Effect on Wired. None of
the Wired Companies is in violation of any law, ordinance, rule or governmental
regulation
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applicable to it or any of its properties or of any judgment, order, writ,
injunction, decree or other instrument of any federal, state, local or foreign
court or governmental or regulatory body, which violation either individually
or when aggregated with all other such violations would have a Material Adverse
Effect on Wired.
2.8 Financial Statements. Ventures has delivered to Purchaser (a) the
consolidated balance sheets of Ventures as of December 31, 1997, 1996 and 1995
and the related consolidated statements of income, stockholders' equity and
cash flows for the years then ended, accompanied in each case by the opinion
thereon of KPMG Peat Marwick LLP, independent public accountants, and (b) the
unaudited consolidated balance sheet of Ventures (the "Unaudited Balance
Sheet") as of August 31, 1998 (the "Balance Sheet Date") and the related
unaudited consolidated statements of income, stockholders' equity and cash
flows for the eight months then ended (such financial statements, including the
notes thereto, hereinafter being referred to as the "Financial Statements").
The Financial Statements are attached hereto as Schedule 2.8. All of the
Financial Statements have been prepared from the books and records of Ventures
and have been prepared in accordance with GAAP and present fairly in all
material respects the consolidated financial position of Ventures as of the
dates thereof and the consolidated results of its operations for the periods
then ended, except that the unaudited financial statements were prepared on an
interim basis, are subject to normal year-end adjustments and do not contain
all the footnote disclosures required by GAAP consistently applied. None of the
Wired Companies has any debts, obligations, guaranties of the obligations of
others or liabilities of the type required to be disclosed in a balance sheet
prepared in accordance with GAAP or the notes thereto, except for (a) debts,
obligations, guaranties and liabilities reflected or reserved against in the
Unaudited Balance Sheet, (b) debts, obligations, guaranties and liabilities
referred to in this Agreement or any of the Schedules hereto or in any of the
documents or other materials identified in the Schedules hereto (excluding
obligations or liabilities arising from the breach or violation of the
documents or other materials identified in the Schedules, unless such
obligations or liabilities are specifically identified in the Schedules), (c)
debts, obligations, guaranties and liabilities incurred or entered into in the
ordinary course of business after the Balance Sheet Date, and (d) debts,
obligations and liabilities directly or indirectly relating to this Agreement
and the other agreements and instruments being executed and delivered in
connection herewith and the transactions referred to herein and therein
(including obligations to pay legal, accounting and investment banker fees and
other amounts in connection therewith).
2.9 Absence of Certain Changes or Events. Except as set forth in Schedule 2.9
and except for (a) any transfers, borrowings, dividends or guaranties between
the Wired Companies that were made, paid or incurred in the ordinary course of
business, (b) transactions and other matters contemplated by this Agreement and
any changes, indebtedness, agreements, encumbrances, damages, liabilities or
obligations arising therefrom or relating thereto, and (c) matters disclosed in
the Financial Statements, since the Balance Sheet Date, none of the Wired
Companies has:
(a) declared, set aside, made or paid any dividend or other distribution
in respect of its capital stock or purchased or redeemed, directly or
indirectly, any shares of its capital stock;
(b) issued or sold any shares of its capital stock of any class or any
subscriptions, options, warrants, calls or other rights to purchase
directly or indirectly any such shares or any securities directly or
indirectly convertible into or exchangeable for such shares (except for
sales of Ventures Capital Stock upon exercise of Warrants and Options or
conversion of convertible securities outstanding on the Balance Sheet
Date);
(c) incurred any indebtedness for money borrowed by any of the Wired
Companies or issued or sold any debt securities;
(d) mortgaged, pledged or subjected to any lien, lease, security interest
or other charge or encumbrance any of its properties or assets, tangible or
intangible;
(e) acquired or disposed of any material assets or properties except in
the ordinary course of business and consistent with past practice, or
canceled or compromised any debts or knowingly waived any claims or rights
of a material nature;
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(f) granted to any officer, director or employee any increase in
compensation, except in the ordinary course of its current personnel
policies consistent with past practice or any bonus or service award or
other like benefit, or instituted, increased, augmented or improved any
Benefit Plan (as that term is hereinafter defined);
(g) suffered any damage, destruction or loss (whether or not covered by
insurance) that has had or would reasonably be expected to have a Material
Adverse Effect on Wired;
(h) incurred any material obligation or liability (whether absolute,
accrued, contingent or otherwise) except for fair equivalent value or in
the ordinary course of business and consistent with past practice;
(i) experienced any Material Adverse Effect on Wired;
(j) made any change in any accounting principle or practice or in its
methods of applying any such principle or practice; or
(k) entered into any agreement to do any of the foregoing.
2.10 Title to Assets. Except as set forth in Schedule 2.10, each of the Wired
Companies has good title to all personal property, tangible or intangible,
which it purports to own, including the tangible assets reflected on the
Unaudited Balance Sheet, other than (a) assets disposed of after the Balance
Sheet Date in the ordinary course of business, and (b) other assets disposed of
after the Balance Sheet Date and referred to in the Financial Statements.
Except as set forth in Schedule 2.10, all personal property, tangible or
intangible, owned by the Wired Companies is owned free and clear of all liens,
mortgages, pledges, charges, security interests or encumbrances except for (a)
liens for current taxes not yet due and payable, and (b) purchase money
security interest and common law liens, in each case for goods purchased in the
ordinary course of business, and (c) such imperfections of title and
encumbrances, if any, that are not material in character, amount or extent and
do not materially detract from the value, or materially interfere with the use
of, the property subject thereto or affected thereby. None of the Wired
Companies owns any real property or any interest in real property, except for
the leasehold interests created under the leases referred to in Schedule 2.15
hereto.
2.11 Intellectual Property.
(a) Except as set forth on Schedule 2.11(a), the Wired Companies own, or
are licensed or otherwise possess legally enforceable rights to use, all
patents, trademarks, trade names, service marks, copyrights and Internet
domain names, and any applications therefor, technology, know-how, computer
software programs and applications, and tangible and intangible proprietary
information or material that are used in the business of the Wired
Companies as currently conducted in all material respects (the
"Intellectual Property Rights"), free and clear of all liens, claims and
encumbrances. The Intellectual Property Rights are sufficient to carry on
the business of the Wired Companies as presently conducted in all material
respects.
(b) Schedule 2.11(b) sets forth a list of patents, registered and
material unregistered trademarks, trade names and service marks, Internet
domain names, and any pending applications therefor, included in the
Intellectual Property Rights and specifies, where applicable, the
jurisdictions in which each such Intellectual Property Right has been
issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners.
(c) The present business activities or products of the Wired Companies do
not infringe any intellectual property rights of others, except where such
infringement would not have a Material Adverse Effect on Wired. Except as
set forth on Schedule 2.11, no material claims with respect to the
Intellectual Property Rights have been asserted and are pending against any
of the Wired Companies as of the date of this Agreement (1) to the effect
that the sale, licensing or use of any of the products of any of the Wired
Companies infringes any other party's valid copyright, trademark, service
mark, trade secret or other intellectual property right, (2) against the
use by any of the Wired Companies of any material trademarks, service
marks, trade names, trade secrets, copyrights, patents, technology, know-
how or computer software programs or applications used in the Wired
Companies' business as currently conducted, or (3)
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challenging the ownership by any of the Wired Companies, of any of the
Intellectual Property Rights owned by the Wired Companies.
(d) The Wired Companies have the right to use all trade secrets, customer
lists, hardware designs, programming processes, software and other
information required for its products or their business as presently
conducted where the absence of such right would have a Material Adverse
Effect on Wired. The Wired Companies have taken commercially reasonable
measures to protect and preserve the security and confidentiality of its
trade secrets and other confidential information. All employees and
consultants of the Wired Companies involved in the design, review,
evaluation or development of proprietary products or Intellectual Property
Rights have executed nondisclosure and assignment of inventions agreements
substantially in the form provided to Purchaser or otherwise sufficient to
give the Wired Companies the legal right to protect the confidentiality of
the Wired Companies' trade secrets and other confidential information and
to assign the interests of such employees or consultants in Intellectual
Property Rights to the Wired Companies.
2.12 Benefit Plans.
(a) Except as set forth on Schedule 2.12, none of the Wired Companies
maintains, is a party to, contributes to or is obligated to contribute to, or
has liability or contingent liability for, any of the following (whether or not
set forth in a written document):
(1) Any employee benefit plan, employee pension benefit plan, employee
welfare benefit plan, or multiemployer plan, all as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), regardless of
whether or not a plan is exempt from some or all of the otherwise
applicable requirements of ERISA; or
(2) Any bonus, deferred compensation, incentive, restricted stock, stock
purchase, stock option, stock appreciation right, debenture, supplemental
pension, profit sharing, royalty pool, severance or termination pay, loan
guarantee, relocation assistance, employee loan or other extensions of
credit, or other similar plan, program, agreement, policy, commitment,
arrangement or benefit currently in effect which is applicable to any
present or former employee or his or her survivors (whether or not
published or generally known).
(b) As to each plan, program, agreement, policy, commitment, arrangement or
benefit listed on Schedule 2.12 (each, a "Benefit Plan"), Ventures has
furnished to Purchaser complete, accurate and current copies of the text
(including amendments) of the Benefit Plan if previously reduced to writing or
has provided in Schedule 2.12 a description of all material elements of the
Benefit Plan if not previously reduced to writing. With respect to each
employee benefit plan (as defined in section 3(3) of ERISA) listed on Schedule
2.12, Ventures has made available to Purchaser the following:
(1) Where applicable, the most recent summary plan description, as
described in section 102 of ERISA;
(2) Any summary of material modifications which has been distributed to
participants or filed with the U.S. Department of Labor but which has not
been incorporated in an updated summary plan description furnished under
paragraph (1) above;
(3) The annual reports, as described in section 103 of ERISA, for the
most recent three plan years for which an annual report has been prepared
(including any schedules), and any financial statements and opinions
required by Section 103(a)(3) of ERISA;
(4) Where applicable, the actuarial reports for the most recent three
reporting periods for which such a report has been prepared;
(5) Any trust agreement, investment management agreement, contract with
an insurance company or service provider, administration agreement or other
contract, agreement or insurance policy; and
(6) Where applicable, the most recent determination letter issued by the
Internal Revenue Service ("IRS").
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(c) With respect to each Benefit Plan:
(1) All of the currently applicable requirements of ERISA and regulations
thereunder have been fully and timely complied with in all material
respects and each Benefit Plan has been administered in material respects
in accordance with its terms;
(2) There is no act or omission of any of the Wired Companies, or any
other person or entity, which would constitute a material violation of or
material prohibited act (for which an exemption is not available) under any
applicable section of ERISA or the Code, or regulations under either, and
no amendment to such Benefit Plan is precluded by any waiver, extension or
prior amendment described in Section 412(f)(1) of the Code;
(3) All contributions, premiums or other payments due from any of the
Wired Companies to (or under) a Benefit Plan for all periods prior to the
date of this Agreement have been fully paid or adequately provided for on
the books of the Wired Companies and all accruals have been made in
accordance with generally accepted accounting principles;
(4) The provisions of each Benefit Plan intended to meet the requirements
of Section 401(a) of the Code meet such requirements; a favorable
determination letter covering the provisions of the Tax Reform Act of 1986
has been issued by the Internal Revenue Service (the "IRS") with respect to
each plan and trust; and nothing has occurred since the date of such
determination letter that would adversely affect the qualification of such
plan;
(5) None of the Benefit Plans nor any fiduciary thereof has been the
subject of an order or investigation or examination by a governmental
agency and there are no matters pending before the IRS, the Department of
Labor, or any other governmental agency pertaining to these Benefit Plans.
(d) The Wired Companies have not maintained or contributed to or in any way
directly or indirectly have any liability (whether contingent or otherwise)
with respect to any Benefit Plan subject to Title IV of ERISA; except as
indicated on Schedule 2.12, the Wired Companies have no obligation to provide
medical or other benefits to employees or former employees of the Wired
Companies or their survivors, dependents and beneficiaries, except as may be
required by the Consolidated Omnibus Budget Reconciliation Act of 1986 or
applicable state medical benefits continuation statues.
(e) Schedule 2.12(e) sets forth the names of all current employees of the
Wired Companies (the "Employees") and such Employee's job title, such
Employee's current salary, the amount of any bonuses or other compensation paid
since January 1, 1998 to such Employee, the date of employment of such Employee
and the accrued vacation time of such Employee. Except as set forth in Schedule
2.12(e), there are no outstanding loans from any Wired Company to any officer,
director, employee or consultant of any Wired Company.
(f) None of the Benefit Plans is a "multiple employer welfare plan" (as
defined in Section 3(40) of ERISA), or an employee benefit pension plan
maintained by more than one employer (as described in Section 413(c) of the
Code).
(g) With respect to any Benefit Plan that is an employee welfare benefit
plan, there are no understandings, agreements or undertakings, written or oral,
that would prevent any such plan (including any such plan covering retirees or
other former employees) from being amended or terminated without material
liability to Ventures or the Surviving Corporation on or at any time after the
Closing Date Time.
(h) Except as set forth in Schedule 2.12(h), no employee of Ventures will be
entitled to any additional compensation or benefits or any acceleration of the
time of payment or vesting of any compensation or benefits under any Benefit
Plan as a result of the transactions contemplated by this Agreement, except to
the extent required by operation of law in the event of a termination or
partial termination of the Benefit Plan.
(i) Except as set forth in Schedule 2.12(i), no amount that could be received
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated by this Agreement by any
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employee, officer, or director of Ventures or any of its subsidiaries who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or Benefit Plan currently in effect
would be an "excess parachute payment" (as such term is defined in Section
280G(b)(1) of the Code). Except as set forth in Schedule 2.12(i), no such
person is entitled to receive any additional payment from Ventures, the
Surviving Corporation or any other person in the event that the excise tax of
Section 4999(a) of the Code is imposed on such person.
(j) No person is entitled to receive a bonus or other compensation pursuant
to the Wired Ventures, Inc. Employee Transaction Bonus Plan as a result of the
consummation of the transactions contemplated by this Agreement.
2.13 Litigation. Schedule 2.13 sets forth, as of the date hereof, each
action, suit, proceeding or governmental investigation pending against any of
the Wired Companies or their respective properties, at law or in equity or
before any court, governmental department, commission, board, agency, authority
or instrumentality, domestic or foreign, or that have been settled, dismissed
or resolved on or since the Balance Sheet Date and each action, suit,
proceeding or governmental investigation known to Ventures as of the date
hereof that is overtly threatened against any of the Wired Companies or other
respective properties. Except as disclosed in Schedule 2.13, there are no
actions, suits, proceedings or governmental investigations pending against any
of the Wired Companies or their respective properties, at law or in equity or
before any court, governmental department, commission, board, agency, authority
or instrumentality, domestic or foreign, or that have been settled, dismissed
or resolved on or since the Balance Sheet Date, that have had or would
reasonably be expected to have a Material Adverse Effect on Wired and, to
Ventures' knowledge, no action, suit, proceeding or governmental investigation
that would reasonably be expected to have a Material Adverse Effect on Wired is
overtly threatened against any of the Wired Companies or their respective
properties. None of the Wired Companies is subject to any judgment,
stipulation, order or decree arising from any action, suit, proceeding or
investigation that individually or in the aggregate would reasonably be
expected to have a Material Adverse Effect on Wired. There are no threatened
strikes or work stoppages by the employees of any of the Wired Companies and,
to Ventures' knowledge, there are no pending union organizing efforts with
respect to such employees. No action, suit, proceeding or governmental
investigation is pending or, to Ventures' knowledge, overtly threatened against
any of the Wired Companies that seeks to question, delay or prevent the
consummation of the transactions contemplated hereby. Ventures has not received
any Officer's Certificate (as such term is defined in Section 10.2(d) of the
Advance Agreement).
2.14 Taxes. Except as set forth in Schedule 2.14, with respect to Taxes (as
defined below):
(a) Each of the Wired Companies has filed or will file or cause to be
filed (or extensions of the time for filing have been or will be duly
filed), within the time prescribed by law, all returns, reports and other
filings ("Returns") required to be filed under federal, state, local or any
foreign laws by such company for all taxable periods ending on or prior to
the Closing Date and such Returns have been, or will be when filed prior to
the Closing Date, accurately and completely prepared in all material
respects in compliance with all laws, rules and regulations;
(b) Each of the Wired Companies has, within the time and in the manner
prescribed by law, paid (and until the Closing will, within the time and in
the manner prescribed by law, pay) all Taxes (as defined below) that are
shown on Returns filed prior to the Closing to be due on or before the
Closing Date;
(c) Since the Balance Sheet Date, Ventures has established (and until the
Closing Ventures will continue to maintain) on its books and records
reserves that are adequate under GAAP for the payment of all Taxes not yet
due and payable; at the Closing, such reserves as adjusted in accordance
with past practice will be sufficient for the then unpaid Taxes of the
Wired Companies attributable to periods prior to or ending on the Closing
Date;
(d) Ventures has not filed (and will not file prior to the Closing Date)
any consent agreement under Section 341(f) of the Code (or any
corresponding provision of state, local or foreign law) or agreed to
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have Section 341(f)(2) of the Code (or any corresponding provision of
state, local or foreign law) apply to any disposition of the subsection (f)
asset (as such term is defined in Section 341(f)(4) of the Code) owned by
any of the Wired Companies;
(e) No deficiency or adjustment for any Taxes has been proposed or
asserted in writing, or assessed against any of the Wired Companies and no
federal, state or local audits or other administrative proceedings or your
proceedings are presently pending with regard to any Taxes, there are no
matters under discussion with any governmental authority regarding claims
for the assessment or collection of Taxes, and no waiver or consent
extending any statute of limitations for the assessment or collection of
any Taxes, which waiver or consent remains in effect, has been executed by
(or on behalf of ) any of the Wired Companies nor are any requests for such
waiver or consent pending;
(f) Ventures has not elected to be treated as an S Corporation pursuant
to Section 1362(a) of the Code;
(g) None of the Wired Companies is, or has at any time been a "United
States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code;
(h) There is no agreement, plan or arrangement covering any employee or
independent contractor or former employee or independent contractor of the
Wired Companies that, considered individually or considered collectively
with any other such agreement, plan or arrangement, will, or could
reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be deductible pursuant to Section 280G of the
Code or that would be subject to an excise tax under Section 4999 of the
Code;
(i) None of the Wired Companies is or has ever been a party to or bound
by any tax indemnity agreement, tax sharing agreement, tax allocation
agreement or similar agreement or arrangement and none of them has any
liability for Taxes of any person (other than such Wired Company) under
Treasury Regulation 1.1502-6 (or any similar provision of state, local or
foreign law);
(j) Each of the Wired Companies has withheld amounts from its employees
and other persons required to be withheld under the tax, social security,
unemployment and other withholding provisions of all federal, state, local
and foreign laws; and
(k) For purposes of this Agreement, "Taxes" in the plural and "Tax" in
the singular shall refer to all or any taxes, charges, fees, levies or
other assessments of whatever kind or nature, including, without
limitation, all net income, gross income, gross receipts, value added,
unitary, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, social security, payroll, employment, excise, estimated,
severance, stamp, occupancy or property taxes, customs duties, fees,
assessments or charges of any kind whatsoever, including the recapture of
any tax items, (together with any interest and any penalties, additions to
tax or additional amounts) imposed by any taxing authority (domestic or
foreign) upon or payable by any of the Wired Companies.
2.15 Contracts. Ventures has made available to Purchaser a copy or
description of any outstanding written or oral (a) contract or arrangement for
the employment of any person by any of the Wired Companies providing for cash
compensation equal to or greater than $100,000 per annum, (b) collective
bargaining agreement to which any of the Wired Companies is a party, (c)
mortgage, indenture, credit facility, note or installment obligation or other
instrument or contract for or relating to any borrowing of an amount in excess
of $50,000 by any of the Wired Companies (other than intercompany borrowings
between the Wired Companies), (d) guaranty of any loan obligation in excess of
$50,000 by any of the Wired Companies (excluding any endorsement made in the
ordinary course of business for collection), (e) agreement between any of the
Wired Companies and any holder of 5% or more of the outstanding Ventures
Capital Stock or any officer or director of any Wired Company, (f) lease or
real or personal property under which any of the Wired Companies is lessor,
except equipment leases entered into in the ordinary course of business, (g)
lease of real property under which any of the Wired Companies is lessee
involving annual rentals in excess of $50,000, (h) lease of personal property
under which any of the Wired Companies is lessee and under which any such
entity is obligated to make annual aggregate payments of more than $50,000, (i)
agreement for the purchase by any of
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the Wired Companies of equipment involving outstanding commitments in excess of
$50,000, (j) agreement materially limiting the freedom of any of the Wired
Companies to compete in any line of business, with any person or other entity
or in any geographical area, (k) other agreement, contract or obligation of any
of the Wired Companies calling for or involving the payment by or to any Wired
Company, potential payment by or to any Wired Company or accrued obligation by
such company, form the date hereof through the earliest date such agreement,
contract or obligation can be terminated unilaterally without material penalty
by such company, of an amount in excess of $100,000, (1) any contract,
arrangement or understanding not otherwise identified on the Disclosure
Schedule and relating to the acquisition, issuance or transfer of any
securities, (m) any material contract, arrangement or understanding having more
than one year remaining on its term and relating to the acquisition, transfer,
distribution, use, development, sharing or license of any Intellectual Property
Rights, and (n) any outstanding offer, commitment or obligation to enter into
any contract or arrangement of the nature described in subsections (a) through
(m) of this subsection 2.15. A list or description of each of the items
described in the previous sentence ("Material Contracts") is set forth on
Schedule 2.15. Except as disclosed in Schedule 2.15, all of the Material
Contracts are in full force and effect and, as to each Material Contract, there
does not exist thereunder any material breach on the part of any of the Wired
Companies, nor (to the best knowledge of the Wired Companies) is any other
party in material breach of any Material Contract, and there does not exist any
event, occurrence or condition, including the consummation of the transactions
contemplated hereunder, which (after notice, passage of time, or both) would
constitute a material breach thereunder on the part of any of the Wired
Companies.
2.16 Insurance. Schedule 2.16 contains a list of all material insurance
policies maintained by or on behalf of or covering any of the Wired Companies
(the "Policies"), together with, in respect of each such policy, the name of
the insurer, the number of the policy, the annual policy premium payable
therefor, the limits of coverage, the deductible amount (if any), the
expiration date thereof and each pending claim thereunder. Ventures has made
available to Purchaser copies of all current declaration sheets relating to the
Policies. Except as noted on Schedule 2.16, as of the date hereof, the Policies
are in full force and effect, no notices of cancellation or nonrenewal have
been received by any of the Wired Companies with respect thereto, and all
premiums due thereon have been paid.
(a) To Ventures' knowledge, during the period of time that the Wired
Companies have leased or owned their respective properties, none of the Wired
Companies used, generated, manufactured, installed, released, discharged,
stored or disposed of any "Hazardous Materials," as defined below, on, under,
in or about the site of such properties. The term "Hazardous Materials" shall
mean any substance, material or waste which is regulated by any local
government authority, the State of California, or the United States Government,
including, without limitation, any material or substance that is (1) defined as
a "hazardous waste," "hazardous material," "hazardous substance," "extremely
hazardous waste" or "restricted hazardous waste" under any provision of
California or any other applicable law, (2) petroleum, (3) asbestos, (4)
designated as a "hazardous substance" pursuant to Section 311 of the Clean
Water Act, 33 U.S.C. (S) 1251 et seq. (33 U.S.C. (S) 1321) or listed pursuant
to Section 307 of the Clean Water Act (33 U.S.C. (S) 1317), (5) defined as a
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 6901 et seq. (42 U.S.C. (S) 6903), or (6) defined
as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S) 9601 et
seq. (42 U.S.C. (S) 9601).
(b) The conduct of the Wired Companies' business complies in all material
respects with all applicable Federal, state and local laws, ordinances and
regulations pertaining to air and water quality, Hazardous Materials, waste,
disposal or other environmental matters, including the Clean Water Act, the
Clean Air Act, the Federal Water Pollution Control Act, the Solid Waste
Disposal Act, the Resource Conservation Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, and the rules,
regulations and ordinances of the city and county in which their business is
located, the Environmental Protection Agency and all other applicable Federal,
state, regional and local agencies and bureaus.
(c) To Ventures' knowledge, none of the Wired Companies (1) has ever sent a
Hazardous Material to a site that, pursuant to any applicable Federal, state or
local law, ordinance and regulation pertaining to
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environmental matters, (A) has been placed on the "National Priorities List" of
hazardous waste sites, the "CERCLIS" list, or any similar state list, or (B) is
subject to a claim, an administrative order or other request to take "removal"
or "remedial" action, as defined in any applicable Federal, state or local law,
ordinance and regulation pertaining to environmental matters, or to pay for the
costs of cleaning up the site, (2) is not in compliance in all material
respects with all applicable Federal, state or local laws, ordinances and
regulations pertaining to environmental matters in all of its activities and
operations, (3) is involved in any suit or proceeding or has received any
notice or request for information from any governmental agency or authority or
other third party with respect to a release or threatened release of any
Hazardous Material or a violation or alleged violation of any applicable
Federal, state or local law, ordinance and regulation pertaining to
environmental matters, or has received notice of any claims from any person or
entity relating to property damage or to personal injuries from exposure to any
Hazardous Material, or (4) has failed to timely file any report required to be
filed, failed to acquire all necessary certificates, approvals and permits or
failed to generate and maintain all required data, documentation and records
under all applicable Federal, state or local laws, ordinances and regulations
pertaining to environmental matter.
2.18 Brokers. No agent, broker, person or firm acting on behalf of Ventures
or its stockholders is, or will be, entitled to any commission or broker's or
finder's fees from any of the parties hereto, or from and person controlling,
controlled by or under common control with any of the parties hereto, in
connection with any of the transactions contemplated herein, except for Lazard
Freres LLC, whose fees and expenses will be paid as provided in Section 12.4. A
copy of the Lazard Freres LLC, engagement letter setting forth such fees and
expenses has been made available to Purchaser.
2.19 Statements; Proxy Statement/Prospectus. The information supplied by
Ventures for inclusion in the Form S-4 Registration Statement (as defined in
Section 3.7) shall not, at the time the Form S-4 Registration Statement becomes
effective under the Securities Act of 1933, as amended (the "Securities Act"),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The information supplied by Ventures for inclusion in the proxy
statement/prospectus or information statement/prospectus to be sent to
stockholders of Ventures in connection with a meeting of Ventures' stockholders
(or, alternatively, the solicitation of written consents in lieu of a meeting)
to approve and adopt this Agreement and approve the Merger (such proxy
statement/prospectus or information statement/prospectus as amended or
supplemented being referred to herein as the "Proxy Statement") shall not, on
the date the Proxy Statement is first mailed to Ventures stockholders or at the
time of the meeting of stockholders (or, alternatively, on the date the
necessary written consent under applicable law has been obtained) contain any
untrue statement of material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
Notwithstanding the foregoing, Ventures makes no representation or warranty
with respect to any information provided by Purchaser or Acquisition Sub that
is contained in any of the foregoing documents.
2.20 Governmental Permits. The Wired Companies have in force, and are in
compliance with, in all material respects, all material governmental permits,
licenses, exemptions, consents, authorizations and approvals used in or
required for the conduct of their business as presently conducted and where the
absence of such compliance would have a Material Adverse Effect on Wired, all
of which shall continue in full force and effect, without requirement of any
filing or the giving of any notice and without modification thereof, following
the consummation of the transactions contemplated hereby.
2.21 Major Customers. Schedule 2.21 sets forth a complete and correct list of
the ten largest customers of the Wired Companies, in terms of revenue
recognized in respect of such customers during the fiscal year ended December
31, 1997 and the six months ended June 30, 1998, showing the amount of revenue
recognized for each such customer during such period. Except as set forth on
Schedule 2.21, as of the date hereof, to the knowledge of the Wired Companies,
none of the Wired Companies has received any written notice or other written
communication from any of the customers listed as customers for the six (6)
months ended June 30,
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1998 in Schedule 2.21 hereto terminating or reducing in any material respect,
or setting forth an intention to terminate or reduce in the future, or
otherwise reflecting a material adverse change in, the business relationship
between such customer and the Wired Companies.
2.22 Traffic. Schedule 2.22 attached hereto sets forth certain statistics
regarding Ventures' business which are true and correct in all material
respects as of the dates stated in such Schedule. Without limiting the
materiality of any other representations, warranties and covenants of Ventures
contained herein, Ventures specifically acknowledges that the accuracy in all
material respects of this representation is material to the Purchaser's
decision to enter into the transactions contemplated by this Agreement and to
pay the Merger Consideration.
2.23 Accounts Receivable. All accounts receivable of the Wired Companies (a)
arose from bona fide transactions in the ordinary course of business and
consistent with past practice, (b) except as set forth on Schedule 2.23, are
owned by the Wired Companies free and clear of any claim, security interest,
lien or other encumbrance and (c) with respect to accounts receivable owned by
the Wired Companies as of the Balance Sheet Date, are accurately and fairly
reflected on the Balance Sheet, or, with respect to accounts receivable of the
Wired Companies created after the Balance Sheet Date, are accurately and fairly
reflected in the books and records of the Wired Companies. The reserves for bad
debts reflected on the Balance Sheet and in the balance sheet included in the
Financial Statements are reasonable and were calculated in accordance with
generally accepted accounting principles consistent with past practice.
2.24 Bank Accounts; Powers of Attorney. Schedule 2.24 sets forth a complete
and correct list showing:
(i) all bank accounts of the Wired Companies, together with, with respect
to each such account, the account number, the names of all signatories
thereof, the authorized powers of each such signatory and the approximate
balance thereof on the date of this Agreement; and
(ii) the names of all persons holding powers of attorney from the Wired
Companies and a summary statement of the terms thereof.
2.25 Minute Books, Etc. The minute books, stock certificate book and stock
ledger of the Wired Companies are complete and correct in all material
respects. The minute books of the Wired Companies contain accurate and complete
records of all formal actions taken at meetings or by written consent of the
Board of Directors and stockholders of the Wired Companies and accurately
reflect all formal corporate actions of the Wired Companies which are required
by law to be passed upon by the Board of Directors or stockholders of the WIred
Companies.
2.26 Company Action. The Board of Directors of Ventures, by unanimous written
consent or at a meeting duly called and held, has (a) determined that the
Merger is fair and in the best interests of Ventures and its stockholders, (b)
approved the Merger and this Agreement in accordance with the provisions of the
DGCL and any applicable California law, and (c) directed that this Agreement
and the Merger be submitted to Ventures' stockholders for their approval and
resolved to recommend that Ventures' stockholders vote favor of the approval of
this Agreement and the Merger.
2.27 Disclosure. No representation or warranty by any of the Wired Companies
contained in this Agreement, when considered together with the statements
contained in the Disclosure Schedule and any certificates or other documents or
instruments delivered or to be delivered by the Wired Companies pursuant to
this Agreement, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND ACQUISITION SUB
Purchaser and Acquisition Sub jointly and severally represent and warrant to
Ventures as follows:
3.1 Organization and Standing of Purchaser. Each of Purchaser and Acquisition
sub is a corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation and has all requisite corporate
power and authority to enter into this Agreement, to carry out the transactions
contemplated hereby and to perform its obligations hereunder.
3.2 Charter and Bylaws. Purchaser has delivered or made available to Ventures
a true and correct copy of the charter and Bylaws of Purchaser and Acquisition
Sub, each as amended to date, and each such instrument is in full force and
effect. Neither Purchaser nor Acquisition Sub is in violation of any of the
provisions of its charter or Bylaws.
3.3 Capitalization of Purchaser. The authorized capital stock of Purchaser
consists of: (a) 5,000,000 shares of Preferred Stock, par value .01 per share;
and (b) 100,000,000 shares of Purchaser Common Stock. As of August 31, 1998,
the shares of Purchaser's capital stock that are issued and outstanding consist
of 42,847,741 shares of Purchaser Common Stock. Each issued and outstanding
share of Purchaser Common Stock has been duly authorized and validly issued and
is fully paid and nonassessable. The Purchaser Common Stock to be issued in the
Merger, when issued by Purchaser pursuant to the terms of this Agreement, will
be duly authorized, validly issued, fully paid and nonassessable.
3.4 Authorization. Each of Purchaser and Acquisition Sub has full corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and all other documents and instruments executed or to be executed by Purchaser
or Acquisition Sub pursuant to this Agreement, and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate and other action on the part of Purchaser and Acquisition
Sub. This Agreement and all other documents and instruments executed or to be
executed by Purchaser or Acquisition Sub pursuant to this Agreement have been,
or will have been, at the time of their respective executions and deliveries,
duly executed and delivered by a duly authorized officer of Purchaser or
Acquisition Sub.
3.5 Enforceability. This Agreement and all other agreements executed or to be
executed by Purchaser or Acquisition Sub pursuant to this Agreement constitute,
or will constitute, the valid and legally binding obligations of Purchaser and
Acquisition Sub, enforceable in accordance with their respective terms, except
as such enforceability may be limited by equitable principles and by applicable
bankruptcy, insolvency, reorganization, arrangement moratorium or similar laws
relating to or affecting the rights of creditors generally.
3.6 Compliance with Other Instruments and Laws. The execution and delivery of
this Agreement and all other documents and instruments executed or to be
executed by Purchaser or Acquisition Sub pursuant to this Agreement, and the
consummation of the transactions contemplated hereby, will not (A) conflict
with or result in any violation of or default under any provision of the
charter or bylaws of Purchaser or Acquisition Sub, (B) breach, violate or
constitute an event of default (or an event which with the lapse of time or the
giving of notice or both would constitute an event of default) under any note,
bond, security agreement, mortgage, indenture, trust, lease, partnership or
other agreement or other instrument, permit, concession, grant, franchise or
license, or give rise to any right of termination, cancellation, modification
or acceleration under, or require any consent or the giving of any notice
under, any agreement or other instrument or obligation to which Purchaser or
Acquisition Sub is a party, or by which Purchaser or Acquisition Sub or any of
their properties or assets may be bound, or result in the creation of any lien,
claim or encumbrance or other right of any third party of any kind whatsoever
upon the properties or assets of Purchaser or Acquisition Sub pursuant to the
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terms of any such instrument or obligation, the result of which (either
individually or in the aggregate)
would have a material adverse effect on the business, operations, financial
condition or results of operations of Purchaser and its subsidiaries, taken as
a whole (a "Material Adverse Effect on Purchaser"), or (C) violate or conflict
with any law, judgment, order, decree, statute, law, ordinance, rule or
regulation, writ injunction, decree or other instrument of any Federal, state,
local or foreign court or governmental or regulatory body, agency or authority
applicable to Purchaser or Acquisition Sub or by which any of their properties
or assets may be bound the result of which (either individually or in the
aggregate) would have a Material Adverse Effect on Purchaser.
3.7 Government Authorizations and Consents. No material consents, licenses,
approvals or authorizations of, or registrations or declarations with, any
governmental authority, bureau, agency or commission, or any third party, are
required to be obtained or made by Purchaser or Acquisition Sub in connection
with the execution, delivery, performance, validity and enforceability of this
Agreement or the Merger, other than (a) a filing with the Federal Trade
Commission and the Department of Justice under the HSR Act, (b) the filing of a
Form S-4 Registration Statement covering the issuance of the Purchaser Common
Stock issuable pursuant to Section 1.6 (a) (the "Form S-4 Registration
Statement") with, and the declaration of the effectiveness of the Form S-4
Registration Statement by, the Securities and Exchange Commission (the "SEC")
in accordance with the Securities Act, the filing of the Certificate of Merger
in accordance with the DGCL (d) other consents, licenses, approvals,
authorizations, registrations or declarations, where the failure to obtain such
would not have a Material Adverse Effect on Purchaser.
3.8 Litigation. There are no actions, suits, proceedings or governmental
investigations pending against Purchaser or Acquisition Sub or their respective
properties, at law or in equity or before any court, governmental department,
commission, board, agency, authority or instrumentality, domestic or foreign,
or that have been settled, dismissed or resolved on or since the Balance Sheet
Date, that have had or would reasonably be expected to have a Material Adverse
Effect on Purchaser and, to Purchaser's knowledge, no action, suit, proceeding
or governmental investigation that would reasonably be expected to have a
Material Adverse Effect on Purchaser has been overtly threatened against
Purchaser or Acquisition Sub or their respective properties. Neither Purchaser
nor Acquisition Sub is subject to any judgment, stipulation, order or decree
arising from any action, suit, proceeding or investigation that individually or
in the aggregate would reasonably be expected to have a Material Adverse Effect
on Purchaser. There are no threatened strikes or work stoppages by the
employees or Purchaser or Acquisition Sub and, to Purchaser's knowledge, there
are no pending union organizing efforts with respect to such employees. No
action, suit, proceeding or governmental investigation is pending or, to
Purchaser's knowledge, overtly threatened against Purchaser or Acquisition Sub
that seeks to question, delay or prevent the consummation of the transactions
contemplated hereby.
3.9 Brokers. No agent, broker, person or firm acting on behalf of Purchaser,
Acquisition Sub or their respective stockholders is, or will be, entitled to
any commission or broker's or finder's fees from any of the parties hereto, or
from and person controlling, controlled by or under common control with any of
the parties hereto, in connection with any of the transactions contemplated
herein, except for Hambrecht & Quist LLC, whose fees and expenses will be paid
by the Purchaser.
3.10 Public Filings.
(a) Purchaser has filed all forms, reports and documents required to be filed
by Purchaser with the SEC since July 31, 1997 and has made available to
Purchaser such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that Purchaser may
file subsequent to the date of this Agreement) are referred to herein as the
"SEC Reports." As of their respective dates, the SEC Reports (1) were prepared
in accordance with, and in compliance with, the requirements of the Securities
Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
the case may be, and the rules and regulations of the SEC thereunder applicable
to such SEC Reports and (2) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated
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therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of Purchaser's
subsidiaries is required to file any forms, reports or other documents with the
SEC.
(b) Each of the consolidated financial statements (including, in ease case,
any related notes thereto) contained in the SEC Reports (the "Purchaser
Financials"), including any SEC Reports filed after the date hereof until the
Closing, (1) complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, (2) was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved and (3) present fairly in all material respects the consolidated
financial position of Purchaser as of the dates thereof and the consolidated
results of its operations and cash flows for the periods then ended, except
that the unaudited financial statements were prepared on an interim basis, are
subject to normal year-end adjustments and do not contain all the footnote
disclosures required by GAAP.
3.11 Statements; Proxy Statement/Prospectus.
The information supplied by Purchaser for inclusion in or incorporation by
reference the Form S-4 Registration Statement shall not at the time the Form S-
4 Registration Statement at the time it becomes effective under the Securities
Act contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The information supplied by Purchaser for inclusion or
incorporation by reference in the Proxy Statement shall not, on the date the
Proxy Statement is first mailed to Ventures stockholders or at the time of the
meeting of stockholders (or, alternatively, on the date the necessary written
consent under applicable law has been obtained) contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, neither Purchaser nor Acquisition Sub makes any representation or
warranty with respect to any information provided by Ventures that is contained
in any of the foregoing documents.
3.12 Ownership of Ventures Stock. Purchaser does not own, beneficially or of
record, any shares of Ventures Capital Stock.
3.13 Material Adverse Effect. Since July 31, 1998, Purchaser has not
experienced any Material Adverse Effect on Purchaser.
ARTICLE 4
COVENANTS OF VENTURES
4.1 Conduct of Business. Between the date of this Agreement and the Closing
Date, except as contemplated by this Agreement or referred to in the Disclosure
Schedule, and except as may be necessary to carry out the transactions
contemplated by this Agreement or to comply with the terms of the contracts
referred to in this Agreement or the Disclosure Schedule, Ventures will carry
on its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, pay its debts and taxes when due, subject
to good faith disputes over such debts or taxes, and perform all other
obligations when due and, to the extent consistent with such business, use
commercially reasonable efforts to preserve intact its present business
organization, maintain its existing insurance policies, keep available the
services of its officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it to the end that its goodwill and ongoing business
shall not be materially impaired at the Effective Time. Purchaser acknowledges
that the transactions contemplated by this Agreement and attendant publicity
may adversely affect Ventures' ability to preserve intact its business and
relationships and to keep available the services of employees. Except as
expressly contemplated by this Agreement, none of the Wired Companies shall,
without Purchaser's prior written consent:
(a) amend its charter documents or by-laws;
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(b) enter into any agreement to dissolve, merge, consolidate or, except
in the ordinary course of business, sell any material assets of the Wired
Companies, or acquire or agree to acquire by merging or consolidating with,
or by purchasing an equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership or
other business organization or division, or otherwise acquire or agree to
acquire any assets in excess of $50,000 in the aggregate;
(c) enter into any material transaction;
(d) declare or pay any dividends on or make any other distributions
(whether in cash, stock, equity securities or property) in respect of any
Ventures Capital Stock or split, combine or reclassify any Ventures Capital
Stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any Ventures Capital Stock;
(e) repurchase, redeem or otherwise acquire, directly or indirectly, any
shares of Ventures Capital Stock, except repurchases of unvested shares at
cost in connection with the termination of the employment or consulting
relationship with any employee or consultant pursuant to agreements in
effect as of the date hereof;
(f) issue or sell, or authorize the issuance or sale of, any shares of
Ventures Capital Stock or any securities convertible into or exercisable
for Ventures Capital Stock other than (1) shares of Ventures Common Stock
pursuant to the exercise of Options outstanding on the date hereof, (2)
shares of Ventures Series A Preferred Stock pursuant to the exercise of
Warrants outstanding on the date hereof and (3) certain options to be
granted prior to the Closing Date as described on Schedule 2.3;
(g) conduct its business in a manner that departs materially from the
manner in which such business was being conducted prior to the date of this
Agreement;
(h) make any capital expenditures in excess of $25,000 per month in the
aggregate;
(i) adopt or amend any Benefit Plan for the benefit of employees or
increase the salary or other compensation (including, without limitation,
bonuses or severance compensation) payable or to become payable to its
employees (except for salary increases consistent with past practice in
connection with annual performance evaluations and increases pursuant to
existing contractual obligations which have been disclosed to Purchaser on
Schedule 2.12), hire any employee or consultant, or accelerate, amend or
change the period of exercisability, the exercise price, or the vesting
schedule of options or restricted stock granted under any stock option plan
or agreements except as specifically required by the terms of such plans or
agreements, or enter into any agreement to do any of the foregoing;
(j) amend or terminate any material contract, agreement or license to
which it is a party, except in the ordinary course of business;
(k) enter into any inbound content licensing agreement providing
exclusivity to the licensor or any outbound content license or distribution
agreement providing exclusivity to the licensee or any other agreement in
which the obligation of Ventures or any Wired Company exceeds $50,000 or
any other agreement which shall not terminate or be subject to termination
for convenience (without penalty or premium) within 180 days following
execution;
(l) enter into or terminate any lease of, or purchase or sell, any real
property, or enter into any leases of personal property involving
individually in excess of $25,000 annually or in the aggregate in excess of
$100,000 annually;
(m) accelerate receivables or delay payables inconsistent with practices
followed in the operation of the business of Wired Digital, Inc. during the
three months ended August 31, 1998 (after giving effect to the working
capital adjustments upon which Purchaser and Ventures agreed in arriving at
the working capital amount set forth in Section 1.5(b)(18) above); or
(n) agree or commit to do any of the foregoing.
In addition, Ventures will promptly advise Purchaser of the commencement of,
or overt threat of (to the extent that such threat comes to the knowledge of
the Wired Companies), any claim, action, suit, proceeding or investigation
against, relating to or involving the Wired Companies or any of their
directions, officers or
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employees, in connection with their businesses or the transactions contemplated
hereby that would reasonably be expected to have a Material Adverse Effect.
4.2 Access. Between the date of this Agreement and the Closing Date, and
subject to the provisions of the Non-Disclosure Agreement between Ventures and
Purchaser dated June 24, 1998 (the "Non-Disclosure Agreement"), Ventures shall,
after receiving reasonable advance notice from Purchaser, give Purchaser
reasonable access (during normal business hours) to the books, records,
contracts and officers of Ventures for the purpose of enabling Purchaser to
further familiarize itself, at Purchaser's sole expense, with the business,
operations and legal affairs of Ventures.
4.3 No-Shop Provision. From and after the date of this Agreement until the
earlier of the Effective Time or termination of this Agreement pursuant to its
terms, the Wired Companies will not, and will instruct their respective
officers, directors, employees, agents, representatives and affiliates not to,
directly or indirectly (a) solicit or knowingly encourage submission of any
Acquisition Proposal (as defined below) by any person, entity or group (other
than Purchaser) or (b) participate in any discussions or negotiations with, or
disclose any non-public information concerning Ventures or any of its
subsidiaries to, any person, entity or group (other than Purchaser) in
connection with any Acquisition Proposal with respect to Ventures or any
material subsidiary. For the purposes of this Agreement, "Acquisition Proposal"
means any proposal or offer for any merger, consolidation, sale of substantial
assets, equity or debt financing, disposition of all or any substantial portion
of the Intellectual Property Rights or similar transactions involving Ventures
or any of its material subsidiaries (other than sales of assets in the ordinary
course of business or as permitted by the terms of this Agreement). Upon
execution of this Agreement, Ventures will immediately cease any and all
existing activities, discussion or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal. In the event Ventures
receives any Acquisition Proposal after the date of this Agreement, it will as
promptly as practicable thereafter notify Purchaser of the existence and all
material terms of such Acquisition Proposal.
4.4 Meeting of Stockholders. Promptly after the date hereof, Ventures will
take all action necessary in accordance with the DGCL, other applicable law,
Ventures' Certificate of Incorporation and Ventures' Bylaws to convene and hold
a meeting of stockholders (or, alternatively, solicit the written consent of
the requisite number of stockholders in lieu of a meeting) as promptly as
practicable, and in any event within 30 days after the date on which Purchaser
makes available sufficient quantities of the final Prospectus/Proxy Statement
included in the Form S-4 Registration Statement, for the purpose of approving
and adopting this Agreement and approving the Merger. In soliciting such
proxies or written consents, the Board of Directors of Ventures will recommend
to the stockholders of Ventures that they approve this Agreement and the Merger
and shall use best efforts to obtain the approval of the stockholders of
Ventures entitled to vote on or consent to this Agreement and the Merger in
accordance with the DGCL, other applicable law, and Ventures' Certificate of
Incorporation and By-laws.
4.5 Consent of Ventures' Stockholders to Certain Payments. Ventures will use
commercially reasonable efforts to obtain, as promptly as practicable after the
date of this Agreement, the requisite approval of its stockholders with respect
to any payments identified on Schedule 2.12(i) made or to be made to persons
who are to be employed by any of the Wired Companies as of the Effective Time.
ARTICLE 5
COVENANTS OF PURCHASER AND ACQUISITION SUB
5.1 Confidentiality. Purchaser and Acquisition Sub shall hold in strict
confidence, and shall cause each of their respective stockholders, affiliates,
directors, officers, employees, agents, attorneys, accountants and
representatives and those of their respective affiliates ("Associates") to hold
in strict confidence, all documents and information obtained with respect to
the Wired Companies. Purchaser shall not permit any of such documents or
information to be improperly utilized or to be disclosed or conveyed to any
other person or entity, and Purchaser shall comply in all respects with the
provisions of the Non-Disclosure Agreement.
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Without limiting the generality of the foregoing, and except as required by law
or pursuant to valid legal process, (a) neither Purchaser nor Acquisition Sub
shall disclose to any person, or permit any of its Associates to disclose to
any person or entity, the existence of this Agreement or any of the terms or
provisions hereof and (b) neither Purchaser nor Acquisition Sub shall contact
any customers or employees of any of the Wired Companies without the prior
consent of an officer of Ventures.
5.2 Investigation. In conducting its review of the business, operations and
legal affairs of Ventures, neither Purchaser nor Acquisition Sub shall
interfere in any manner with the business of operations of the Wired Companies
or with the performance of any of their employees.
5.3 Employees. Purchaser will offer each Employee who is employed by any of
the Wired Companies on the Closing Date employment after the Closing Date as an
employee at will and will provide such Employee with benefit plans which in the
aggregate are no less favorable to such Employee that those provided from time
to time by Purchaser to similarly situated employees. Purchaser's offer of
employment to each of the persons named on Schedule 5.3 will include the grant
of a standard Purchaser stock option covering a number of shares of Purchaser
Common Stock no less than the number of shares of Ventures Common Stock set
forth opposite such employee's name on Schedule 5.3, appropriately adjusted to
reflect the exchange ratio of shares of Purchaser Common Stock for shares of
Ventures Common Stock pursuant to this Agreement.
5.4 Indemnification. Purchaser will cause each of the Wired Companies to ensure
the following;
(a) The respective certificates of incorporation, by-laws and other
governing documents of each of the Wired Companies shall contain the
provisions with respect to indemnification set forth in the respective
certificates of incorporation, by-laws and other governing documents of the
Wired Companies on the date of this Agreement, which provisions shall not,
for a period of six years from the Closing Date, be amended, repealed or
otherwise modified in any manner that would adversely affect the rights
therender of individuals who at or prior to the Closing Date were
directors, officers, employees or agents of the Wired Companies, unless
such modification is required by law.
(b) From and after the Closing Date, each of the Wired Companies shall
honor all of the indemnity agreements entered into prior to the date of
this Agreement by the Wired Companies with their respective directors and
officers, all of which are listed on Schedule 2.15, whether or not such
persons continue in their positions with the Wired Companies following the
Closing Date.
(c) The provisions of Sections 5.3 and 5.4 shall survive the Closing and
are intended to be for the benefit of, and shall be enforceable by, each
Employee and by each director and officer of the Wired Companies described
in this Section 5.4 and his or her heirs, representatives and assigns.
5.5 Stock Options.
(a) At the Effective Time, each outstanding Option, whether or not
exercisable, will be assumed by Purchaser. Each Option so assumed by
Purchaser under this Agreement will continue to have, and be subject to,
the same terms and conditions set forth in Ventures' 1996 Equity Incentive
Plan immediately prior to the Effective Time and the stock option agreement
by which it is evidenced, except that (1) each Option will be exercisable
(or will become exercisable in accordance with its terms) for that number
of whole sales of Purchaser Common Stock (including Escrow Shares, if
applicable) into which the shares of Ventures Common Stock subject to such
option would have been converted pursuant to Section 1.6A(a), 1.6B(a) or
1.6C(a), whichever is applicable, if such option had been exercised in its
entirety immediately prior to the Effective Time, rounded down to the
nearest whole share of Purchaser Common Stock, and (2) the per share
exercise price for the shares of Purchaser Common Stock issuable upon
exercise of such Option will be equal to the quotient determined by
dividing (A) the aggregate exercise price of such option, less any cash in
lieu of a fractional share to which the holder of the Option would have
been entitled had such Option been exercised immediately prior to the
Effective Time, by (B) the number of shares of Purchaser Common Stock
issuable upon exercise of such Option pursuant to clause (1) above, and
rounding the resulting exercise price up to the nearest whole cent. As soon
as practicable following
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the Effective Time, Purchaser will issue to each holder of an Option a
notice describing the foregoing assumption of such Option by Purchaser.
(b) Purchaser will, within fifteen (15) business days after the Closing,
file a registration statement on Form S-8 covering the shares of Purchaser
Common Stock issuable upon exercise of the assumed Options and deliver
prospectuses relating thereto to the holders thereof in accordance with the
rules and regulations of the SEC.
5.6 Nasdaq National Market. Purchaser shall cause appropriate notice to be
filed with Nasdaq National Market with respect to the issuance of the Purchaser
Common Stock in the Merger.
5.7 Advance Agreement. Following the Closing Date, Purchaser shall take all
such action as may be reasonably necessary (including, without limitation,
using commercially reasonable efforts to amend the Advance Agreement), to
irrevocably designate the Stockholder Representatives to act as agents and
attorneys-in-fact on behalf of Ventures in connection with the Escrow Fund (as
defined in the Adverse Agreement) established pursuant to the Advance
Agreement, with sole power and full authority to do all acts and things with
respect to such Escrow Fund that Ventures could otherwise do, including,
without limitation, to give and receive notices and communications, to
authorize delivery to Advance of cash from such Escrow Fund in satisfaction of
claims by Advance, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, to demand arbitration, to comply with
orders of courts and awards of arbitrators with respect to such claims, to
appoint substitute Stockholder Representatives, and to take all such actions
necessary or appropriate in the judgment of the Stockholder Representatives for
the accomplishment of the foregoing; provided, however, that the assets subject
to the authority of the Stockholder Representatives to enter into any such
settlement or compromise shall be limited to the assets held in the Advance
Escrow. All costs and expenses reasonably incurred by Purchaser in complying
with its obligations under this Section 5.7 will be paid out of the Escrow
Fund. Upon release of any funds from such Escrow fund from time to time,
Ventures and the Stockholder Representatives shall promptly (but in no event
later than two business days after receipt thereof) deliver all such funds to
the Escrow Agent (as hereinafter defined). Ventures and the Stockholder
Representatives shall take all such action as may be necessary to ensure the
delivery of such funds to the former holders of Ventures Capital Stock, Options
and Warrants in accordance with Schedule 5.7 hereto.
5.8 Tax Refund Amount. Within 15 days following the receipt of any tax refund
(including any offset to tax payments that would otherwise be required)
applicable to any tax year of Purchaser or the Wired Companies following the
Closing Date, Purchaser shall calculate the Tax Refund Amount with respect to
such recently-ended tax year and shall pay such amount to the Escrow Agent for
distribution to the former holders of Ventures Capital Stock, Options and
Warrants as set forth in the Escrow Agreement. Purchaser shall prepare and file
its post-Closing period tax returns and shall make its tax elections in a
manner so as to maximize the dollar amount of any Tax Refund Amount and shall
use its best efforts to take such other actions, including with respect to the
manner in which Purchaser shall operate the Wired Companies and Purchaser
following the Closing, as shall maximize the dollar amount of any Tax Refund
Amount. Purchaser shall provide the Stockholder Representatives with copies of
all tax returns filed on behalf of, or including the taxable results of, any of
the Wired Companies with respect to the first three tax years of the Wired
Companies following the Closing. Without limiting the materiality of any other
representations, warranties and covenants of Purchaser contained herein,
Purchaser specifically acknowledges that Purchaser's performance in all
material respects of its obligations under this Section 5.8 is material to
Ventures' decision to enter into the transactions contemplated by this
Agreement.
ARTICLE 6
COVENANTS OF ALL PARTIES
6.1 Best Efforts; Further Assurances. Subject to the terms and conditions of
this Agreement, each party will use all its best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all
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things necessary or desirable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement. Ventures, Purchaser
and Acquisition Sub each will execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement expeditiously
the transactions contemplated by this Agreement.
6.2 Certain Filings. Ventures, Purchaser and Acquisition Sub shall cooperate
with one another (a) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority is required,
or any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, in furnishing such information as may be required in
connection therewith, including without limitation filings under the HSR Act,
and in seeking timely to obtain any such actions, consents, approvals or
waivers.
6.3 Public Announcements. The parties will not issue any press release or
make any public statement with respect to this Agreement or the transactions
contemplated hereby prior to or within three (3) business days after the
Closing except as mutually agreed by Purchaser and Ventures, or except as may
be required by law or applicable regulatory authority (including, without
limitation, the rules applicable to Nasdaq National Market companies). Prior to
the issuance of any such press release or public statement determined by
Purchaser or Ventures to be required by law or applicable regulatory authority,
the party making such determination shall use commercially reasonable efforts
to consult with the other party regarding the appropriate contents of such
press release or public statement.
6.4 Tax Returns.
(a) Ventures shall prepare and submit to Purchaser all returns or reports of
each of the Wired Companies for Taxes for any taxable period that, under
applicable law, ends with or prior to the Closing Date, and shall prepare and
submit to Purchaser for its review and approval (which review and approval
shall not be unreasonably withheld or delayed) not later than 30 days before
the due date of such return or report (or extension thereof) all returns or
reports of each of the Wired Companies for Taxes for any taxable period that,
under applicable law, does not end on or prior to the Closing Date but that
includes any portion of the Pre-Closing Tax Period (as defined below).
(1) Any such return or report referred to in this Section 6.4 shall be
prepared on a basis consistent with returns or reports prepared for prior
taxable periods. If Purchaser reasonably determines that changes or
supplements are required on any return or report described in this Section
6.4, the parties shall meet in an effort to agree on any such changes.
(2) Purchaser and Ventures shall deliver to the Stockholder
Representatives such information and data concerning the operations of each
of the Wired Companies as they relate to any Taxes for the Pre-Closing Tax
Period and make available such knowledgeable employees of each of the Wired
Companies as the Stockholder Representatives may reasonably request,
including providing the information and the data required by Ventures'
customary tax and accounting questionnaires, in order to enable each of the
Wired Companies to complete and file all forms and reports which it may be
required to file with respect to its Pre-Closing Tax Period operations and
business with respect to such operations, and otherwise to enable it to
satisfy accounting, tax and other legitimate requirements.
(b) Purchaser, Ventures and the Stockholder Representatives will furnish or
cause to be furnished to each other as promptly as practicable such information
(including access to books and records) and assistance relating to each of the
Wired Companies as is reasonably requested for the filing of any return,
determining a Tax liability or right to refund, the preparation for any audit
or other proceeding, the prosecution or defense of any claim, suit or
proceeding relating to any proposed adjustment, and the enforcement of this
Agreement, and shall cooperate with each other in the conduct of any Tax audit
or other Tax proceedings involving any of the Wired Companies. Such parties
shall execute and deliver such powers of attorney and other documents as are
reasonably requested to carry out the provisions and purposes of this
Agreement.
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(c) Purchaser, Ventures and their respective successors and assigns will use
commercially reasonable efforts to preserve and retain all books, records,
returns, schedules, work papers, and other documents (including, without
limitation, appraisals and other background information) relating to any
returns, claims, audits or other proceedings that relate to Pre-Closing Tax
Periods of the Wired Companies until the expiration of the statutory period of
limitations (including extensions) of the taxable periods to which such
documents relate or until the Final Determination (as defined below) of any
payments which may be required with respect to such taxable periods, whichever
period is longer. Purchaser, Ventures and The Stockholder Representatives and
their successors shall make such documents available to each other's
representatives upon reasonable notice for purposes specified in such notice
and at reasonable times, it being understood that such representatives shall be
entitled to make copies of any such materials as they shall deem necessary.
(d) Each of the parties hereto agrees to permit representatives of the other
parties to meet with their employees (and the employees of their successors) on
a mutually convenient basis in order to enable such representatives to obtain
additional information and explanations of any document described in this
Section 6.4. The parties shall make available, or cause to be made available,
to the representatives of the other parties sufficient work space and
facilities to perform the activities described in this Section 6.4. Any
information obtained pursuant to this Section 6.4 shall be kept confidential,
except as may be otherwise necessary in connection with the filing of returns
or claims or refund or in conducting any audit or other proceeding.
(e) The following terms, as used herein, have the following meaning:
(1) "Final Determination" means the later to occur of: (a) a decision of
the United States Tax Court, or a judgment, decree or other order by
another court of competent jurisdiction, which has become final and
unappealable; (b) a closing agreement under Code Section 7121; and (c) any
other final disposition by reason of an agreement between the affected
party or parties and the appropriate tax authority, the expiration of the
application statute of limitations, or otherwise.
(2) "Pre-Closing Tax Period" means any period ending with, on or prior to
the Closing Date with respect to which any of the Wired Companies is
required to report and/or pay any Tax.
6.5 Proxy Statement and Registration Statements.
(a) As promptly as practicable following the execution of this Agreement,
Purchaser and Ventures will prepare the Proxy Statement and will prepare and
file with the SEC the Form S-4 Registration Statement. Each of Ventures and
Purchaser will respond to any comments of the SEC and will use its respective
reasonable best efforts to have the Form S-4 Registration Statement declared
effective under the Securities Act as promptly as practicable following such
filing. Ventures will use its reasonable best efforts to cause the Proxy
Statement to be mailed to the Ventures stockholders at the earliest practicable
time following the time the Form S-4 Registration Statement is declared
effective by the SEC.
(b) As promptly as practicable after the date of this Agreement, each of
Purchaser and Ventures will prepare and file any other filings required to be
filed by it under the Exchange Act, the Securities Act or any other Federal,
state or foreign laws relating to the Merger and the transactions contemplated
by this Agreement (the "Other Filings"). Purchaser and Ventures will notify
each other promptly upon the receipt of any comments from the SEC or its staff
or any other government officials for amendments or supplements to the Form S-4
Registration Statement, the Proxy Statement or any Other Filings. Each of
Ventures and Purchaser will cause all documents that it is responsible for
filing with the SEC or other regulatory authorities under this Section 6.5 to
comply in all material respects with all applicable requirements of law the
rules and regulations promulgated thereunder.
(c) Purchaser will cause each of the shares of Purchaser Common Stock
issuable pursuant to Section 1.6A, 1.6B or 1.6C, whichever is applicable, to be
listed for trading on the NNM at the Effective Time. Purchaser will cause each
of the shares of Purchaser Common Stock issuable upon exercise of the Options
to be listed for trading on the NNM on or prior to the effective date of the
Form S-8 registration statement filed pursuant to Section 5.5(b).
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6.6 Tax-Free Reorganization. No party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368 of the Code.
6.7 Tax Representation Letters. At or prior to the filing of the Form S-4
Registration Statement with the SEC and, to the extent necessary, at the
Closing, Purchaser and Ventures shall each execute and deliver to Hutchins,
Wheeler & Dittmar and Cooley Godward LLP management tax representation letters
in the form attached hereto as Exhibit B and Exhibit C, respectively. Each of
Purchaser and Ventures shall use its reasonable efforts to cause Hutchins,
Wheeler & Dittmar and Cooley Godward llp, respectively, to deliver promptly to
it a legal opinion satisfying the requirements of Item 601 of Regulation S-K
promulgated under the Securities Act. In rendering such opinion, each of such
counsel shall be entitled to rely on the management tax representation letters.
6.8 Marketing Program Funding. Purchaser and Ventures have agreed that,
between the date of this Agreement and the Closing Date, Wired Digital, Inc.
will carry out certain intensive marketing activities, including a television
advertising campaign previously described to Purchaser, that are beyond the
scope of its ordinary ongoing marketing programs. Ventures will obtain
Purchaser's written approval for all expenditures in connection with such
activities, and the aggregate amount of such approved expenditures (the
"Marketing Program Funding Amount") shall be deemed to be Wired Cash at Closing
as described in Section 1.5(b)(16). Production costs incurred prior to the date
hereof are not included in the Marketing Program Funding Amount, and the cost
(approximately $700,000) of television advertising during the week beginning
Sunday, October 18, 1998 is included in the Marketing Program Funding Amount.
Except with Purchaser's written approval, the cost of television advertising
scheduled to air after the Closing Date will not be included in the Marketing
Program Funding Amount.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF PURCHASER ANDACQUISITION SUB TO CLOSE
The obligations of Purchaser and Acquisition Sub to effect the Merger and
otherwise consummate the transactions that are to be consummated at the Closing
are subject to the satisfaction, as of the Closing Date, of the following
conditions (any of which may be waived by Purchaser in whole or in part):
7.1 Accuracy of Representations and Warranties. The representations and
warranties of Ventures set forth in Article 2 shall be accurate in all material
respects as of the Closing, as though made on and as of the Closing Date,
except to the extent that (a) any of such representations and warranties refers
specifically to another date, in which such case such representation or
warranty shall have been accurate as of such other date or (b) the accuracy of
any of such representations and warranties is affected by any of the
transactions contemplated by this Agreement.
7.2 Performance. Ventures shall have performed, in all material respects, all
obligations required by this Agreement to be performed by Ventures on or before
the Closing Date.
7.3 Certificate. Purchaser shall have received from a duly a authorized
officer of Ventures a certificate dated the Closing Date confirming, to such
person's knowledge, that the conditions in Sections 7.1 and 7.2 have been met.
7.4 Employment Agreements. Elizabeth Vanderslice, Richard D. Boyce, Joel
Truher, June Cohen, Mary M. Moore and Barbara Kuhr shall have entered into
employment agreements in the form attached hereto as Exhibit D, and Purchaser's
Nondisclosure and Developments Agreement in the form attached hereto as Exhibit
E.
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7.5 No Injunction. There shall not be in effect, at the Closing, any
injunction or other binding order of any court or other tribunal having
jurisdiction over Purchaser or Acquisition Sub that prohibits the Merger or
that limits or restricts the conduct or operation of the business of the Wired
Companies after the Merger.
7.6 HSR Act. Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been terminated.
7.7 Legal Opinion. Purchaser shall have received from Cooley Godward LLP, to
counsel to Ventures, an opinion in substantially the form of Exhibit F attached
hereto.
7.8 Stockholder Approval. The Merger shall have been approved by the
stockholders of Ventures in accordance with applicable law.
7.9 Consents. All approvals, consents, waivers and authorizations required to
be obtained by Ventures in connection with the Merger and the other
transactions contemplated by this Agreement set forth on Schedule 7.9 shall
have been obtained and shall be in full force and effect.
7.10 Escrow Agreement. Purchaser shall have entered into the Escrow Agreement
annexed as Exhibit G hereto (the "Escrow Agreement"), duly executed by the
Stockholder Representatives, together with counterparts signed by the escrow
agent named therein and blank stock powers executed by each of the holders with
respect to such holder's portion of the Escrow Shares.
7.11 Resignations. Purchaser shall have received resignations of all
directors and officers of all subsidiaries of Ventures, effective as of the
Effective Time.
7.12 Appraisal Rights. The holders of those outstanding shares of Ventures
Capital Stock representing the right to receive no more than 5% of the Merger
Consideration shall have affirmatively demanded appraisal rights in respect of
the Merger.
7.13 Termination of Agreements. The agreements identified on Schedule 7.13
between Ventures and certain of its stockholders shall have been terminated,
effective no later than the Effective Time.
7.14 Form S-4 Registration Statement. The Form S-4 Registration Statement
shall have been declared effective under the Securities Act and shall not be
subject to a stop order or any threatened stop order. All necessary state
securities and blue sky permits, approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained.
7.15 Tax Opinion. Purchaser shall have received a written opinion from
Hutchins, Wheeler & Dittmar in form and substance reasonably satisfactory to
them, to the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code and such opinion shall not have been
withdrawn; provided, however, that if Hutchins, Wheeler & Dittmar does not
render such opinion or withdraws or modifies such opinion to Purchaser, this
condition shall nonetheless be deemed to be satisfied if counsel to Ventures
renders such opinion to Purchaser. In rendering such tax opinion, counsel shall
be entitled to rely on the management tax representation letters referred to in
Section 6.7.
7.16 Quotation on Nasdaq National Market. The Purchaser Common Stock issuable
in the Merger shall have been approved for quotation on the Nasdaq National
Market upon official notice of issuance thereof.
7.17 Consent of Ventures' Stockholders to Certain Payments. Ventures shall
have either (a) obtained the requisite approval of its stockholders with
respect to any payments identified on Schedule 2.12(i) made or to be made to
persons who are to be employed by any of the Wired Companies as of the
Effective Time (the "Recipients") or (b) made available to Purchaser and the
Recipients, by amendment of this Agreement or otherwise, such arrangements
(including the establishment of an additional cash escrow fund in an
appropriate amount) as may be necessary to indemnify Purchaser and the
Recipients fully against any after-tax cost to them (including the after-tax
cost of any tax "gross-up" obligation of Ventures) of Ventures' failure to
obtain such approval.
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ARTICLE 8
CONDITIONS TO OBLIGATION OF VENTURES TO CLOSE
The obligation of Ventures to effect the Merger and otherwise consummate the
transactions that are to be consummated at the Closing is subject to the
satisfaction, as of the Closing Date, of the following conditions (any of which
may be waived by Ventures):
8.1 Accuracy of Representations and Warranties. The representations and
warranties of Purchaser and Acquisition Sub set forth in Article 3 shall be
accurate in all material respects as of the Closing, as though made on and as
of the Closing Date, except to the extent that (a) any of such representations
and warranties refers specifically to a date other than the Closing Date, in
which such case such representation or warranty shall have been accurate in all
material respects of such other or (b) the accuracy of any of such
representations and warranties is affected by any of the transactions
contemplated by this Agreement.
8.2 Performance. Purchaser and Acquisition Sub shall have performed, in all
material respects, all obligations required by this Agreement to be performed
by Purchaser and Acquisition Sub on or before the Closing Date.
8.3 Certificate. Ventures shall have received from a duly authorized officer
of Purchaser a certificate dated the Closing Date confirming, to such person's
knowledge, that the conditions in Sections 8.1 and 8.2 have been met.
8.4 No Injunction. There shall not be in effect, at the Closing, any
injunction or other binding order of any court or other tribunal having
jurisdiction over Ventures that prohibits the Merger or that limits or
restricts the conduct or operations of Purchaser after the Merger.
8.5 HSR Act. Any applicable waiting period under the HSR Act relating to the
transactions contemplated shall have expired or been terminated.
8.6 Consents. The consents, licenses, approvals, releases and authorizations
specified on Schedule 2.6 shall have been obtained, except where the failure to
obtain such consents did not and would not reasonably be expected to result in
a Material Adverse Effect on Purchaser or a material adverse effect on the
transactions contemplated by this Agreement.
8.7 Legal Opinion. Ventures shall have received from Hutchins, Wheeler &
Dittmar, counsel to Purchaser, an opinion in substantially the form of Exhibit
H attached hereto.
8.8 Stockholder Approval. The Merger shall have been approved by the
stockholders of Ventures in accordance with applicable law.
8.9 Tax Opinion. Ventures shall have received a written opinion from Cooley
Godward LLP in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368 of the Code and such opinion shall not have been withdrawn;
provided, however, that if Cooley Godward LLP does not render such opinion or
withdraws or modifies such opinion to Ventures, this condition shall
nonetheless be deemed to be satisfied if counsel to Purchaser renders such
opinion to Ventures. In rendering such tax opinion, counsel shall be entitled
to rely on the management tax representation letters referred to in Section
6.7.
8.10 Form S-4 Registration Statement. The Form S-4 Registration Statement
shall have been declared effective under the Securities Act and shall not be
subject to a stop order or any threatened stop order. All necessary state
securities and blue sky permits, approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained.
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8.11 Quotation on Nasdaq National Market. The Purchaser Common Stock issuable
in the Merger shall have been approved for quotation on the Nasdaq National
Market upon official notice of issuance thereof.
ARTICLE 9
TERMINATION
9.1 Right to Terminate Agreement. This Agreement may be terminated prior to
the Closing:
(a) by mutual agreement of Ventures and Purchaser;
(b) by Purchaser at any time after 282 days after signing (excluding the
number of days, if any, elapsed during the dispute resolution proceedings
relating to the Preliminary Closing Balance Sheet pursuant to Section
1.5(c)), if the Closing shall not have occurred on or prior to such date;
provided, however, that the right to terminate this Agreement under this
Section 9.1(b) shall not be available to Purchaser if the action of
Purchaser or Acquisition Sub or any of their Associates has been a
principal cause of or resulted in the failure of the Merger to occur on or
before such date and such action or failure to act constitutes a breach of
this Agreement; or
(c) by Ventures at any time after 282 days after signing (excluding the
number of days, if any, elapsed during the dispute resolution proceedings
relating to the Preliminary Closing Balance Sheet pursuant to Section
1.5(c)), if the Closing shall not have occurred on or prior to such date;
provided, however, that the right to terminate this Agreement under this
Section 9.1(c) shall not be available to Ventures if the action of Ventures
or any of its Associates (including those persons who have signed the
Voting Agreement) has been a principal cause of or resulted in the failure
of the Merger to occur on or before such date and such action or failure to
act constitutes a breach of this Agreement.
9.2 Effect of Termination. Upon the termination of this Agreement pursuant to
Section 9.1:
(a) Purchaser and Acquisition Sub shall promptly cause to be returned to
Ventures all documents and information obtained in connection with this
Agreement and the transactions contemplated by this Agreement and all
documents and information obtained in connection with the Purchaser's
investigation of Ventures' business, operations and legal affairs,
including any copies made by or supplied to Purchaser or any of Purchaser's
agents of any such documents or information; and
(b) No party hereto shall have any obligation or liability to other
parties hereto, except that the parties hereto shall remain bound by the
provisions of this Section 9.2 and Sections 5.1, 6.3 and 9.3 and Article 12
and by the provisions of the Non-Disclosure Agreement, and except that
nothing herein shall relieve any party from liability for a breach of this
Agreement prior to the termination hereof.
9.3 Failure to Close.
(a) If Purchaser fails to consummate the transactions contemplated on its
part to occur on the Closing Date, in circumstances whereby this Agreement
has not been terminated and all conditions of the Closing set forth in
Article 7 have been satisfied in all material respects or waived, Purchaser
shall be liable to Ventures for damages to the extent provided by law and
Ventures shall be entitled to be reimbursed by Purchaser for its expenses
as provided in Section 12.4.
(b) If Ventures fails to consummate the transactions contemplated on its
part to occur on the Closing Date, in circumstances whereby this Agreement
has not been terminated and all conditions of the Closing set forth in
Article 8 have been satisfied in all material respects or waived, Ventures
shall be liable to Purchaser for damages to the extent provided by law and
Purchaser shall be entitled to be reimbursed by Ventures for its expenses
as provided in Section 12.4.
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ARTICLE 10
ADJUSTMENT PROCEDURES
10.1 Preparation of Final Closing Balance Sheet.
(a) For purposes of this Article 10:
(1) "Final Cash at Closing" shall mean all cash and cash equivalents held
by the Wired Companies as of the Closing (including any cash held by
Ventures that represents the exercise price of stock options exercised for
cash after the date hereof), as shown on the Final Closing Balance Sheet
(as hereinafter defined), minus the Cash Exclusions; provided, however,
that, for purposes of calculating Final Cash at Closing, Ventures shall be
deemed to hold an incremental amount of cash equal to the sum of (A) the
Marketing Program Funding Amount described in Section 6.8, (B) any amounts
paid by Ventures at or prior to the Closing pursuant to Section 12.4, (C)
the aggregate exercise price of all stock options presently held by or
hereafter granted to employees of the Wired Companies (but not non-
employees), as described in Schedule 2.3, and Warrants to the extent such
stock options and Warrants are either held unexercised at the Closing Date
or net-exercised between the date hereof and the Closing Date and (D) the
amounts set forth on Schedule 10.1(a) hereto.
(2) "Final Borrowings at Closing" shall mean all indebtedness for
borrowed money of the Wired Companies as of the Closing, as shown on the
Final Closing Balance Sheet.
(3) "Final Adjusted Working Capital Shortfall at Closing" shall mean the
absolute value of the difference between (i) $432,172 and (ii) the adjusted
working capital (i.e., current assets less current liabilities) of the
Wired Companies as of the Closing, as reflected on the Final Closing
Balance Sheet; provided, however, that, for the purpose of calculating
Final Adjusted Working Capital Shortfall at Closing only, Final Cash at
Closing (together with the offsetting Cash Exclusions) and Final Borrowings
at Closing shall be disregarded, and amounts payable by Ventures as
contemplated by Section 6.8 or Section 12.4 at or prior to Closing shall
not be deemed to be a current liability. Notwithstanding the foregoing,
Final Adjusted Working Capital Shortfall at Closing shall be zero if the
adjusted working capital described in subparagraph (ii) above is $432,172
or greater.
(b) As soon as practicable following the Closing, Purchaser shall prepare in
good faith, and shall cause Purchaser's independent auditors to review, the
consolidated balance sheet of Ventures and the other Wired Companies as of the
Closing Date (the "Final Closing Balance Sheet"). Except for the absence of
footnotes, the Final Closing Balance Sheet shall be prepared in accordance with
GAAP on a basis consistent with that used in the preparation of the Financial
Statements. Based on the Final Closing Balance Sheet, Purchaser shall
calculate, and shall cause Purchaser's independent auditors to review, Final
Cash at Closing, Final Borrowings at Closing and Final Adjusted Working Capital
Shortfall at Closing, and Purchaser shall deliver such calculations to the
Stockholder Representatives with the Final Closing Balance Sheet. If the
Stockholder Representatives have not given the Purchaser notice of their
objection to the Final Closing Balance Sheet (which notice must contain a
statement of the basis of the Stockholder Representatives' objection) within
fifteen (15) days after delivery of such Final Closing Balance Sheet, then
Final Cash at Closing and Final Adjusted Working Capital Shortfall at Closing
based on the Final Closing Balance Sheet as delivered by Purchaser shall be
used in computing the Escrow Adjustment Shares (as hereinafter defined).
(c) In the event the Stockholder Representatives have provided notice of
their objection in accordance with Section 10.1(b) within such fifteen (15) day
period, then the issues in dispute shall be resolved in accordance with this
Section 10.1(c). First, Purchaser and the Stockholder Representatives shall
attempt to resolve the issues outstanding with respect to the Final Closing
Balance Sheet and the calculation of Final Cash at Closing, Final Borrowings at
Closing and Final Adjusted Working Capital Shortfall at Closing. If Purchaser
and the Stockholder Representatives are unable to resolve those issues within
thirty (30) days of Purchaser's receipt of the Stockholders Representatives'
objections, then Purchaser and the Stockholder Representatives shall submit the
remaining issues in dispute to Arthur Andersen LLP, independent auditors (the
"Independent Auditors"), for resolution. If issues in dispute are submitted to
the Independent Auditors for resolution, (1)
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each party shall furnish to the Independent Auditors such workpapers and other
documents and information relating to the disputed issues as the Independent
Auditors may request and as are available to that party and shall be afforded
the opportunity to present to the Independent Auditors and material relating to
the determination and to discuss the determination with the Independent
Auditors; (2) the Determination by the Independent Auditors, as set forth in a
notice delivered to both Purchaser and the Stockholder Representatives by the
Independent Auditors within thirty (30) days of the submission to them of the
issues in dispute, shall be binding and conclusive on the parties and any
determination of Final Cash at Closing, Final Borrowings at Closing and Final
Adjusted Working Capital Shortfall at Closing made by the Independent Auditors
in their determination of the issues in dispute shall be used in computing the
Escrow Adjustment Shares; and (3) Purchaser shall bear the fees and costs of
the Independent Auditors in making such determination and shall be entitled to
recover 50% of such fees and cost from the Escrow Fund.
(d) Within one (1) business day after Final Cash at Closing, Final Borrowings
at Closing and Final Adjusted Working Capital Shortfall at Closing have been
determined pursuant to Section 10.1(b), Section 10.1(c) or any combination
thereof, the "Escrow Adjustment Shares" shall mean and be calculated as
follows: the number of shares of Purchaser Common Stock, rounded to the nearest
full share, equal to the absolute value of the Adjustment Amount (as
hereinafter defined) shall be divided by the Average Closing Stock Price. The
term "Adjustment Amount" shall mean the aggregate of: (1) Final Cash at Closing
minus Wired Cash at Closing minus Excess Expenses, (2) Wired Borrowings at
Closing minus Final Borrowings at Closing and (3) Wired Adjusted Working
Capital Shortfall at Closing minus Final Adjusted Working Capital Shortfall at
Closing. The term "Excess Expenses" shall mean (i) the amount paid or payable
by Ventures pursuant to Section 12.4 (except to the extent such amount was
included as a Closing Expense Adjustment Amount thereby reducing the Cash
Balance as determined pursuant to Section 1.5(b)(2) or to the extent Purchaser
has made a claim against the Escrow Fund with respect to such amount under
Section 12.4), minus (ii) $2.5 million; provided that the amount in clause (i)
above exceeds the amount in clause (ii) above.
10.2 Adjustment of Escrow Fund. If the Adjustment Amount is greater than
zero, Purchaser shall issue the Escrow Adjustment Shares and deposit such
shares in the Escrow Fund within five (5) business days following the
determination of the Escrow Adjustment Shares. If the Adjustment Amount is less
than zero, then, within five (5) business days following the determination of
the Escrow Adjustment Shares, Purchaser and the Stockholder Representatives
shall deliver to the Escrow Agent a notice authorizing the release to the
Purchaser from the Escrow Fund of (a) the number of shares of Purchaser Common
Stock equal to the Escrow Adjustment Shares or (b) if the number of Escrow
Shares remaining in the Escrow Fund (the "Remaining Escrow Shares") is less
than the number of Escrow Adjustment Shares, all of the remaining Escrow Shares
(if any) plus an amount of cash equal to the product of (i) the difference
between the number of Escrow Adjustment Shares and the number of Remaining
Escrow Shares and (ii) the Average Closing Stock Price. If the Adjustment
Amount is negative and the amount exceeds $2 million, then, within five (5)
business days following the determination of the Escrow Adjustment Shares,
Purchaser and the Stockholder Representatives shall deliver to the Escrow Agent
a notice instructing the Escrow Agent that: (a) it is promptly to release to
Purchaser from the Escrow Fund a number of shares of Purchaser Common Stock
having a value, based on the Average Closing Stock Price, of $2 million and if
there are not enough Escrow Shares remaining, then the amount of cash as
determined pursuant to the preceding sentence; and (b) if it subsequently (but
before the end of the Escrow Period) receives any funds released from the
Advance Escrow as contemplated by Section 5.7, an amount of such funds equal to
the Adjustment Amount in excess of $2 million shall be added to the Escrow Fund
and promptly released to Purchaser before any distribution of the balance, if
any, of such funds to the former holders of Ventures capital stock. In the
event that the cash received from the Advance Escrow is not sufficient to
reimburse Purchaser for the entire Adjustment Amount, an additional number of
shares of Purchaser Common Stock, with a value based on the Average Closing
Stock Price (or cash as determined above), shall be released from the Escrow
Fund such that Purchaser is reimbursed for the entire Adjustment Amount. In the
event of any increase or decrease in the number of shares of Purchaser Common
Stock or cash held in the Escrow Fund pursuant to this Section 10.2, the term
"Escrow Fund" shall thereafter mean the Escrow Fund as adjusted.
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ARTICLE 11
CERTAIN REMEDIES AND LIMITATIONS
11.1 Expiration of Representations, Warranties and Covenants. All of the
representations and warranties of Ventures set forth in this Agreement and all
of the covenants set forth in Article 4 shall terminate and expire, and shall
cease to be of any force or effect, at 5:00 p.m., Massachusetts time, on the
first anniversary of the Closing Date, and all liability with respect to such
representations, warranties and covenants shall thereupon be extinguished.
Notwithstanding the foregoing, if, prior to such date, Purchaser shall have in
good faith delivered a claim notice to the Stockholder Representatives and the
Escrow Agent in conformity with all of the applicable procedures set forth in
the Escrow Agreement, then the specific indemnification claim set forth in such
claim notice shall survive such date and shall not be extinguished thereby.
11.2 Escrow Fund. At the Effective Time, Ventures' stockholders and Warrant
and Option holders will be deemed to have received and deposited the Escrow
Shares with the Escrow Agent without any act of any stockholder, Warrant holder
or Option holder. At the Closing, the Escrow Shares, without any act of
stockholder, Warrant holder or Option holder will be deposited with State
Street Bank and Trust Company (or other institution acceptable to Purchaser and
the Stockholder Representatives), as Escrow Agent (the "Escrow Agent"), such
deposit for a period of one year from the Closing Date to constitute an escrow
fund (the "Escrow Fund") to be governed by the terms set forth herein and in
the Escrow Agreement. The Escrow Fund shall be available to compensate
Purchaser and its affiliates for any and all losses, damages, deficiencies,
liabilities, obligations, actions, claims, suits, proceedings, demands,
assessments, judgments, recoveries, fees, costs and expenses (including,
without limitation, all out-of-pocket expenses, reasonable investigation
expenses and reasonable fees and disbursements of accountants and counsel) of
any nature whatsoever, net of insurance proceeds actually realized or to be
realized by Purchaser (collectively, "Losses"), arising out of, based upon or
resulting from (1) any inaccuracy in or breach of any representation and
warranty of Ventures which is contained in this Agreement or any Schedule or
certificate delivered pursuant hereto or thereto; (2) any breach or non-
fulfillment of, or any failure to perform, any of the covenants, agreements or
undertakings of Ventures (which covenants, agreements or undertakings were to
be performed or complied with on or prior to the consummation of the Merger)
which are contained in or made pursuant to the terms and conditions of this
agreement; (3) any losses of Purchaser or any Wired Company (whether or not
disclosed on a Schedule hereto) to the extent arising out of the Wired
Companies' obligations to provide indemnification in excess of the amount of
the Advance Escrow pursuant to Section 10.3(b) of the Advance Agreement or
otherwise resulting from or relating to the operation or sale of the Business
(as such term is defined in the Advance Agreement); or (4) any Losses resulting
from the delayed form filings described in paragraph (c) of Schedule 2.12.
Purchaser may not receive any payment from the Escrow Fund unless and until
Officer's Certificates (as defined in the Escrow Agreement) identifying Losses,
the aggregate amount of which exceed $500,000, have been delivered to the
Escrow Agent as provided in the Escrow Agreement; in such case, Purchaser may
recover from the Escrow Fund its Losses in excess of the first $500,000 (the
"Deductible"); provided, however, that in no event shall the Deductible apply
to the Losses resulting from any inaccuracy or breach of any representation and
warranty contained in Sections 2.1(b), 2.2, 2.14 or 2.18, any Losses arising
under clause (3) or (4) above, any fees and costs that Purchaser is entitled to
recover pursuant to Section 10.1(c), or any negative Adjustment Amount
determined pursuant to Section 10.1(d), and provided, further, that any such
Losses or fees and costs or Adjustment Amount shall not be taken into account
in determining whether aggregate Losses exceed the threshold of the Deductible
or whether the Deductible has been satisfied for purposes of calculating
Purchaser's recovery from the Escrow Fund.
11.3 Indemnification by Purchaser. Subject to the limitations and the
provisions set forth herein, Purchaser and the Surviving Corporation, jointly
and severally, will indemnify and hold harmless the stockholders, Warrant
holders and Option holders of Ventures from, against and in respect of the net
amount (after deduction of the amount of any insurance proceeds recoverable and
net of any tax benefit) of any and all Losses actually suffered by them as a
direct result of the failure of any representation or warranty made by
Purchaser or Acquisition Sub in Article 3 to have been true in all material
respects when made.
11.4 Defense of Third Party Actions. If either Purchaser, on the one hand, or
the Stockholder Representatives, on the other hand (the "Indemnitee"), receives
notice or otherwise obtains knowledge of any
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matter or any threatened matter that may give rise to an indemnification claim
against the Escrow Fund, on the one hand, or Purchaser, on the other hand (the
"Indemnifying Party"), then the Indemnitee shall promptly deliver to the
Indemnifying Party a written notice describing such matter in reasonable
detail. The timely delivery of such written notice by the Indemnitee to the
Indemnifying Party shall be a condition precedent to any liability on the part
of the Indemnifying Party under this Article 11 with respect to such matter.
The Indemnifying Party shall have the right at its option (acting through the
Stockholder Representatives, if the "Indemnifying Party" is the Escrow Fund),
to assume the defense of any such matter with its own counsel, but only if the
Indemnifying Party simultaneously agrees to indemnify the Indemnitee for such
matter. If the Indemnifying Party elects to assume the defense of and
indemnification for any such matter, then:
(a) notwithstanding anything to the contrary contained in this Agreement,
the Indemnifying Party shall not be required to pay or otherwise indemnify
the Indemnitee against any attorneys' fees or other
expenses incurred on behalf of the Indemnitee in connection with such matter
following the Indemnifying Party's election to assume the defense of such
matter;
(b) the Indemnitee shall make available to the Indemnifying Party all books,
records and other documents and materials that are under the direct or indirect
control of the Indemnitee or any of the Indemnitee's agents and that the
Indemnifying Party considers necessary or desirable for the defense of such
matter;
(c) the Indemnitee shall execute such documents and take such other actions
as the Indemnifying Party may reasonably request for the purpose of
facilitating the defense of, or any settlement, comprise or adjustment relating
to, such matter;
(d) the Indemnitee shall otherwise fully cooperate as reasonably requested by
the Indemnifying Party in the defense of such matter; and
(e) the Indemnitee shall not admit any liability with respect to such matter.
Notwithstanding the foregoing, the Indemnifying Party shall not, without the
prior written consent of the Indemnitee, agree to settlement of any third party
claim, unless the settlement provides an unconditional release and discharge of
the Indemnitee. If the Indemnifying Party elects not to assume the defense of
and indemnification for such matter, then the Indemnitee shall proceed
diligently to defend such matter with the assistance of counsel reasonably
satisfactory to the Indemnifying Party; provided, however, that the Indemnitee
shall not settle, adjust or compromise such matter, or admit any liability with
respect to such matter, without the prior written consent of the Indemnifying
Party, such consent not to be unreasonably withheld or delayed. In the event
the Escrow Fund is the "Indemnifying Party" in connection with a matter, the
Stockholder Representatives shall have the right to pay any attorneys' fees and
other expenses of any defense of a matter assumed pursuant to this Section 11.4
out of the amount then available thereunder.
11.5 Subrogation; No Contribution. To the extent that the Indemnifying Party
makes or is required to make any indemnification payment to the Indemnitee, the
Indemnifying Party shall be entitled to exercise, and shall be subrogated to,
any rights and remedies (including rights of indemnity, rights of contribution
and other rights of recovery) that the Indemnitee or any of the Indemnitee's
affiliates may have against any other person with respect to any Losses,
circumstances or matter to which such indemnification payment is directly or
indirectly related. The Indemnitee shall permit the Indemnifying Party to use
the name of the Indemnitee and the names of the Indemnitee's affiliates in any
transaction or in any proceeding or other matter involving any of such rights
or remedies; and the Indemnitee shall take such actions as the Indemnifying
Party may reasonably request for the purpose of enabling the Indemnitee to
perfect or exercise the Indemnifying Party's right of subrogation hereunder.
Notwithstanding the foregoing, the Stockholder Representative, on behalf of all
holders of Ventures Capital Stock, Warrants and Options, hereby waives, and
acknowledges and agrees that no holder of Ventures Capital Stock, Warrants or
Options shall have and shall not exercise or assert (or attempt to exercise or
assert), any right of contribution, right of indemnity or other right or remedy
against Purchaser or Ventures in connection with any indemnification obligation
to which such stockholder may become subject under this Agreement or the Escrow
Agreement.
11.6 Exclusivity. The right of each party hereto to assert indemnification
claims and receive indemnification payments pursuant to this Article 11 shall
be the sole and exclusive right and remedy
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exercisable by such party with respect to any breach by the other party hereto
of any representation, warranty or covenant, except for claims based on fraud.
11.7 Retention of Records. From and after the date of this Agreement,
Purchaser shall preserve, and shall cause the Surviving Corporation and the
Wired Companies to preserve, all books, records and other documents, materials
and information relevant to the representations, warranties and covenants set
forth in this Agreement for a period of six years following the date of this
Agreement or for such longer period as the rights of the parties hereunder may
exist.
11.8 Notice as to Representations. Without limiting any of the other
obligations of the respective parties hereunder, if at any time after the date
of this Agreement, Purchaser shall have any reason to believe that any
representation or warranty made by Ventures hereunder may have been untrue,
Purchaser shall promptly provide the Stockholder Representatives written notice
to that effect, indicating the basis for Purchaser's belief that such
representation or warranty may have been untrue. For purposes of this Article
11, Ventures shall not be deemed to have breached any representation or
warranty if Purchaser, prior to the Closing Date, had knowledge of the breach,
or facts and circumstances constituting or resulting in a breach, of such
representation or warranty, and consummated the Merger notwithstanding such
knowledge.
11.9 No Rescission. Neither Purchaser, Acquisition Sub nor Ventures shall be
entitled to rescind the Merger by virtue of any failure of any party's
representations and warranties herein to have been true or any breach of any
party's obligations hereunder.
ARTICLE 12
MISCELLANEOUS
12.1 Material Adverse Effect. Any adverse change, event or effect that is
proximately caused by conditions affecting the United States economy generally
shall not be taken into account in determining whether there has been or would
be a Material Adverse Effect on Wired or a Material Adverse Effect on Purchaser
(unless such conditions adversely affect Ventures or Purchaser, as the case may
be, in a materially disproportionate manner). Any adverse change, event or
effect that is proximately caused by any industry in which Purchaser or
Ventures competes shall not be taken into account in determining whether there
has been or would be a Material Adverse Effect on Purchaser or Material Adverse
Effect on Ventures (unless such conditions adversely affect Ventures or
Purchaser, as the case may be, in a materially disproportionate manner). Any
adverse change, event or effect that is proximately caused by the announcement
or pendency of the Merger shall not be taken into account in determining
whether there has been or would be a Material Adverse Effect on Purchaser or a
Material Adverse Effect on Wired. Any adverse change, event or effect that is
proximately caused by any breach by Purchaser or Ventures of any covenant or
obligation set forth in this Agreement shall not be taken into account in
determining whether there has been or would be a Material Adverse Effect on
Wired or Material Adverse Effect on Purchaser, respectively.
12.2 Knowledge of Ventures. As used in this Agreement, a corporate party's
"knowledge" means the actual knowledge of any director or executive officer of
such party.
12.3 Memorandum; Disclaimer of Projections. Ventures makes no representation
or warranty to Purchaser or Acquisition Sub except as specifically made in this
Agreement. In particular, Ventures makes no representation or warranty to
Purchaser or Acquisition Sub with respect to any financial projection or
forecast delivered by or on behalf of Ventures to Purchaser. Purchaser and
Acquisition sub acknowledge that (a) there are uncertainties inherent in
attempting to make such projections and forecasts, (b) they are familiar with
such uncertainties, (c) they are taking full responsibility for making their
own evaluation of the adequacy and accuracy of all such projections and
forecasts so furnished to them and (d) they shall have no claim against
Ventures or its stockholders with respect thereto.
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12.4 Expenses.
(a) If the Merger is consummated or if this Agreement is terminated under
circumstances other than those specified in Section 9.3(a) or (b), Ventures and
Purchaser shall pay their own respective expenses and costs incidental to the
preparation of this Agreement, the performance and compliance with all
agreements contained in this Agreement to be performed or complied with by them
and the consummation of the transactions contemplated hereby. Ventures shall
pay all such legal, accounting, investment banking and other fees and expenses
that are payable by it in full at or prior to the Closing against appropriate
invoices therefor. So that Purchaser may calculate the Cash Balance pursuant to
Section 1.5(b)(2), Ventures shall provide Purchaser with an estimate of amounts
to be paid by Ventures at or prior to the Closing at least two days prior to
the Effective Time. Notwithstanding anything to the contrary contained herein,
if the Merger is consummated, and if the aggregate legal, accounting,
investment banking and other fees and expenses paid or payable by Ventures and
determined by Ventures to be substantially related to the preparation for,
negotiation of or consummation of this Agreement or the transactions
contemplated hereby exceed $2.5 million and have not otherwise been included as
a Closing Expense Adjustment Amount thereby reducing the Cash Balance pursuant
to Section 1.5(b)(2) or included in the definition of Excess Expenses as
defined in Section 10.1(d), Purchaser shall be entitled to seek
indemnification, by making a claim against the Escrow Fund pursuant to Article
11, with respect to the amount by which such fees and expenses exceed $2.5
million. The Deductible shall not apply to any such claim, and any such claim
shall not be taken into account in determining whether aggregate Losses exceed
the threshold of the Deductible or whether the Deductible has been satisfied
for purposes of calculating Purchaser's recovery from the Escrow Fund.
(b) If the Merger is not consummated under the circumstances described in
Section 9.3(a), Purchaser shall pay (1) all of its own expenses and costs and
(2) the reasonable expenses and costs of Ventures incidental to the preparation
of this Agreement, the performance and compliance with all agreements contained
in this Agreement and the consummation of the transactions contemplated hereby
including, without limitation, the reasonable fees and expenses of their
respective counsel and investment bankers, in an aggregate amount not to exceed
$200,000.
(c) If the Merger is not consummated under the circumstances described in
Section 9.3(b), Ventures shall pay (1) all of its own expenses and costs and
(2) the reasonable expenses and costs of Purchaser incidental to the
preparation of this Agreement, the performance and compliance with all
agreements contained in this Agreement and the consummation of the transactions
contemplated hereby including, without limitation, the reasonable fees and
expenses of their respective counsel and investment bankers, in an aggregate
amount not to exceed $200,000.
12.5 Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (a) by registered or
certified mail, return receipt requested, postage prepaid, or (b) via a
reputable nationwide overnight courier service, in each case to the address set
forth below. Any such notice, instruction or communication shall be deemed to
have been delivered three business days after it is sent prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
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If to Purchaser, Acquisition Sub or the Surviving Corporation to:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: General Counsel
Tel: (781) 370-2700
Fax: (781) 370-2600
with a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara
Tel: (617) 951-6663
Fax: (617) 951-1295
If to Ventures, to:
Wired Ventures, Inc.
660 Third Street, 4th Floor
San Francisco, CA 94107
Attention: President
Tel: (415) 276-8400
Fax: (415) 276-8699
with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
Tel: (415) 693-2000
Fax: (415) 951-3699
If to the Stockholder Representatives, to:
H. William Jesse, Jr.
222 Sutter Street, 8th Floor
San Francisco, CA 94108
Tel: (415) 274-4550
Fax: (415) 274-4567
and to:
Louis Rossetto
1678 Shattuck Avenue
Berkeley, CA 94709
Tel: (510) 841-4430
Fax: (510) 841-4431
and to:
Paul J. Salem
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Tel: (401) 751-6763
Fax: (401) 751-1790
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with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey
Tel: (415) 693-2000
Fax: (415) 951-3699
or, in each case, to such other address as may be specified in writing to the
other parties.
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery,
telecopy or ordinary mail), but no such notice, instruction or communication
shall be deemed to have been delivered unless and until it is actually received
by the party to whom it was sent. Any party may change the address to which
notices, instructions or communications are to be delivered by giving the other
parties to this Agreement notice thereof in the manner set forth in this
Section 12.5.
12.6 Assignment. No party may assign or otherwise transfer this Agreement or
any of his rights hereunder to any person or entity, without the prior written
consent of Purchaser, Ventures and the Stockholder Representatives, which
consent shall not be unreasonably withheld or delayed. Subject to the
foregoing, this Agreement shall inure to the benefit of and be binding upon the
parties hereto and their successors and assigns.
12.7 Entire Agreement; Amendment; Governing Law; Etc. This Agreement
(together with the Exhibits and Schedules hereto) and the Non-Disclosure
Agreement embody the entire agreement and understanding among the parties
hereto with respect to the subject matter hereof. This Agreement may be
amended, modified, waived, discharged or terminated only by (and any consent
hereunder shall be effective only if contained in) an instrument in writing
signed by the party against which enforcement of such amendment, modification,
waiver, discharge, termination or consent is sought. This Agreement shall be
construed in accordance with and governed by the laws of the State of Delaware
as it applies to contracts to be performed entirely within the State of
Delaware.
12.8 Counterparts. This Agreement may be executed in several counterparts,
each of which is an original, but all of which shall constitute one instrument.
12.9 Venue. If any legal proceeding or other action relating to this
Agreement or any of the other agreements being executed and delivered in
connection herewith, or any of the transactions contemplated hereby or thereby,
is brought or otherwise initiated, the venue therefor shall be in the city and
state in which the principal executive offices of the party who is not
initiating the legal proceeding, which shall be deemed to be a convenient
forum. Each of the parties hereto hereby expressly and irrevocably consents and
submits to the jurisdiction of the Federal and State courts sitting in such
city and state in connection with any such legal proceeding or other action.
12.10 Third-Party Rights. The stockholders of Ventures and holders of Options
and Warrants, acting solely through the Stockholder Representatives, are
intended third-party beneficiaries of the obligations of Purchaser and
Acquisition Sub set forth in Articles 1, 5, 6, 10, 11 and 12 of this Agreement.
Except as otherwise set forth herein, the parties do not intend to confer any
benefit hereunder on any person or entity other than the parties hereto and
their respective successors in interest. The Stockholder Representatives are
signatories to this Agreement solely for the purpose of establishing their
authority hereunder and identity and shall not have any liability hereunder or
be deemed "parties" hereto for any purpose. Any decision or act of a majority
of the Stockholder Representatives shall be deemed the decision or act of the
Stockholder Representatives, and the remaining Stockholder Representative(s)
shall have the authority to appoint a replacement for any Stockholder
Representative who ceases to serve as such.
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<PAGE>
12.11 Titles and Headings. Titles and headings of sections of this Agreement
and the "Table of Contents" and the "Table of Exhibits" included herewith are
for convenience of reference only and shall not affect the construction of any
provision of this Agreement.
12.12 Exhibits and Schedules. Each of the Exhibits and Schedules referred to
herein and attached hereto is an integral part of this Agreement and is
incorporated herein by this reference.
12.13 Pronouns. All pronouns and any variations thereof used in this
Agreement shall be deemed to refer to the masculine, feminine or neuter,
singular or plural, as appropriate.
12.14 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction, as to such jurisdiction, shall be
ineffective to the extent of such invalidity or unenforceability, without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
12.15 Time of Essence. Time is of the essence of this Agreement.
12.16 Interpretation. Each party acknowledges that such party, either
directly or through such party's representatives, has participated in the
drafting of this Agreement and any applicable rule of constructions that
ambiguities are to be resolved against the drafting party should not be applied
in connection with the construction or interpretation of this Agreement.
In Witness Whereof, the parties hereto have duly caused this Agreement to be
executed as of the date first above written.
Lycos, Inc.,
a Delaware corporation
By: _________________________________
Its: ________________________________
BF Acquisition Corp.,
a Delaware corporation
By: _________________________________
Its: ________________________________
Wired Ventures, Inc.,
a Delaware corporation
By: _________________________________
Its: ________________________________
Stockholder Representatives:
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<PAGE>
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of May , 1999, between the undersigned
holder (the "Holder") of shares of the common stock, $.001 par value per share
(the "Company Common Stock") of Wired Ventures, Inc., a Delaware corporation
(the "Company"), the Series A Preferred Stock, $.001 par value per share of the
Company (the "Company Series A Preferred Stock"), the Series B Preferred Stock,
$.001 par value per share of the Company (the "Company Series B Preferred
Stock") and/or the Series C Preferred Stock, $.001 par value per share of the
Company (the "Company Series C Preferred Stock" and together with the Company
Common Stock, Company Series A Preferred Stock and Company Series B Preferred
Stock, the "Ventures Capital Stock"), Raymond M. Mathieu and Robert Forlenza
(together, the "Attorneys-in-Fact") as proxies for certain holders of shares of
Ventures Capital Stock, Lycos, Inc., a Delaware corporation ("Parent"), and BF
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Merger Sub").
RECITALS
WHEREAS, the Company, Parent, Merger Sub, and the representatives of the
stockholders of the Company entered into an Agreement and Plan of Merger and
Reorganization dated October 5, 1998 and amended and restated on November 25,
1998 (the "Merger Agreement") pursuant to which Merger Sub would be merged with
and into the Company (the "Merger"), and each outstanding share of Ventures
Capital Stock would be converted into the right to receive shares of the common
stock, $0.01 par value, of Parent ("Parent Shares") as provided therein;
WHEREAS, in order to induce Parent to enter into the Merger Agreement, and at
the request of Parent, the Holder entered into a Voting Agreement dated as of
October 5, 1998 (the "Initial Voting Agreement");
WHEREAS, the Company, Parent, Merger Sub and the representatives of the
stockholders of the Company propose to amend and restate the Merger Agreement
(the "Amended Merger Agreement");
WHEREAS, on May 10, 1999 the Company and certain stockholders of the Company
entered into a Settlement Agreement (the "Settlement Agreement") pursuant to
which the Attorneys-in-Fact were granted certain proxies by such stockholders;
and
WHEREAS, in order to induce Parent and Merger Sub to enter into the Amended
Merger Agreement, and at the request of Parent and Merger Sub, (i) the Holder
has agreed to reaffirm all obligations under the Initial Voting Agreement and
to enter into this Agreement whereby the Holder amends and restates the Initial
Voting Agreement from and after such time as the Amended Merger Agreement is
executed by all parties thereto; and (ii) the Attorneys-in-Fact are entering
into this Agreement for the purpose of making certain agreements with Parent
and Merger Sub regarding the voting of certain shares of Ventures Capital Stock
and granting unto Merger Sub certain proxies.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Amended Merger Agreement.
2. Representations and Warranties of Holder. The Holder represents and
warrants to Parent and Merger Sub that, except as set forth in Section 8 below:
(a) Ownership of Securities. The Holder is the record and beneficial
owner of the number of shares of Ventures Capital Stock (together with any
shares of Ventures Capital Stock hereafter acquired
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<PAGE>
by the Holder, the "Subject Shares") and the number and kind of other
securities of the Company (together with the Subject Shares and any other
securities of the Company hereafter acquired by the Holder, the "Subject
Securities") set forth on the signature page to this Agreement. The Holder
has sole voting power and sole power to issue instructions with respect to
the voting of the Subject Securities, sole power of disposition, sole power
of exercise or conversion and the sole power to demand appraisal right, in
each case with respect to all of the Subject Securities.
(b) Power; Binding Agreement. The Holder has the legal capacity, power
and authority to enter into and perform all of the Holder's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Holder will not violate any other agreement to which such
Holder is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by the Holder and
constitutes a valid and binding agreement of such Holder, enforceable
against the Holder in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of
creditors' rights generally and by general principles of equity, regardless
of whether such enforceability is considered in a proceeding at law or in
equity. If the Holder is married and the Subject Securities constitute
community property, this Agreement has been duly authorized, executed and
delivered by, and constitutes a valid and binding agreement of, the
Holder's spouse, enforceable against such person in accordance with its
terms.
(c) No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary
for the execution of this Agreement by the Holder and the consummation by
the Holder of the transactions contemplated hereby and neither the
execution and delivery of this Agreement by the Holder nor the consummation
by the Holder of the transactions contemplated hereby nor compliance by the
Holder with any of the provisions hereof shall conflict with or result in
any breach of any applicable partnership or other organizational documents
applicable to the Holder, result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which the Holder is a party or by which the
Holder's properties or assets may be bound or violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Holder or any of the Holder's properties or assets.
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Holder, or by a nominee or custodian for
the benefit of the Holder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any
encumbrances arising hereunder and under applicable securities laws and
except as provided in the Stockholders' Agreement dated December 30, 1996,
as amended by Amendment No. 1 thereto dated March 23, 1998.
3. Holders Agreement to Vote Shares. Subject to Section 8 below, at every
meeting of the stockholders of the Company called with respect to any of the
following, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of the Company with respect to any of the
following, the Holder shall vote or cause to be voted all of the Subject
Securities that it beneficially owns on the record date of any such vote: (i)
in favor of the Merger, the adoption of the Amended Merger Agreement and the
approval of the terms thereof and (ii) against the following actions (other
than the Merger and the transactions contemplated by the Amended Merger
Agreement): (1) any merger, consolidation or other business combination
involving the Company or its subsidiaries; (2) a sale, lease or transfer of a
material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries that under applicable law requires the approval of the
Company's stockholders; (3) any change in a majority of the board of directors
of the Company; (4) any amendment to the Company's Certificate of Incorporation
other than a change necessary or desirable in connection with the Merger and
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<PAGE>
acceptable to Parent, or (5) any other action that under applicable law or
contract requires the approval of the Company's stockholders which is intended,
or could reasonably be expected, to impede, interfere with, delay, postpone, or
materially adversely affect the consummation of the Merger or the transactions
contemplated by the Amended Merger Agreement or this Agreement. The Holder will
retain at all times during the term hereof the right to vote the Holder's
Subject Securities, in Holder's sole discretion, on all matters other than
those in this Section 3 which are at any time or from time to time presented to
the Company's stockholders.
4. Attorneys-in-Fact Agreement to Vote Shares. At every meeting of the
stockholders of the Company called with respect to any of the following, and at
every adjournment thereof, and on every action or approval by written consent
of the stockholders of the Company with respect to any of the following, the
Attorneys-in-Fact shall vote or cause to be voted all of the Ventures Capital
Stock with respect to which they hold proxies granted by the Holder pursuant to
the Settlement Agreement: (i) to approve and adopt the Amended Merger Agreement
and all other matters expressly referred to in the Amended Merger Agreement,
(ii) against any Acquisition Proposal (as defined in the Amended Merger
Agreement) and (iii) against any amendment of the Charter or By-Laws of the
Company or other proposal or transaction (including any consent solicitation to
remove or elect any directors of the Company) involving the Company which
amendment or other proposal or transaction would be reasonably likely to
impede, frustrate prevent or nullify, or result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under or with respect to the Amended Merger Agreement.
5. HOLDER PROXY. SUBJECT TO SECTION 8 BELOW, THE HOLDER HEREBY GRANTS TO, AND
APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER
SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY
INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND
ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, THE HOLDER'S PROXY
AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY
WRITTEN CONSENT WITH RESPECT TO THE SUBJECT SECURITIES SOLELY WITH RESPECT TO
THE MATTERS IN CLAUSES (i) AND (ii) OF SECTION 3 HEREOF, AND SOLELY IN
ACCORDANCE WITH SECTION 3 HEREOF. THIS PROXY IS COUPLED WITH AN INTEREST AND
SHALL BE IRREVOCABLE, AND THE HOLDER WILL TAKE SUCH FURTHER ACTION OR EXECUTE
SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE INTENT OF THIS
PROXY AND, EXCEPT FOR IRREVOCABLE PROXIES GRANTED UNDER THE VOTING TRUST OR THE
SETTLEMENT AGREEMENT, THE HOLDER HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY
IT WITH RESPECT TO THE SUBJECT SECURITIES.
6. ATTORNEYS-IN-FACT PROXY. EACH OF THE ATTORNEYS-IN-FACT HEREBY GRANTS TO,
AND APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF
MERGER SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY
INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND
ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, SUCH ATTORNEY-IN-
FACT'S PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR
ACT BY WRITTEN CONSENT WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT
TO WHICH HE HAS BEEN GRANTED PROXIES SOLELY WITH RESPECT TO THE MATTERS IN
CLAUSES (i), (ii) AND (iii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 4 HEREOF.
THIS PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE FOR SO LONG AS
SUCH ATTORNEY-IN-FACT HAS THE RIGHT TO VOTE THE VENTURES CAPITAL STOCK PURSUANT
TO THE SETTLEMENT AGREEMENT, AND SUCH ATTORNEY-IN-FACT WILL TAKE SUCH FURTHER
ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE
INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY HIM
WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT TO WHICH HE HAS BEEN
GRANTED PROXIES.
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<PAGE>
7. Covenants of the Holder. The Holder hereby agrees and covenants that:
(a) No Solicitation. The Holder shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub and other than advising such person or entity of the
existence of this Agreement) with respect to the Company that constitutes
or could reasonably be expected to lead to an Acquisition Transaction. If
the Holder receives any such inquiry or proposal, then it shall promptly
inform Parent of the terms and conditions, if any, of such inquiry or
proposal and the identity of the person making it. The Holder will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing.
(b) Restriction on Transfer, Proxies and Noninterference. The Holder
shall not, directly or indirectly: (i) except pursuant to the terms of the
Amended Merger Agreement, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of the Holder's Subject Securities;
(ii) except as contemplated hereby, grant any proxies or powers of
attorney, deposit any Subject Shares into a voting trust or enter into a
voting agreement with respect to any Subject Shares; or (iii) take any
action that would make any representation or warranty contained herein
untrue or incorrect or have the effect of preventing or disabling the
Holder from performing its obligations under this Agreement.
8. Other Agreements. If the undersigned Holder is a party to the Wired
Ventures, Inc. Voting Trust (the "Voting Trust"), this Agreement and the
representations, warranties and agreements contained herein are given and made
subject to the Voting Trust and this Agreement is intended to assure to Parent
and Merger Sub the full benefit of agreements set forth herein to the extent
that such Voting Agreement entered into by Voting Trust is for any reason
ineffective. Furthermore, the parties hereto acknowledge that the undersigned
Holder has given certain proxies to the Attorneys-in-Fact under the Settlement
Agreement. This Agreement is intended to assure to Parent and Merger Sub the
full benefit of the agreements set forth herein to the extent that this
Agreement grants the Parent or Merger Sub any rights which exceed the authority
of the Attorneys-in-Fact.
9. Agreement as Stockholder. Parent and the Holder acknowledge and agree that
none of the provisions set forth herein shall be deemed to restrict or limit
any fiduciary duty that the Holder may have as a director or an officer of the
Company provided that no such duty shall excuse the Holder from its obligation
to vote the Subject Securities, to the extent that they may be so voted as
provided herein, and to otherwise comply with each of the terms and conditions
of the Agreement.
10. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Holder, the Attorneys-in-Fact, Parent the Merger Sub and their respective
successors and permitted assigns.
11. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
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If to the Holder, to the Holder at the address appearing on the signature
page beneath the Holder's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey, Esq.
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara, Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
12. Specific Performance. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
13. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
14. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 8 or by any other method permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
16. Effectiveness; Termination.
(a) Unless and until this Agreement is deemed effective pursuant to this
Section 16, the Initial Voting Agreement shall remain in full force and
effect in accordance with its terms. This Agreement shall become effective
simultaneously with the execution of the Amended Merger Agreement (the
"Voting Agreement Effective Time"). From and after the Voting Agreement
Effective Time, this Agreement shall supersede and replace the Initial
Voting Agreement in its entirety.
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(b) This Agreement shall terminate upon the earliest to occur of (i) the
consummation of the Merger, or (ii) the termination of the Amended Merger
Agreement pursuant to Section 9.1 thereof. The date and time at which this
Agreement is terminated in accordance with this Section 16 is referred to
herein as the "Termination Date." Upon any termination of this Agreement,
this Agreement shall thereupon become void and of no further force and
effect, and there shall be no liability in respect of this Agreement or of
any transactions contemplated hereby or by the Amended Merger Agreement on
the part of any party hereto or any of its directors, officers, partners,
stockholders, employees, agents, advisors, representatives or affiliates;
provided, however, that nothing herein shall relieve any party from any
liability for such party's willful breach of this Agreement; and provided
further that nothing herein shall limit, restrict, impair, amend or
otherwise modify the rights, remedies, obligations or liabilities of any
person under any contract or agreement, including, without limitation, the
Amended Merger Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
<TABLE>
<S> <C>
THE HOLDER
LYCOS, INC.
By: By:
------------------------------------- ----------------------------------
Name: Name:
Title:
Title:
THE ATTORNEYS-IN-FACT
BF ACQUISITION CORP.
- -------------------------------------
By:
----------------------------------
Raymond M. Mathieu Name:
- -------------------------------------
Name:
Robert Forlenza Title:
Shares of Common Stock:
Shares of Preferred Stock:
Warrants:
Stock Options:
</TABLE>
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<PAGE>
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of May , 1999 between the Wired Ventures,
Inc. Voting Trust (the "Trust"), Raymond M. Mathieu of Pawtucket, Rhode Island
as trustee of the Trust (in his capacity as such the "Trustee"), Lycos, Inc., a
Delaware corporation ("Parent") and BF Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub").
RECITALS
WHEREAS, Wired Ventures, Inc., a Delaware corporation (the "Company"),
Parent, Merger Sub, and the representatives of the stockholders of the Company
entered into an Agreement and Plan of Merger and Reorganization dated October
5, 1998 and amended and restated November 25, 1998 (the "Merger Agreement")
pursuant to which Merger Sub would be merged with and into the Company (the
"Merger"), and each outstanding share of (or warrants to purchase shares of)
the common stock, $.001 par value per share, the Series A Preferred Stock,
$.001 par value per share, the Series B Preferred Stock, $.001 par value per
share, and the Series C Preferred Stock, $.001 par value per share, of the
Company (the "Ventures Capital Stock") would be converted into the right to
receive shares of the common stock, $0.01 par value, of Parent ("Parent
Shares") as provided therein;
WHEREAS, in order to induce Parent and Merger Sub to enter into the Merger
Agreement, and at the request of Parent and Merger Sub, the Trust and the
Trustee entered into a Voting Agreement dated as of October 5, 1998 (the
"Initial Voting Agreement").
WHEREAS, the Company, Merger Sub and the representatives of the stockholders
of the Company propose to amend and restate the Merger Agreement (the "Amended
Merger Agreement"); and
WHEREAS, in order to induce Parent and Merger Sub to enter into the Amended
Merger Agreement, and at the request of Parent and Merger Sub, the Trustee has
agreed to reaffirm all obligations under the Initial Voting Agreement and to
enter into this Agreement whereby the Trustee amends and restates the Initial
Voting Agreement from and after such time as the Amended Merger Agreement is
executed by all parties thereto.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Amended Merger Agreement.
2. Representations and Warranties of Trustee. The Trustee represents and
warrants to Parent and Merger Sub as follows:
(a) Ownership of Securities. The Trustee is the record owner of the
number of shares of Ventures Capital Stock (together with any shares of
Ventures Capital Stock hereafter acquired by the Trustee, the "Subject
Shares") and the number and kind of other securities of the Company
(together with the Subject Shares and any other securities of the Company
hereafter acquired by the Trustee, the "Subject Securities") set forth on
the signature page to this Agreement. The Trustee has sole voting power and
sole power to issue instructions with respect to the voting of the Subject
Securities for or against the Merger.
(b) Power; Binding Agreement. The Trustee has the legal capacity, power
and authority to enter into and perform all of the Trustee's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Trustee will not violate any other agreement to which such
Trustee is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or
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voting trust. This Agreement has been duly and validly executed and
delivered by the Trustee and constitutes a valid and binding agreement of
such Trustee, enforceable against the Trustee in accordance with its terms,
except to the extent that enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other laws affecting
the enforcement of creditors' rights generally and by general principles of
equity, regardless of whether such enforceability is considered in a
proceeding at law or in equity.
(c) Trustee. The Trustee is the duly appointed trustee of the Trust
pursuant to that certain Wired Ventures, Inc. Voting Trust Agreement by and
among the Trustee, the Company and certain stockholders of the Company
dated March 23, 1998 (the "Voting Trust Agreement") and as such has the
exclusive right to vote all of the shares of Ventures Capital Stock listed
on the signature page to this Agreement for or against the Merger on behalf
of the persons on Schedule A attached hereto. The Merger constitutes a
Board Approved Sale of the Company (as defined in the Voting Trust
Agreement).
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Trustee, or by a nominee or custodian for
the benefit of the Trustee, free and clear of any liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances created or granted by Trustee,
except for the Voting Trust Agreement and except for any encumbrances
arising hereunder and under applicable securities laws.
3. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, the Trustee shall vote or
cause to be voted all of the Subject Securities that it owns of record on the
record date of any such vote: (i) in favor of the Merger, the adoption of the
Amended Merger Agreement and the approval of the terms thereof and (ii) against
the following actions (other than the Merger and the transactions contemplated
by the Amended Merger Agreement) to the extent the Trustee is entitled to vote
thereon under the Trust: (1) any merger, consolidation or other business
combination involving the Company or its subsidiaries; (2) a sale, lease or
transfer of a material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries that under applicable law requires the approval of the
Company's stockholders; (3) any change in a majority of the board of directors
of the Company; (4) any amendment to the Company's Certificate of Incorporation
other than a change necessary or desirable in connection with the Merger and
acceptable to Parent, or (5) any other action that under applicable law or
contract requires the approval of the Company's stockholders which is intended,
or could reasonably be expected, to impede, interfere with, delay, postpone, or
materially adversely affect the consummation of the Merger or the transactions
contemplated by the Amended Merger Agreement or this Agreement. The Trustee
will retain at all times during the term hereof the right to vote the Subject
Securities, in Trustee's sole discretion, on all matters provided for in the
Trust.
4. PROXY. THE TRUSTEE HEREBY GRANTS TO, AND APPOINTS MERGER SUB AND THE
PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER SUB, IN THEIR RESPECTIVE
CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY INDIVIDUAL WHO SHALL HEREAFTER
SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND ANY OTHER DESIGNEE OF MERGER SUB,
EACH OF THEM INDIVIDUALLY, THE TRUSTEE'S PROXY AND ATTORNEY-IN-FACT (WITH FULL
POWER OF SUBSTITUTION) TO VOTE OR ACT BY WRITTEN CONSENT WITH RESPECT TO THE
SUBJECT SECURITIES SOLELY WITH RESPECT TO THE MATTERS IN CLAUSE (i) AND, TO THE
EXTENT THE TRUSTEE IS ENTITLED TO VOTE THEREON UNDER THE TRUST, CLAUSE (ii) OF,
AND SOLELY IN ACCORDANCE WITH SECTION 3 HEREOF. THIS PROXY IS COUPLED WITH AN
INTEREST AND SHALL BE IRREVOCABLE, AND THE TRUSTEE WILL TAKE SUCH FURTHER
ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE
INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY HIM
WITH RESPECT TO THE SUBJECT SECURITIES.
B-8
<PAGE>
5. Covenants of the Trustee. The Trustee hereby agrees and covenants that:
(a) No Solicitation. The Trustee shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub) with respect to the Company that constitutes or could
reasonably be expected to lead to an Acquisition Transaction. If the
Trustee receives any such inquiry or proposal, then he shall promptly
inform Parent of the terms and conditions, if any, of such inquiry or
proposal and the identity of the person making it. The Trustee will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing.
(b) Restriction on Proxies and Noninterference. The Trustee shall not,
directly or indirectly: (i) except as contemplated hereby, grant any
proxies or powers of attorney, deposit any Subject Shares into a voting
trust or enter into a voting agreement with respect to any Subject Shares;
or (ii) take any action that would make any representation or warranty
contained herein untrue or incorrect or have the effect of preventing or
disabling the Trustee from performing its obligations under this Agreement.
(c) Release. The Trustee shall not, directly or indirectly release any of
the Stock (as defined in the Voting Trust Agreement) from the Trust until
the Termination Date (as defined herein).
(d) Termination. The Trustee shall not, directly or indirectly, terminate
the Trust prior to the Termination Date (as defined herein).
6. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Trustee, Parent, Merger Sub and their respective successors and permitted
assigns.
7. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
If to the Trustee, to the Trustee at the address appearing on the signature
page beneath the Trustee's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey, Esq.
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara, Esq.
B-9
<PAGE>
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
8. Specific Performance. The parties hereto agree that irreparable harm would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
9. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
10. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 7 or by any other method permitted by law.
11. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
12. Effectiveness; Termination.
(a) Unless and until this Agreement is deemed effective pursuant to this
Section 12, the Initial Voting Agreement shall remain in full force and effect
in accordance with its terms. This Agreement shall become effective
simultaneously with the execution of the Amended Merger Agreement (the "Voting
Agreement Effective Time"). From and after the Voting Agreement Effective Time,
this Agreement shall supersede and replace the Initial Voting Agreement in its
entirety.
(b) This Agreement shall be in full force and effect at the Voting Agreement
Effective Time and thereafter shall terminate upon the earliest to occur of (i)
the consummation of the Merger, or (ii) the termination of the Amended Merger
Agreement pursuant to Section 9.1 thereof. The date and time at which this
Agreement is terminated in accordance with this Section 12 is referred to
herein as the "Termination Date." Upon any termination of this Agreement, this
Agreement shall thereupon become void and of no further force and effect, and
there shall be no liability in respect of this Agreement or of any transactions
contemplated hereby or by the Amended Merger Agreement on the part of any party
hereto or any of its directors, officers, partners, stockholders, employees,
agents, advisors, representatives or affiliates; provided, however, that
nothing herein shall relieve any party from any liability for such party's
willful breach of this Agreement; and provided further that nothing herein
shall limit, restrict, impair, amend or otherwise modify the rights, remedies,
obligations or liabilities of any person under any contract or agreement,
including, without limitation, the Amended Merger Agreement.
B-10
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
LYCOS, INC.
By:__________________________________
Name: Edward M. Philip
Title: Chief Operating Officer
BF ACQUISITION CORP.
By:_____________________________
Name:
Title:
WIRED VENTURES, INC. VOTING TRUST:
By:__________________________________
Raymond M. Mathieu
Trustee
Shares of Common Stock:
-------------------
Shares of Series A Preferred Stock: 8,786,741
------------
Shares of Series B Preferred Stock: 350,000
------------
Shares of Series C Preferred Stock:
------------
B-11
<PAGE>
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of May , 1999, between the undersigned
holder (the "Holder") of shares of the common stock, $.001 par value (the
"Company Common Stock") of Wired Ventures, Inc., a Delaware corporation (the
"Company"), options to acquire shares of Company Common Stock (the "Stock
Options"), the Series A Preferred Stock, $.001 par value per share of the
Company (the "Company Series A Preferred Stock"), the Series B Preferred Stock,
$.001 par value of the Company (the "Company Series B Preferred Stock") and/or
the Series C Preferred Stock, $.001 par value of the Company (the "Company
Series C Preferred Stock" and together with the Company Common Stock, Company
Series A Preferred Stock and Company Series B Preferred Stock, the "Ventures
Capital Stock"), Raymond M. Mathieu and Robert Forlenza (together, the
"Attorneys-in-Fact") as proxies for certain holders of Ventures Capital Stock,
Lycos, Inc., a Delaware corporation ("Parent") and BF Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Parent (the "Merger
Sub").
RECITALS
WHEREAS, the Company, Parent, Merger Sub, and the representatives of the
stockholders of the Company entered into an Agreement and Plan of Merger and
Reorganization dated October 5, 1998 and amended and restated on November 25,
1998 (the "Merger Agreement") pursuant to which Merger Sub would be merged with
and into the Company (the "Merger"), and each outstanding share of Ventures
Capital Stock would be converted into the right to receive shares of the common
stock, $0.01 par value, of Parent ("Parent Shares") as provided therein;
WHEREAS, in order to induce Parent and Merger Sub to enter into the Merger
Agreement, and at the request of Parent and Merger Sub, the Holder entered into
a Voting Agreement dated October 5, 1998 (the "Initial Voting Agreement").
WHEREAS, the Company, Merger Sub and the representatives of the stockholders
of the Company propose to amend and restate the Merger Agreement (the "Amended
Merger Agreement");
WHEREAS, on May 10, 1999 the Company and certain stockholders of the Company
entered into a Settlement Agreement (the "Settlement Agreement") pursuant to
which the Attorneys-in-Fact were granted certain proxies by such stockholders;
and
WHEREAS, in order to induce Parent and Merger Sub to enter into the Amended
Merger Agreement, and at the request of Parent and Merger Sub, (i) the Holder
has agreed to reaffirm all obligations under the Initial Voting Agreement and
to enter into this Agreement whereby the Holder amends and restates the Initial
Voting Agreement from and after such time as the Amended Merger Agreement is
executed by all parties thereto; and (ii) the Attorneys-in-Fact are entering
into this Agreement for the purpose of making certain agreements with Parent
and Merger Sub regarding the voting of certain shares of Ventures Capital Stock
and granting unto Merger Sub certain proxies.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Amended Merger Agreement.
2. Representations and Warranties of Holder. The Holder represents and
warrants to Parent and Merger Sub that, except as set forth in Section 8 below:
(a) Ownership of Securities. The Holder is the record and beneficial
owner of the number of shares of Ventures Capital Stock (together with any
shares of Ventures Capital Stock hereafter acquired by the
B-12
<PAGE>
Holder, the "Subject Shares") and the number and kind of other securities
of the Company (together with the Subject Shares and any other securities
of the Company hereafter acquired by the Holder, the "Subject Securities")
set forth on the signature page to this Agreement. The Holder has sole
voting power and sole power to issue instructions with respect to the
voting of the Subject Securities, sole power of disposition, sole power of
exercise or conversion and the sole power to demand appraisal right, in
each case with respect to all of the Subject Securities.
(b) Power; Binding Agreement. The Holder has the legal capacity, power
and authority to enter into and perform all of the Holder's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Holder will not violate any other agreement to which such
Holder is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by the Holder and
constitutes a valid and binding agreement of such Holder, enforceable
against the Holder in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of
creditors' rights generally and by general principles of equity, regardless
of whether such enforceability is considered in a proceeding at law or in
equity. If the Holder is married and the Subject Securities constitute
community property, this Agreement has been duly authorized, executed and
delivered by, and constitutes a valid and binding agreement of, the
Holder's spouse, enforceable against such person in accordance with its
terms.
(c) No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary
for the execution of this Agreement by the Holder and the consummation by
the Holder of the transactions contemplated hereby and neither the
execution and delivery of this Agreement by the Holder nor the consummation
by the Holder of the transactions contemplated hereby nor compliance by the
Holder with any of the provisions hereof shall conflict with or result in
any breach of any applicable partnership or other organizational documents
applicable to the Holder, result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any third-party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which the Holder is a party or by which the
Holder's properties or assets may be bound or violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Holder or any of the Holder's properties or assets.
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Holder, or by a nominee or custodian for
the benefit of the Holder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any
encumbrances arising hereunder and under applicable securities laws.
3. Holder Agreement to Vote Shares. Subject to Section 8 below, at every
meeting of the stockholders of the Company called with respect to any of the
following, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of the Company with respect to any of the
following, the Holder shall vote or cause to be voted all of the Subject
Securities that he or she beneficially owns on the record date of any such
vote: (i) in favor of the Merger, the adoption of the Amended Merger Agreement
and the approval of the terms thereof and (ii) against the following actions
(other than the Merger and the transactions contemplated by the Amended Merger
Agreement): (1) any merger, consolidation or other business combination
involving the Company or its subsidiaries; (2) a sale, lease or transfer of a
material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries that under applicable law requires the approval of the
Company's stockholders; (3) any change in a majority of the board of directors
of the Company; (4) any amendment to the Company's Certificate of Incorporation
other than a change necessary or desirable in connection with the Merger and
acceptable to Parent, or (5) any other action that under applicable law or
contract requires the approval of the Company's stockholders which is intended,
or could reasonably be expected, to impede, interfere with, delay,
B-13
<PAGE>
postpone, or materially adversely affect the consummation of the Merger or the
transactions contemplated by the Amended Merger Agreement or this Agreement.
The Holder will retain at all times during the term hereof the right to vote
the Holder's Subject Securities, in Holder's sole discretion, on all matters
other than those in this Section 3 which are at any time or from time to time
presented to the Company's stockholders.
4. Attorneys-in-Fact Agreement to Vote Shares. At every meeting of the
stockholders of the Company called with respect to any of the following, and at
every adjournment thereof, and on every action or approval by written consent
of the stockholders of the Company with respect to any of the following, the
Attorneys-in-Fact shall vote or cause to be voted all of the Ventures Capital
Stock with respect to which they then hold proxies granted by the Holder
pursuant to the Settlement Agreement: (i) to approve and adopt the Amended
Merger Agreement and all other matters expressly referred to in the Amended
Merger Agreement, (ii) against any Acquisition Proposal (as defined in the
Amended Merger Agreement) and (iii) against any amendment of the Charter or By-
Laws of the Company or other proposal or transaction (including any consent
solicitation to remove or elect any directors of the Company) involving the
Company which amendment or other proposal or transaction would be reasonably
likely to impede, frustrate, prevent or nullify, or result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
the Company under or with respect to the Amended Merger Agreement.
5. HOLDER PROXY. SUBJECT TO SECTION 8 BELOW THE HOLDER HEREBY GRANTS TO, AND
APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER
SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY
INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND
ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, THE HOLDER'S PROXY
AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY
WRITTEN CONSENT WITH RESPECT TO THE SUBJECT SECURITIES SOLELY WITH RESPECT TO
THE MATTERS IN CLAUSES (i) AND (ii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 3
HEREOF. THIS PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE, AND
THE HOLDER WILL TAKE SUCH FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS
MAY BE NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY AND, EXCEPT FOR
IRREVOCABLE PROXIES GRANTED UNDER THE SETTLEMENT AGREEMENT, THE HOLDER HEREBY
REVOKES ANY PROXY PREVIOUSLY GRANTED BY HIM OR HER WITH RESPECT TO THE SUBJECT
SECURITIES.
6. ATTORNEYS-IN-FACT PROXY. EACH OF THE ATTORNEYS-IN-FACT HEREBY GRANTS TO,
AND APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF
MERGER SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY
INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND
ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, SUCH ATTORNEY-IN-
FACT'S PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR
ACT BY WRITTEN CONSENT WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT
TO WHICH HE HAS BEEN GRANTED PROXIES SOLELY WITH RESPECT TO THE MATTERS IN
CLAUSES (i), (ii) AND (iii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 4 HEREOF.
THIS PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE FOR SO LONG AS
SUCH ATTORNEY-IN-FACT HAS THE RIGHT TO VOTE THE VENTURES CAPITAL STOCK PURSUANT
TO THE SETTLEMENT AGREEMENT, AND SUCH ATTORNEY-IN-FACT WILL TAKE SUCH FURTHER
ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE
INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY HIM
WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT TO WHICH HE HAS BEEN
GRANTED PROXIES.
B-14
<PAGE>
7. Covenants of the Holder. The Holder hereby agrees and covenants that:
(a) No Solicitation. The Holder shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub) with respect to the Company that constitutes or could
reasonably be expected to lead to an Acquisition Transaction. If the Holder
receives any such inquiry or proposal, then he or she shall promptly inform
Parent of the terms and conditions, if any, of such inquiry or proposal and
the identity of the person making it. The Holder will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing.
(b) Restriction on Transfer, Proxies and Noninterference. The Holder
shall not, directly or indirectly: (i) except pursuant to the terms of the
Amended Merger Agreement, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of the Holder's Subject Securities;
(ii) except as contemplated hereby, grant any proxies or powers of
attorney, deposit any Subject Shares into a voting trust or enter into a
voting agreement with respect to any Subject Shares; or (iii) take any
action that would make any representation or warranty contained herein
untrue or incorrect or have the effect of preventing or disabling the
Holder from performing its obligations under this Agreement.
(c) Option Exercise. If requested by Parent at any time prior to the
earlier of the record date for the meeting of the stockholders of the
Company called for the purpose of approving the Merger or the date on which
written consents to approve the Merger are first solicited by the Company
(the earlier of such dates being referred to as the "Record Date"), the
Holder will exercise Stock Options to purchase the number of shares of
Ventures Common Stock (the "Option Shares") which will, after giving effect
to the exercise of such Stock Options, represent a majority of the shares
of Company Common Stock outstanding on the Record Date. The Option Shares
shall be Subject Shares for purposes of this Agreement. In the event that
Parent requests that the Holder exercise the Stock Options, Parent will
make an interest free loan to the Holder in the amount of the aggregate
exercise price necessary to purchase the Option Shares which shall be
secured by a security interest in the Option Shares and which shall be
repaid upon the sale of the Option Shares, or any securities issued in
exchange for the Option Shares, from the proceeds of such sale.
8. Other Agreements. The parties hereto acknowledge that the undersigned
Holder has given certain proxies to the Attorneys-in-Fact under the Settlement
Agreement. This Agreement is intended to assure to Parent and Merger Sub the
full benefit of the agreements set forth herein to the extent that this
Agreement grants the Parent or Merger Sub any rights which exceed the authority
of the Attorneys-in-Fact.
9. Agreement as Stockholder. Parent and the Holder acknowledge and agree that
none of the provisions set forth herein shall be deemed to restrict or limit
any fiduciary duty that the Holder may have as a director or an officer of the
Company provided that no such duty shall excuse the Holder from its obligation
to vote the Subject Securities, to the extent that they may be so voted as
provided herein, and to otherwise comply with each of the terms and conditions
of the Agreement.
10. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Holder the Attorneys-in-Fact, Parent, Merger Sub and their respective
successors and permitted assigns.
B-15
<PAGE>
11. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
If to the Holder, to the Holder at the address appearing on the signature
page beneath the Holder's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey, Esq.
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara, Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
12. Specific Performance. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
13. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
14. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 8 or by any other method permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
B-16
<PAGE>
16. Effectiveness; Termination.
(a) Unless and until this Agreement is deemed effective pursuant to this
Section 16, the Initial Voting Agreement shall remain in full force and
effect in accordance with its terms. This Agreement shall become effective
simultaneously with the execution of the Amended Merger Agreement (the
"Voting Agreement Effective Time"). From and after the Voting Agreement
Effective Time, this Agreement shall supersede and replace the Initial
Voting Agreement in its entirety.
(b) This Agreement shall be in full force and effect at the Voting
Agreement Effective Time and thereafter shall terminate upon the earliest
to occur of (i) the consummation of the Merger, or (ii) the termination of
the Amended Merger Agreement pursuant to Section 9.1 thereof. The date and
time at which this Agreement is terminated in accordance with this Section
16 is referred to herein as the "Termination Date." Upon any termination of
this Agreement, this Agreement shall thereupon become void and of no
further force and effect, and there shall be no liability in respect of
this Agreement or of any transactions contemplated hereby or by the Amended
Merger Agreement on the part of any party hereto or any of its directors,
officers, partners, stockholders, employees, agents, advisors,
representatives or affiliates; provided, however, that nothing herein shall
relieve any party from any liability for such party's willful breach of
this Agreement; and provided further that nothing herein shall limit,
restrict, impair, amend or otherwise modify the rights, remedies,
obligations or liabilities of any person under any contract or agreement,
including, without limitation, the Amended Merger Agreement.
B-17
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
LYCOS, INC.
THE ATTORNEYS-IN-FACT By:__________________________________
- --------------------------------- Name: Edward M. Philip
Title: Chief Operating Officer
Raymond M. Mathieu
BF ACQUISITION CORP.
- ---------------------------------
Robert Forlenza
By:_____________________________
Name:
Title:
THE HOLDER:
By:__________________________________
Name:
Title:
Shares of Common Stock: _____________
Shares of Preferred Stock: __________
Warrants: ___________________________
Stock Options: ______________________
B-18
<PAGE>
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of May , 1999, between the undersigned
holder (the "Holder") of shares of the common stock, $.001 par value per share
(the "Company Common Stock") of Wired Ventures, Inc., a Delaware corporation
(the "Company"), the Series A Preferred Stock, $.001 par value per share of the
Company (the "Company Series A Preferred Stock"), the Series B Preferred Stock,
$.001 par value per share of the Company (the "Company Series B Preferred
Stock") and/or the Series C Preferred Stock, $.001 par value per share of the
Company (the "Company Series C Preferred Stock" and together with the Company
Common Stock, Company Series A Preferred Stock and Company Series B Preferred
Stock, the "Ventures Capital Stock"), Raymond M. Mathieu and Robert Forlenza
(together, the "Attorneys-in-Fact") as proxies for certain holders of shares of
Ventures Capital Stock, Lycos, Inc., a Delaware corporation ("Parent"), and BF
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Merger Sub").
RECITALS
WHEREAS, the Company, Parent, Merger Sub, and the representatives of the
stockholders of the Company entered into an Agreement and Plan of Merger and
Reorganization dated October 5, 1998 and amended and restated on November 25,
1998 (the "Merger Agreement") pursuant to which Merger Sub would be merged with
and into the Company (the "Merger"), and each outstanding share of Ventures
Capital Stock would be converted into the right to receive shares of the common
stock, $0.01 par value, of Parent ("Parent Shares") as provided therein;
WHEREAS, the Company, Parent, Merger Sub and the representatives of the
stockholders of the Company propose to amend and restate the Merger Agreement
(the "Amended Merger Agreement");
WHEREAS, on May 10, 1999 the Company and certain stockholders of the Company
entered into a Settlement Agreement (the "Settlement Agreement") pursuant to
which the Attorneys-in-Fact were granted certain proxies by such stockholders;
and
WHEREAS, in order to induce Parent and Merger Sub to enter into the Amended
Merger Agreement, and at the request of Parent and Merger Sub, (i) the Holder
has agreed to enter into this Agreement; and (ii) the Attorneys-in-Fact are
entering into this Agreement for the purpose of making certain agreements with
Parent and Merger Sub regarding the voting of certain shares of Ventures
Capital Stock and granting unto Parent and Merger Sub certain proxies.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Amended Merger Agreement.
2. Representations and Warranties of Holder. The Holder represents and
warrants to Parent and Merger Sub that, except as set forth in Section 8 below:
(a) Ownership of Securities. The Holder is the record and beneficial
owner of the number of shares of Ventures Capital Stock (together with any
shares of Ventures Capital Stock hereafter acquired by the Holder, the
"Subject Shares") and the number and kind of other securities of the
Company (together with the Subject Shares and any other securities of the
Company hereafter acquired by the Holder, the "Subject Securities") set
forth on the signature page to this Agreement. The Holder has sole voting
power and sole power to issue instructions with respect to the voting of
the Subject Securities, sole
B-19
<PAGE>
power of disposition, sole power of exercise or conversion and the sole
power to demand appraisal right, in each case with respect to all of the
Subject Securities.
(b) Power; Binding Agreement. The Holder has the legal capacity, power
and authority to enter into and perform all of the Holder's obligations
under this Agreement. The execution, delivery and performance of this
Agreement by the Holder will not violate any other agreement to which such
Holder is a party including, without limitation, any trust agreement,
voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by the Holder and
constitutes a valid and binding agreement of such Holder, enforceable
against the Holder in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of
creditors' rights generally and by general principles of equity, regardless
of whether such enforceability is considered in a proceeding at law or in
equity. If the Holder is married and the Subject Securities constitute
community property, this Agreement has been duly authorized, executed and
delivered by, and constitutes a valid and binding agreement of, the
Holder's spouse, enforceable against such person in accordance with its
terms.
(c) No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any state or federal public body or authority is necessary
for the execution of this Agreement by the Holder and the consummation by
the Holder of the transactions contemplated hereby and neither the
execution and delivery of this Agreement by the Holder nor the consummation
by the Holder of the transactions contemplated hereby nor compliance by the
Holder with any of the provisions hereof shall conflict with or result in
any breach of any applicable partnership or other organizational documents
applicable to the Holder, result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default (or give rise
to any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract,
commitment, arrangement, understanding, agreement or other instrument or
obligation of any kind to which the Holder is a party or by which the
Holder's properties or assets may be bound or violate any order, writ,
injunction, decree, judgment, order, statute, rule or regulation applicable
to the Holder or any of the Holder's properties or assets.
(d) No Liens. The Subject Securities are now and at all times during the
term hereof will be held by the Holder, or by a nominee or custodian for
the benefit of the Holder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any
encumbrances arising hereunder and under applicable securities laws and
except as provided in the Stockholders' Agreement dated December 30, 1996,
as amended by Amendment No. 1 thereto dated March 23, 1998.
3. Holder Agreement to Vote Shares. Subject to Section 8 below, at every
meeting of the stockholders of the Company called with respect to any of the
following, and at every adjournment thereof, and on every action or approval by
written consent of the stockholders of the Company with respect to any of the
following, the Holder shall vote or cause to be voted all of the Subject
Securities that it beneficially owns on the record date of any such vote: (i)
in favor of the Merger, the adoption of the Amended Merger Agreement and the
approval of the terms thereof and (ii) against the following actions (other
than the Merger and the transactions contemplated by the Amended Merger
Agreement): (1) any merger, consolidation or other business combination
involving the Company or its subsidiaries; (2) a sale, lease or transfer of a
material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its subsidiaries that under applicable law requires the approval of the
Company's stockholders; (3) any change in a majority of the board of directors
of the Company; (4) any amendment to the Company's Certificate of Incorporation
other than a change necessary or desirable in connection with the Merger and
acceptable to Parent, or (5) any other action that under applicable law or
contract requires the approval of the Company's stockholders which is intended,
or could reasonably be expected, to impede, interfere with, delay, postpone, or
materially adversely affect the consummation of the Merger or the transactions
contemplated by the Amended Merger Agreement or this Agreement. The Holder will
retain at all times during the term hereof
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<PAGE>
the right to vote the Holder's Subject Securities, in Holder's sole discretion,
on all matters other than those in this Section 3 which are at any time or from
time to time presented to the Company's stockholders.
4. Attorneys-in-Fact Agreement to Vote Shares. At every meeting of the
stockholders of the Company called with respect to any of the following, and at
every adjournment thereof, and on every action or approval by written consent
of the stockholders of the Company with respect to any of the following, the
Attorneys-in-Fact shall vote or cause to be voted all of the Ventures Capital
Stock with respect to which they then hold proxies granted by the Holder
pursuant to the Settlement Agreement: (i) to approve and adopt the Amended
Merger Agreement and all other matters expressly referred to in the Amended
Merger Agreement, (ii) against any Acquisition Proposal (as defined in the
Amended Merger Agreement) and (iii) against any amendment of the Charter or By-
Laws of the Company or other proposal or transaction (including any consent
solicitation to remove or elect any directors of the Company) involving the
Company which amendment or other proposal or transaction would be reasonably
likely to impede, frustrate prevent or nullify, or result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
the Company under or with respect to the Amended Merger Agreement.
5. HOLDER PROXY. SUBJECT TO SECTION 8 BELOW, THE HOLDER HEREBY GRANTS TO, AND
APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER
SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY
INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND
ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, THE HOLDER'S PROXY
AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY
WRITTEN CONSENT WITH RESPECT TO THE SUBJECT SECURITIES SOLELY WITH RESPECT TO
THE MATTERS IN CLAUSES (i) AND (ii) OF SECTION 3 HEREOF, AND SOLELY IN
ACCORDANCE WITH SECTION 3 HEREOF. THIS PROXY IS COUPLED WITH AN INTEREST AND
SHALL BE IRREVOCABLE, AND THE HOLDER WILL TAKE SUCH FURTHER ACTION OR EXECUTE
SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE INTENT OF THIS
PROXY AND, EXCEPT FOR IRREVOCABLE PROXIES GRANTED UNDER THE SETTLEMENT
AGREEMENT, THE HOLDER HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY IT WITH
RESPECT TO THE SUBJECT SECURITIES.
6. ATTORNEYS-IN-FACT PROXY. EACH OF THE ATTORNEYS-IN-FACT HEREBY GRANTS TO,
AND APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF
MERGER SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY
INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND
ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, SUCH ATTORNEY-IN-
FACT'S PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR
ACT BY WRITTEN CONSENT WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT
TO WHICH HE HAS BEEN GRANTED PROXIES SOLELY WITH RESPECT TO THE MATTERS IN
CLAUSES (i), (ii) AND (iii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 4 HEREOF.
THIS PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE FOR SO LONG AS
SUCH ATTORNEY-IN-FACT HAS THE RIGHT TO VOTE THE VENTURES CAPITAL STOCK PURSUANT
TO THE SETTLEMENT AGREEMENT, AND SUCH ATTORNEY-IN-FACT WILL TAKE SUCH FURTHER
ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO EFFECTUATE THE
INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY HIM
WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT TO WHICH HE HAS BEEN
GRANTED PROXIES.
7. Covenants of the Holder. The Holder hereby agrees and covenants that:
(a) No Solicitation. The Holder shall not, directly or indirectly,
solicit (including by way of furnishing information) or respond to any
inquiries or the making of any proposal by any person or entity (other than
Parent or Merger Sub and other than advising such person or entity of the
existence of this
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<PAGE>
Agreement) with respect to the Company that constitutes or could reasonably
be expected to lead to an Acquisition Transaction. If the Holder receives
any such inquiry or proposal, then it shall promptly inform Parent of the
terms and conditions, if any, of such inquiry or proposal and the identity
of the person making it. The Holder will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing.
(b) Restriction on Transfer, Proxies and Noninterference. The Holder
shall not, directly or indirectly: (i) except pursuant to the terms of the
Amended Merger Agreement, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to or consent to
the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment
or other disposition of, any or all of the Holder's Subject Securities;
(ii) except as contemplated hereby, grant any proxies or powers of
attorney, deposit any Subject Shares into a voting trust or enter into a
voting agreement with respect to any Subject Shares; or (iii) take any
action that would make any representation or warranty contained herein
untrue or incorrect or have the effect of preventing or disabling the
Holder from performing its obligations under this Agreement.
8. Other Agreements. The parties hereto acknowledge that the undersigned
Holder has given certain proxies to the Attorneys-in-Fact under the Settlement
Agreement. This Agreement is intended to assure to Parent and Merger Sub the
full benefit of the agreements set forth herein to the extent that this
Agreement grants the Parent and Merger Sub any rights which exceed the
authority of the Attorneys-in-Fact.
9. Agreement as Stockholder. Parent and the Holder acknowledge and agree that
none of the provisions set forth herein shall be deemed to restrict or limit
any fiduciary duty that the Holder may have as a director or an officer of the
Company provided that no such duty shall excuse the Holder from its obligation
to vote the Subject Securities, to the extent that they may be so voted as
provided herein, and to otherwise comply with each of the terms and conditions
of the Agreement.
10. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Holder, the Attorneys-in-Fact, Parent, Merger Sub and their respective
successors and permitted assigns.
11. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
If to the Holder, to the Holder at the address appearing on the signature
page beneath the Holder's name, with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey, Esq.
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
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<PAGE>
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara, Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
12. Specific Performance. The parties hereto agree that irreparable harm
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
13. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
14. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 8 or by any other method permitted by law.
15. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
16. Termination. This Agreement shall terminate upon the earliest to occur of
(i) the consummation of the Merger, or (ii) the termination of the Amended
Merger Agreement pursuant to Section 9.1 thereof. The date and time at which
this Agreement is terminated in accordance with this Section 16 is referred to
herein as the "Termination Date." Upon any termination of this Agreement, this
Agreement shall thereupon become void and of no further force and effect, and
there shall be no liability in respect of this Agreement or of any transactions
contemplated hereby or by the Amended Merger Agreement on the part of any party
hereto or any of its directors, officers, partners, stockholders, employees,
agents, advisors, representatives or affiliates; provided, however, that
nothing herein shall relieve any party from any liability for such party's
willful breach of this Agreement; and provided further that nothing herein
shall limit, restrict, impair, amend or otherwise modify the rights, remedies,
obligations or liabilities of any person under any contract or agreement,
including, without limitation, the Amended Merger Agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
THE HOLDER LYCOS, INC.
By: By:
------------------------------------- ----------------------------------
Name: Name:
Title: Title:
THE ATTORNEYS-IN-FACT BF ACQUISITION CORP.
By:
- ------------------------------------- ----------------------------------
Raymond M. Mathieu Name:
Title:
- -------------------------------------
Robert Forlenza
Shares of Common Stock:
Shares of Preferred Stock:
Warrants:
Stock Options:
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<PAGE>
VOTING AGREEMENT
This VOTING AGREEMENT, dated as of May , 1999, between Robert M. Mathieu
and Robert Forlenza (together, the "Attorneys-In-Fact") as proxies for certain
holders of shares of capital stock (the "Ventures Capital Stock") of Wired
Ventures, Inc., a Delaware corporation (the "Company"), Lycos, Inc., a Delaware
corporation ("Parent") and BF Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub").
RECITALS
WHEREAS, the Company, Parent, Merger Sub, and the representatives of the
stockholders of the Company entered into an Agreement and Plan of Merger and
Reorganization dated October 5, 1998 and amended and restated on November 25,
1998 (the "Merger Agreement") pursuant to which Merger Sub would be merged with
and into the Company (the "Merger"), and each outstanding share of Ventures
Capital Stock would be converted into the right to receive shares of the common
stock, $0.01 par value, of Parent ("Parent Shares") as provided therein;
WHEREAS, the Company, Parent, Merger Sub and the representatives of the
stockholders of the Company propose to amend and restate the Merger Agreement
(the "Amended Merger Agreement");
WHEREAS, on May 10, 1999 the Company and certain stockholders of the Company
entered into a Settlement Agreement (the "Settlement Agreement") pursuant to
which the Attorneys-in-Fact were granted certain proxies by such stockholders;
and
WHEREAS, in order to induce Parent to enter into the Amended Merger
Agreement, and at the request of Parent and Merger Sub, the Attorneys-In-Fact
are entering into this agreement for the purpose of making certain agreements
with Parent and Merger Sub regarding the voting of certain shares of Ventures
Capital Stock and granting unto Merger Sub certain proxies.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall be as
defined in the Amended Merger Agreement.
2. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the stockholders
of the Company with respect to any of the following, the Attorneys-in-Fact
shall vote or cause to be voted all of the Ventures Capital Stock with respect
to which they have been granted proxies: (i) to approve and adopt the Amended
Merger Agreement and all other matters expressly referred to in the Amended
Merger Agreement, (ii) against any Acquisition Proposal (as defined in the
Amended Merger Agreement) and (iii) against any amendment of the Charter or By-
Laws of the Company or other proposal or transaction (including any consent
solicitation to remove or elect any directors of the Company) involving the
Company which amendment or other proposal or transaction would be reasonably
likely to impede, frustrate prevent or nullify, or result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
the Company under or with respect to the Amended Merger Agreement.
3. PROXY. EACH OF THE ATTORNEYS-IN-FACT HEREBY GRANTS TO, AND APPOINTS MERGER
SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER SUB, IN THEIR
RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY INDIVIDUAL WHO SHALL
HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND ANY OTHER DESIGNEE OF
MERGER SUB, EACH OF THEM INDIVIDUALLY, SUCH ATTORNEY-IN-FACT'S
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<PAGE>
PROXY AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY
WRITTEN CONSENT WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH RESPECT TO
WHICH HE HAS BEEN GRANTED PROXIES SOLELY WITH RESPECT TO THE MATTERS IN CLAUSES
(i), (ii) AND (iii) OF, AND SOLELY IN ACCORDANCE WITH SECTION 2 HEREOF. THIS
PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE, AND SUCH ATTORNEY-
IN-FACT WILL TAKE SUCH FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS AS MAY
BE NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY
PROXY PREVIOUSLY GRANTED BY HIM WITH RESPECT TO THE VENTURES CAPITAL STOCK WITH
RESPECT TO WHICH HE HAS BEEN GRANTED PROXIES.
4. Assignment; Benefits. The rights (but not the obligations) of Parent
hereunder may be assigned, in whole or in part, to Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent, to the extent and for so
long as it remains a direct or indirect wholly owned subsidiary of Parent.
Other than as permitted in the preceding sentence, this Agreement may not be
assigned by any party hereto without the prior written consent of the other
party.
This Agreement shall be binding upon, and shall inure to the benefit of, the
Attorneys-in-Fact, Parent, Merger Sub and their respective successors and
permitted assigns.
5. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
if and when delivered personally or by overnight courier or sent by electronic
transmission, with confirmation received, to the telecopy numbers specified
below:
If to the Attorneys-In-Fact, to the Attorneys-In-Fact in care of:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey, Esq.
If to Parent or Merger Sub:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: Chief Financial Officer
With a copy to:
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara, Esq.
or to such other address or telecopy number as any party may have furnished to
the other parties in writing in accordance herewith.
6. Specific Performance. The parties hereto agree that irreparable harm would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
7. Amendment. This Agreement may not be amended or modified, except by an
instrument in writing signed by or on behalf of each of the parties hereto.
This Agreement may not be waived by either party hereto, except by an
instrument in writing signed by or on behalf of the party granting such waiver.
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<PAGE>
8. Governing Law: Consent to Jurisdiction. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware. Each
party hereto hereby irrevocably submits to the jurisdiction of any
Massachusetts State or Federal court sitting in the City of Boston in any
action or proceeding arising out of or related to this Agreement, and hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such State or Federal court. Each party hereto
hereby irrevocably consents to the service of process, which may be served in
any such action or proceeding by certified mail, return receipt requested, by
delivering a copy of such process to such party at its address specified in
Section 5 or by any other method permitted by law.
9. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
10. Effectiveness; Termination. This Agreement shall terminate upon the
earliest to occur of (i) the consummation of the Merger, or (ii) the
termination of the Amended Merger Agreement pursuant to Section 9.1 thereof.
The date and time at which this Agreement is terminated in accordance with this
Section 10 is referred to herein as the "Termination Date." Upon any
termination of this Agreement, this Agreement shall thereupon become void and
of no further force and effect, and there shall be no liability in respect of
this Agreement or of any transactions contemplated hereby or by the Amended
Merger Agreement on the part of any party hereto or any of its directors,
officers, partners, stockholders, employees, agents, advisors, representatives
or affiliates; provided, however, that nothing herein shall relieve any party
from any liability for such party's willful breach of this Agreement; and
provided further that nothing herein shall limit, restrict, impair, amend or
otherwise modify the rights, remedies, obligations or liabilities of any person
under any contract or agreement, including, without limitation, the Amended
Merger Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each
of the parties hereto, all as of the date first above written.
THE ATTORNEYS-IN-FACT LYCOS, INC.
By:
- ------------------------------------- ----------------------------------
Raymond M. Mathieu Name:
Title:
- ------------------------------------- BF ACQUISITION CORP.
Robert Forlenza
By:
Shares of Common Stock: ----------------------------------
Name:
Shares of Preferred Stock: Title:
Warrants:
Stock Options:
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<PAGE>
Annex C
ESCROW AGREEMENT
This Agreement is made as of by and among Lycos, Inc., a Delaware
corporation (the "Parent"), State Street Bank and Trust Company, as escrow
agent (the "Escrow Agent"), and H. William Jesse, Jr., Louis Rossetto and Paul
J. Salem, as representatives of the holders of shares of Ventures Capital Stock
and options and warrants to purchase Ventures Capital Stock at the Effective
Time (except such holders as shall have properly exercised their appraisal or
dissenters' rights under applicable law) (the "Holders"). Capitalized terms
used in this Agreement that are not otherwise defined herein shall be defined
as set forth in the Agreement and Plan of Merger and Reorganization, amended
and restated as of November 25, 1998 and on May , 1999 (the "Merger
Agreement") among Wired Ventures, Inc., a Delaware corporation (the "Company"),
the Parent, and BF Acquisition Corp., a Delaware corporation (the "Subsidiary")
a copy of which is attached hereto as Exhibit A.
WITNESSETH:
Whereas, the Company, the Parent and the Subsidiary have entered into the
Merger Agreement, pursuant to which the Subsidiary is being merged with and
into the Company; and
Whereas, the Merger Agreement provides that, at the Effective Time, share
certificates representing an aggregate of shares of Common Stock of Parent,
$.01 par value per share ("Parent Common Stock"), and documents evidencing
options and warrants to purchase an aggregate of shares of Parent Common
Stock (together with any additional such shares held by the Escrow Agent
hereunder, the "Escrow Shares" or the "Escrow Fund"), shall be deposited in
escrow, to be held and disposed of by the Escrow Agent as provided herein; and
Whereas, pursuant to the Merger Agreement, each of the Holders has appointed
H. William Jesse, Jr., Louis Rossetto and Paul J. Salem (or such individuals as
may succeed them pursuant to the provisions of Section 1.1 hereof) as such
Holder's agents and attorneys-in-fact (such individuals or such other
individuals as may succeed them being hereinafter referred to as the
"Representatives") to act with full authority for such Holder and on such
Holder's behalf pursuant to this Agreement; and
Whereas, the Parent and the Representatives desire the Escrow Agent to serve
as the escrow agent, and the Escrow Agent is willing to do so, upon the terms
and conditions hereinafter set forth;
Now, Therefore, it is agreed:
ARTICLE 1
Indemnification; Appointment of Representative
1.1 Appointment of Representative. Each of the Holders has appointed the
Representatives as such Holder's agents and attorneys-in-fact to give and
receive notices and communications, to authorize delivery to the Parent of
Escrow Shares from the Escrow Fund in satisfaction of claims by Parent, to
object to such deliveries, to agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Representatives for the
accomplishment of the foregoing. Such agency may be changed by the Holders from
time to time upon not less than 30 days prior written notice to Parent;
provided, however, that no Representative may be removed unless Holders of a
two-thirds interest in the Escrow Fund agree to such removal and to the
identity of the substituted agent. Any vacancy in the position of
Representatives may be filled by approval of the Holders of a majority in
interest of the Escrow Fund. No
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<PAGE>
bond shall be required of the Representatives, and no Representative shall
receive any compensation for his or her services. Notices or communications to
or from the Representatives shall constitute notice to or from each of the
Holders. The Representatives shall not be liable for any act done or omitted
hereunder as Representatives while acting in good faith and in the exercise of
reasonable judgment, except in the case of their bad faith, gross negligence or
willful misconduct. The Holders shall severally indemnify the Representatives
and hold the Representatives harmless against any loss, liability or expense
incurred without gross negligence or bad faith on the part of the
Representatives and arising out of or in connection with the acceptance or
administration of the Representatives' duties hereunder, including the
reasonable fees and expenses of any legal counsel retained by the
Representatives.
1.2 Actions of the Representatives. A decision, act, consent or instruction
of a majority of the Representatives shall constitute a decision of all Holders
and shall be final, binding and conclusive upon each of such Holders, and the
Escrow Agent and the Parent may rely upon any such decision, act, consent or
instruction of the Representatives as being the decision, act, consent or
instruction of each such Holder. The Escrow Agent and the Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Representatives. Until notified in writing by the Representatives that one or
more has resigned or has been removed, the Escrow Agent may act upon the
directions, instructions and notices of the Representatives named above and,
thereafter, upon the directions, instructions and notices of any successor
named in a writing executed by the Holders of a majority in interest in the
Escrow Fund and filed with the Escrow Agent.
ARTICLE 2
Appointment of Escrow Agent; Creation of Escrow Fund
2.1 Appointment of Escrow Agent. The Parent and the Representatives hereby
appoint the Escrow Agent, and the Escrow Agent hereby agrees to act, as
depository and administrator of the Escrow Fund, upon the terms and conditions
set forth below.
2.2 Creation of Escrow Fund. Pursuant to the Merger Agreement, at the
Effective Time, Parent shall deposit in escrow with the Escrow Agent, as escrow
agent, a stock certificate or certificates representing the Escrow Shares which
shall be registered in the name of the Escrow Agent as Escrow Agent hereunder.
The Escrow Agent shall have no responsibility for the genuineness, validity,
market value, title or sufficiency for any intended purpose of the Escrow
Shares. The Escrow Fund shall be held and distributed by the Escrow Agent in
accordance with the terms and conditions of this Agreement. The number of
Escrow Shares beneficially owned by each Holder is set forth in Exhibit B
attached hereto. The Holders hereby authorize the Parent to deliver directly to
the Escrow Agent all dividends and other distributions paid in the Parent's
common stock made in respect of any Escrow Shares held in the Escrow Fund, all
of which dividends and distributions shall be added to and become part of the
Escrow Fund held for the respective Holders on account of whose shares such
dividends or distributions were paid. Any cash dividends or distributions of
property (other than securities) received by the Escrow Agent in respect of the
Escrow Fund shall be paid by the Escrow Agent to the Holders according to the
percentage of the Escrow Shares, cash or other property held by it for each
Holder as hereinafter provided in Section 2.4. The Parent, upon depositing the
Escrow Shares (and upon depositing any dividends and other distributions made
in respect of the Escrow Shares which are paid in securities) with the Escrow
Agent in the Escrow Fund, as hereinabove provided, shall deliver to the Escrow
Agent three copies of a schedule, signed by the chief financial officer or the
controller of the Parent, identifying the securities being deposited by the
Parent in the Escrow Fund, two copies of which schedule shall be countersigned
by an appropriate officer of the Escrow Agent, acknowledging the deposit of
such securities in the Escrow Fund, and returned by the Escrow Agent to,
respectively, the Parent and the Representatives. The Escrow Agent shall hold
the Escrow Fund in a separate account and shall invest such account (to the
extent of any cash held therein) and disburse such account as hereinafter
provided. The Escrow Fund, less any amounts therefrom disbursed to the Parent,
shall be disbursed by the Escrow Agent to the Holders on or after the
Expiration Date (as that term is hereinafter defined) in accordance with the
provisions of this Agreement.
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2.3 Holder Rights. While any Escrow Shares, cash or other property are held
in escrow in the Escrow Fund, and pending the disbursement thereof to the
Parent or the Holders, as the case may be, in connection with any disbursement
of property from the Escrow Fund in accordance with Article III hereof, the
Holders will have all rights with respect thereto (including, without
limitation, the right to vote such shares), except (i) the right of possession
thereof, (ii) except as set forth in Section 2.5, the right to sell, assign,
pledge, hypothecate or otherwise dispose of such Escrow Shares or any interest
therein, and (iii) the right to receive any dividends or other distributions in
respect thereof paid in securities. The Escrow Agent grants a proxy to the
Holders to the extent necessary for them to vote their shares. The Parent shall
deliver any stockholder communications directly to the Holders, and the Escrow
Agent shall not be responsible for voting with regard to the Escrow Shares. The
Escrow Agent shall be under no obligation to exercise rights in the Escrow
Shares, and shall be responsible for only reasonable measures to maintain the
physical safekeeping thereof, and otherwise to perform and observe such duties
on its part as are expressly set forth in this Agreement.
2.4 Holder Percentage Interest in Escrow Fund. Attached hereto as Schedule
2.4 is a schedule listing each Holder, such Holder's address and Social
Security or other tax identification number and such Holder's interest in the
Escrow Fund (expressed as a percentage, based on the number of Escrow Shares
delivered to the Escrow Agent at the Effective Time on behalf of such Holder).
At the time of its delivery to the Escrow Agent of any shares of its common
stock, the Parent shall notify the Escrow Agent of the Holder's account for
which such shares are delivered.
2.5 Sale of Escrow Shares. The Representatives may direct the Escrow Agent to
sell Escrow Shares by delivery to the Escrow Agent of a notice stating the
number of Escrow Shares to be sold and the minimum price per share to be
realized from such sale. The Representatives shall not direct the Escrow Agent
to sell Escrow Shares at any price which is less than the Average Closing Stock
Price. To the extent directed to do so by the Representatives, the Escrow Agent
shall promptly upon receipt of such notice (provided that the minimum price per
share indicated may be realized), sell such number of Escrow Shares as is
designated by the Representatives, at no more than the usual and customary
brokerage commissions, and shall add the proceeds of such sale to the Escrow
Fund; provided, however, that with respect to each sale, except for the
Holdback Amount (as defined below), to the extent that the proceeds per share
less the customary brokerage commissions and the applicable Sales
Administration Fee (as defined below) with respect to such sale exceed the
Average Closing Stock Price, (a) ninety percent (90%) of such excess shall not
be added to the Escrow Fund and shall be promptly paid in the form of checks
issued by and drawn on the Escrow Agent and distributed to the Holders and (b)
ten percent (10%) of such excess (with respect to each sale, the "Holdback
Amount") shall be held by the Escrow Agent in the Escrow Fund until the Escrow
Agent has received either (i) a certificate from Parent and the Representatives
that the Adjustment Amount has been determined to be greater than or equal to
zero, in which case the Escrow Agent shall distribute the total of the Holdback
Amounts to the Holders, or (ii) a certificate from the Parent and
Representatives authorizing the payment to the Parent of the number of shares
or cash set forth therein which has been determined to be the Adjustment Amount
pursuant to Section 10.2 of the Merger Agreement, at which time the Escrow
Agent shall make the authorized distribution to the Parent and, if the total of
the Holdback Amounts exceeds the Adjustment Amount, distribute such excess to
the Holders. The Holdback Amounts shall be available solely for the purpose of
payments to Parent, if any, of the Adjustment Amount pursuant to Section 10.2
of the Merger Agreement or distribution to Holders pursuant to this
Section 2.5. Each distribution to the Holders under this Section 2.5 shall be
in the proportions indicated on Schedule 2.4, by first class mail or expedited
courier service to each Holder at the address indicated on such Schedule, or
such other address as shall have been specified in a written notice to the
Escrow Agent from the relevant Holder or the Representatives. The Escrow Agent
may but shall not be required to release or distribute escrowed funds or
property sooner than two (2) business days but shall release or distribute
escrowed funds no later than four (4) business days after the Escrow Agent has
received the requisite notices or paperwork in good form, or passage of the
applicable claims period or release date, as the case may be.
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2.6 Mechanics of Sale of Escrow Shares.
(a) In connection with any sale of the Escrow Shares pursuant to Section 2.5
of this Agreement, the Escrow Agent shall be entitled to receive and rely upon,
prior to taking action in that regard, written direction from the
Representatives as to the manner and method to be undertaken in carrying out
such sale, including without limitation written direction (i) identifying the
number of shares to be sold, (ii) identifying the brokerage firm the
Representatives request to be used or instructing the Escrow Agent to use its
affiliated brokerage service, and (iii) setting forth any necessary or special
instructions with respect to the sale (including any stop loss or minimum price
per share instruction); and the Representatives shall execute and deliver any
instruments reasonably required by the Escrow Agent in order to carry out such
sale or liquidation.
(b) The Escrow Agent shall have no responsibility in connection with such
sale other than to make prompt delivery of the Escrow Shares to the selected
brokerage firm, with instruction (including any special instruction provided by
the Representatives), and to receive and deposit into the Escrow Account (to be
administered and distributed in accordance with this Agreement) any net sale
proceeds received therefrom in accordance with this Agreement. The Escrow Agent
shall have no liability for any actions or omissions of any such brokerage
firm, and shall have no liability for the price or execution achieved. Without
limiting the generality of the foregoing, the Representatives expressly
acknowledge that (a) the Escrow Shares may need to be sent to a transfer agent
to be reissued in saleable form, (b) the Escrow Shares may contain or be
subject to transfer restrictions that may limit their marketability and impose
restrictions upon the number or types of purchasers to whom they can be offered
or sold, and (c) the Escrow Agent shall have no liability for any failure or
delay (or any price change during any such delay) on the part of the
Representatives or any transfer agent, or caused by any necessary registration
or delivery procedures, or compliance with any applicable transfer
restrictions, involved in the transfer of such Escrow Shares.
(c) The Escrow Agent shall be entitled to contract with any brokerage firm
(which may be selected by the Escrow Agent without liability on its part unless
the Representatives shall have indicated a brokerage firm to be used, in which
event such brokerage firm shall be used), which may be affiliated with the
Escrow Agent. The Escrow Agent shall be indemnified hereunder for any costs,
expenses and risks associated therewith or arising thereunder (other than
resulting from its own gross negligence, bad faith or wilful misconduct), and
the proceeds of sale attributable to the Escrow Fund shall be entitled shall be
net of all brokerage commissions and charges.
(d) The interest of each Holder in the net sale proceeds of any such sale of
Escrow Shares received by the Escrow Agent shall be apportioned among the
Holders on a pro rata basis as set forth in Schedule 2.4 less a $5.00 per
Holder fee for the proration of the net sales price and individual 1099-B
reporting (the "Sales Administration Fee"). The Sales Administration Fee shall
be assessed each day a sale is affected until the total number of shares
specified in such written direction from the Representatives are sold.
ARTICLE 3
DISPOSITION OF ESCROW FUND
3.1 Escrow Period; Distribution Upon Termination of Escrow Periods. Subject
to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Massachusetts time, on the first anniversary of the Closing Date (the period
from the Effective Time to such anniversary being referred to herein as the
"Escrow Period," and the last day of the Escrow Period being referred to herein
as the "Expiration Date"); provided, however, that the Escrow Period shall not
terminate with respect to such amount (or some portion thereof) that, together
with the aggregate amount remaining in the Escrow Fund, is necessary in the
reasonable judgment of Parent, subject to the objection of the Representatives
and the subsequent arbitration of the matter in the manner provided in
Section 3.4 hereof, to satisfy any unsatisfied claims concerning facts and
circumstances existing prior to the
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termination of such Escrow Period specified in any Officer's Certificate
delivered to and received by the Escrow Agent prior to termination of such
Escrow Period. As soon as all such claims have been resolved as evidenced by
(i) a joint written instrument signed by Parent and a majority of the
Representatives, (ii) a copy of an arbitration or mediation award determination
pursuant to Section 3.4 or (iii) a judgement, order or decree of a court of
competent jurisdiction, the time for perfection of an appeal of such order,
decree or judgement having expired, delivered to the Escrow Agent, the Escrow
Agent shall deliver to the Holders the remaining portion of the Escrow Fund not
required to satisfy such claims. Deliveries of amounts from the Escrow Fund to
the Holders pursuant to this Section 3.1 shall be made in proportion to their
respective original contributions to the Escrow Fund as indicated on Schedule
2.4 attached hereto.
3.2 Claims Upon Escrow Fund. Claims for Losses may be made pursuant to
Sections 11.2 and 12.4 of the Merger Agreement up to a maximum of $ which
amount is equal to the product of the number of Escrow Shares multiplied by the
Average Closing Stock Price. Upon the occurrence of an event which the Parent
asserts constitutes a Loss for which Parent may properly claim indemnity under
Sections 11.2 and 12.4 of the Merger Agreement (an "Indemnity Claim") on or
before the last day of the Escrow Period, the Parent shall deliver for receipt
by the Escrow Agent a certificate signed by any officer of Parent (an
"Officer's Certificate"): (1) stating the aggregate amount of Parent's Losses
or an estimate thereof, and (2) specifying in reasonable detail the individual
items of Losses included in the amount so stated, the date each such item was
paid or properly accrued or arose, or the basis for such anticipated liability,
and the nature of the misrepresentation, breach of warranty or covenant or
other matter to which such item is related. Upon receipt by the Escrow Agent at
any time on or before the last day of the Escrow Period of an Officer's
Certificate, the Escrow Agent shall, subject to the provisions of Section 3.3
hereof, deliver to Parent out of the Escrow Fund, as promptly as practicable,
an amount equal to the amount of such Losses (1) in cash, (2) if no cash is
remaining in the Escrow Fund, then that number of shares of Parent Common Stock
held in the Escrow Fund equal to the quotient obtained by dividing (i) the
amount of such Losses by (ii) the Average Closing Stock Price (which shall be
specified in such Officer's Certificate), or, (3) if the Escrow Fund consists
of both cash and shares of Parent Common Stock, then the amount of such Losses
in cash and shares of Parent Common Stock (determined as described in clause
(2) above) pro rata in accordance with the relative value of the cash and
shares of Parent Common Stock (valued at the Average Closing Stock Price, as
specified in such Officer's Certificate) constituting the Escrow Fund at the
time of payment.
3.3 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Representatives and for a period of 30 days after such
delivery, the Escrow Agent shall make no delivery to Parent of any amount from
the Escrow Fund pursuant to Section 3.2 unless the Escrow Agent shall have
received written authorization from the Representatives to make such delivery.
After the expiration of such 30-day period, the Escrow Agent shall make
delivery of an amount from the Escrow Fund in accordance with Section 3.2
hereof; provided, however, that no such payment or delivery may be made if the
Representatives shall object in a written statement to the claim made in the
Officer's Certificate, and such statement shall have been received by the
Escrow Agent prior to the expiration of such 30-day period (such claim a
"Disputed Claim").
3.4 Resolution of Conflicts; Arbitration. In case the Representatives shall
so object in writing to any claim or claims made in any Officer's Certificate,
the Representatives and Parent shall attempt in good faith to agree upon the
rights of the respective parties with respect to each of such claims, if the
Representatives and Parent should so agree, a memorandum setting forth such
agreement shall be prepared and signed by both parties and shall be furnished
to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such
memorandum and distribute an amount from the Escrow Fund in accordance with the
terms thereof.
If no such agreement can be reached after good faith negotiation, either
Parent or the Representatives may demand arbitration of the matter unless the
amount of the damage or loss is at issue pending litigation with a third party,
in which event arbitration shall not be commenced until such amount is
ascertained or both parties agree to arbitration; and in either such event the
matter shall be settled by arbitration conducted by three arbitrators. Parent
and the Representatives shall each select one arbitrator, and the two
arbitrators so selected
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shall select a third arbitrator, each of which arbitrators shall be independent
and have at least ten years' relevant experience. The arbitrators shall set a
limited time period and establish procedures designed to reduce the cost and
time for discovery while allowing the parties an opportunity, adequate in the
sole judgment of the arbitrators, to discover relevant information from the
opposing parties about the subject matter of the dispute. The arbitrators shall
rule upon motions to compel or limit discovery and shall have the authority to
impose sanctions, including attorneys' fees and costs, to the same extent as a
court of competent jurisdiction, sitting in law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement (the "Arbitration Award"),
and notwithstanding anything in Section 3.3 hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the Escrow Fund in accordance therewith. Such decision shall be written
and shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the arbitrators.
Judgment upon any award rendered by the arbitrators may be entered in any
court having jurisdiction. Any such arbitration shall be held in the City and
County of Denver, Colorado under the rules then in effect of the Judicial
Arbitration and Mediation Services, Inc. Except as provided below, the non-
prevailing party to an arbitration shall pay its own expenses, the fees of each
arbitrator, the administrative costs of the arbitration, and the expenses,
including without limitation, reasonable attorneys' fees and costs, incurred by
the other party to the arbitration. In the event Parent is awarded less than
50% of the disputed amount (excluding any amounts not in dispute), then Parent
shall pay its own expenses in addition to one-half the fees of each arbitrator
and one half of the administrative costs of the arbitration.
3.5 Notice to Withhold on Expiration Date. On or prior to the Expiration
Date, the Parent shall notify the Escrow Agent and the Representatives of the
amount, if any, in Parent's reasonable judgment, to be retained after the
Expiration Date on account of Indemnity Claims concerning facts or
circumstances existing prior to the termination of the Escrow Period and
concerning which the Parent has delivered to the Escrow Agent, prior to
termination of the Escrow Period, the Officer's Certificate specified in
Section 3.2 hereof, which Indemnity Claims are not, at such time, absolute as
to liability or liquidated as to amount. Such notice shall contain the
information specified in Section 3.2 to the extent it requires supplementation
or change based on the Parent's then knowledge, whereupon the Escrow Agent
shall, subject to the objection of the Representatives in a written statement
delivered to the Escrow Agent within 10 days after the Expiration Date and the
subsequent arbitration of the matter in the manner provided in Section 3.4
hereof, retain an amount in the Escrow Fund having a value (determined in
accordance with Section 3.2 hereof) equal to the amount set forth in the notice
given by the Parent pursuant to this Section 3.5. In the event the Parent does
not timely provide the notice required by this Section 3.5, all remaining
property held in the Escrow Fund shall be distributed by the Escrow Agent to
the Holders promptly after the Expiration Date. Each individual claim as
evidenced by an Officer's Certificate delivered to and received by the Escrow
Agent shall be resolved pursuant to Sections 3.3 and 3.4 hereof.
3.6 Distribution Following Expiration Date. As soon as practicable following
the Expiration Date, such number of Escrow Shares and such cash and other
property as shall remain in the Escrow Fund, less all amounts in the Escrow
Fund retained pursuant to Section 3.5 hereof, shall be released from the
provisions of this Agreement and distributed promptly by the Escrow Agent to
the Holders, in the proportions indicated on Schedule 2.4, by first class mail
or expedited courier service to each Holder at the address indicated on such
Schedule, or such other address as shall have been specified in a written
notice to the Escrow Agent from the relevant Holder or the Representatives,
with any cash amounts paid in the form of a check issued by and drawn on the
Escrow Agent.
3.7 Retention of Escrow Fund After Expiration Date. Upon receipt of a notice
pursuant to Section 3.5 hereof, the Escrow Agent shall continue to hold after
the Expiration Date, with respect to each Indemnity Claim included in such
notice, the amount specified by such notice in respect of such Indemnity Claim
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determined pursuant to Section 3.5 until such time as the Escrow Agent receives
a written agreement signed by the Representatives and the Parent stating the
amount, if any, which the Parent is entitled to receive from the Escrow Fund in
connection with such Indemnity Claim, or a copy of an Arbitration Award with
respect to such Indemnity Claim, at which time the Escrow Agent shall return to
the Parent, with respect to such Indemnity Claim, cash from the Escrow Fund or
Escrow Shares having a value (determined in accordance with the final sentence
of Section 3.2 hereof) equal to the amount specified in such agreement or
Arbitration Award and shall distribute to the Holders, in the proportions
indicated on Schedule 2.4, such property, if any, which the Escrow Agent was
holding after the Expiration Date pursuant to Section 3.5 by reason of such
Indemnity Claim and which is in excess of the amount so distributed to the
Parent with respect thereto; provided, however, that to the extent the
distribution of such property from the Escrow Fund to the Holders would cause
the value of the property remaining in the Escrow Fund after such distribution
to fall below the amount (determined pursuant to Section 3.5) of all still
unresolved Indemnity Claims identified in the Section 3.5 notice, such property
shall be retained by the Escrow Agent in the Escrow Fund and shall be available
for distribution to the Parent upon the resolution of any unresolved Indemnity
Claims, and such property shall not be distributed to the Holders until such
time, if any, as such distribution can be made without causing the value of all
property remaining in the Escrow Fund to fall below the amount of all remaining
unresolved Indemnity Claims identified in the Section 3.5 notice.
3.8 Allocation of Escrow Shares Distributed to the Parent. In the event
amounts from the Escrow Fund are retained by the Escrow Agent or distributed to
the Parent pursuant to any provisions of this Article III, such amounts from
the Escrow Fund shall be taken from the amounts in such Escrow Fund deposited
by each Holder in proportion to such Holder's percentage interest in the Escrow
Fund as set forth on Schedule 2.4.
3.9 Adjustment of Escrow Fund. Promptly upon receipt by the Escrow Agent of a
notice from the Parent and the Representatives indicating that the Adjustment
Amount, as determined pursuant to Section 10.1 of the Merger Agreement, is
negative and authorizing release to the Parent of an amount of shares of Parent
Common Stock or cash from the Escrow Fund, the Escrow Agent shall release to
the Parent that number of shares of Parent Common Stock or cash from the Escrow
Fund as set forth in such notice.
3.10 Advance Escrow. Promptly after receipt by the Escrow Agent of any funds
released from the Advance Escrow as contemplated by Section 5.7 of the Merger
Agreement, which shall be identified in writing as funds from the Advance
Escrow, the Escrow Agent shall (i) comply with any instruction previously
received from the Parent and the Representatives pursuant to Section 10.2 of
the Merger Agreement with respect to the addition of some or all of such funds
to the Escrow Fund, in which case, a portion of the Advance Escrow as set forth
in such written shall be promptly paid to Parent in accordance with such
instructions, and (ii) distribute any portion of such funds not distributed to
Parent pursuant to such written instructions to the former holders of Ventures
Capital Stock identified on Exhibit B hereto in the proportions specified
thereon.
3.11 Tax Refund Amount. Promptly after receipt by the Escrow Agent of any
funds from Purchaser identified in writing as contemplated by Section 5.8 of
the Merger Agreement, the Escrow Agent shall distribute such funds to the
former holders of Ventures Capital Stock identified on Exhibit B hereto in the
proportions specified thereon.
ARTICLE 4
Investment of Escrow Fund and Accounting
4.1 Investment of Escrow Fund. All cash held in the Escrow Fund shall be
invested by the Escrow Agent in interest-bearing securities of, or guaranteed
by, the United States Government with maturities of not more than 30 days, or
in such other investments as the Parent and the Representative may agree in a
writing delivered to the Escrow Agent. All interest and other income earned on
the Escrow Fund shall be added to and become part of the Escrow Fund, and the
distribution thereof shall be subject to the terms of this Agreement
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(and any losses on such investments shall be debited to the Escrow Fund). The
Escrow Agent shall have no liability for any investment losses, including any
losses incurred in investments made consistent with this Section 4.1 on any
investment required to be liquidated prior to maturity in order to make a
payment required hereunder.
4.2 Accounting. In the event cash is held in the Escrow Fund, the Escrow
Agent shall supply a written account to the Parent and the Representatives at
the end of each month prior to the Expiration Date in which there is cash in
the Escrow Fund (and thereafter to the extent any amounts remain in escrow
pursuant to Section 3.5 hereof) listing all transactions with respect to the
Escrow Fund during the immediately preceding month.
4.3 Tax Reporting. The parties hereto agree that, for tax reporting purposes,
all interest or other income earned from the investment of the Escrow Fund
shall be allocable one-half to Parent and one-half to the Holders in the
proportions set forth on Schedule 2.4 as such proportions may be modified due
to the receipt by the Escrow Agent of any additional Escrow Shares.
4.4 Certification of Tax Identification Number. The Parent and the Holders
agree to provide the Escrow Agent with their respective certified tax
identification numbers by signing and delivering a Form W-9 (or Form W-8, in
the case of non-U.S. persons) to the Escrow Agent within 30 days from the date
hereof. The parties hereto understand that, in the event their tax
identification numbers are not certified to the Escrow Agent, the Internal
Revenue Code may require withholding of a portion of any interest or other
income earned on the investment of the Escrow Fund in accordance with the
Internal Revenue Code of 1986, as amended from time to time.
ARTICLE 5
Representatives
5.1 Expenses. Any out-of-pocket fees and expenses incurred by the
Representatives shall be paid out of the Escrow Fund in preference to other
distributions from such Escrow Fund, and shall be payable from the proceeds of
the sales of shares made pursuant to Section 5.2 below; provided, however, that
under no circumstances will the Representatives have personal liability for any
such fees and expenses.
5.2 Sale of Escrow Shares. To the extent directed to do so by the
Representatives, the Escrow Agent shall sell a portion of the Escrow Shares
during the term of this Agreement and shall apply the proceeds of such sale to
pay expenses incurred by the Representatives on behalf of the Holders as
provided in Section 5.1 above.
ARTICLE 6
Escrow Agent
6.1 Escrow Agent Duties, Protections, Indemnifications, Etc.
(a) The other parties hereto acknowledge and agree that the Escrow Agent (i)
shall not be responsible for any of the agreements referred to herein
(including without limitation the Merger Agreement) or for determining or
compelling compliance therewith, and shall not be bound thereby but shall be
obligated only for the performance of such duties as are specifically set forth
in this Escrow Agreement on its part to be performed, each of which are
ministerial (and shall not be construed to be fiduciary) in nature, and no
implied duties or obligations of any kind shall be read into this Agreement
against or on the part of the Escrow Agent; (ii) shall not be obligated to take
any legal or other action hereunder which might in its judgment involve expense
or liability unless it shall have been furnished with indemnity acceptable to
it; (iii) may rely on and
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shall be protected in acting or refraining from acting upon any written notice,
instruction (including, without limitation, wire transfer instructions, whether
incorporated herein or provided in a separate written instruction), instrument,
statement, request or document furnished to it hereunder and believed by it to
be genuine and to have been signed or presented by the proper person, and shall
have no responsibility for making any investigation into the facts or matters
set forth therein or otherwise determining the accuracy or rightfulness
thereof; and (iv) may consult counsel satisfactory to it, including house
counsel, and the advice or opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in accordance with the advice or
opinion of such counsel.
(b) Neither the Escrow Agent nor any of its directors, officers or employees
shall be liable to anyone for any action taken or omitted to be taken by it or
any of its directors, officers or employees hereunder except in the case of
gross negligence, bad faith or willful misconduct. Subject to the limitations
contained in Section 6.1(e), the Parent and Holders, jointly and severally,
covenant and agree to indemnify the Escrow Agent and hold it harmless without
limitation from and against any loss, liability or expense of any nature
incurred by the Escrow Agent arising out of or in connection with this Escrow
Agreement or with the administration of its duties hereunder, including, but
not limited to, legal fees and expenses and other costs and expenses of
defending or preparing to defend against any claim of liability in the
premises, unless such loss, liability or expense shall be caused by the Escrow
Agent's gross negligence, bad faith or willful misconduct. In no event shall
the Escrow Agent be liable for indirect, punitive, special or consequential
damage or loss (including but not limited to lost profits) whatsoever, even if
the Escrow Agent has been informed of the likelihood of such loss or damage or
regardless of the form of action.
(c) Subject to the limitations contained in Section 6.1(e), the Parent,
jointly and severally, and the Holders, severally and not jointly, agree to
assume any and all obligations imposed on each of them now or hereafter by any
applicable tax law with respect to the payment of Escrow Funds to such Holders
and the Parent under this Agreement, and to indemnify and hold the Escrow Agent
harmless from and against any taxes, additions for late payment, interest,
penalties and other expenses, that may be assessed against the Escrow Agent on
any such payment or other activities under this Escrow Agreement. The Holders
and the Parent undertake to instruct the Escrow Agent in writing with respect
to the Escrow Agent's responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting in connection with its acting as Escrow Agent under this Escrow
Agreement. The Parent, jointly and severally, and the Holders, severally and
not jointly, agree to indemnify and hold the Escrow Agent harmless from any
liability on account of taxes, assessments or other governmental charges with
respect to the Holders and the Parent, including without limitation the
withholding or deduction or the failure to withhold or deduct same, and any
liability for failure to obtain proper certifications or to properly report to
governmental authorities, to which the Escrow Agent may be or become subject in
connection with or which arises out of this Escrow Agreement, including costs
and expenses (including reasonable fees and expenses), interest and penalties,
except in the event of the Escrow Agent's gross negligence, bad faith or
willful misconduct. The Escrow Agent shall have no more or less responsibility
or liability on account of any action or omission of any book-entry depository,
securities intermediary or other subescrow agent employed by the Escrow Agent
than any such book-entry depository, securities intermediary or other subescrow
agent has to the Escrow Agent, except to the extent that such action or
omission of any book-entry depository, securities intermediary or other
subescrow agent was caused by the Escrow Agent's own gross negligence, bad
faith or wilful misconduct in breach of this Agreement.
(d) The Parent agrees to pay or reimburse the Escrow Agent up to $1,400 for
any legal fees and expenses incurred in connection with the preparation of this
Agreement and to pay the Escrow Agent's reasonable compensation for its normal
services hereunder in accordance with the attached fee schedule, which may be
subject to change on an annual basis. The Escrow Agent shall be entitled to
reimbursement from Parent on demand for all expenses incurred in connection
with the administration of the escrow created hereby which are in excess of its
compensation for normal services hereunder, including without limitation,
payment of any legal fees and expenses incurred by the Escrow Agent in
connection with the resolution of any claim by any party hereunder.
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(e) The provisions of paragraphs (b), (c) and (d) shall survive the
resignation or removal of the Escrow Agent or the termination of this Escrow
Agreement. As between the Parent and Holders, the indemnification obligations
of Parent and the Holders shall be paid first from the Escrow Fund and, after
the Escrow Fund has been exhausted or otherwise committed, the remaining
indemnification obligations shall be paid by Parent and not by the Holders.
6.2 Disputes. In the event that the Escrow Agent shall be uncertain as to its
duties or rights hereunder, or shall receive instructions from any party hereto
with respect to the Escrow Fund which, in its opinion, are in conflict with any
of the provisions of this Agreement, it shall be entitled to refrain from
taking any action until such time as there has been a final determination of
the rights of the Parent and the Representatives with respect to the Escrow
Fund (or relevant portion thereof). For purposes of this Section 6.2 there
shall be deemed to have been a final determination of the rights of the Parent
and the Representative with respect to the Escrow Fund (or relevant portion
thereof) at such time as Escrow Agent shall receive (i) an executed counterpart
of an agreement between the Representatives and the Parent or (ii) a copy of an
Arbitration Award, which provides for the disposition of the Escrow Fund (or
relevant portion thereof). It is understood and agreed that should any claim be
made upon the Escrow Agent or the Escrow Fund by a third party, the Escrow
Agent upon receipt of notice of such dispute or claim is authorized and shall
be entitled (at its sole option and election) to retain in its possession
without liability to anyone, all or any of said Fund until such dispute shall
have been settled either by the mutual written agreement of the parties
involved or by a final order, decree or judgment of a court in the United
States of America, the time for perfection of any appeal of such order, decree
or judgment having expired. The Escrow Agent may, but shall be under no duty
whatsoever to, institute or defend any legal proceedings which relate to the
Escrow Fund.
6.3 Resignation. The Escrow Agent may at any time resign and be discharged of
the duties imposed hereunder (but without prejudice for any liability for bad
faith, gross negligence or willful misconduct hereunder) by giving notice to
the Representatives and the Parent at least 60 business days prior to the date
specified for such resignation to take effect, in which case, upon the
effective date of such resignation:
(a) all property then held by the Escrow Agent hereunder shall be
delivered by it to such person as may be designated in writing by the
Parent and the Representatives, whereupon the Escrow Agent's obligations
hereunder shall cease and terminate;
(b) if no such person has been designated by such date, the Escrow Agent
may apply to a court of competent jurisdiction for appointment of a
successor escrow agent, and all obligations of the Escrow Agent hereunder
shall, nevertheless, cease and terminate, subject to clause (c) below; and
(c) the Escrow Agent's sole responsibility thereafter shall be to keep
all property then held by it (and to make the investments as hereinbefore
provided) and to account for and deliver the same (i) to the successor
escrow agent designated in writing by the Parent and the Representatives or
appointed by a court of competent jurisdiction or, (ii) if no such
successor escrow agent shall have been so designated or appointed, in
accordance with the directions of an Arbitration Award, and in either case
the provisions of Section 6.1(d) and Section 6.1(e) shall remain in effect.
6.4 Removal of Escrow Agent. The Parent and the Representatives may, upon at
least 30 business days prior written notice to the Escrow Agent executed by
each of them, dismiss the Escrow Agent hereunder and appoint a successor. In
such event, the Escrow Agent shall promptly account for and deliver to the
successor escrow agent named in such notice the then balance of the Escrow
Fund, including all investments thereof and accrued income thereon. Upon
acceptance thereof and of such accounting by such successor escrow agent, and
upon reimbursement to the Escrow Agent of all expenses and other amounts due to
it hereunder through the date of such accounting and delivery, the Escrow Agent
shall be released and discharged from all of its duties and obligations
hereunder, but without prejudice to any liability of the Escrow Agent for its
bad faith, gross negligence or willful misconduct hereunder.
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ARTICLE 7
Miscellaneous
7.1 Term. This Agreement shall continue in force until the final distribution
of all amounts held by the Escrow Agent hereunder.
7.2 Notices.
(a) All notices, instructions and other communications given hereunder or in
connection herewith shall be in writing. Any such notice, instruction or
communication shall be sent either (i) by registered or certified mail, return
receipt requested, postage prepaid, or (ii) via a reputable nationwide
overnight courier service, in each case to the address set forth below. Any
such notice, instruction or communication shall be deemed to have been
delivered and received three business days after it is sent prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to Parent:
Lycos, Inc.
400-2 Totten Pond Road
Waltham, MA 02451
Attention: General Counsel
Tel: (781) 370-2700
Fax: (781) 370-2600
with a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: Mary Ellen O'Mara, Esq.
Tel: (617) 951-6663
Fax: (617) 951-1295
If to the Representatives, to:
H. William Jesse, Jr.
222 Sutter Street, 8th Floor
San Francisco, CA 94108
Tel: (415) 274-4550
Fax: (415) 274-4567
and to:
Louis Rossetto
1678 Shattuck Avenue, #126
Berkeley, CA 94709
Tel: (510) 841-4430
Fax: (510) 841-4431
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and to:
Paul J. Salem
901 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
Tel: (401) 751-6763
Fax: (401) 751-1790
with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Kenneth L. Guernsey, Esq.
Tel: (415) 693-2000
Fax: (415) 951-3699
If to Escrow Agent, to:
State Street Bank & Trust Company
Two International Place
Boston, MA 02110
Attention: Corporate Trust Department--Lycos/Ventures Escrow
Fax: (617) 664-5374
or, in each case, to such other address as may be specified in writing to
the other parties.
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery,
telecopy or ordinary mail), but no such notice, instruction or communication
shall be deemed to have been delivered unless and until it is actually received
by the party to whom it was sent. Any party may change the address to which
notices, instructions or communications are to be delivered by giving the other
parties to this Agreement notice thereof in the manner set forth in this
Section 7.2.
(b) Wiring Instructions. Any funds to be paid to or by the Escrow Agent
hereunder shall be sent by wire transfer pursuant to the following instructions
(or by such method of payment and pursuant to such instruction as may have been
given in advance and in writing to or by the Escrow Agent, as the case may be,
in accordance with Section 7.2(a) above).
If to Escrow Agent:
Bank: State Street Bank & Trust Company
ABA #: 0110 0002 8
A/C #: 9903-990-1
Attn: Corporate Trust Department
Ref: Lycos/Ventures Escrow
7.3 Assignment. No party may assign or otherwise transfer this Agreement or
any of his rights hereunder to any person or entity, without the prior written
consent of the Parent, the Escrow Agent and the Representatives, which consent
shall not be unreasonably withheld or delayed. Subject to the foregoing, this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their successors and assigns.
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7.4 Entire Agreement; Amendment; Governing Law; Etc. This Agreement (together
with the Exhibits and Schedules hereto), the Merger Agreement and the Non-
Disclosure Agreement embody the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof. This Agreement may be
amended, modified, waived, discharged or terminated only by (and any consent
hereunder shall be effective only if contained in) an instrument in writing
signed by the party against which enforcement of such amendment, modification,
waiver, discharge, termination or consent is sought. A waiver of any of the
terms and conditions of this Escrow Agreement on one occasion shall not
constitute a waiver of the other terms of this Escrow Agreement, or of such
terms and conditions on any other occasion. This Agreement shall be construed
in accordance with and governed by the laws of the State of Delaware as it
applies to contracts to be performed entirely within the State of Delaware.
7.5 Counterparts. This Agreement may be executed in several counterparts,
each of which is an original, but all of which shall constitute one instrument.
7.6 Venue. If any legal proceeding or other action relating to this Agreement
or any of the other agreements being executed and delivered in connection
herewith, or any of the transactions contemplated hereby or thereby, is brought
or otherwise initiated, the venue therefor shall be in the city and state in
which the principal executive offices of the party who is not initiating the
legal proceeding, which shall be deemed to be a convenient forum. Each of the
parties hereto hereby expressly and irrevocably consents and submits to the
jurisdiction of the Federal and State courts sitting in such city and state in
connection with any such legal proceeding or other action.
7.7 Titles and Headings. Titles and headings of sections of this Agreement
are for convenience of reference only and shall not affect the construction of
any provision of this Agreement.
7.8 Exhibits and Schedules. Each of the Exhibits and Schedules referred to
herein and attached hereto is an integral part of this Agreement and is
incorporated herein by this reference.
7.9 Pronouns. All pronouns and any variations thereof used in this Agreement
shall be deemed to refer to the masculine, feminine or neuter, singular or
plural, as appropriate.
7.10 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any jurisdiction, as to such jurisdiction, shall be
ineffective to the extent of such invalidity or unenforceability, without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
7.11 Time of Essence. Time is of the essence of this Agreement.
7.12 Interpretation. Each party acknowledges that such party, either directly
or through such party's representatives, has participated in the drafting of
this Agreement and any applicable rule of constructions that ambiguities are to
be resolved against the drafting party should not be applied in connection with
the construction or interpretation of this Agreement.
7.13 Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be executed, and (b) certificates and other information
previously or hereafter furnished, may be reproduced by any photographic,
photostatic, microfilm, optical disk, micro-card, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that
any enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
7.14 Force Majeure. The Escrow Agent shall not be responsible for delays or
failures in performance resulting from acts beyond its control. Such acts shall
include but not be limited to acts of God, strikes, lockouts, riots, acts of
war, epidemics, governmental regulations superimposed after the fact, fire,
communication line failures, computer viruses, power failures, earthquakes and
other disasters.
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COUNTERPART SIGNATURE PAGE
TO ESCROW AGREEMENT
In Witness Whereof, the parties hereto have executed this Agreement as of the
date first above set forth.
Lycos, Inc.
By: _________________________________
State Street Bank and Trust Company
By: _________________________________
Name: _______________________________
Title: ______________________________
Stockholder Representatives:
_____________________________________
H. William Jesse, Jr.
_____________________________________
Louis Rossetto
_____________________________________
Paul J. Salem
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ANNEX D
[LETTERHEAD]
October 5, 1998
Board of Directors
Wired Ventures, Inc.
660 Third Street
San Francisco, CA 94107
Ladies and Gentlemen:
We understand that Wired Ventures, Inc. (the "Company"), Lycos, Inc.
("Parent") and BF Acquisition Corp., a wholly owned subsidiary of Parent
("Merger Sub"), have entered into an Agreement and Plan of Merger and
Reorganization, dated as of the date hereof (the "Agreement"), pursuant to
which Merger Sub will be merged with and into the Company (the "Merger").
Pursuant to the Agreement, upon consummation of the Merger, the security
holders of the Company will receive aggregate consideration (the "Merger
Consideration") comprised of (i) $5.0 million in cash contingent upon certain
events (the "Tax Refund Amount") and (ii) shares of the common stock, par value
$.01 per share, of Parent ("Parent Common Stock") with a value of approximately
$130.0 million, based on the average closing price of Parent Common Stock for
the 20 consecutive trading days ending on the third trading day preceding
consummation of the Merger (the "Average Closing Stock Price"); provided,
however, that the Average Closing Stock Price shall not be greater than 135% of
the Parent Common Stock closing price on the date immediately prior to the date
hereof or less than 65% of such closing price. The terms and conditions of the
Merger are more fully set forth in the Agreement.
You have requested our opinion as to the fairness in the aggregate of the
Merger Consideration to the stockholders of the Company taken as a whole, from
a financial point of view. In connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of the Agreement;
(ii) Analyzed certain historical business and financial information
relating to the Company and Parent;
(iii) Reviewed various internal financial forecasts and other financial and
operating data provided to us by the Company relating to its business
and financial performance;
(iv) Reviewed analysts' financial forecasts regarding Parent with Parent in
order to elicit Parent's views of its future financial performance,
Parent having informed us that it does not have a current forecast;
(v) Held discussions with certain members of the senior managements of the
Company and Parent with respect to the past and current business
operations and financial condition and the prospects of the Company and
Parent, respectively, the strategic objectives of each, certain
possible strategic, financial and operating benefits that may be
realized following the Merger and the Company's competitive position;
(vi) Reviewed the pro forma impact of the Merger on the earnings per share
of Parent;
(vii) Reviewed the historical stock prices and trading volumes of the
Parent Common Stock;
(viii) Reviewed publicly available commentary of the research analysts
following Parent and the Internet sector generally;
(ix) Participated in discussions with the Company's Board of Directors and
its legal and other advisors; and
(x) Considered such other financial studies, analyses and investigations as
we deemed appropriate.
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We note that while we reviewed public information with respect to certain
other companies in the Internet sector and the financial terms, to the extent
publicly available, of certain business combinations involving companies in the
Internet sector, there was no such company or transaction that we considered
comparable to the Company or the Merger.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of the Company or Parent, or concerning the
solvency or fair value of either of the foregoing entities. With respect to
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates in the case of the
Company and judgments of the managements of the Company and Parent as to the
financial performance of the Company and Parent, respectively. We assume no
responsibility for and express no view as to such forecasts or the assumptions
on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. In rendering our opinion, we took into account the
Company's commercial assessment regarding the timing of a transaction and the
Company's ability to access the capital markets.
In rendering our opinion, we have assumed that (i) the Merger will be
consummated on the terms described in the Agreement, without any waiver of any
material terms or conditions by the Company, (ii) obtaining the necessary
regulatory approvals for the Merger will not have a material adverse effect on
the Company or Parent, (iii) the Merger Consideration will not be reduced as a
result of the adjustment, indemnification or escrow provisions of the Agreement
and (iv) the full amount of the Tax Refund Amount will be paid to security
holders of the Company. In addition, we are not expressing any opinion as to
(a) the prices at which the Parent Common Stock may trade following the date of
this opinion or (b) the manner in which the Merger Consideration is allocated
among the different classes of Company securities or among the different
holders of such securities.
Lazard Freres & Co. LLC is acting as investment banker to the Board of
Directors of the Company in connection with the Merger and will receive a fee
for our services, all of which is contingent upon the consummation of the
Merger. As you know, certain managing directors of our Firm are limited
partners of Providence Equity Partners LP, a significant stockholder of the
Company. We have in the past provided investment banking services to the
Company for which we expect to receive customary fees.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors, and our opinion is rendered in connection with
its consideration of the Merger. This opinion is not intended to and does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger. Except for the inclusion of
this letter in its entirety in the proxy statement/prospectus distributed to
the security holders of the Company in connection with the Merger, this letter
may not be disclosed or otherwise referred to without our prior written
consent, except as may otherwise be required by law or by a court of competent
jurisdiction.
Based on and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Merger Consideration is fair in the aggregate to the
stockholders of the Company taken as a whole, from a financial point of view.
Very truly yours,
Lazard Freres & Co. LLC
/s/ Richard P. Emerson
By: _________________________________
Richard P. Emerson
Managing Director
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ANNEX E
DELAWARE CODE TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
(S) 262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264
of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such a merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
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determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to
E-3
<PAGE>
the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
E-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, Lycos'
Amended and Restated Certificate of Incorporation, as amended, included a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, the
Delaware General Corporation Law and Lycos' Amended and Restated By-laws
provide for indemnification of Lycos' directors and officers for liabilities
and expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
Lycos, and with respect to any criminal action or proceeding, actions that the
indemnitee has no reasonable choice to believe were unlawful.
Lycos has purchased insurance with respect to, among other things, the
liabilities that may arise under the provisions referred to above. The
directors and officers of Lycos are also insured against certain liabilities
arising under the Securities Act of 1933, as amended, which might be incurred
by them in such capacities and against which they are not indemnified by Lycos.
Lycos has entered into separate indemnification agreements with its directors
and officers. The indemnification agreements create certain indemnification
obligations of Lycos in favor of the directors and officers and, as permitted
by applicable law, will clarify and expand the circumstances under which a
director or officer will be indemnified.
Item 21. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated as of
November 25, 1998 by and among Registrant, BF Acquisition Corp.,
Wired Ventures, Inc., and H. William Jesse, Jr., Louis Rossetto
and Paul J. Salem as Stockholder Representatives (filed as Annex
A to the Proxy Statement/Prospectus forming a part of this
Registration Statement).
3.1* Restated Certificate of Incorporation of the Registrant dated as
of April 4, 1996.
3.2* Amended and Restated By-Laws of Registrant.
3.3s Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant dated August 13, 1998.
4.1* Specimen Certificate of Registrant's Common Stock (incorporated
by reference to Exhibit 4.1 to the Registration Statement on Form
S-1 (Reg. No. 333-1354)).
5.1s Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to the legality of the securities to be
registered.
8.1s Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to federal income tax consequences.
8.2s Opinion of Cooley Godward LLP, as to federal income tax
consequences.
9.1s Wired Ventures, Inc. Voting Trust Agreement.
10.1* Subscription Agreement between Registrant and CMG@Ventures, dated
June 16, 1995.
10.2* Subscription Agreement between Registrant and CMU, dated June 16,
1995.
10.3* Subscription Agreement between Registrant and Dr. Mauldin, dated
June 16, 1995.
10.4* Subscription Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.5* Subscription Agreement between Registrant and CMU, dated February
9, 1996.
10.6* License Agreement among CMU, CMGI, CMG@Ventures, and Registrant,
dated June 16, 1995, as amended.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.7* Amendment and Waiver to License Agreement among CMU, CMGI,
CMG@Ventures, Registrant and Dr. Mauldin, dated February 9, 1996.
10.8* Stockholders' Agreement between Registrant and Christopher Kitze,
dated October 12, 1995.
10.9* Right of First Refusal Agreement between Registrant and
Christopher Kitze, dated October 12, 1995.
10.10* Registration Rights Agreement among Registrant, CMU, CMG@Ventures
and Dr. Mauldin, dated February 9, 1996.
10.11* Consulting, Non-Compete, Invention and Non-Disclosure Agreement
between Registrant and Dr. Mauldin, dated June 16, 1995.
10.12* Non-Competition, Non-Disclosure and Developments Agreement
between Point Communications Corporation and Christopher Kitze,
dated October 12, 1995.
10.13* Letter Agreement between Robert J. Davis and Registrant dated
October 12, 1995.
10.14* Lycos, Inc. 1995 Stock Option Plan.
10.15* Lycos, Inc. 1996 Stock Option Plan.
10.16* Lycos, Inc. 1996 Non-Employee Director Stock Option Plan.
10.17* Lycos, Inc. 1996 Employee Stock Purchase Plan.
10.18* Option Agreement between Registrant and Christopher Kitze, dated
October 12, 1995.
10.19* Option Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.20* Option Agreement between Registrant and CMU, dated February 9,
1996.
10.21* Letter Agreement between Fleet Bank of Massachusetts, N.A. and
Registrant, dated January 31, 1996.
10.22* Office lease between Everett Realty Company and Point
Communications, dated July 13, 1995.
10.23* Office lease between Rosewood III Associates, L.P. and
Registrant, dated August 29, 1995, as amended.
10.24* Office lease between Wilpen, Inc. and Registrant dated October
19, 1995.
10.25* Form of Indemnity Agreement between Registrant and its executive
officers and directors.
10.26* Amendment to License Agreement among CMU, CMGI and Registrant,
dated March 4, 1996.
10.27** Agreement between Registrant and Netscape Communications
Corporation dated as of March 29, 1996.
10.28***+ Agreement between Registrant and Netscape Communications
Corporation dated as of April 1, 1997.
10.29***+ Agreement between Registrant and Bertelsmann Internet Services
GmbH dated as of May 1, 1997.
10.30***+ Agreement between Registrant and GTE New Media Services dated as
of November 18, 1996.
10.31*** Office sublease between Praxis International and Registrant dated
December 4, 1996.
10.32*****+ Agreement between Registrant and Barnes and Noble.com, Inc. dated
July 31, 1997.
10.33**** Leggat McCall Properties Lease, dated January 30, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.34****+ Agreement between Registrant and Netscape Communications
Corporation dated as of May 19, 1998.
21.1s Subsidiaries of the Registrant include:
a.Tripod, Inc., a Delaware corporation, doing business as
"Tripod;"
b.WiseWire, Inc., a Pennsylvania corporation, doing business as
"WiseWire;"
c.WhoWhere, Inc., a California corporation, doing business as
"WhoWhere;"
d.GuestWorld, Inc., a Delaware corporation, doing business as
"GuestWorld"; and
e.BF Acquisition Corp., a Delaware corporation, doing business as
"BF Acquisition Corp."
23.1s Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (set forth in Exhibit 5.1).
23.2s Consent of Cooley Godward LLP (set forth in Exhibit 8.2).
23.3 Consent of KPMG LLP, Independent Auditors of the Registrant.
23.4 Consent of KPMG LLP, Independent Auditors of Ventures.
24.1s The power of attorney of officers and directors of the Registrant
is set forth on the signature page of this Registration
Statement.
27.1 Financial Data Schedule.
99.1s Consent of Lazard Freres & Co. LLC (filed as Annex D to the Proxy
Statement/Prospectus forming a part of this Registration
Statement).
99.2s Form of Proxy for Special Meeting of Stockholders of Ventures.
</TABLE>
- --------
s Previously filed.
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-1354).
** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1996 (File No. 0-27830).
*** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1997 (File No. 0-27830).
**** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1998 (File No. 0-27830).
*****Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the annual period ended July 31, 1998.
+ Confidential material omitted and filed separately with the Securities and
Exchange Commission.
Item 22. Undertakings
A. Undertaking Regarding Filings Incorporating Subsequent Securities Exchange
Act of 1934 Documents by Reference
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in this Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
B. Undertaking in Respect of Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed by
the final adjudication of such issue.
C. Undertaking Regarding 145(a) Transaction
The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 19(a)(3) of the Securities Act of 1933, as amended, and is used in
connection with an offering subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
D. Undertaking in Response to Providing Information
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
E. Undertaking Regarding Post-Effective Amendments
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 3 to
the Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on this 20th day of May, 1999.
Lycos, Inc.
/s/ Robert J. Davis
By: _________________________________
Robert J. Davis
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert J. Davis President, Chief Executive May 20, 1999
____________________________________ Officer and Director
Robert J. Davis (Principal Executive
Officer)
/s/ Edward M. Philip Chief Operating Officer and May 20, 1999
____________________________________ Chief Financial Officer
Edward M. Philip (Principal Financial and
Accounting Officer)
* Director May 20, 1999
____________________________________
John M. Connors, Jr.
* Director May 20, 1999
____________________________________
Daniel J. Nova
* Director May 20, 1999
____________________________________
Richard H. Sabot
</TABLE>
/s/ Edward M. Philip
*By: __________________________
Edward M. Philip
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
2.1* Agreement and Plan of Merger and Reorganization dated as of
November 25, 1998 by and among Registrant, BF Acquisition Corp.,
Wired Ventures, Inc., and H. William Jesse, Jr., Louis Rossetto
and Paul J. Salem as Stockholder Representatives (filed as Annex
A to the Proxy Statement/Prospectus forming a part of this
Registration Statement).
3.1* Restated Certificate of Incorporation of the Registrant dated as
of April 4, 1996.
3.2* Amended and Restated By-Laws of Registrant.
3.3s Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant dated August 13, 1998.
4.1* Specimen Certificate of Registrant's Common Stock (incorporated
by reference to Exhibit 4.1 to the Registration Statement on Form
S-1 (Reg. No. 333-1354)).
5.1s Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to the legality of the securities to be
registered.
8.1s Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to federal income tax consequences.
8.2s Opinion of Cooley Godward LLP, as to federal income tax
consequences.
9.1s Wired Ventures, Inc. Voting Trust Agreement.
10.1* Subscription Agreement between Registrant and CMG@Ventures, dated
June 16, 1995.
10.2* Subscription Agreement between Registrant and CMU, dated June 16,
1995.
10.3* Subscription Agreement between Registrant and Dr. Mauldin, dated
June 16, 1995.
10.4* Subscription Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.5* Subscription Agreement between Registrant and CMU, dated February
9, 1996.
10.6* License Agreement among CMU, CMGI, CMG@Ventures, and Registrant,
dated June 16, 1995, as amended.
10.7* Amendment and Waiver to License Agreement among CMU, CMGI,
CMG@Ventures, Registrant and Dr. Mauldin, dated February 9, 1996.
10.8* Stockholders' Agreement between Registrant and Christopher Kitze,
dated October 12, 1995.
10.9* Right of First Refusal Agreement between Registrant and
Christopher Kitze, dated October 12, 1995.
10.10* Registration Rights Agreement among Registrant, CMU, CMG@Ventures
and Dr. Mauldin, dated February 9, 1996.
10.11* Consulting, Non-Compete, Invention and Non-Disclosure Agreement
between Registrant and Dr. Mauldin, dated June 16, 1995.
10.12* Non-Competition, Non-Disclosure and Developments Agreement
between Point Communications Corporation and Christopher Kitze,
dated October 12, 1995.
10.13* Letter Agreement between Robert J. Davis and Registrant dated
October 12, 1995.
10.14* Lycos, Inc. 1995 Stock Option Plan.
10.15* Lycos, Inc. 1996 Stock Option Plan.
10.16* Lycos, Inc. 1996 Non-Employee Director Stock Option Plan.
10.17* Lycos, Inc. 1996 Employee Stock Purchase Plan.
10.18* Option Agreement between Registrant and Christopher Kitze, dated
October 12, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.19* Option Agreement between Registrant and Dr. Mauldin, dated
February 9, 1996.
10.20* Option Agreement between Registrant and CMU, dated February 9,
1996.
10.21* Letter Agreement between Fleet Bank of Massachusetts, N.A. and
Registrant, dated January 31, 1996.
10.22* Office lease between Everett Realty Company and Point
Communications, dated July 13, 1995.
10.23* Office lease between Rosewood III Associates, L.P. and
Registrant, dated August 29, 1995, as amended.
10.24* Office lease between Wilpen, Inc. and Registrant dated October
19, 1995.
10.25* Form of Indemnity Agreement between Registrant and its executive
officers and directors.
10.26* Amendment to License Agreement among CMU, CMGI and Registrant,
dated March 4, 1996.
10.27** Agreement between Registrant and Netscape Communications
Corporation dated as of March 29, 1996.
10.28***+ Agreement between Registrant and Netscape Communications
Corporation dated as of April 1, 1997.
10.29***+ Agreement between Registrant and Bertelsmann Internet Services
GmbH dated as of May 1, 1997.
10.30***+ Agreement between Registrant and GTE New Media Services dated as
of November 18, 1996.
10.31*** Office sublease between Praxis International and Registrant dated
December 4, 1996.
10.32*****+ Agreement between Registrant and Barnes and Noble.com, Inc. dated
July 31, 1997.
10.33**** Leggat McCall Properties Lease, dated January 30, 1998.
10.34****+ Agreement between Registrant and Netscape Communications
Corporation dated as of May 19, 1998.
21.1s Subsidiaries of the Registrant include:
a.Tripod, Inc., a Delaware corporation, doing business as
"Tripod;"
b.WiseWire, Inc., a Pennsylvania corporation, doing business as
"WiseWire;"
c.WhoWhere, Inc., a California corporation, doing business as
"WhoWhere;"
d.GuestWorld, Inc., a Delaware corporation, doing business as
"GuestWorld"; and
e.BF Acquisition Corp., a Delaware corporation, doing business as
"BF Acquisition Corp."
23.1s Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (set forth in Exhibit 5.1).
23.2s Consent of Cooley Godward LLP (set forth in Exhibit 8.2).
23.3 Consent of KPMG LLP, Independent Auditors of the Registrant.
23.4 Consent of KPMG LLP, Independent Auditors of Ventures.
24.1s The power of attorney of officers and directors of the Registrant
is set forth on the signature page of this Registration
Statement.
27.1 Financial Data Schedule.
99.1s Consent of Lazard Freres & Co. LLC (filed as Annex IV to the
Proxy Statement/Prospectus forming a part of this Registration
Statement).
99.2s Form of Proxy for Special Meeting of Stockholders of Ventures.
</TABLE>
- --------
s Previously filed.
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-1354).
** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1996 (File No. 0-27830).
<PAGE>
*** Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended April 30, 1997 (File No. 0-27830).
**** Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 1998 (File No.
0-27830).
***** Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the annual period ended July 31, 1998.
+ Confidential material omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Lycos, Inc.:
We consent to the use of our report incorporated herein by reference and to
the references to our firm under the headings "Experts" and "Selected
Historical Financial Data" in the proxy statement/prospectus.
/s/ KPMG LLP
Boston, Massachusetts
May 18, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Wired Ventures, Inc. and Subsidiaries:
We consent to the use of our report dated February 26, 1999 on the consolidated
financial statements of Wired Ventures, Inc. as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998
included herein and to the references to our firm under the headings "Experts"
and "Selected Historical Financial Data" in the proxy statement/prospectus.
/s/ KPMG LLP
San Francisco, California
May 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-START> AUG-01-1998 AUG-01-1997
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 135,167,427 153,728,200
<SECURITIES> 0 0
<RECEIVABLES> 16,120,325 12,166,812
<ALLOWANCES> 1,547,947 1,208,342
<INVENTORY> 0 0
<CURRENT-ASSETS> 198,209,059 200,796,790
<PP&E> 10,105,984 6,596,831
<DEPRECIATION> 4,372,181 2,636,772
<TOTAL-ASSETS> 464,914,723 248,758,257
<CURRENT-LIABILITIES> 50,612,280 53,734,492
<BONDS> 0 0
0 0
0 0
<COMMON> 438,821 389,916
<OTHER-SE> 384,777,260 168,296,678
<TOTAL-LIABILITY-AND-EQUITY> 464,914,723 248,758,257
<SALES> 55,336,300 21,905,870
<TOTAL-REVENUES> 55,336,300 21,905,870
<CGS> 11,740,131 4,498,120
<TOTAL-COSTS> 86,316,328 22,602,010
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (17,348,583) 408,599
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (17,348,583) 408,599
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (17,348,583) 408,599
<EPS-PRIMARY> (0.41) (0.01)
<EPS-DILUTED> (0.41) (0.01)
</TABLE>
