<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998
REGISTRATION NO. 333-56659
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GEOCITIES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7310 95-4515867
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
---------------
1918 MAIN STREET, SUITE 300
SANTA MONICA, CALIFORNIA 90405
(310) 664-6500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEPHEN L. HANSEN
CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER
GEOCITIES
1918 MAIN STREET, SUITE 300
SANTA MONICA, CALIFORNIA 90405
(310) 664-6500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
RICHARD A. FINK, ESQ. DONALD M. KELLER, JR., ESQ.
GREG T. WILLIAMS, ESQ. JEFFREY Y. SUTO, ESQ.
NEEL A. GROVER, ESQ. DAVID R. YOUNG, ESQ.
BROBECK, PHLEGER & HARRISON LLP DAVID T. SOBOTA, ESQ.
38 TECHNOLOGY DRIVE VENTURE LAW GROUP
IRVINE, CALIFORNIA 92618 A PROFESSIONAL CORPORATION
(949) 790-6300 2775 SAND HILL ROAD
MENLO PARK, CALIFORNIA 94025
(650) 854-4488
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF ADDITIONAL REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================
AMOUNT OF
PROPOSED ADDITIONAL ADDITIONAL
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE(2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value................ $4,025,000 $1,188
================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
registration fee.
(2) The total registration fee is $22,561, of which $21,373 was previously paid
by the Company.
---------------
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 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 21, 1998
4,750,000 SHARES
[LOGO OF GEOCITIES]
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
-----------
All of the 4,750,000 shares of Common Stock offered hereby are being sold by
the Company. Prior to the offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
per share will be between $12.00 and $14.00. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "GCTY".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total (3)............................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting estimated expenses of $1,050,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 712,500 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such options are exercised in full, the total initial public offering
price, underwriting discount and proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting".
----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
----------
The date of this Prospectus is , 1998.
<PAGE>
[Inside Front Cover]
The largest community of personal Web sites on the Internet
Organized in 40 themed neighborhoods
[GRAPHIC OF GEOCITIES LOGO SUPERIMPOSED OVER COLLAGE OF NEIGHBORHOOD HOME PAGE
SCREEN SHOTS]SM
[GRAPHIC OF GEOCITIES LOGO](R)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE>
[Fold-Out Cover]
Come join the world's largest community of personal Web sites on the Internet.
GeoCities provides a platform for people to express themselves. To share
interests. To bond. GeoCities creates a sense of place and a sense of
belonging. With real community spirit and genuine pride.
So far, over two million Homesteads have been built in the GeoCities
community. Each Homesteader receives a free personal Web site and free e-mail.
Homesteaders engage in lively forums and chats. GeoCities offers powerful,
easy-to-use publishing tools and the support of knowledgeable, neighborly
volunteers and staff.
[GRAPHICS OF FACE PHOTOGRAPHS, SCREEN SHOTS OF WEB SITES, QUOTES AND GEOCITIES
LOGO](R)
"I thought Michelle's page was nice, so I dropped her an e-mail. The rest, as
they say, is history. She accepted my proposal of marriage on January 31st of
this year."
[http://www.geocities.com/SouthBeach/Boardwalk/1038]
Liz and Allen desperately wanted a child to call their own. They created a
site on GeoCities to help them in their search. The Web site caught the eye of
Helen, a mother-to-be who was willing to fulfill the couple's dreams. Their
daughter Emily was born in May 1998.
Come explore the avenues and neighborhoods of GeoCities.
GeoCities Homesteaders create diverse content within themed virtual
neighborhoods. Make a connection with the authors. Share in their passion.
Discover an opportunity. Make a new friend.
Find out why GeoCities is one of the fastest growing communities on the
Internet. GeoCities is active, with more than half a million page edits every
24 hours. And no matter what you're looking for on the Web, chances are good
you'll land on GeoCities during your search.
The personal content drives significant monthly visits and page views.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and the Notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus: (i) reflects, upon the closing of the offering, the automatic
conversion of all outstanding shares of the Company's preferred stock into
shares of Common Stock (the "Preferred Stock Conversion"); (ii) reflects the
Company's reincorporation in Delaware and a concurrent two-for-one stock split
of the Company's capital stock to be effected in July 1998 (including
associated changes to the Company's Certificate of Incorporation and Bylaws)
and (iii) assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
GeoCities offers the world's largest and one of the fastest growing
communities of personal Web sites on the Internet. GeoCities pioneered the
first large-scale, Web-based community for Internet users to express
themselves, share ideas, interests and expertise, and publish content
accessible to other users with common interests. The mainstay of the Company's
community are its "Homesteaders," Internet users who create their own personal
Web sites or "Homesteads" in themed "neighborhoods" on the GeoCities Web site.
These neighborhoods provide a context for Web users to publish content, to
share experiences and ideas with other users and to access a centralized and
easy-to-navigate destination for user-published content. With thousands of new
Homesteaders joining each day, the GeoCities community has grown from
approximately 10,000 Homesteads in October 1995 to over 2.1 million in July
1998. Homesteaders have created an estimated 17 million pages of personalized
content, attracting over 14.8 million unique visitors to, and generating over
925 million page views on, the GeoCities Web site, according to Relevant
Knowledge in June 1998 and Nielsen I/Pro in May 1998, respectively. GeoCities
was the third most trafficked Web site on the Internet among home users in June
1998, according to Media Metrix, and, based on this information, the Company
believes it was the most popular community of personal Web sites on the
Internet during the first two quarters of 1998. This combination of GeoCities'
distinctive community context, topical organization and high volume of traffic
provides advertisers and businesses with an attractive platform for targeted
Web advertising and Web commerce.
As the Internet continues to grow, Web users, advertisers and businesses are
increasingly seeking online communities. Users are seeking from the Web the
same opportunity for expression, interaction, sharing and recognition that they
seek in the everyday world. To date, a typical Internet user's experience
surfing the Web has been essentially one-way--searching and viewing Web sites
containing professionally created content on topics of general interest, such
as current events, sports, finance, politics and weather. In general, the Web
does not provide a context to publish, promote, search, view and react to
personal content. While Internet search and navigational sites have improved a
user's ability to seek out aggregated Web content, these sites are not
primarily focused on providing a robust platform for publishing or aggregating
the rapidly increasing volume of personalized content created by users with
similar interests, or enabling such users to interact with one another.
Similarly, users browsing the Web are increasingly seeking ways of accessing
unique, personalized content, and interacting and communicating with other
individuals with similar interests. Often the most relevant content for a user
is that generated by other users who share a common interest. Online
communities offer a centralized means of accessing diverse, user-created
content in an easy-to-navigate context
3
<PAGE>
and the ability to interact directly with the author of such personalized
content. For advertisers and businesses, online communities hold the potential
of reaching highly targeted audiences within a more personalized context, thus
providing the opportunity to increase advertising efficiency and improve the
likelihood of a sale.
GeoCities offers Web users the ability to join and become actively involved
in the world's largest Web community of personal Web sites. GeoCities provides
Web users with free disk space and publishing tools to quickly and easily
create their own sites in one of over 40 topically organized neighborhoods,
such as CapitolHill for politics, Colosseum for sports, Hollywood for movies
and television and WallStreet for finance. Homesteaders are encouraged to
become active participants in the GeoCities community by updating their sites
and communicating with others through free e-mail, chat and bulletin-board
services provided by the Company. The Company offers Homesteaders seeking
greater involvement the opportunity to join the ranks of over one thousand
active Community Leaders and Community Liaisons--volunteers who welcome
Homesteaders and provide them with assistance, suggest improvements to
GeoCities and monitor the GeoCities community for compliance with community
guidelines. In addition, the Company seeks to make the GeoCities community a
primary destination point for Internet users seeking personalized, user-created
content. Through the Company's enhanced user interface, GeoCities provides a
central site for Internet users to quickly access and view millions of pages of
topically organized content created by fellow users. This distinct community
context and high volume of traffic attracts advertisers, vendors and third-
party content providers from whom the Company derives revenue from advertising
and online commerce. For the six months ended June 30, 1998, the Company had
approximately 170 advertising customers, including Acura, IBM, Microsoft and
VISA, and four premier commerce partners, including Amazon.com, CDnow, First
USA and Surplus Direct/Egghead. The Company's equity investors include Chase
Capital Partners, CMG@Ventures, Intel Corporation, SOFTBANK Holdings Inc. and
Yahoo! Inc.
The Company's objective is to be the world's leading member-created online
community for Web users. The Company's strategy includes: (i) expanding its
Homesteader base and strengthening Homesteader affinity through the
introduction of new classes of membership, more advanced and easier-to-use
publishing tools and affinity-building programs; (ii) building the GeoCities
brand; (iii) enhancing the GeoCities site functionality and performance through
continued investments in technology and site infrastructure; (iv) expanding
globally, through initiatives similar to its current GeoCities Japan
Corporation joint venture with SOFTBANK Corporation of Japan and
(v) establishing additional strategic relationships, such as its current
distribution relationship with Yahoo! Inc. The Company believes that this
strategy will result in a highly scalable business platform from which it can
generate revenues from multiple sources, including advertising, commerce and
premium membership services. The Company does not generate revenues from
general Internet access or subscription fees.
The Company was incorporated under the laws of California in December 1994
and intends to reincorporate in Delaware in July 1998. Unless the context
otherwise requires, references in this Prospectus to the "Company" or
"GeoCities" refer to GeoCities, a Delaware corporation and its predecessor
California corporation. The Company's principal executive offices are located
at 1918 Main Street, Suite 300, Santa Monica, California 90405. Its telephone
number at that location is (310) 664-6500.
GeoCities is a registered service mark of the Company. GeoPlus, GeoPoints,
GeoRewards, GeoShops and GeoTickets are service marks of the Company. This
Prospectus contains other product names, trade names, service marks and
trademarks of the Company and of other organizations, all of which are the
property of their respective owners.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 4,750,000 shares
Common Stock to be outstanding after
the offering......................... 30,661,000 shares(1)
Use of proceeds....................... For investments in the GeoCities
community site, including enhancements
to the Company's server and networking
infrastructure and the functionality of
its Web site, and general corporate
purposes, including working capital,
expansion of its sales and marketing
capabilities and brand-name promotions.
See "Use of Proceeds".
Proposed Nasdaq National Market
symbol............................... "GCTY"
</TABLE>
SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial data for the
Company. This information should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------------------
1995 1996 1997 1997 1998
-------- ------- -------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ 46 $ 314 $ 4,582 $ 1,632 $ 5,542
Gross profit (loss)..... (57) (474) (52) 211 1,605
Loss from operations.... (479) (2,965) (9,019) (3,629) (7,739)
Net loss................ $ (482) $(3,006) $ (8,903) $(3,561) $(7,253)
======== ======= ======== ======= =======
Basic and diluted net
loss per share (2)..... $ (3.40) $ (2.27)
Shares outstanding used
in basic and diluted
per-share
calculation (2)........ 2,620 3,194
Pro forma basic and
diluted net loss per
share (3).............. $ (0.36) $ (0.29)
Shares outstanding used
in pro forma basic and
diluted net loss per
share calculation (3).. 24,850 25,425
<CAPTION>
JUNE 30, 1998
-------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
-------- ------------ --------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash
equivalents and short-
term investments....... $ 20,388 $20,388 $76,765
Working capital......... 17,706 17,706 74,083
Total assets............ 28,260 28,260 84,637
Debt and capital lease
obligations, less
current portion........ 780 780 780
Mandatory redeemable
convertible preferred
stock.................. 37,200 -- --
Total stockholders'
equity (deficiency).... (15,868) 21,332 77,709
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1998. Excludes (i) 6,531,000 shares of Common Stock issuable upon the
exercise of outstanding stock options, including stock options outstanding
under the Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive
Plan"), at a weighted average exercise price of $1.97 per share; (ii)
2,671,000 shares of Common Stock reserved for future issuance under the
1998 Stock Incentive Plan (which includes an increase of 2,300,000 shares
in the reserve under the 1998 Stock Incentive Plan approved in July); (iii)
427,000 shares issuable upon the exercise of stock options granted under
the predecessor plan to the 1998 Stock Incentive Plan in July 1998, at a
weighted average exercise price of $10.88 per share; (iv) 300,000 shares of
Common Stock reserved for future issuance under the Company's Employee
Stock Purchase Plan (the "Purchase Plan"); (v) 20,304 shares of Common
Stock issuable upon the exercise of an outstanding warrant at an exercise
price of $4.695 per share and (vi) up to 46,154 shares of Common Stock to
be issued pursuant to a technology purchase agreement, assuming an initial
public offering price of $13.00 per share. Includes 15,840 shares of Common
Stock to be issued to the Community Leaders and Liaisons under the 1998
Stock incentive Plan. See "Capitalization", "Management--Employee Benefit
Plans", "Description of Capital Stock" and Notes 2, 6, 8 and 10 of Notes to
Financial Statements.
(2) See Notes 2 and 10 of Notes to Financial Statements for the determination
of shares used in computing basic and diluted loss per share.
(3) Pro forma gives effect to the Preferred Stock Conversion.
(4) As adjusted to reflect the sale of 4,750,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $13.00 per share
after deducting the estimated underwriting discount and estimated offering
expenses payable by the Company. See "Use of Proceeds" and
"Capitalization".
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
LIMITED OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY; ANTICIPATED LOSSES
The Company was founded in December 1994, but did not begin generating
advertising revenues until mid-1996. For 1997 and the six months ended June
30, 1998, the Company generated revenues of $4.6 million and $5.5 million,
respectively. Accordingly, the Company has a limited operating history upon
which an evaluation of the Company, its current business and prospects can be
based. In addition, the Company's revenue model is evolving and relies
substantially upon the sale of advertising on its Web site. The Company's
business must be considered in light of the risks, expenses and problems
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as the
Internet. Specifically, such risks include, without limitation, the inability
of the Company to maintain and increase levels of traffic on the GeoCities Web
site, the failure by the Company to continue to develop and extend the
GeoCities brand, the inability of the Company to meet minimum guaranteed
impressions under advertising agreements, the lack of broad acceptance of the
community model on the Internet, the inability of the Company to attract or
retain members, acceptance by Homesteaders of advertising on Homesteads, the
inability of the Company to generate significant Web-based commerce revenues
or premium service revenues from its members, the failure of the Company to
anticipate and adapt to the developing Internet market, the failure of its
server and networking systems to efficiently handle the Company's Web traffic,
changes in laws that adversely affect the Company's business, competition, the
inability to effectively manage rapidly expanding operations, dependence on
the Internet, the introduction and development of different or more extensive
communities by direct and indirect competitors, particularly in light of the
fact that many of such competitors are much larger and have greater financial,
technical and marketing resources than the Company, the failure of the Web to
achieve broad acceptance as an advertising and commercial medium, reductions
in market prices for Web-based advertising as a result of competition or
otherwise, the inability of the Company to maintain or achieve higher rates
for advertising, the inability of the Company to identify, attract, retain and
motivate qualified personnel, other risks noted in this section of the
Prospectus, and general economic conditions. There can be no assurance that
the Company will be successful in addressing such risks, and any failure to do
so could have a material adverse effect on the Company's business, results of
operations and financial condition.
As of June 30, 1998, the Company had an accumulated deficit of $19.7
million. Although the Company has experienced revenue growth in recent
periods, there can be no assurance that the revenues of the Company will
continue at their current level or increase in the future. The Company has not
achieved profitability on a quarterly or annual basis to date, and the Company
anticipates that it will incur net losses for the foreseeable future. The
extent of these losses will be contingent, in part, on the amount of growth in
the Company's revenues from advertising, commerce and premium membership
service fees. The Company expects its operating expenses to increase
significantly, especially in the areas of sales and marketing and brand
promotion, and, as a result, will need to generate increased quarterly
revenues to achieve profitability. The extremely limited operating history of
the Company makes the prediction of future results of operations difficult or
impossible, and, therefore, the recent revenue growth experienced by the
Company should not be taken as an
6
<PAGE>
indication of the rate of revenue growth, if any, that can be expected in the
future. The Company believes that period-to-period comparisons of its
operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. To the
extent that revenues do not grow at anticipated rates or that increases in its
operating expenses precede or are not subsequently followed by commensurate
increases in revenues, or that the Company is unable to adjust operating
expense levels accordingly, the Company's business, results of operations and
financial condition will be materially and adversely affected. There can be no
assurance that the Company's operating losses will not increase in the future
or that the Company will ever achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; UNPREDICTABILITY OF FUTURE
REVENUES; SEASONALITY
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of the Company's
control. These factors include demand for Web-based advertising, acceptance of
the Web as an advertising medium, the level of traffic on the GeoCities Web
site, the advertising budgeting cycles of advertisers, the amount and timing
of capital expenditures and other costs relating to the expansion of the
Company's operations, the introduction of new or enhanced services by the
Company or its competitors, the timing and number of new hires, pricing
changes for Web-based advertising as a result of competition or otherwise, the
loss of a key advertising contract or relationship by the Company, changes in
the Company's pricing policy or those of its competitors, the mix of types of
advertisements sold by the Company, engineering or development fees that may
be paid in connection with adding new Web site development and publishing
tools, technical difficulties with the GeoCities Web site, incurrence of costs
relating to future acquisitions, general economic conditions, and economic
conditions specific to the Internet or all or a portion of the technology
sector. As a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing, service or marketing
decisions or business combinations that could have a material adverse effect
on the Company's business, results of operations and financial condition. In
order to accelerate the promotion of the GeoCities brand, the Company intends
to significantly increase its marketing budget. A substantial increase in
marketing expenditures will have a negative impact on the Company's results of
operations for a number of quarterly periods. The Company has experienced, and
expects to continue to experience, seasonality in its business, with user
traffic on the GeoCities Web site being lower during the summer and year-end
vacation and holiday periods when overall usage of the Web is lower.
Additionally, seasonality may significantly affect the Company's advertising
revenues during the first and third calendar quarters, as advertisers
historically spend less during these periods. Because Web-based advertising is
an emerging market, additional seasonal and other patterns in Web advertising
may develop in the future as the market matures, and there can be no assurance
that such patterns will not have a material adverse effect on the Company's
business, results of operations and financial condition.
As a result of the Company's limited operating history, the Company has
limited meaningful historical financial data upon which to base planned
operating expenses. Accordingly, the Company's expense levels are based in
part on its expectations as to future revenues from advertising, commerce
revenue-sharing arrangements, premium membership service fees and its
anticipated growth in memberships and to a large extent are fixed. There can
be no assurance that the Company will be able to accurately predict its
revenues, particularly in light of the intense competition for the sale of
Web-based advertisements, revenue-sharing opportunities and new members, the
Company's limited operating history and the uncertainty as to the broad
acceptance of the Web as an advertising and commerce medium. Any failure by
the Company to accurately predict revenues in relation to fixed-expense levels
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company derives a significant portion of its revenues from the sale of
advertising under short-term contracts, averaging one to two months in length.
As a result, the Company's quarterly
7
<PAGE>
revenues and operating results are, to a significant extent, dependent on
advertising revenues from contracts entered into within the quarter, as well
as on the Company's ability to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. To date, a significant
portion of the Company's revenues in any given period have been derived from a
small group of customers, the composition of which generally changes from
period to period. The Company expects this situation to continue in the
future. The Company's largest customer, Egghead, Inc. ("Surplus
Direct/Egghead"), accounted for approximately 12% and 10% of the Company's net
revenues during 1997 and the six months ended June 30, 1998, respectively. The
Company's four largest customers during 1997 and the six months ended June 30,
1998, including Surplus Direct/Egghead, which were, other than Surplus
Direct/Egghead, different customers in both of such periods, accounted for
approximately 29% and 28%, respectively, of the Company's net revenues in such
periods. The cancellation or deferral of existing advertising or commerce
contracts or the failure to obtain new contracts in any quarter could
materially and adversely affect the Company's business, results of operations
and financial condition for that quarter and future periods. Furthermore, the
Company's advertising revenues are based in part on the amount of traffic on
the GeoCities Web site. Accordingly, any significant shortfall in traffic on
the GeoCities Web site in relation to the Company's expectations or the
expectations of existing or potential advertisers would have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, substantially all of the Company's advertising
contracts require the Company to guarantee a minimum number of impressions. In
the event that these minimum impressions are not met, the Company could be
required to provide credit for additional impressions and the ability of the
Company to sell advertising to new or existing advertisers could be adversely
affected, and the Company could be forced to reduce advertising rates.
A key element of the Company's strategy is to generate revenues through
revenue-sharing relationships with commerce partners in addition to selling
standard banner advertising. The Company currently has short-term agreements
with four premier commerce partners: Amazon.com, CDnow, First USA and Surplus
Direct/Egghead. Under the terms of these agreements, the Company has agreed to
limit the number of such premier commerce partners on its Web site to four and
certain other restrictions. Each of these agreements is renewable at the
option of the other party, subject to the payment of certain renewal fees and
rates. To date, the revenues received by the Company under the revenue-sharing
portions of these arrangements have not been material, and there can be no
assurance that the Company will receive a material amount of revenue under
these agreements in the future. The Company's agreement with Surplus
Direct/Egghead allows Surplus Direct/Egghead to terminate its agreement with
the Company upon 30 days notice, subject to the payment of certain termination
fees. Moreover, there can be no assurance that any of these parties will
exercise its renewal right or that Surplus Direct/Egghead will not exercise
its right to terminate its agreement with the Company, either of which events
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, under the terms of its
agreement with First USA, the Company is obligated to generate a certain
number of accepted credit-card applications, and, if the Company fails to
generate such applications, it is generally required to increase the amount of
advertising it provides to First USA on its site. There can be no assurance
that this provision will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Due to any of the foregoing factors, in some future quarter or quarters the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
UNPROVEN BUSINESS MODEL; DEPENDENCE ON MEMBERS
The Company's business model depends upon its ability to leverage its
community platform and generate multiple revenue streams. The potential
profitability of this business model is unproven, and, to be successful, the
Company must, among other things, develop and market solutions that achieve
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broad market acceptance by its members, Internet advertisers, commerce vendors
and Internet users. Under the Company's model, the Company is substantially
dependent upon its member-generated content, the grass-roots promotional
efforts of its members, the acceptance by its members of advertising and other
promotional programs of third parties and the Company, including the Company's
recently introduced watermark on Homesteads, and the voluntary involvement of
its Community Leaders and Liaisons to attract Web users to its site and to
reduce the demands on Company personnel. This model has existed for only a
limited period of time, and, as a result, is relatively unproven. There can be
no assurance that the Company's member-generated content or the promotional
efforts of its members will continue to attract users to the Company's Web
site. There can also be no assurance that the Company's Community Leaders and
Liaisons will continue to devote their time voluntarily to improving the
community, or, given the fact that the Company provides free disk space to its
Homesteaders and the Company supports the involvement of its Community Leaders
and Liaisons, that third parties will not attempt to hold the Company
responsible for such content and/or any actions or omissions of such Community
Leaders and Liaisons. There also can be no assurance that the Company's
business, results of operations and financial condition would not be
materially and adversely affected if a substantial number of Homesteaders
became dissatisfied with the Company's services or its focus on the
commercialization of those services. Moreover, there can be no assurance that
community on the Internet or the Company's services and brand will achieve
broad market acceptance. Accordingly, no assurance can be given that the
Company's business model will be successful or that it can sustain revenue
growth or generate significant profits.
RELIANCE ON ADVERTISING REVENUES AND UNCERTAIN ADOPTION OF THE WEB AS AN
ADVERTISING MEDIUM
The Company has derived a substantial majority of its revenues to date from
the sale of advertisements, including banner advertising revenues and
advertising revenues from its premier commerce partners. For 1997 and the six
months ended June 30, 1998, advertising revenues represented 90.6% and 90.2%,
respectively, of the Company's net revenues. The Company's strategy is to
continue to emphasize advertising as a method of generating revenues. The
Company's current business model is therefore highly dependent on the amount
of traffic on the Company's Web site. This type of business model, however, is
relatively unproven. The Internet as an advertising medium has not been
available for a sufficient period of time to gauge its effectiveness as
compared with traditional advertising media. Many of the Company's advertisers
have only limited experience with the Web as an advertising medium, have not
yet devoted a significant portion of their advertising budgets to Web-based
advertising and may not find such advertising to be effective for promoting
their products and services relative to traditional print and broadcast media.
For 1997, advertising on the Web represented less than 0.5% of overall
advertising revenues in the United States according to industry sources. The
Company's ability to generate significant advertising revenues will also
depend on, among other things, the development of a large base of users of the
Company's services possessing demographic characteristics attractive to
advertisers and the ability of the Company to develop or acquire effective
advertising delivery and measurement systems.
The adoption of Web-based advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business and exchanging information.
Entities that already have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts. There can be no assurance that the market
for Web advertising will continue to emerge or become sustainable. If the
market develops more slowly than expected, the Company's business, results of
operations and financial condition could be materially and adversely affected.
No standards have been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that
such standards will develop sufficiently to support the Web as an effective
advertising medium. There can be no assurance that advertisers will accept the
Company's or other third-party measurements of impressions, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, there is intense
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competition in the sale of advertising on the Web resulting in a wide variety
of pricing models, rate quotes and advertising services, making it difficult
to project future levels of advertising revenues and rates. It is also
difficult to predict which pricing models, if any, will achieve broad
acceptance among advertisers. The Company has traditionally based its
advertising rates on providing advertisers with a guaranteed number of
impressions, and any failure of the Company's advertising model to achieve
broad market acceptance would have a material adverse effect on the Company's
business, results of operations and financial condition.
The process of managing advertising within a large, high-traffic Web site
such as the Company's is an increasingly important and complex task. The
Company licenses from IMGIS, Inc. ("IMGIS") its advertising management system
(the "AdForce service"). Under the license agreement, IMGIS provides the
Company an Internet advertising administration system to facilitate the
Company's management of advertising on its Web site. The Adforce service is
intended to permit the Company to generate ad tags, schedule advertising to
run in the online environments in which the Company places the ad tags and
generate reports on such advertising. The IMGIS agreement is for a term of two
years and will expire in May 2000, subject to the Company's right to terminate
the agreement with or without cause during the 30-day period following May 4,
1999. Additionally, the Company may terminate the agreement for IMGIS' non-
performance under the agreement. No assurance can be given that the Company
will not elect to terminate the agreement. If it elected to do so, the Company
believes that it could replace the Adforce service with other available
advertising management systems. However, any such termination and replacement
could disrupt the Company's ability to manage its advertising operations for a
period of time. In addition, to the extent that the Company encounters system
failures or material difficulties in the operation of this system, the Company
could be unable to deliver banner advertisements and sponsorships through its
Web site. Any extended failure of, or material difficulties encountered in
connection with, the Company's advertising management system may expose the
Company to "make good" obligations with its advertisers, which, by displacing
saleable advertising inventory, among other consequences, would reduce
revenues and have a material adverse effect on the Company's business, results
of operations and financial condition.
There can be no assurance that current advertisers will continue to purchase
advertising space and services from the Company at current levels or at all,
or that impressions sufficient to generate revenues will be achieved, or that
the Company will be able to successfully attract additional advertisers.
Furthermore, with the rapid growth of available advertising inventory on the
Internet and the intense competition among sellers of advertising space, it is
difficult to project pricing models that will be adopted by the industry or
individual companies. The Company's ability to generate significant
advertising revenues will depend, in part, on the ability of the Company to
leverage additional platforms within its community for new advertising
programs without diluting the perceived value of its existing programs.
Moreover, "filter" software programs that limit or remove advertising from a
Web user's desktop are available; widespread adoption or increased use of such
software by users could have a material adverse effect upon the viability of
advertising on the Web and on the Company's business, results of operations
and financial condition. There can be no assurance that the Company will be
successful in generating significant future advertising revenues or other
source of revenues, and any failure to do so would have a material adverse
effect on the Company's business, results of operations and financial
condition.
MANAGEMENT OF GROWTH AND RELATIONSHIPS; BRIEF TENURE OF MANAGEMENT; DEPENDENCE
ON KEY PERSONNEL
The Company has experienced and may continue to experience rapid growth,
which has placed, and could continue to place, a significant strain on the
Company's managerial, financial and operational resources. The Company is
required to manage multiple relationships with various strategic partners,
technology licensors, members, advertisers and other third parties. These
requirements will be exacerbated in the event of further growth of the Company
or in the number of third party relationships, and there can be no assurance
that the Company's systems, procedures or controls will be adequate to support
the Company's operations or that Company management will be
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able to manage any growth effectively. To effectively manage its potential
growth, the Company must continue to implement and improve its operational,
financial and management information systems and to expand, train and manage
its employee base. As of June 30, 1998, the Company had grown to 152 full-time
employees from 63 on June 30, 1997, and the Company anticipates that the
number of its employees will increase significantly in the next 12 months. The
Company has recently hired a substantial number of its existing executive
officers to establish a management infrastructure to manage the potential
growth of its business, including its Chief Executive Officer (May 1998),
Chief Financial and Chief Operating Officer (November 1997), Vice President,
Advertising Sales (September 1997), Vice President, Marketing (May 1998), Vice
President, Business Development (May 1998) and Vice President, Human Resources
(June 1998). In certain cases, these executives replaced existing executive
officers, but in all other cases were added to fill newly-created positions in
response to the Company's expanding operations. These individuals have not
previously worked together and are in the process of integrating as a
management team, and there can be no assurance that they will be able to work
together effectively or successfully manage any growth experienced by the
Company. Certain of the Company's new executives lack experience in an
Internet industry environment and, accordingly, there can be no assurance that
they will quickly adapt to the Internet marketplace. In addition, the majority
of the Company's sales personnel have recently joined the Company, and there
can be no assurance that they will be successful in increasing the Company's
level of sales.
The Company's performance is substantially dependent on the performance of
its executive officers and other key employees. The Company does not currently
have "key person" life insurance policies on any of its employees, other than
on David Bohnett, the Company's Chairman and founder. The loss of the services
of any of its executive officers or other key employees could have a material
adverse effect on the business, results of operations and financial condition
of the Company. Competition for senior management, experienced media sales and
marketing personnel, qualified Web engineers and other employees is intense,
and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The Company has experienced
difficulty from time to time in hiring and retaining the personnel necessary
to support the growth of its business, and there can be no assurance that the
Company will not experience similar difficulty in the future. The failure of
the Company to successfully manage its personnel requirements would have a
material adverse effect on the Company's business, results of operations and
financial condition.
INTENSE COMPETITION
The market for members, visitors and Internet advertising is new and rapidly
evolving, and competition for members, visitors and advertisers is intense and
is expected to increase significantly in the future. Barriers to entry are
relatively insubstantial. The Company believes that the principal competitive
factors for companies seeking to create community on the Internet are critical
mass, functionality, brand recognition, member affinity and loyalty, broad
demographic focus and open access for visitors. Other companies who are
primarily focused on creating Web-based community on the Internet are Tripod,
Inc., a subsidiary of Lycos, Inc. ("Tripod/Lycos"), Angelfire Communications
("Angelfire"), Xoom, Inc. ("Xoom") and theglobe.com ("theglobe"). The Company
will likely also face competition in the future from Web directories, search
engines, shareware archives, content sites, commercial online service
providers ("OSPs"), sites maintained by Internet service providers ("ISPs")
and other entities that attempt to or establish communities on the Internet by
developing their own community or acquiring one of the Company's competitors.
In addition, the Company could face competition in the future from traditional
media companies, a number of which, including Disney, CBS and NBC, have
recently made significant acquisitions of or investments in Internet
companies. Further, there can be no assurance that the Company's competitors
and potential competitors will not develop communities that are equal or
superior to those of the Company or that achieve greater market acceptance
than the Company's community. The Company also competes for visitors with many
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Internet content providers and ISPs, including Web directories, search
engines, shareware archives, content sites, commercial online services and
sites maintained by Internet service providers, as well as thousands of
Internet sites operated by individuals and government and educational
institutions. These competitors include free information, search and content
sites or services, such as America Online, Inc. ("AOL"), CNET, Inc. ("CNET"),
CNN/Time Warner, Inc. ("CNN/Time Warner"), Excite, Inc. ("Excite"), Infoseek
Corporation ("Infoseek"), Lycos, Inc. ("Lycos"), Netscape Communications
Corporation ("Netscape"), Microsoft Corporation ("Microsoft") and Yahoo! Inc.
("Yahoo!") some of whom, such as Yahoo! and Lycos, may also have relationships
with GeoCities. The Company also competes with the foregoing companies, as
well as traditional forms of media such as newspapers, magazines, radio and
television, for advertisers and advertising revenues. The Company believes
that the principal competitive factors in attracting advertisers include the
amount of traffic on its Web site, brand recognition, customer service, the
demographics of the Company's members and viewers, the Company's ability to
offer targeted audiences and the overall cost-effectiveness of the advertising
medium offered by the Company. The Company believes that the number of
Internet companies relying on Web-based advertising revenue will increase
substantially in the future. Accordingly, the Company will likely face
increased competition, resulting in increased pricing pressures on its
advertising rates which could in turn have a material adverse effect on the
Company's business, results of operations and financial condition.
Many of the Company's existing and potential competitors, including Web
directories and search engines and large traditional media companies, have
longer operating histories in the Web market, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than the Company. Such competitors are able to undertake more
extensive marketing campaigns for their brands and services, adopt more
aggressive advertising pricing policies and make more attractive offers to
potential employees, distribution partners, commerce companies, advertisers
and third-party content providers. There can be no assurance that Internet
content providers and ISPs, including Web directories, search engines,
shareware archives, sites that offer professional editorial content,
commercial online services and sites maintained by ISPs will not be perceived
by advertisers as having more desirable Web sites for placement of
advertisements. In addition, substantially all of the Company's current
advertising customers and strategic partners also have established
collaborative relationships with certain of the Company's competitors or
potential competitors, and other high-traffic Web sites. Accordingly, there
can be no assurance that the Company will be able to grow its membership base,
traffic levels and advertiser customer base at historical levels or retain its
current members, traffic levels or advertiser customers, or that competitors
will not experience greater growth in traffic than the Company as a result of
such relationships which could have the effect of making their Web sites more
attractive to advertisers, or that the Company's strategic partners will not
sever or will elect not to renew their agreements with the Company. There can
also be no assurance that the Company will be able to compete successfully
against its current or future competitors or that competition will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISK OF CAPACITY CONSTRAINTS; SYSTEM FAILURES; TECHNOLOGICAL RISKS
The performance of the Company's server and networking hardware and software
infrastructure is critical to the Company's business and reputation and its
ability to attract Web users, advertisers, new members and commerce partners
to the Company's Web site. Any system failure that causes an interruption in
service or a decrease in responsiveness of the Company's Web site could result
in less traffic on the Company's Web site and, if sustained or repeated, could
impair the Company's reputation and the attractiveness of its brand name. The
Company maintains redundant systems for all critical operational areas. If
necessary, connectivity through a failed router or switch can be restored via
one of the hot standby systems maintained on site. Moreover, the Company
maintains redundant application servers and databases to ensure full
functionality in the event of a system failure. Disk storage is
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configured to survive multiple drive failures without risk of data loss. To
ensure backup and restoration of all production data, the Company's system is
comprised of several dedicated servers and tape libraries with the capacity to
backup the Web site every 24 hours. Backup media is rotated into offsite
archives to ensure data integrity should catastrophic events occur on site.
The Company entered into a one-year Web-hosting agreement with Exodus
Communications, Inc. ("Exodus") in November 1997. This agreement is
automatically renewed for subsequent one-year terms unless either party
provides notice at least 90 days prior to the expiration of any term. Pursuant
to the agreement, Exodus provides and manages power and environmentals for the
Company's networking and server equipment. Exodus also provides site
connectivity to the Internet via multiple DS-3 and OC-3 links on a 24 hour-a-
day, seven days per week basis. In the event that the Company's Internet
connectivity is interrupted due to reasons within Exodus' reasonable control,
Exodus must in general provide the Company with additional access at no
charge. Under the terms of the agreement, Exodus does not, however, guarantee
that the Company's Internet access will be uninterrupted, error-free or
completely secure. Any disruption in the Internet access provided by Exodus or
any failure of the Company's server and networking systems to handle current
or higher volumes of traffic could have a material adverse effect on the
Company's business, results of operations and financial condition. An increase
in the use of the Company's Web site could strain the capacity of its systems,
which could lead to slower response time or system failures. Slowdowns or
system failures adversely affect the speed and responsiveness of the Company's
Web site and would diminish the experience for the Company's members and
visitors and reduce the number of impressions received by advertisers, and,
thus, could reduce the Company's advertising and commerce revenues. The
ability of the Company to provide effective Internet connections or of its
systems to manage substantially larger numbers of customers at higher
transmission speed is as yet unknown, and, as a result, the Company faces
risks related to its ability to scale up to its expected customer levels while
maintaining superior performance. If GeoCities' usage of bandwidth increases,
GeoCities will need to purchase additional servers and networking equipment
and rely more heavily on its equipment and on Exodus and its services to
maintain adequate data transmission speeds, the availability of which may be
limited or the cost of which may be significant.
The successful delivery of the Company's services is also dependent in
substantial part upon the ability of Exodus and the Company to protect
GeoCities' servers and network infrastructure against damage from human error,
fire, flood, power loss, telecommunications failure, sabotage, intentional
acts of vandalism and similar events. In addition, substantially all of the
Company's servers and network infrastructure are located in Northern
California, an area susceptible to earthquakes, which also could cause system
outages or failures if one should occur. Despite precautions taken by and
planned to be taken by the Company and Exodus, the occurrence of other natural
disasters or other unanticipated problems at their respective facilities could
result in interruption in the services provided by the Company or significant
damage to GeoCities' equipment. Despite the implementation of network security
measures by the Company, its servers are vulnerable to computer viruses,
break-ins, and similar disruptions from unauthorized tampering. The occurrence
of any of these events could result in interruptions, delays or cessations in
service, which could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company's
reputation and the GeoCities brand could be materially and adversely affected.
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new product and
service announcements and enhancements and changing customer demands.
Accordingly, the Company's success will depend on its ability to adapt to
rapidly changing technologies and industry standards, and its ability to
continually improve the speed, performance, features, ease of use and
reliability of its server and networking system in
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response to both evolving demands of the marketplace and competitive service
and product offerings. Any failure to rapidly adapt in a changing environment
would have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company continually strives to incorporate new technology into its Web
site for the benefit of its members, visitors and advertising and commerce
partners. Introducing new technology into the Company's systems involves
numerous technical challenges, substantial amounts of personnel resources and
often times takes many months to complete. There can be no assurance that the
Company will be successful at integrating such technology into its Web site on
a timely basis or without degrading the responsiveness and speed of its Web
site or that, once integrated, such technology will function as expected.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
GENERAL
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations,
and it is possible that a number of laws or regulations may be adopted with
respect to the Internet relating to such issues as user privacy, user
screening to prevent inappropriate uses of the Internet by, for example,
minors or convicted criminals, taxation, infringement, pricing, content
regulation, quality of products and services and intellectual property
ownership and infringement. The adoption of any such laws or regulations may
decrease the growth in the use of the Internet, which could in turn decrease
the demand for the Company's community, increase the Company's cost of doing
business, or otherwise have a material adverse effect on the Company's
business, results of operations and financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, copyright, trademark, trade secret, obscenity, libel and
personal privacy is uncertain and developing. Any new legislation or
regulation, or application or interpretation of existing laws, could have a
material adverse effect on the Company's business, results of operations and
financial condition. For example, although it was held unconstitutional, the
Telecommunications Act of 1996 prohibited the transmission over the Internet
of certain types of information and content. Other nations, including Germany
and China, have taken actions to restrict the free flow of material on the Web
deemed to be objectionable. In addition, although substantial portions of the
Communications Decency Act (the "CDA") were held to be unconstitutional, there
can be no assurance that similar legislation will not be enacted in the
future, and it is possible that such legislation could expose the Company to
substantial liability. Legislation like the CDA could also dampen the growth
in use of the Web generally and decrease the acceptance of the Web as a
communications and commercial medium, and could, thereby, have a material
adverse effect on the Company's business, results of operations and financial
condition. It is also possible that the Company's use of "cookies" to track
demographic information and user preferences and to target advertising may
become subject to laws limiting or prohibiting their use. A "cookie" is a bit
of information keyed to a specific server, file pathway or directory location
that is stored on a user's hard drive, possibly without the user's knowledge.
A user is generally able to remove cookies. Germany, for example, has imposed
laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries
have urged the passage of laws limiting or abolishing the use of cookies.
Limitations on or elimination of the Company's use of cookies could limit the
effectiveness of the Company's targeting of advertisements, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, a number of legislative proposals have been
made at the federal, state and local level that would impose additional taxes
on the sale of goods and services over the Internet and certain states have
taken measures to tax Internet-related activities. Currently, Congress is
considering a number of
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versions of legislation which would place a moratorium of a number of years on
any new taxation of Internet commerce. There can be no assurance that any such
legislation will be adopted by Congress. Moreover, it is likely that, once
such moratorium is lifted, some type of federal and/or state taxes will be
imposed upon Internet commerce, and there can be no assurance that such
legislation or other attempts at regulating commerce over the Internet will
not substantially impair the growth of commerce on the Internet and, as a
result, adversely affect the Company's opportunity to derive financial benefit
from such activities. In addition to the foregoing areas of recent legislative
activities, several telecommunications carriers are currently seeking to have
telecommunications over the Web regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications
services. For example, America's Carriers Telecommunications Association has
filed a petition with the FCC for this purpose. In addition, because the
growing popularity and use of the Web have burdened the existing
telecommunications infrastructure and many areas with high Web use have begun
to experience interruptions in phone service, local telephone carriers have
petitioned the FCC to regulate ISPs and OSPs in a manner similar to long-
distance telephone carriers and to impose access fees on the ISPs and OSPs. If
either of these petitions is granted, or the relief sought therein is
otherwise granted, the costs of communicating on the Web could increase
substantially, potentially slowing growth in use of the Web, which could in
turn decrease demand for the Company's services or increase the Company's cost
of doing business.
Due to the global nature of the Web, it is possible that, although
transmissions by the Company over the Internet originate primarily in the
State of California, the governments of other states and foreign countries
might attempt to regulate the Company's transmissions or prosecute the Company
for violations of their laws. There can be no assurance that violations of
local laws will not be alleged or charged by state or foreign governments,
that the Company might not unintentionally violate such laws or that such laws
will not be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, as the Company's services are available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state or foreign country. The Company is qualified to do business only in
California and New York, and failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties and could result in the inability of the
Company to enforce contracts in such jurisdictions. Any such new legislation
or regulation, the application of laws and regulations from jurisdictions
whose laws do not currently apply to the Company's business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company's "GeoRewards" affinity program, which entitles Homesteaders to
receive GeoPoints and GeoTickets redeemable for merchandise, such as T-shirts,
books, music or other merchandise, also exposes the Company to certain
additional risks and expenses including, without limitation, those related to
compliance with consumer protection laws, loss of customer data, disputes over
redemption procedures and rules, product liability, sales taxation and
liabilities associated with any failure in the performance by participating
merchants.
FEDERAL TRADE COMMISSION INVESTIGATION
In September 1997, GeoCities received a letter from the Federal Trade
Commission (the "FTC") requesting that GeoCities voluntarily produce certain
information regarding GeoCities' collection and use of personal identifying
information. GeoCities produced the requested information as well as certain
supplemental information in late 1997. In February 1998, the FTC staff sent a
draft complaint and draft consent order to GeoCities. At that time, the FTC
staff indicated that, if approved by the FTC,
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an administrative suit would be brought against GeoCities alleging that it had
violated Section 5(a) of the Federal Commission Act (the "FTC Act") by
engaging in unfair and deceptive practices in connection with the Company's
collection and use of personal identifying information obtained from
individuals, including children. The FTC staff also offered to settle the
matter under the terms contained in the draft consent order.
After receiving the draft complaint and draft consent order, GeoCities and
the FTC staff engaged in settlement discussions. As a result of these
discussions, on June 11, 1998, the Company and FTC staff attorneys executed an
Agreement Containing Consent Order (the "Proposed Consent Order") which is
subject to FTC approval including a period of public comment, to settle the
matter. The Proposed Consent Order resolves the FTC's allegations (which are
contained in a revised draft complaint to be filed by the FTC with the
Proposed Consent Order) that the Company: (i) disclosed to third parties
personal identifying information collected in its member application process
contrary to what had been represented to consumers by the Company; (ii)
implied that there was an affiliation between the Company and a children's
club operated by a GeoCities Community Leader such that children provided
personal identifying information to the club believing they were disclosing
the information to GeoCities and (iii) failed to disclose to consumers
(including the parents of children) how the Company would use the personal
identifying information it collected from those consumers and children. Under
the Proposed Consent Order, GeoCities would be required to: (i) cease and
desist from the allegedly deceptive practices in the future and (ii) establish
certain procedures to: (a) give adequate notice to consumers regarding
GeoCities' information collection and disclosure practices; (b) provide
consumers with the ability to have GeoCities delete their personal identifying
information from GeoCities' database; (c) more clearly identify its
affiliation (or lack thereof) with third parties which may collect information
or sponsor activities on GeoCities; and (d) obtain express parental consent
prior to collecting and using personal identifying information obtained from
children under 13 years of age. By the terms of the Proposed Consent Order,
GeoCities would not admit any of the allegations contained in the complaint,
nor would it be required to make any monetary payment to the FTC or consumers.
Although the Proposed Consent Order requires that the Company take specific
actions, including those outlined above, GeoCities has been and remains
committed to protecting the privacy rights of all consumers (and, in
particular children) on the Internet. As part of its ongoing efforts to
enhance the protection of the privacy of its members, the Company has
consulted and worked with industry self-regulation groups and has implemented
or intends to implement programs designed to enhance the protection of the
privacy of its members, including children. Such programs include: (i)
publishing a comprehensive, multi-screen, privacy statement that is accessible
from many places on the Company's Web site, including the GeoCities home page
and new member application form; (ii) revamping the new member application
form to make the questions clearer to consumers; (iii) enhancing its training
program for Community Leaders; (iv) suspending certain e-mail marketing
programs of an affiliate and confirming that the affiliate had never sent e-
mails to individuals based on the representation included in the application
form; (v) altering its rules to expressly forbid third parties from collecting
information in connection with promotions for any purpose other than to
fulfill the promotion; (vi) instructing companies that received information
from the Company regarding children under 13 to cease use of such information;
(vii) making changes to the content that appears on the Company's Web site,
such as warnings to children not to give out personal information, and
removing inappropriate advertising and promotions from GeoCities' children and
family-oriented "EnchantedForest" neighborhood and (viii) requiring that
individuals under 13 involve their parents in the process of applying for a
free membership in GeoCities. To confirm the adequacy of its disclosure
practices in the area of information collection and use, the Company submitted
its privacy statement to TRUSTe, an industry self-regulation group. TRUSTe has
certified such statement as an accurate representation to consumers of
GeoCities' information collection practices.
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The Proposed Consent Order has been approved by the Director of Consumer
Protection for the FTC, but remains subject to preliminary and final approval
by the FTC after a period of public comment. There can be no assurance that
the Proposed Consent Offer ultimately will be approved by the FTC. If the
Proposed Consent Order is not approved by the FTC and the FTC ultimately
decides to file suit, the Company intends to vigorously defend itself against
the FTC's allegations. If the FTC files suit, there can be no assurance that
the FTC will not make additional allegations against the Company or seek more
extensive relief than the relief sought by the Proposed Consent Order, or that
any subsequent settlement, or other relief ultimately obtained by the FTC will
not exceed the relief contained in the Proposed Consent Order. If more
extensive relief is obtained by the FTC, there can be no assurance that it
will not have a material adverse effect on the Company's business, results of
operations or financial condition.
LIABILITY FOR INFORMATION RETRIEVED FROM THE WEB
Because materials may be downloaded by members and other users of the
Company's Web site and subsequently distributed to others, there is a
potential that claims will be made against the Company for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature, content, publication and distribution of such
materials. Such claims have been brought, and sometimes successfully pressed,
against OSPs for example in the past. The Company has received inquiries on a
regular basis from third parties regarding such matters, all of which have
been resolved to date without any payments or other material adverse effect on
the Company. In addition, the increased attention focused upon liability
issues as a result of these lawsuits and legislative proposals could impact
the overall growth of Internet use. The Company could also be exposed to
liability with respect to the offering of third-party content that may be
accessible through the Company's Web site, or through content and materials
that may be posted by members on their personal Web sites or chat rooms, or
bulletin boards offered by the Company. Such claims might include, among
others, that by directly or indirectly hosting the personal Web sites of third
parties, the Company is liable for copyright or trademark infringement or
other wrongful actions by such third parties through such Web sites. It is
also possible that if any third-party content information provided on the
Company's Web site contains errors, third parties could make claims against
the Company for losses incurred in reliance on such information. The Company
also offers e-mail services, which expose the Company to potential risk, such
as liabilities or claims resulting from unsolicited e-mail (spamming), lost or
misdirected messages, illegal or fraudulent use of e-mail or interruptions or
delays in e-mail service. Even to the extent that such claims do not result in
liability to the Company, the Company could incur significant costs in
investigating and defending against such claims. The imposition on the Company
of potential liability for information carried on or disseminated through its
systems could require the Company to implement measures to reduce its exposure
to such liability, which may require the expenditure of substantial resources
and limit the attractiveness of the Company's services to members and users.
The Company also enters into agreements with commerce partners and sponsors
under which the Company is in general entitled to receive a share of any
revenue from the purchase of goods and services through direct links from the
Company's Web site. Such arrangements may expose the Company to additional
legal risks and uncertainties, including potential liabilities to consumers of
such products and services by virtue of the Company's involvement in providing
access to such products or services, even if the Company does not itself
provide such products or services. While the Company's agreements with these
parties often provide that the Company will be indemnified against such
liabilities, there can be no assurance that such indemnification, if
available, will be adequate. Although the Company carries general liability
insurance, the Company's insurance may not cover all potential claims to which
it is exposed or may not be adequate to indemnify the Company for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the increased attention focused upon liability issues
as a result of these lawsuits and legislative proposals could impact the
overall growth of Internet use.
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RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that establishing and maintaining the GeoCities brand
is a critical aspect of its efforts to attract and expand its member base, Web
traffic and advertising and commerce relationships, and that the importance of
brand recognition will increase due to the growing number of Internet sites
and the low barriers to entry. In order to attract and retain members,
Internet users, advertisers and commerce partners, and to promote and maintain
the GeoCities brand in response to competitive pressures, the Company intends
to increase substantially its financial commitment to creating and maintaining
distinct brand loyalty among these groups, including through traditional media
advertising campaigns in print, radio, billboards and television. Promotion
and enhancement of the GeoCities brand will also depend, in part, on the
Company's success in providing a high-quality community experience, which
success cannot be ensured. If the Company does not generate a corresponding
increase in revenue as a result of its branding efforts or otherwise fails to
promote its brand successfully, or if the Company incurs excessive expenses in
an attempt to promote and maintain its brand, the Company's business, results
of operations and financial condition, will be materially and adversely
affected. If members, visitors to the GeoCities Web site, advertisers or
businesses do not perceive the Company's existing services to be of high
quality, or if the Company introduces new services or enters into new business
ventures that are not favorably received by such parties, the value of the
Company's brand could be diluted, thereby decreasing the attractiveness of its
Web site to such parties.
SECURITY RISKS
The Company has experienced attempts by experienced programmers or "hackers"
to penetrate the Company's network security, some of which have succeeded, and
expects these attempts to continue to occur from time to time. To date, none
of this activity has had a material adverse effect on the Company's business,
results of operations or financial condition. A party who is able to penetrate
the Company's network security could misappropriate proprietary information or
cause interruptions in the Company's Web site. In addition, in offering
certain payment services through its GeoShops program, the Company could
become increasingly reliant on encryption and authentication technology
licensed from third parties to provide the security and authentication
necessary to effect secure transmission of confidential information, such as
customer credit card numbers. Advances in computer capabilities, discoveries
in the field of cryptography and other discoveries, events, or developments
could lead to a compromise or breach of the algorithms that the Company's
licensed encryption and authentication technology uses to protect such
confidential information. If such a compromise or breach of the Company's
licensed encryption authentication technology occurs, it could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company may be required to expend significant capital and
resources to protect against the threat of such security, encryption and
authentication technology breaches or to alleviate problems caused by such
breaches. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet generally, particularly
as a means of conducting commercial transactions. Security breaches or the
inadvertent transmission of computer viruses could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that contractual provisions attempting to limit the Company's liability in
such areas will be successful or enforceable, or that other parties will
accept such contractual provisions as part of the Company's agreements which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
RELIANCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its technology as proprietary and attempts to protect it
by relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. The
Company currently has no patents or patents pending and does not anticipate
that patents will become a significant part of the Company's intellectual
property in the foreseeable future. The Company also generally enters into
confidentiality or license agreements
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with its employees and consultants, and generally controls access to and
distribution of its documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's proprietary information without authorization or
to develop similar technology independently. The Company pursues the
registration of its service marks in the United States and internationally,
and has applied for and obtained the registration in the United States for a
number of its service marks, including "GeoCities". Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which the Company's services are distributed or made
available through the Internet, and policing unauthorized use of the Company's
proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company or other companies
within this market. There can be no assurance that the steps taken by the
Company will prevent misappropriation or infringement of its proprietary
information. Any such infringement or misappropriation, should it occur, could
have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, litigation may be necessary
in the future to enforce the Company's intellectual property rights, to
protect the Company's trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation might result in substantial
costs and diversion of resources and management attention and could have a
material adverse effect on the Company's business, results of operations and
financial condition. Furthermore, there can be no assurance that the Company's
business activities will not infringe upon the proprietary rights of others,
or that other parties will not assert infringement claims against the Company.
From time to time, the Company has been, and expects to continue to be,
subject to claims in the ordinary course of its business including claims of
alleged infringement of the trademarks, service marks and other intellectual
property rights of third parties by the Company and the content generated by
its members. Although such claims have not resulted in any significant
litigation or had a material adverse effect on the Company's business to date,
such claims and any resultant litigation, should it occur, might subject the
Company to significant liability for damages and might result in invalidation
of the Company's proprietary rights and even if not meritorious, could be time
consuming and expensive to defend and could result in the diversion of
management time and attention, any of which might have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Company currently licenses from third parties certain technologies
incorporated into the Company's Web site. As the Company continues to
introduce new services that incorporate new technologies, it may be required
to license additional technology from others. There can be no assurance that
these third-party technology licenses will continue to be available to the
Company on commercially reasonable terms, if at all. The inability of the
Company to obtain any of these technology licenses could result in delays or
reductions in the introduction of new services or could adversely affect the
performance of its existing services until equivalent technology could be
identified, licensed and integrated. See "Business--Intellectual Property and
Proprietary Rights".
DEPENDENCE ON CONTINUED GROWTH IN THE USE OF THE INTERNET; DEPENDENCE ON WEB
INFRASTRUCTURE
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web in order to support the sale of
advertising on the Company's Web site and in the acceptance and volume of
commerce transactions on the Internet. There can be no assurance that the
number of Internet users will continue to grow or that commerce over the
Internet will become more widespread. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for recently
introduced services are subject to a high level of uncertainty. The Internet
may not prove to be a viable commercial marketplace for a number of reasons,
including lack of acceptable security technologies, lack of access and ease of
use, congestion of traffic, inconsistent quality of service and lack of
availability of cost-effective, high-speed service, potentially inadequate
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development of the necessary infrastructure, excessive governmental
regulation, uncertainty regarding intellectual property ownership or timely
development and commercialization of performance improvements, including high-
speed modems.
The success of the GeoCities Web site will depend in large part upon the
continued development of a Web infrastructure, such as a reliable network
backbone with the necessary speed, data capacity and security, and timely
development of complementary products such as high speed modems for providing
reliable Web access and services. Because global commerce and online exchange
of information on the Web and other similar open wide area networks are new
and evolving, it is difficult to predict with any assurance whether the Web
will support increasing use or will prove to be a viable commercial
marketplace. The Web has experienced, and is expected to continue to
experience, significant growth in the number of users and the amount of
content. To the extent that the Web continues to experience increased numbers
of users, frequency of use or increased bandwidth requirements of users, there
can be no assurance that the Web infrastructure will continue to be able to
support the demands placed on it by this continued growth or that the
performance or reliability of the Web will not be adversely affected by this
continued growth. In addition, the Web could lose its viability or
effectiveness due to delays and the development or adoption of new standards
and protocols to handle increased levels of activities or due to increased
government regulation. There can be no assurance that the infrastructure or
complementary products or services necessary to make the Web a viable
commercial marketplace will be developed, or, if they are developed, that the
Web will achieve broad acceptance. If the necessary infrastructure standards,
protocols or complementary products, services or facilities are not developed,
or if the Web does not become a viable commercial marketplace, the Company's
business, results of operations and financial condition will be materially and
adversely affected. Even if such infrastructure, standards or protocols or
complementary products, services or facilities are developed and the Web
becomes a viable commercial marketplace, there can be no assurance that the
Company will not be required to incur substantial expenditures in order to
adapt its services to changing Web technologies, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
A part of the Company's strategy is to develop the GeoCities community model
in international markets. There can be no assurance that the Internet, the Web
or the Company's community model will become widely accepted in any
international markets. The Company has developed and operates with SOFTBANK
Corporation of Japan ("SOFTBANK"), GeoCities Japan Corporation ("GeoCities
Japan"), a joint venture that is 40% owned by GeoCities. The Company has not
generated a material amount of revenue from its ownership interest in
GeoCities Japan to date. The Company has only limited experience in developing
this localized version of its community model and will be relying heavily on
the efforts and abilities of SOFTBANK in such venture. In addition, the
Company expects that the success of any additional foreign operations it
initiates in the future will also be substantially dependent upon local
partners. If revenues from international ventures are not adequate to cover
the investments in such activities, the Company's business, results of
operations and financial condition could be materially and adversely affected.
The Company may experience difficulty in managing international operations as
a result of difficulty in locating an effective foreign partner, competition,
technical problems, distance and language and cultural differences, and there
can be no assurance that the Company or its international partners will be
able to successfully market and operate the Company's community model in
foreign markets. The Company also believes that in light of substantial
anticipated competition, it will be necessary to move quickly into
international markets in order to effectively obtain market share, and there
can be no assurance that the Company will be able to do so. There are certain
risks inherent in doing business on an international level, such as unexpected
changes in regulatory requirements, trade barriers, difficulties in staffing
and managing foreign operations, fluctuations in currency exchange rates,
longer payment cycles in general, problems in collecting accounts receivable,
difficulty in enforcing contracts, political and economic instability,
seasonal reductions in business activity in certain other parts
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of the world and potentially adverse tax consequences. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, results of operations and financial condition.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, CMG@VENTURES AND SOFTBANK
Upon completion of the offering, CMG@Ventures and SOFTBANK, and their
respective affiliates, will, in the aggregate, beneficially own approximately
62.8% of the outstanding Common Stock. In addition, upon completion of the
offering, the directors, executive officers and principal stockholders of the
Company and their respective affiliates will, in the aggregate, beneficially
own approximately 73.2% of the outstanding Common Stock. As a result, these
stockholders will possess significant influence over the Company, giving them
the ability, among other things, to elect a majority of the Company's Board of
Directors and approve significant corporate transactions. Such share ownership
and control may also have the effect of delaying or preventing a change in
control of the Company, impeding a merger, consolidation, takeover or other
business combination involving the Company or discourage a potential acquiror
from making a tender offer or otherwise attempting to obtain control of the
Company which could have a material adverse effect on the market price of the
Company's Common Stock.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that the net proceeds of the offering,
together with its existing line of credit and available funds will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. The Company may need to raise
additional funds in the future in order to fund more aggressive brand
promotions and more rapid expansion, to develop newer or enhanced services, to
respond to competitive pressures or to acquire complementary businesses,
technologies or services. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution and such securities may have rights, preferences or
privileges senior to those of the rights of the Company's Common Stock. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
not available on acceptable terms, the Company may not be able to fund its
expansion, promote its brand names as the Company desires, take advantage of
unanticipated acquisition opportunities, develop or enhance services or
respond to competitive pressures. Any such inability could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
As part of its business strategy, the Company expects to review acquisition
prospects that would complement its existing business, augment the
distribution of its community or enhance its technological capabilities.
Although the Company currently has no agreements with respect to any material
acquisitions, the Company may make acquisitions of complementary businesses,
products or technologies in the future. However, there can be no assurance
that the Company will be able to locate suitable acquisition opportunities.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, large and immediate write-offs, the incurrence
of debt and contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could materially and
adversely affect the Company's results of operations. Furthermore,
acquisitions entail numerous risks and uncertainties, including difficulties
in the assimilation of operations, personnel, technologies, products and the
information systems of the acquired companies, diversion of management's
attention from other business concerns, risks of entering geographic and
business markets in which the Company has no or limited prior experience and
potential loss of key employees of acquired organizations. The Company has not
made any material acquisitions in the past. No assurance can be given as to
the ability of the Company to successfully integrate any businesses, products,
technologies or personnel that might be acquired in the future, and the
failure of the Company to do so could have a material adverse effect on the
Company's business, results of operations and financial condition.
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YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail. The Company
is in the process of working with its software vendors to ensure that the
software that the Company has licensed from third parties will operate
properly in the year 2000 and beyond. In addition, the Company is working with
its external suppliers and service providers to ensure that they and their
systems will be able to support the Company's needs and, where necessary,
interoperate with the Company's server and networking hardware and software
infrastructure in preparation for the year 2000. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. Any year 2000
compliance problems of either the Company, its customers or vendors could have
a material adverse effect on the Company's business, results of operations and
financial condition.
PUBLICITY
In March and April 1998 interviews with the New York Times, certain members
of the Company's management either disclosed or confirmed certain prospective
financial information regarding the Company. Such information was reported in
a July 13, 1998 article in the New York Times regarding the Company.
Specifically, the New York Times article included statements from a March
interview of the then President and Chief Executive Officer that the Company
was hoping to achieve revenues of between $20 million and $25 million in 1998,
and from an April interview of the Chief Financial Officer that the Company
expected to "break even" in 1999. These statements were made prior to the time
the Company began preparing for the offering and were not made in anticipation
of the offering. These statements were not intended to be relied upon by
potential investors in making an investment decision to purchase the Common
Stock offered hereby. The Company disclaims all such statements for purposes
of the offering and prospective investors should not rely on such statements
or any other information not contained in this Prospectus in making any
investment decision to purchase the Common Stock offered hereby. Revenue and
profitability forecasts of any company, especially in the rapidly evolving
Internet market, are forward-looking statements that involve numerous risks
and uncertainties. The Company's actual results could differ materially from
those stated in such forward-looking statements as a result of numerous
factors, including those set forth in these "Risk Factors" and elsewhere in
this Prospectus.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of significant amounts of Common Stock in the public market after the
offering or the perception that such sales will occur could materially and
adversely affect the market price of the Common Stock or the future ability of
the Company to raise capital through an offering of its equity securities. Of
the 30,661,000 shares of Common Stock to be outstanding upon the closing of
the offering (assuming no exercise of the Underwriters' over-allotment option
and based on the number of shares outstanding as of June 30, 1998), the
4,750,000 shares offered hereby will be eligible for immediate sale in the
public market without restriction, unless the shares are purchased by
"affiliates" of the Company within the meaning of Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). The 15,840
shares of Common Stock to be issued to the Community Leaders and Liaisons
under the 1998 Stock Incentive Plan will also be eligible for immediate sale
in the public market without restriction, subject to the filing of the Form S-
8 registration statement with respect thereto as of the date of this
Prospectus. The remaining 25,895,000 shares of Common Stock held by existing
stockholders upon the
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closing of the offering (based on the number of shares of Common Stock
outstanding as of June 30, 1998, and giving effect to the Preferred Stock
Conversion) will be "restricted securities" as that term is defined in Rule
144 under the Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act. The Company's directors and officers, and substantially all of its other
stockholders and holders of options to purchase Common Stock, have agreed that
they will not sell, directly or indirectly, any Common Stock without the prior
consent of Goldman, Sachs & Co. for a period of 180 days from the date of this
Prospectus. Subject to the provisions of Rules 144, 144(k) and 701, 25,895,000
shares will be eligible for sale 180 days after the date of this Prospectus
upon the expiration of such lock-up agreements. However, one affiliate of the
Company who is subject to a lock-up agreement and the volume limitations of
Rule 144 will be permitted to sell up to $1.0 million of Common Stock
commencing 91 days after the date of this Prospectus. Any shares of Common
Stock issued pursuant to the technology purchase agreement will be restricted
securities and will also be subject to a 180 day lock-up agreement. In
addition, as of June 30, 1998, there were outstanding options to purchase up
to 6,531,000 shares of Common Stock which will be eligible for sale in the
public market following the offering from time to time subject to becoming
exercisable and the expiration of any lock-up agreements applicable thereto.
There is also a warrant outstanding to purchase up to 20,304 shares of Common
Stock which will be eligible for sale in the public market following the
offering, subject to being exercised and the expiration of the 180-day lock-up
agreement applicable thereto. In addition, subject to the lock-up agreements,
certain stockholders, holding an aggregate of 26,160,128 shares of Common
Stock (including shares issuable upon the exercise of certain options to
purchase Common Stock), have the right, subject to certain conditions, to
include their shares in future registration statements relating to the
Company's securities, and certain stockholders holding an aggregate of
22,230,128 shares of Common Stock have the right, subject to certain
conditions, to cause the Company to register their shares of Common Stock. In
addition, in the event that the Company proposes to register any shares of
Common Stock under the Securities Act to the public in a firm commitment
underwritten public offering, David Bohnett and John Rezner, as well as any
other officer or director designated by the Company's Board of Directors by
unanimous vote, shall be entitled to piggyback registration rights if such
persons who choose to include their shares in such registration shall continue
to serve the Company as an officer or director on the effective date of such
registration statement.
The Company intends to file, as of the date of this Prospectus, Form S-8
registration statements under the Securities Act to register all shares of
Common Stock issuable under certain individual stock option agreements and the
1998 Stock Incentive Plan, the shares of Common Stock that will be issued to
the Community Leaders and Liaisons thereunder immediately following the
execution of the Underwriting Agreement and shares of Common Stock issuable
under the Purchase Plan. Such registration statements are expected to become
effective immediately upon filing, and shares covered by those registration
statements will thereupon be eligible for sale in the public markets, subject
to any lock-up agreements applicable thereto and Rule 144 limitations
applicable to affiliates. See "Management--Employee Benefit Plans",
"Description of Capital Stock--Registration Rights", "Shares Eligible for
Future Sale" and "Underwriting".
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common Stock.
Accordingly, there can be no assurance that an active trading market for the
Common Stock will develop or be sustained following the closing of the
offering or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price, which
may bear no relationship to the price at which the Common Stock will trade
upon completion of the offering, will be determined by negotiations between
the Company and the representatives of the Underwriters based upon factors
that may not be indicative of future market performance. See "Underwriting".
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to variations in the Company's quarterly results of
operations, the gain or loss of significant
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advertisers, changes in earnings estimates by analysts, announcements of
technological innovations or new solutions by the Company or its competitors,
general conditions in the technology and Internet sectors and in Internet-
related industries, other matters discussed elsewhere in this section of the
Prospectus and other events or factors, many of which are beyond the Company's
control. In addition, the stock market in general and the technology and
Internet sectors in particular have recently experienced extreme price and
volume fluctuations which have affected the market price for many companies in
industries similar or related to that of the Company and which have been
unrelated to the operating performance of these companies. These market
fluctuations, as well as general economic, political and market conditions,
may have a material adverse effect on the market price of the Company's Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such companies. Such litigation, if instituted, and
irrespective of the outcome of such litigation, could result in substantial
costs and a diversion of management's attention and resources and have a
material adverse effect on the Company's business, results of operations and
financial condition.
BROAD DISCRETION IN USE OF PROCEEDS
The net proceeds of the offering will be added to the Company's working
capital. As of the date of this Prospectus, the Company cannot specify with
certainty the particular uses for the net proceeds to be received upon
completion of the offering. Accordingly, the Company's management will have
broad discretion in the application of the net proceeds. The failure of
management to apply such funds effectively could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Use of Proceeds".
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAWS AND DELAWARE LAW PROVISIONS;
POSSIBLE ISSUANCE OF PREFERRED STOCK; PROVISIONS OF 1998 STOCK INCENTIVE PLAN
Following the closing of the offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock without
any further vote or action by the stockholders, and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
such shares. Since the Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock,
the rights of the holders of Common Stock would be subject to, and may be
adversely affected by, the rights of the holders of any such Preferred Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of the Company's Certificate
of Incorporation and Bylaws and of Delaware law could have the effect of
delaying or preventing a change in control of the Company. In addition,
certain provisions of the Company's 1998 Stock Incentive Plan which become
operative upon a hostile takeover, such as those involving acceleration of
vesting and required cash distributions upon surrender of options, could have
the effect of delaying, deferring or preventing a tender offer or takeover
attempt that might result in a premium over the market price for the Company's
Common Stock. See "Description of Capital Stock--Anti-Takeover Effects of
Certain Provisions of Delaware Law and the Company's Certificate of
Incorporation and Bylaws" and "Management--Employee Benefit Plans".
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
The existing stockholders of the Company will recognize significant benefits
from the offering. These benefits include the creation of a public market for
the Company's Common Stock which will afford existing stockholders the ability
to liquidate their investments, subject, in certain cases, to volume
limitations and other limitations and restrictions upon the sale of the Common
Stock, including any lock-up agreements applicable thereto. As of June 30,
1998, existing stockholders held 25,895,000 shares of outstanding Common Stock
(on an as-converted basis to give effect to the Preferred Stock Conversion)
which shares were originally purchased from the Company at prices ranging from
$0.01
24
<PAGE>
to $7.43 per share, with an aggregate consideration paid to the Company of
approximately $40,672,000. Based on an assumed initial public offering price
of $13.00 per share, after the offering (assuming no exercise of the
Underwriters' over-allotment option) the aggregate value of the outstanding
shares owned by the Company's existing stockholders will be approximately
$336,635,000 ($39,525,000 of which is held by current management), reflecting
unrealized gains of approximately $295,963,000 over the aggregate
consideration paid to the Company for such shares (assuming that such shares
continue to be held by the original purchasers thereof). Further, as of June
30, 1998, there were 6,531,000 shares of Common Stock issuable upon exercise
of outstanding options at a weighted average exercise price of $1.97. Such
options have an aggregate potential realizable gain of approximately
$72,037,000 following the offering, based on an assumed initial public
offering price of $13.00 per share. Accordingly, after the offering, existing
stockholders and optionholders will have substantial unrealized gains on their
shares and options. See "Shares Eligible For Future Sale", "Dilution" and
"Principal Stockholders".
DILUTION; ABSENCE OF DIVIDENDS
Investors purchasing shares of Common Stock in the offering will incur
immediate and substantial dilution of $10.47 per share in net tangible book
value per share of the Common Stock from the initial public offering price. To
the extent outstanding options to purchase Common Stock are exercised, there
will be further dilution. In addition, the Company does not anticipate paying
any cash dividends in the foreseeable future. See "Dividend Policy" and
"Dilution".
25
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,750,000 shares of
Common Stock offered hereby are estimated to be approximately $56,377,000
million ($64,992,000 million if the Underwriters' over-allotment option is
exercised in full) after deducting the underwriting discount and estimated
offering expenses payable by the Company and assuming an initial public
offering price of $13.00 per share. The primary purposes of the offering are
to create a public market for the Common Stock, to facilitate the Company's
future access to public equity markets and to obtain additional working
capital.
The Company intends to use the net proceeds of the offering for investments
in the GeoCities community site, including enhancements to the Company's
server and networking infrastructure and the functionality of its Web site,
and general corporate purposes, including working capital, expansion of its
sales and marketing capabilities and brand-name promotions. As of the date of
this Prospectus, the Company cannot specify with certainty the particular uses
for the net proceeds to be received upon completion of the offering.
Accordingly, the Company's management will have broad discretion in the
application of the net proceeds.
Pending such uses, the net proceeds will be invested in interest-bearing
investment-grade instruments, certificates of deposit or direct or guaranteed
obligations of the United States.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
since inception and does not expect to pay any cash dividends for the
foreseeable future. The Company currently intends to retain future earnings,
if any, to finance the expansion of its business. The Company's line of credit
arrangement prohibits the payment of dividends by the Company without the
lender's prior consent.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, (i) on an actual basis; (ii) on a pro forma basis to reflect the
Preferred Stock Conversion and (iii) the pro forma capitalization as adjusted
to reflect the receipt by the Company of the estimated net proceeds from the
sale of 4,750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $13.00 per share.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings.......................... $ 301 $ 301 $ 301
======== ======== ========
Long-term debt, less current portion........... $ 780 $ 780 $ 780
-------- -------- --------
Mandatory Redeemable Convertible Preferred
Stock:
Series A through F, $0.001 par value,
26,526,000 authorized, actual and pro forma,
22,230,000 issued and outstanding, actual,
none issued and outstanding, pro forma and
as adjusted................................. 37,200 -- --
-------- -------- --------
Stockholders' equity:
Common Stock, $0.001 par value, 60,000,000
shares authorized; 3,462,000 shares issued
and outstanding, actual, 25,895,000 shares
issued and outstanding, pro forma and
30,661,000 shares issued and outstanding, as
adjusted(1)................................. 253 26 31
Preferred Stock, $0.001 par value, 5,000,000
shares authorized; none issued and
outstanding, actual, pro forma and as
adjusted ................................... -- -- --
Additional paid-in capital..................... 10,577 48,004 104,376
Unearned deferred compensation................. (7,044) (7,044) (7,044)
Accumulated deficit............................ (19,654) (19,654) (19,654)
-------- -------- --------
Total stockholders' equity (deficiency)........ (15,868) 21,332 77,709
-------- -------- --------
Total capitalization......................... $ 22,112 $ 22,112 $ 78,489
======== ======== ========
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1998. Excludes (i) 6,531,000 shares of Common Stock issuable upon the
exercise of outstanding stock options, including options outstanding under
the 1998 Stock Incentive Plan, at a weighted average exercise price of
$1.97 per share; (ii) 2,671,000 shares of Common Stock reserved for future
issuance under the 1998 Stock Incentive Plan (which includes an increase
of 2,300,000 shares in the reserve thereunder approved in July 1998);
(iii) 427,000 shares issuable upon the exercise of stock options granted
under the predecessor plan to the 1998 Stock Incentive Plan, at a weighted
average exercise price of $10.88 per share; (iv) 300,000 shares of Common
Stock reserved for future issuance under the Purchase Plan; (v) 20,304
shares of Common Stock issuable upon the exercise of an outstanding
warrant at an exercise price of $4.695 per share and (vi) up to 46,154
shares of Common Stock to be issued pursuant to a technology purchase
agreement, assuming an initial public offering price of $13.00 per share.
Includes 15,840 shares of Common Stock to be issued to the Community
Leaders and Liaisons under the 1998 Stock Incentive Plan. See
"Management--Employee Benefit Plans", "Description of Capital Stock" and
Notes 2, 6, 8 and 10 of Notes to Financial Statements.
27
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
June 30, 1998, was $21.3 million, or $0.82 per share of Common Stock, after
giving effect to the Preferred Stock Conversion. Pro forma net tangible book
value per share is equal to the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding as of June 30, 1998. Assuming the sale by the Company of 4,750,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $13.00 per share and the application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of June 30,
1998, would have been $77.7 million, or $2.53 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $1.71
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $10.47 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share as of June 30,
1998....................................................... $0.82
Increase per share attributable to new investors............ 1.71
-----
Pro forma net tangible book value per share after the offer-
ing.......................................................... 2.53
------
Dilution per share to new investors........................... $10.47
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences in total consideration paid and the average price per share
paid to the Company by existing stockholders (including holders of preferred
stock) and by new investors with respect to the number of shares of Common
Stock purchased from the Company, assuming an initial public offering price of
$13.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 25,911,000 84.5% $ 40,672,000 39.7% $ 1.57
New investors.............. 4,750,000 15.5 61,750,000 60.3 13.00
---------- ----- ------------ -----
Total.................... 30,661,000 100.0% $102,422,000 100.0% $ 3.34
========== ===== ============ ===== ======
</TABLE>
The foregoing computations are based on the number of shares of Common Stock
outstanding as of June 30, 1998. These computations exclude (i) 6,531,000
shares of Common Stock issuable upon the exercise of outstanding stock
options, including options outstanding under the 1998 Stock Incentive Plan, at
a weighted average exercise price of $1.97 per share; (ii) 2,671,000 shares of
Common Stock reserved for future issuance under the 1998 Stock Incentive Plan
(which includes an increase of 2,300,000 shares in the reserve thereunder
approved in July 1998); (iii) 427,000 shares issuable upon the exercise of
stock options granted under the predecessor plan to the 1998 Stock Incentive
Plan, at a weighted average exercise price of $10.88 per share; (iv) 300,000
shares of Common Stock reserved for future issuance under the Purchase Plan;
(v) 20,304 shares of Common Stock issuable upon the exercise of an outstanding
warrant at an exercise price of $4.695 per share and (vi) up to 46,154 shares
of Common Stock to be issued pursuant to a technology purchase agreement,
assuming an initial public offering price of $13.00 per share. These
computations also reflect the inclusion under "Existing Stockholders" of
15,840 shares of Common Stock to be issued to Community Leaders and Liaisons
under the 1998 Stock Incentive Plan. See "Capitalization", "Management--
Employee Benefit Plans", "Description of Capital Stock" and Notes 2, 6, 8 and
10 of Notes to Financial Statements.
28
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for
each of the years in the three-year period ended December 31, 1997, and the
balance sheet data at December 31, 1996 and 1997, are derived from financial
statements of the Company which have been audited by PricewaterhouseCoopers
LLP, independent accountants, and are included elsewhere in this Prospectus.
The balance sheet data at December 31, 1995, are derived from audited
financial statements of the Company not included herein. The statement of
operations data for each of the six-month periods ended June 30, 1997 and
1998, and the balance sheet data at June 30, 1998, are derived from unaudited
interim financial statements of the Company included elsewhere in this
Prospectus. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of the results to be expected in the future, and results of interim periods
are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------ -----------------
1995 1996 1997 1997 1998
------ ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $ 46 $ 314 $ 4,582 $ 1,632 $ 5,542
Cost of revenues.................. 103 788 4,634 1,421 3,937
------ ------- ------- -------- -------
Gross profit (loss).............. (57) (474) (52) 211 1,605
Operating expenses:
Sales and marketing.............. 117 764 5,045 2,130 5,072
Product development.............. 72 475 1,021 437 1,325
General and administrative....... 233 1,252 2,901 1,273 2,947
------ ------- ------- -------- -------
Total operating expenses....... 422 2,491 8,967 3,840 9,344
------ ------- ------- -------- -------
Loss from operations.............. (479) (2,965) (9,019) (3,629) (7,739)
Interest income (expense), net.... (2) (40) 117 69 487
------ ------- ------- -------- -------
Loss before provision for income
taxes............................ (481) (3,005) (8,902) (3,560) (7,252)
Provision for income taxes........ (1) (1) (1) (1) (1)
------ ------- ------- -------- -------
Net loss.......................... $ (482) $(3,006) $(8,903) $ (3,561) $(7,253)
====== ======= ======= ======== =======
Basic and diluted net loss per
share............................ $(0.11) $ (1.15) $ (3.40) $ (1.36) $ (2.27)
Weighted average shares
outstanding used in basic and
diluted per-share calculation.... 4,431 2,617 2,620 2,617 3,194
Pro forma basic and diluted net
loss per share(1)................ $ (.36) $ (.29)
Weighted average shares
outstanding used in pro forma
basic and diluted per-share
calculation(1)................... 24,850 25,425
<CAPTION>
DECEMBER 31,
------------------------
1995 1996 1997 JUNE 30, 1998
------ ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments........... $ 1 $ 33 $ 3,785 $ 20,388
Working capital................... (135) (1,642) 26,451 17,706
Total assets...................... 105 1,448 32,868 28,260
Debt and capital lease
obligations, less current
portion.......................... -- 437 834 780
Mandatory redeemable convertible
preferred stock.................. -- 2,063 37,200 37,200
Total stockholders' equity
(deficiency)..................... (40) (3,046) (9,109) (15,868)
</TABLE>
- -------
(1) See Note 2 and 10 of Notes to Financial Statements for an explanation of
the method used to determine the number of shares used to compute pro
forma basic and diluted net loss per share.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those set forth under "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
GeoCities offers the world's largest and one of the fastest growing
communities of personal Web sites on the Internet. GeoCities pioneered the
first large-scale, Web-based community for Internet users to express
themselves, share ideas, interests and expertise, and publish content
accessible to other users with common interests. The mainstay of the Company's
community are its "Homesteaders," Internet users who create their own personal
Web sites or "Homesteads" in themed "neighborhoods" on the GeoCities Web site.
These neighborhoods provide a context for Web users to publish content, to
share experiences and ideas with other users and to access a centralized and
easy-to-navigate destination for user-published content.
Founded in December 1994 as Beverly Hills Internet, the Company first
launched an online community of six neighborhoods in January 1995. From
January 1995 through early 1996, the Company's operating activities related
primarily to developing software and hardware infrastructure for the Company's
Web site, recruiting personnel, raising capital and developing programs to
attract Homesteaders. During this period, the Company's revenues were derived
from commercial Web site set-up and maintenance operations which were de-
emphasized in early 1996. The Company changed its name to GeoCities in early
1996, and, for the remainder of 1996 and through 1997, shifted its focus
toward building its Homesteader membership base, broadening the functionality
of the Company's Web site, developing a broader range of neighborhoods and, to
a lesser extent, selling advertising on its Web site. The Company began
focusing on generating advertising revenues in 1996 as a result of the
maturing advertising market on the Internet. Moreover, the Company determined
that it was generating sufficient traffic to support the efforts of a
dedicated advertising sales team. The Company reached one million Homesteads
in October 1997 and over 2.1 million Homesteads in July 1998. From the end of
1997 through May 1998, the Company hired substantially all of its senior
management team and began to focus more strongly on building its revenue base.
To date, the Company's revenues have been derived principally from the sale
of advertisements. Advertising revenues constituted 90.2% of net revenues for
the six months ended June 30, 1998 and 90.6% of net revenues for 1997. The
Company sells banner advertisements, event sponsorships and premium site
locations within the Company's Web site. The Company also receives advertising
revenues from select premier commerce partners in return for preferred banner
advertising locations on, and integration into, the Company's Web site. The
Company has also recently begun receiving advertising revenues from third-
party content providers who pay the Company for displaying their content on
the Company's Web site. Currently, the duration of the Company's banner
advertising arrangements averages between one to two months. Advertising rates
are dependent on whether the impressions are for general rotation throughout
the Company's Web site or for targeted audiences and properties within
specific areas of the GeoCities site. All advertising revenues are recognized
ratably in the period in which the advertisement is displayed, provided that
no significant Company obligations remain and collection of the resulting
receivable is probable. Company obligations typically include guarantees of a
minimum number of "impressions" or times that an advertisement appears in page
views downloaded by users. Payments received from advertisers prior to
displaying their advertisements on the site are recorded as deferred revenues
and are recognized as revenue ratably when the advertisement is displayed.
30
<PAGE>
In addition to advertising revenues, the Company derives other revenues
primarily from its GeoPlus program, and, to a lesser extent, from its GeoShops
program and revenue-sharing arrangements with its premier commerce partners.
The Company's GeoPlus program offers premium services for a monthly fee,
providing Homesteaders additional disk space and enhanced publishing tools for
their Web pages. In March 1998, the Company introduced the GeoShops program, a
commerce service that, for a monthly fee, allows Homesteaders to sell products
and services on their personal Web sites, and, for an additional fee, provides
Homesteaders with transaction authorization and processing capabilities. The
Company's agreements with its premier commerce partners generally provide the
Company with a share of any sales resulting from direct links from the
Company's Web site, subject to certain minimum sales levels. Revenues from the
GeoPlus and GeoShops programs are recognized in the month that the service is
provided. Revenues from the Company's share of the proceeds from its premier
commerce partners' sales are recognized by the Company upon notification from
its premier commerce partners of sales attributable to the Company's Web site.
To date, revenues from such revenue-sharing arrangements have not been
material.
The Company has incurred significant losses since its inception, and as of
June 30, 1998, had an accumulated deficit of approximately $19.7 million.
Also, in connection with the grant of certain stock options to employees
during 1997 and the six months ended June 30, 1998, the Company recorded
unearned deferred compensation of approximately $7.4 million through June 30,
1998, representing the difference between the deemed value of the Company's
Common Stock for accounting purposes and the exercise price of such options at
the date of grant. Such amount, net of amortization, is presented as a
reduction of stockholders' equity and amortized over the vesting period of the
applicable options. As a result, the Company currently expects to amortize the
following amounts of deferred compensation annually: 1998--$1.1 million;
1999--$1.6 million; 2000--$1.8 million; 2001--$1.8 million; 2002--$766,000;
2003--$265,000 and 2004--$90,000. Amortization of deferred compensation was
$290,000 and $24,000 for the six months ended June 30, 1998, and for 1997,
respectively.
The Company and the FTC staff attorneys executed the Proposed Consent Order
in June 1998, in connection with the FTC's investigation into certain past
business practices of the Company. The Proposed Consent Order has been
approved by the Director of Consumer Protection for the FTC, but is subject to
final FTC approval after a period of public comment. There can be no assurance
that the Proposed Consent Offer ultimately will be approved. Based on the
scope of the Proposed Consent Order, the Company does not believe that its
compliance with the Order will have a material adverse effect on the Company's
business, results of operations or financial condition.
31
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the Company
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------------- ---------------
1995 1996 1997 1997 1998
-------- ------ ------ ------ ------
(AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C>
Net revenues................ 100% 100% 100% 100% 100%
Cost of revenues............ 224 251 101 87 71
-------- ------ ------ ------ ------
Gross profit (loss)........ (124) (151) (1) 13 29
Operating expenses:
Sales and marketing........ 254 243 110 130 92
Product development........ 157 151 22 27 24
General and
administrative............ 507 399 63 78 53
-------- ------ ------ ------ ------
Total operating expenses.. 918 793 195 235 169
-------- ------ ------ ------ ------
Loss from operations........ (1,042) (944) (196) (222) (140)
Interest income (expense),
net........................ (4) (13) 2 4 9
-------- ------ ------ ------ ------
Loss before provision for
income taxes............... (1,046) (957) (194) (218) (131)
Provision for income taxes.. (2) -- -- -- --
-------- ------ ------ ------ ------
Net loss.................... (1,048)% (957)% (194)% (218)% (131)%
======== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET REVENUES
Net revenues increased 240% to $5.5 million for the six months ended June
30, 1998, from $1.6 million for the six months ended June 30, 1997. The
increase in net revenues was due primarily to an increase in the number of
advertisers, the addition of the Company's premier commerce partners, the
increase in the Company's Web site traffic and, to a lesser extent, expansion
in GeoPlus memberships and the addition of third-party content providers which
pay the Company for carrying their content within the GeoCities community.
Advertising revenues accounted for approximately 90.2% and 92.2% of net
revenues for the six months ended June 30, 1998 and 1997, respectively. The
Company's four largest customers accounted for approximately 28% and 30% of
net revenues in the six months ended June 30, 1998 and 1997, respectively.
During these periods, the Company's revenues from its GeoPlus and GeoShops
programs and revenue-sharing arrangements with commerce partners were non-
existent or individually insignificant as a percentage of net revenues. At
June 30, 1998, the Company had deferred revenues of $566,000. The Company
anticipates that advertising revenues will continue to account for a
substantial share of net revenues for the foreseeable future.
COST OF REVENUES
Cost of revenues consists primarily of Internet connection charges, Web site
equipment leasing costs, depreciation, salaries of operations personnel and
other related operations costs. During the six months ended June 30, 1998 and
1997, cost of revenues related to the Company's premium service programs were
individually and collectively insignificant. Cost of revenues increased to
$3.9 million or 71% of net revenues for the six months ended June 30, 1998,
from $1.4 million or 87% of net revenues for the six months ended June 30,
1997. The absolute dollar increases in cost of revenues were primarily due to
building the Company's server and networking infrastructure in response to the
growth in number of Homesteads. Cost of revenues decreased as a percentage of
net revenues because of the growth in net revenues. The Company anticipates
that its Internet connection, Web site equipment and related operating costs
will continue to grow in absolute dollars for the foreseeable future.
32
<PAGE>
OPERATING EXPENSES
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries of sales and
marketing personnel, commissions, advertising and other marketing related
expenses. Sales and marketing expenses also include personnel costs related to
editorial content and community management and support. Sales and marketing
expenses increased to $5.1 million or 92% of net revenues for the six months
ended June 30, 1998, from $2.1 million or 130% of net revenues for the six
months ended June 30, 1997. The absolute dollar increase in sales and
marketing expenses was primarily due to increases in the number of sales
personnel, increased sales commissions and increased expenses associated with
promotion and marketing efforts. Sales and marketing expenses as a percentage
of net revenues decreased because of the growth in net revenues. The Company
expects that sales and marketing expenses will grow significantly in absolute
dollars for the foreseeable future as it pursues an aggressive branding
strategy and hires additional sales and marketing personnel.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses consist primarily of salaries of certain
software development and operations personnel and expenditures related to
third party software. Product development expenses increased to $1.3 million
or 24% of net revenues for the six months ended June 30, 1998, from $437,000
or 27% of net revenues for the six months ended June 30, 1997. The absolute
dollar increase in product development expenses was primarily attributable to
increased personnel and associated software costs related to enhancing the
functionality of the Company's Web site. Product development expenses
decreased as a percentage of net revenues because of the growth in net
revenues. To date, all product development expenditures have been expensed as
incurred. The Company believes that significant investments in product
development are required to remain competitive. Therefore, the Company expects
that its product development expenses will continue to increase in absolute
dollars for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, including finance, accounting,
facilities and legal, and fees for professional services. General and
administrative expenses increased to $2.9 million or 53% of net revenues for
the six months ended June 30, 1998, from $1.3 million or 78% of net revenues
for the six months ended June 30, 1997. The absolute dollar increase in
general and administrative expenses was primarily due to increases in the
number of personnel to support the growth of the Company's business, and
increases in recruiting costs related to filling key senior executive
positions. General and administrative expenses decreased as a percentage of
net revenues because of the growth in net revenues. The Company expects that
it will incur additional general and administrative expenses in absolute
dollars as the Company hires additional personnel and incurs additional
expenses related to the growth of the business and its operations as a public
company.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes income from the Company's cash and
investments and expenses related to the Company's financing obligations.
Interest income (expense), net increased to $487,000 for the six months ended
June 30, 1998, from $69,000 for the six months ended June 30, 1997. The
increase in absolute dollars was primarily due to a higher average investment
balance as a result of the receipt of the proceeds of the issuance of shares
of the Company's preferred stock in October and December 1997.
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YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
NET REVENUES
Net revenues were $4.6 million, $314,000 and $46,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The absolute dollar increases
from year to year were due primarily to an increase in the number of
advertisers, increase in traffic on the Company's Web site and, to a lesser
extent, increase in revenues from expansion of GeoPlus memberships.
Advertising revenues accounted for approximately 90.6%, 89.7%, and 0% of net
revenues in 1997, 1996 and 1995, respectively. The Company's four largest
advertising customers accounted for 29% and 40% of net revenues for the years
ended 1997 and 1996, respectively. For the years ended December 31, 1997 and
1996, the Company's other sources of net revenues, which included revenues
from premium services, were individually insignificant as a percentage of net
revenues. Prior to 1996, the Company's revenues were derived from commercial
Web site set-up and maintenance operations which were de-emphasized in early
1996 as the Company transitioned its business model toward building
advertising revenues.
COST OF REVENUES
Cost of revenues were $4.6 million or 101% of net revenues, $788,000 or 251%
of net revenues and $103,000 or 224% of net revenues for the years ended
December 31, 1997, 1996 and 1995 respectively. Cost of revenues in 1997 and
1996 related to the Company's premium-service programs were individually
insignificant. Cost of revenues in 1995 consisted primarily of salaries of
design personnel and Internet connection charges. The absolute dollar
increases from year to year in cost of revenues were primarily due to the
costs of building the Company's server and networking infrastructure in
response to the growth in Homesteader membership. Cost of revenues as a
percentage of net revenues has decreased because of the growth in net
revenues.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $5.0 million or 110% of net revenues,
$764,000 or 243% of net revenues and $117,000 or 254% of net revenues for the
years ended December 31, 1997, 1996 and 1995, respectively. The absolute
dollar increases from year to year in sales and marketing expenses were
primarily due to the addition of a direct sales force which the Company began
building in the second half of 1996 and increases in marketing expenses. Sales
and marketing expenses as a percentage of net revenues have decreased because
of the growth in net revenues.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses were $1.0 million or 22% of net revenues,
$475,000 or 151% of net revenues and $72,000 or 157% of net revenues for the
years ended December 31, 1997, 1996 and 1995, respectively. The absolute
dollar increases from year to year in product development expenses were
primarily attributable to increases in the number of personnel and related
costs to support enhancement to the Company's products. Product development
expenses as a percentage of net revenues have decreased because of the growth
in net revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2.9 million or 63% of net
revenues, $1.3 million or 399% of net revenues and $233,000 or 507% of net
revenues for the years ended December 31, 1997, 1996 and 1995, respectively.
The absolute dollar increases from year to year in general and administrative
expenses were primarily due to increases in the number of general and
administrative personnel, professional services and facility expenses to
support the growth of the Company's operations. General and administrative
expenses as a percentage of net revenues have decreased because of the growth
in net revenues.
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INTEREST INCOME (EXPENSE), NET
Interest income (expense), net was $117,000 for the year ended December 31,
1997. Interest income (expense), net was ($40,000) and ($2,000) for the years
ended December 31, 1996 and 1995, respectively. The increase in interest
income (expense), net for the year ended December 31, 1997 was primarily due
to a higher average investment balance as a result of preferred stock proceeds
from the first quarter and third quarter of 1997.
INCOME TAXES
As of December 31, 1997 the Company had approximately $11.3 million and
$10.7 million of federal and state net operating loss carryforwards,
respectively, for tax reporting purposes available to offset future taxable
income. The Company's federal and state net operating loss carryforwards
expire beginning 2010 and 2002, respectively. Due to the change in the
Company's ownership interests in 1996 and 1997, future utilization of the
Company's net operating loss carryforwards will be subject to certain
limitations or annual restrictions under the tax laws. See Note 9 of Notes to
Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data and such
statement of operations data as a percentage of net revenues for the three
months ended June 30, September 30 and December 31, 1997 and March 31 and June
30, 1998. The information for each of these quarters has been prepared on
substantially the same basis as the audited financial statements included
elsewhere in this Prospectus and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. Historical
results are not necessarily indicative of the results to be expected in the
future, and results of interim periods are not necessarily indicative of
results for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1998 1998
-------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues................. $ 1,050 $ 1,271 $ 1,679 $ 2,173 $3,369
Cost of revenues............. 1,050 1,382 1,831 1,565 2,372
------- ------- ------- ------- -------
Gross profit (loss)......... -- (111) (152) 608 997
Operating expenses:
Sales and marketing......... 1,409 1,289 1,626 2,118 2,954
Product development......... 235 264 321 508 817
General and administrative.. 722 649 979 1,083 1,864
------- ------- ------- ------- -------
Total operating expenses... 2,366 2,202 2,926 3,709 5,635
------- ------- ------- ------- -------
Loss from operations......... (2,366) (2,313) (3,078) (3,101) (4,638)
Interest income, net......... 40 5 43 204 283
------- ------- ------- ------- -------
Loss before provision for
income taxes................ (2,326) (2,308) (3,035) (2,897) (4,355)
Provision for income taxes... -- -- -- (1) --
------- ------- ------- ------- -------
Net loss..................... $(2,326) $(2,308) $(3,035) $(2,898) $(4,355)
======= ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1998 1998
-------- --------- -------- --------- --------
(AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C>
Net revenues................... 100% 100% 100% 100% 100%
Cost of revenues............... 100 109 109 72 70
---- ---- ---- ---- ----
Gross profit (loss)........... -- (9) (9) 28 30
Operating expenses:
Sales and marketing........... 134 101 97 97 88
Product development........... 23 21 19 23 24
General and administrative.... 69 51 58 50 55
---- ---- ---- ---- ----
Total operating expenses..... 226 173 174 170 167
---- ---- ---- ---- ----
Loss from operations........... (226) (182) (183) (142) (137)
Interest income, net........... 4 -- 2 9 8
---- ---- ---- ---- ----
Loss before provision for
income taxes.................. (222) (182) (181) (133) (129)
Provision for income taxes..... -- -- -- -- --
---- ---- ---- ---- ----
Net loss....................... (222)% (182)% (181)% (133)% (129)%
==== ==== ==== ==== ====
</TABLE>
The Company's net revenues have increased in all quarters presented as a
result of an increase in the number of advertisers, the increase in the
Company's Web site traffic and, to a lesser extent, the expansion of the
Company's GeoPlus program. The increase in net revenues for the quarter ended
June 30, 1998, was due primarily to an increase in the number of advertisers,
an increase in revenues from the Company's premier commerce partners and the
addition of payments from third-party content providers.
Cost of revenues has increased in absolute dollars for each quarter
presented other than the quarter ended March 31, 1998. The increases in cost
of revenues in absolute dollars are the result of expanding the Company's
server and networking infrastructure to accommodate the growth in Homesteads
and increased traffic to the Company's Web site. The increase in cost of
revenues in absolute dollars for the quarter ended December 31, 1997 resulted
from the decision to change the Company's Internet service provider which
resulted in increased expenses during the transition period. The increase in
cost of revenues in absolute dollars for the quarter ended June 30, 1998, was
due to expansion of the Company's infrastructure to accommodate the increase
in the Company's Web site traffic and Homesteads and the costs associated with
increasing disk space available to Homesteads. The decrease in cost of
revenues as a percentage of net revenues for the quarter ended March 31 and
June 30, 1998, is a result of the growth in the Company's net revenues.
Operating expenses have increased in each of the quarters presented
reflecting the growth of the Company's operations. In addition, the increase
in sales and marketing expenses for the quarter ended June 30, 1998, was due
primarily to the addition of sales and marketing personnel, increased
commissions associated with higher sales and expenses related to increased
editorial content and community management and support. The increase in
general and administrative expenses for the quarter ended June 30, 1998,
primarily was due primarily to the expansion of the Company's corporate
infrastructure and legal expenses related to the FTC Proposed Consent Order.
Operating expenses as a percentage of net revenues have decreased as a result
of the growth in net revenues.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of the Company's
control. These factors include demand for Web-based advertising, advertisers'
market acceptance of the Web as an advertising medium, the level of traffic on
the GeoCities Web site, the advertising budgeting cycles of advertisers, the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, the introduction of new or enhanced
services by the Company or its competitors, the timing and number of new
hires, pricing changes for Web-based advertising as a result of competition or
otherwise, the loss
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of a key advertising contract or relationship by the Company, changes in the
Company's pricing policy or those of its competitors, the mix of types of
advertisements sold by the Company, engineering or development fees that may
be paid in connection with adding new Web site development and publishing
tools, technical difficulties with the GeoCities Web site, incurrence of costs
relating to future acquisitions, general economic conditions, and economic
conditions specific to the Internet or all or a portion of the technology
sector. As a strategic response to changes in the competitive environment, the
Company may from time to time make certain pricing, service or marketing
decisions or business combinations that could have a material adverse effect
on the Company's business, results of operations and financial condition. In
order to accelerate the promotion of the GeoCities brand, the Company intends
to significantly increase its marketing budget which could materially and
adversely affect the Company's business, results of operations and financial
condition for a number of quarterly periods. The Company has experienced, and
expects to continue to experience, seasonality in its business, with user
traffic on the GeoCities Web site being lower during the summer and year-end
vacation and holiday periods when overall usage of the Web is lower.
Additionally, seasonality may significantly affect the Company's advertising
revenues during the first and third calendar quarters, as advertisers
historically spend less during these periods. Because Web-based advertising is
an emerging market, additional seasonal and other patterns in Web advertising
may develop in the future as the market matures, and there can be no assurance
that such patterns will not have a material adverse effect on the Company's
business, results of operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the private placement of its preferred stock and equipment lease
financing. As of June 30, 1998, the Company had approximately $1.2 million in
cash and cash equivalents and $19.2 million in short-term investments.
Net cash used in operating activities increased to $7.2 million for 1997
from $2.8 million for 1996, and increased to $6.3 million for the six months
ended June 30, 1998, compared to $3.7 million for the six months ended June
30, 1997. The increase in net cash used resulted primarily from increasing net
losses and accounts receivable, partially offset by increases in accrued
expenses.
Net cash used in investing activities increased to $1.3 million for 1997
from $130,000 for 1996, resulting from increased purchases of property and
equipment and the $645,000 investment in 40% of GeoCities Japan, a joint
venture with SOFTBANK. Net cash used in investing activities increased to
$21.3 million for the six months ended June 30, 1998, compared to $258,000 for
the six months ended June 30, 1997, resulting primarily from the purchase of
investments with the proceeds received in January 1998 from the Company's
issuance of shares of its preferred stock. The Company invested these proceeds
in debt securities, primarily U.S. Government and corporate debt securities,
with maturities not exceeding one year. The Company intends to continue to
invest its surplus funds in such securities.
Net cash provided by financing activities increased to $12.3 million for
1997 compared to $2.9 million for 1996 resulting primarily from the $13.0
million of cash proceeds from the sale of shares of the Company's preferred
stock for $38 million. Approximately $25.0 million of such preferred stock
proceeds were not received at December 31, 1997. The resulting $25.0 million
subscription receivable included in the financial statements at December 31,
1997, was subsequently received in January 1998. See Note 8 of Notes to
Financial Statements.
The Company has a bank line of credit for $10.0 million. To date there have
been no borrowings under this line of credit. This credit facility includes a
$7.0 million revolving facility for working capital and a $3.0 million lease
facility. This facility bears interest at the bank's prime rate for the
revolving facility and the bank's prime rate plus 0.75% for the lease
facility. Any borrowings under this line of credit will be collateralized by
substantially all of the Company's assets.
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In July 1998, the Company entered into an agreement to purchase certain Web-
page development technology for $850,000 in cash and, subject to the
technology being successfully installed and becoming operational on the
Company's servers to the Company's satisfaction within 90 days of the date of
the purchase agreement, $455,000 in Common Stock valued at the initial public
offering price. If the offering is not consummated within 90 days of the date
of the purchase agreement, such amount is payable in cash. In addition, if the
technology is successfully installed and becomes operational within an agreed-
upon period prior to the 90-day deadline, the Company will be required to pay
the seller an additional $145,000, payable in Common Stock or cash as set
forth above. If the technology is not successfully installed and does not
become operational on the Company's servers within 90 days of the date of the
agreement to the Company's satisfaction, the seller is obligated to refund to
the Company all but $300,000 of the cash payment.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's services, the amount of resources the
Company devotes to investments in the GeoCities community, the resources the
Company devotes to marketing and selling its services and its brand promotions
and other factors. The Company has experienced a substantial increase in its
capital expenditures and operating lease arrangements since its inception
consistent with the growth in the Company's operations and staffing, and
anticipates that this will continue for the foreseeable future. Additionally,
the Company will continue to evaluate possible investments in businesses,
products and technologies, and plans to expand its sales and marketing
programs and conduct more aggressive brand promotions. The Company currently
anticipates that the net proceeds of the offering, together with its existing
line of credit and available funds will be sufficient to meet its anticipated
needs for working capital and capital expenditures for at least the next 12
months. See "Risk Factors--Future Capital Needs; Uncertainty of Additional
Financing".
The Company is in the process of working with its software vendors to ensure
that the Company's systems are prepared for the year 2000. In addition, the
Company is working with its external suppliers and service providers to ensure
that they and their systems will be able to support the Company's needs in
preparation for the year 2000. Management does not anticipate that the Company
will incur significant operating expenses or be required to invest heavily in
computer systems improvements to be year 2000 compliant. However, significant
uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance. Any year 2000 compliance problems of either the
Company, its customers or vendors could have a material adverse effect on the
Company's business, results of operations and financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") 128
"Earnings Per Share", was issued and effective for the Company's year ended
December 31, 1997. As a result, the Company's earnings per share ("EPS") data
for all periods has been presented in accordance with SFAS 128. In March 1997,
SFAS 129, "Disclosure of Information About Capital Structure", was issued and
will be effective for 1998. In June 1997, SFAS 130, "Comprehensive Income" and
SFAS 131, "Disclosure about Segments of an Enterprise", were issued and will
be effective for 1998. The Company is evaluating additional disclosures, if
any, which may result from these pronouncements. See Note 2 of Notes to
Financial Statements.
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<PAGE>
BUSINESS
OVERVIEW
GeoCities offers the world's largest and one of the fastest growing
communities of personal Web sites on the Internet. The Company pioneered the
first large-scale, Web-based community for Internet users to express
themselves, share ideas, interests and expertise, and publish content
accessible to other users with common interests. The mainstay of the Company's
community are its "Homesteaders," Internet users who create their own personal
Web sites or "Homesteads" in themed "neighborhoods" on the GeoCities Web site.
These neighborhoods provide a context for Web users to publish content, to
share experiences and ideas with other users and to access a centralized and
easy-to-navigate destination for user-published content.
INDUSTRY BACKGROUND
THE INTERNET AND WORLD WIDE WEB
The Internet and the World Wide Web ("Web") have emerged as mass
communications and commerce mediums enabling millions of people worldwide to
share information, communicate and conduct business electronically.
International Data Corporation ("IDC") estimates that the number of Web users
worldwide will exceed 95 million by the end of 1998 and will grow to over 170
million users by the end of 2000. Jupiter Communications estimates that the
number of Internet-connected households worldwide will grow from approximately
45 million at the end of 1998 to approximately 66 million by the end of 2000.
The relatively lower costs required to publish content on the Web compared to
traditional media and the availability of powerful new tools for the
development and distribution of multimedia-rich content, including video and
audio, have led to a proliferation of more useful and engaging information and
services on the Internet. As the amount of content and services on the
Internet continues to grow at a rapid pace, greater numbers of Internet users
are attracted, fueling a cycle of growth wherein more users demand more
content and more content attracts more users.
THE NEED FOR ONLINE COMMUNITIES
As the Internet continues to grow, users seek from the Web the same
opportunity for expression, interaction, sharing, support and recognition they
seek in the everyday world. To date, a typical Internet user's experience
surfing the Web has been essentially one-way--searching and viewing Web sites
containing professionally created content on topics of general interest such
as current events, sports, finance, politics and weather. However, the Web in
general does not provide a context for users to publish, promote, search and
view personal Web pages. As a result, users publishing personal Web sites have
had limited means of attracting visitors to their sites or interacting with or
receiving recognition from visitors. Internet search and navigational sites
serve a valuable function for users seeking to navigate the Internet for
aggregated Web content; however, these sites are not primarily focused on
providing a platform for publishing and aggregating the rapidly increasing
volume of personalized content created by users or enabling such users to
interact with each other--unique characteristics that distinguish the Internet
from traditional print, radio and television media. As a result, there is a
significant growing demand by Web users for an online community site in which
they can publish easy-to-find, context-based content for, interact with, and
be recognized by, other Web users.
Similarly, Web users engaged in passive browsing are increasingly seeking
ways of interacting and communicating with other individuals with similar
interests and accessing unique, personalized content. While users are
generally able to obtain relevant professionally created content through
traditional navigational sites such as Web directories and search engines, the
source of such content is usually the media and not fellow Web users. Often,
the most relevant content for a user is generated by other users who share an
interest in what is published; however, most Web sites are not dedicated to
providing a platform for aggregating and accessing user-created content.
Online communities, unlike
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traditional Web navigational or content sites, provide the user with the
ability to directly interact with the author of such personalized content. As
a result, there is a significant and growing demand among users surfing the
Internet for an online community site that offers a centralized means of
accessing diverse, personally created content in an easy-to-navigate
contextual manner.
Online communities also provide advertisers and businesses an attractive
means of promoting and selling their products and services. According to
Jupiter Communications, the amount of advertising dollars spent on the Web is
expected to increase 67% annually over the next three years, reaching
approximately $4.3 billion by 2000. According to IDC, worldwide commerce
revenue on the Internet is expected to increase from approximately $32 billion
in 1998 to approximately $130 billion in 2000. To date, advertisers and
businesses have typically used traditional navigational sites and
professionally created content sites to promote their products and services
online. However, online communities allow advertisers and businesses to reach
highly targeted audiences within a more personalized context, thus providing
the opportunity to increase advertising efficiency and improve the likelihood
of a successful sale.
THE GEOCITIES SOLUTION
Founded by David Bohnett, GeoCities pioneered the first large-scale, Web-
based community for users to express themselves, share ideas, interests and
expertise and publish content accessible to other users with common interests.
The Company believed that user affinity to the Web occurs when users relate
personally to their online experience, and the more active users are in the
creation of that experience, the more personal the experience becomes. To
attract members to its community, the Company established a service enabling
Internet users to create their own Web sites in themed "neighborhoods" on the
GeoCities Web site. These neighborhoods provide a context for Web users to
publish content, to share experiences and ideas with other users and to access
a centralized and easy-to-navigate destination for user-created content.
Since its inception, GeoCities has become the world's largest and one of the
fastest growing communities of personal Web sites on the Internet. With
thousands of Homesteaders joining each day, the GeoCities community has grown
from approximately 10,000 Homesteads in October 1995 to over 2.1 million in
July 1998. Homesteaders have created an estimated 17 million pages of
personalized content, attracting over 14.8 million unique visitors to, and
generating over 925 million page views on, the GeoCities community, according
to Relevant Knowledge in June 1998 and Nielsen I/PRO in May 1998,
respectively. GeoCities was the third most trafficked Web site on the Internet
among home users in June 1998, according to Media Metrix, and, based on this
information, the Company believes it was the most popular community of
personal Web sites on the Internet during the first two quarters of 1998.
The Company believes that its success to date is attributable to its focus
on Homesteaders, visitors and advertising and commerce partners. This focus is
highlighted by the following distinguishing characteristics of the GeoCities
community:
LARGE WEB-BASED COMMUNITY WITH BROAD RANGE OF NEIGHBORHOODS. Homesteaders
are able to join one of 40 themed GeoCities neighborhoods, which are organized
topically, based on themes associated with well-known places. By providing
this broad range of neighborhoods for Homesteaders, GeoCities fosters a
virtual "greenhouse" for a wide range of individual self-expression and
interaction. Web users interested in finance and investing, for example,
Homestead in and create content for WallStreet and those interested in
politics Homestead in and support CapitolHill. Moreover, as the Internet's
largest community of personal Web sites, GeoCities offers on average over
40,000 Homesteads within each of its neighborhoods, providing Homesteaders
with the critical mass and platform to interact with and be recognized by
others.
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ACTIVE OWNERSHIP AND COMMUNITY PARTICIPATION. GeoCities encourages active
participation in its community and offers a number of programs to increase
levels of participation. When Homesteaders first apply to join a GeoCities
neighborhood, they agree to abide by the GeoCities community guidelines.
Homesteaders also agree to begin creation of their Web sites within two weeks
of joining a GeoCities neighborhood or relinquish their Homesteads.
Additionally, the Company welcomes suggestions from its Homesteaders and
implements those ideas that improve the community. As a result, the Company's
Homesteaders develop a keen sense of personal involvement in and ownership of
the GeoCities community, and actively encourage others to join and
participate. Homesteaders seeking greater involvement in their neighborhoods
are given the opportunity to join the active ranks of 40 Community Liaisons
and over one thousand Community Leaders. The Community Liaison and Community
Leaders within each neighborhood welcome new Homesteaders, provide assistance
to other Homesteaders, actively provide GeoCities with suggestions for
improvements and monitor sites. The Company believes that the greater the
involvement of its Homesteaders, the greater the loyalty and affinity of those
Homesteaders to the GeoCities site, and the more successful the GeoCities
community.
FOCUS ON CONTINUALLY IMPROVING THE HOMESTEADER EXPERIENCE. GeoCities
continually strives to improve the online experience of its members.
Homesteaders are provided free of charge with disk space for personal Web
sites, powerful Web-page publishing and communication tools to create their
own fully customized, multimedia-rich content and e-mail, chat and bulletin
board services. The Company offers premium memberships for Homesteaders who
want more utilities, disk space and a personal URL. GeoCities holds a monthly
conference call with its Community Liaisons in order to proactively determine
what improvements and suggestions are important to its GeoCities community. By
supplementing this call with a weekly newsletter for Community Leaders,
GeoCities maintains close interaction with its community on issues and
suggestions of a broader group of Homesteaders. In addition, the Company
offers a comprehensive online help function and encourages volunteerism among
its Community Leaders and Liaisons and other Homesteaders in helping their
GeoCities neighbors.
INTUITIVE MEANS OF FINDING PERSONALIZED CONTENT. While Internet users can
generally find Web content aggregated by subject area, aggregated user-created
content is much more challenging to find. GeoCities' topical categorization of
user-created content provides visitors with a central online site for quickly
accessing a critical mass of an estimated 17 million pages of personalized
content. Given their strong affinity for their Homestead and the GeoCities
community, Homesteaders actively promote their Web sites throughout the
Internet with hyperlinks located on other individual sites as well as through
listings on Internet directories and search engines, thereby resulting in
millions of Internet users visiting the GeoCities community site.
UNIQUE PERSONALIZED COMMUNITY ENVIRONMENT FOR ADVERTISING AND
COMMERCE. Online communities of members with common interests and demographics
constitute attractive opportunities for advertisers seeking to promote their
products and services online and businesses desiring to conduct commerce on
the Internet. The combination of GeoCities' unique community context,
intuitive topical organization, high volumes of traffic and Homesteaders'
acceptance of the role of advertising in the community provides an attractive
platform for targeted and cost-effective Web advertising and Web commerce.
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THE GEOCITIES STRATEGY
The Company's objective is to be the world's leading member-created online
community for people on the Web. The Company's strategies to achieve this
objective include:
FOCUS ON HOMESTEADER GROWTH AND AFFINITY. The Company intends to continue to
increase the number of its Homesteaders and concentrate on member affinity to
maintain its position as a leading community of personal Web sites. The
Company intends to continue to grow its membership base by: (i) introducing
additional classes of membership that appeal to a broader range of Internet
users; (ii) offering easier-to-use Web-page publishing tools, allowing
Homesteaders to easily create and enhance personal Web sites; (iii) promoting
GeoCities as a destination point on the Web by augmenting its existing
distribution alliances with Yahoo! and other partners and (iv) launching
brand- name promotional campaigns to drive both growth in membership and
traffic to its members' personal Web sites. In addition, the Company intends
to introduce more value-added member services and strengthen and expand the
number of affinity programs offered by the Company, including its GeoRewards
affinity program. Similar to airline frequent-flyer bonus point programs, the
GeoRewards affinity program is designed to reward Homesteaders with points
based on their level of participation, which they can later redeem for
discounts on purchases within the GeoCities community. The Company believes
that its focus on the needs of its Homesteaders and enhancing their experience
within the GeoCities community will produce continued growth in, and foster
loyalty among its membership base. The Company believes that a large and
growing base of committed Homesteaders organized on a contextual basis
provides advertisers and businesses with an attractive market to target
promotion of their products and services, thereby creating advertising and
commerce revenue opportunities for the Company.
BUILD THE GEOCITIES BRAND. The Company intends to increase its focus on
building the GeoCities brand. Historically, the Company's growth has been
primarily by word of mouth and the informal promotional efforts of its
members. Following the offering, the Company intends to launch an aggressive
promotional campaign to increase awareness of the GeoCities brand through
traditional media, including print, radio, billboard and television. In
addition, the Company intends to pursue additional distribution arrangements
to increase its reach on the Internet and introduce a number of additional
brand awareness programs on the GeoCities site to leverage its large and
growing Homesteader base and visitor traffic. The Company believes that a
well-recognized GeoCities brand will be attractive to existing and potential
advertising customers and commerce partners of the Company.
CONTINUE TO ENHANCE SITE FUNCTIONALITY AND PERFORMANCE. The Company believes
continually providing Homesteaders and visitors with greater functionality and
performance is critical to its continued leadership. The Company introduced a
new user interface in May 1998, which offers substantially improved
presentation of member-generated content in an intuitive topical format and
has been well received by the Company's Homesteaders and visitors to the
GeoCities community. The Company recently integrated third-party news and
editorial content into its site, allowing side-by-side interaction of personal
and professionally published content. In addition, the Company will utilize
proceeds from the offering to continue to upgrade and expand its server and
networking infrastructure, improving its ability to provide fast and reliable
access to the GeoCities community. The Company will also continue to provide
its members with enhanced Web-page publishing and communication tools to
enhance the community experience. The Company believes that continually-
enhancing site functionality and performance foster Homesteader and visitor
growth and affinity to the GeoCities community, thereby providing the Company
with an attractive platform for advertisers and for expansion of its
fee-generating premium membership services.
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ESTABLISH NEW STRATEGIC ALLIANCES. The Company has formed a number of
strategic relationships, including a distribution and equity relationship with
Yahoo! intended to increase traffic and memberships of both partners, in
addition to offering GeoCities' Homesteaders an array of free personalized
member services on Yahoo!. The Company has also formed four premier commerce
relationships with Amazon.com for books, CDnow for compact discs, First USA
for credit cards and Surplus Direct/Egghead for software and computer
hardware, making the products and services of these leading Internet vendors
available throughout the GeoCities community. These relationships provide an
opportunity for the Company to receive monthly payments and share in any
ongoing revenue streams from sales of products and services by these partners.
The Company intends to seek additional strategic relationships with commerce
and distribution partners.
EXPAND GLOBALLY. The Company believes that the anticipated growth of
Internet usage internationally presents significant opportunities to extend
GeoCities globally. According to Jupiter Communications, the number of online
households in the Asia/Pacific Rim and Europe is expected to reach
approximately 15 million at the end of 1998 and is expected to grow to
approximately 26 million by 2000. GeoCities is focused on establishing the
GeoCities community and brand in Japan, a market which, according to Jupiter
Communications, is second only to the United States in terms of Internet use.
Accordingly, the Company has entered into a joint venture with SOFTBANK to
form GeoCities Japan, which is 40% owned by the Company. The Company intends
to pursue additional opportunities for international expansion. The Company
believes that the introduction of localized GeoCities Web communities in
international markets will present many of the same opportunities for
advertising and commerce revenue as those in the United States.
BUILD MULTIPLE REVENUE STREAMS. The Company's large and growing Web
community offers a scalable business platform from which the Company plans to
generate revenue from multiple sources, including advertising, commerce and
premium membership service fees. The Company intends to achieve its revenue
objectives by: (i) increasing its advertising revenues through expansion of
its customer base, increasing the rates it charges advertisers by continuing
to improve its ability to target advertisements to more demographically
distinct groups, increasing its page views, increasing the average size and
length of its advertising contracts, increasing the number of its direct sales
representatives and continuing to invest in improving ad serving and ad
targeting technology; (ii) expanding its revenue-sharing commerce
relationships and its relationships with third-party content providers that
pay the Company for access to its site; (iii) promoting its GeoShops program,
which is designed to provide an effective means for small and home business
owners to leverage the reach of the Internet through a commercial presence
within the GeoCities community and (iv) expanding the number and scope of its
fee-based premium membership services.
HOMESTEADING ON GEOCITIES
GeoCities distinguishes itself from other Web sites by offering Homesteaders
a diverse range of neighborhoods and a critical mass of neighbors with whom to
interact. The Company also promotes active Homesteader participation through
its member-focused editorial philosophy--millions of personal Web pages
created and maintained by the community members themselves--providing Internet
users with a platform for contributing their talents and ideas, meeting and
interacting with others with similar interests and creating their own "home on
the Web". Supporting the editorial efforts of its Homesteaders are
approximately 45 GeoCities employees dedicated exclusively to community
organization, content management and community interaction. GeoCities provides
disk space, powerful Web-page publishing tools, customer support, high-speed,
high-quality site performance and e-mail, chat and bulletin-board services,
all free of charge.
The Company emphasizes a sense of responsibility among community members by
leveraging the characteristics of the Web that users find most attractive--
connection, expression, communication, entertainment and utility. GeoCities
Homesteaders abide by the community values--respect for the
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individual, open and honest communication, encouragement of ethical behavior
and respect for diverse points of view--reflected in the Company's content
guidelines and rules of conduct. GeoCities appeals to people's interest in
others by inviting users to move in, meet their neighbors, share ideas,
communicate, shop, check e-mail and join its growing community.
HOW HOMESTEADERS JOIN
GeoCities' 40 themed neighborhoods--virtual communities of people with
common interests--are based on familiar themes and provide Web users with a
place to connect on the Internet. Homesteading is analogous to moving to a new
community, picking a neighborhood to live in and designing and building a new
home to reflect one's own style and tastes. Each Homesteader is able to join
the neighborhood that most closely matches his or her interests. For example,
Homesteaders interested in music join and contribute to SunsetStrip and those
interested in wine support NapaValley. Homesteading in the GeoCities community
is designed to be easy and fun. After choosing a neighborhood, Homesteaders
find a vacant address, fill out an application, move-in and commence
developing their personal Web site. Homesteaders agree to abide by the
community guidelines and begin construction of their home within two weeks of
moving into a neighborhood. The Homesteading experience makes a user's online
experience expressive, interactive and personal.
PARTICIPATING IN THE GEOCITIES COMMUNITY
After joining a neighborhood, Homesteaders are encouraged to become active
in the community. Members can interact with their neighbors, support community
building initiatives, participate in chat sessions with their neighbors and
collaborate on editorial content. The Company believes that the more
Homesteaders participate, the more attachment they feel to the community and
the higher the quality of their content. Homesteaders seeking greater
involvement apply to become Community Leaders and Community Liaisons.
GeoCities currently has over one thousand Community Leaders, who are elected
by Homesteaders, and 40 Community Liaisons, who represent a neighborhood and
are elected by Community Leaders. The Community Leaders and Community Liaisons
are highly valued community builders who greet and assist new Homesteaders,
mentor other Homesteaders, coordinate neighborhood activities, interface with
the Company's in-house editorial staff and work to foster core community
values. In recognition of this valued service, Community Leaders and Liaisons
will receive a stock grant under the Company's 1998 Stock Incentive Plan. The
Company intends to introduce additional community leadership positions in the
future to increase levels of community participation. The Company also
encourages greater Homesteader involvement through its GeoRewards affinity
program. Homesteaders accrue bonus points based on their level of
participation which they can later redeem for discounts on purchases within
the GeoCities community.
HOW TO SURF THE GEOCITIES COMMUNITY
The Company believes that it provides users surfing the Web with a
comprehensive, high-quality concentration of personal Web sites on the
Internet. The Company strives to improve its site for such users by upgrading
the look and feel of its Web site to provide easier navigation of and to
direct greater levels of traffic to Homesteaders' Web sites. In May 1998, the
Company introduced its new user interface designed to be easier to use and
highly intuitive. The new user interface presents the GeoCities Web site to
visitors in a topical format to facilitate the aggregation of categories of
interests. This format allows easier and more intuitive access to content on
the GeoCities Web site and enhances the integration of Homesteaders' content
with the Company's e-mail, chat, bulletin-board services and selected third-
party content such as news and editorial feeds from Reuters, Women.com and
ZDNet.
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ADVERTISING, COMMERCE AND PREMIUM SERVICES
ADVERTISING
The Company has built a direct sales organization of 18 professionals as of
June 30, 1998, located in New York, San Francisco and Los Angeles, which is
dedicated to maintaining close relationships with top advertisers and leading
advertising agencies nationwide. The Company's direct sales organization is
organized regionally and is focused solely on selling advertising on the
GeoCities Web site. The Company also has arrangements with a number of third-
party advertising sales representatives pursuant to short-term agreements that
in general may be terminated by either party, without notice or penalty. The
Company's sales organization consults regularly with advertisers and agencies
on design and placement of their Web-based advertising, provides customers with
advertising measurement analysis and focuses on providing a high level of
customer service and satisfaction.
Currently, advertisers and advertising agencies enter into short-term
agreements, on average one to two months, pursuant to which they receive a
guaranteed number of impressions for a fixed fee. Advertising in GeoCities
currently consists primarily of banner-style advertisements that are
prominently displayed at the top of pages on a rotating basis throughout the
GeoCities community, including members' personal Web sites. From each banner
advertisement, viewers can hyperlink directly to the advertiser's own Web site,
thus providing the advertiser an opportunity to directly interact with an
interested customer. The Company's standard cost per thousand impressions
("CPM") for banner advertisements currently ranges from $15 to $40, depending
upon location of the advertisement and the extent to which it is targeted for a
particular audience. Discounts from standard CPM rates may be provided for
higher volume, longer-term advertising contracts.
The Company intends to increase its advertising revenues by focusing on a
number of key strategies, including expanding its advertising customer base,
increasing the CPM it charges advertisers by continuing to improve its ability
to target advertisements to demographically distinct groups, increasing page
views, increasing the average size and length of its advertising contracts,
increasing the number of its direct sales representatives and continuing to
invest in improving ad serving and ad targeting technology.
The Company also offers special sponsorship and promotional advertising
programs, such as contests, sampling and couponing opportunities to build brand
awareness, generate leads and drive traffic to an advertiser's site. The
Company also sells sponsorships of special interest pages where topically
focused content is aggregated on a permanent area within a neighborhood. The
Company has also recently entered into relationships with third-party Internet
content providers, many of whom pay GeoCities for integrating their content
within the GeoCities community. The Company will also seek to expand its third-
party content-provider relationships.
The Company has derived a substantial majority of its revenues to date from
the sale of advertisements. For 1997 and the six months ended June 30, 1998,
advertising revenues represented 90.6% and 90.2%, respectively, of the
Company's net revenues.
ADVERTISING CUSTOMERS
During the six months ended June 30, 1998, approximately 170 companies
advertised on the GeoCities Web site compared to approximately 80 advertisers
for the same six-month period in 1997. The following is a selected list of
certain of the Company's advertising customers for the 18-month period ended
June 30, 1998:
Amazon.com Hewlett-Packard Surplus
American Express Honda Direct/Egghead
AT&T IBM Toyota
CDnow Microsoft USA Net
Dell Computers SkyTel Visa
General Motors Sony ZDNet
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During 1997 and the six months ended June 30, 1998, the Company's four
largest customers accounted for approximately 29% and 28%, respectively, of
the Company's net revenues. During these same periods, Surplus Direct/Egghead
accounted for approximately 12% and 10%, respectively, of the Company's net
revenues. No other customer accounted for more than 10% of the Company's net
revenues during either of such periods.
COMMERCE PARTNERS
GeoCities believes Web commerce fits naturally into the Company's community
model. Through Web commerce, the Company partners with merchants and service
providers to integrate their products and services into the GeoCities
community, making them available for sale to the Company's Homesteaders and
visitors. In its premier commerce arrangements, the Company generally receives
a fixed monthly fee and a share of the proceeds from any online sales. In
addition, certain of the Company's premier commerce partners pay GeoCities
fees for Homesteader participation in vendor-sponsored sales programs after a
minimum level of participation has been achieved. To date, the Company has
entered into four premier alliances with commerce partners that are given
access to GeoCities' community platform and are provided with premier banner
and other space in permanent locations on select community Web pages. These
premier commerce arrangements typically have one-year terms and, subject to
the payment of certain fees, are renewable at the option of the Company's
commerce partners.
The Company has established premier commerce relationships with the
following entities:
. Amazon.com--providing GeoCities' Homesteaders and visitors with the
opportunity to purchase books throughout the Company's Web site;
. CDnow--providing GeoCities' Homesteaders and visitors with the
opportunity to purchase compact discs and other music-related items;
. Surplus Direct/Egghead--providing GeoCities' members and visitors with
the opportunity to purchase software and computer hardware; and
. First USA--providing GeoCities' members and visitors with an opportunity
to apply for a First USA credit card.
GEOSHOPS
In March 1998, GeoCities introduced GeoShops, its member-focused Web
commerce solution designed to provide a range of services which commerce-
enable Homesteaders' personal Web sites. Homesteaders are able to choose
between two GeoShops options: (i) for a $24.95 monthly fee, GeoShops allows
GeoCities members to sell products and services from their personal Web sites
within the GeoCities community and (ii) for a set-up fee of $120, a per
transaction fee and an additional monthly amount equal to the greater of $80,
or $40 plus a 5% commission on sales, GeoCities provides Homesteaders with a
transaction authentication and processing solution for their Web-based
businesses. With its GeoShops program, the Company enables home-based
businesses to leverage a fast, effective, easy-to-use program for commerce,
and the Company intends to actively promote this service in the future.
GEOPLUS
In addition to its free services, the Company offers a fee-based premium
service for its Homesteaders. For a fee of $4.95 per month, the Company's
GeoPlus service provides enhanced Web-page publishing tools for creating more
robust content, a personalized URL (Universe Resource Locator that determines
the particular location of a Web page on the Internet) and up to 25 megabytes
of disk space for Homesteaders' personal Web sites. GeoCities intends to
introduce additional features and premium service levels to appeal to a
broader range of Homesteaders. The Company does not generate revenues from
general Internet access or subscription fees.
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MARKETING AND BRAND AWARENESS
Historically, the Company's marketing has been primarily by word of mouth
and the informal promotional efforts of Homesteaders. The Company believes
initiating a formal, aggressive brand promotional campaign will provide the
Company with a significant opportunity for growing its Homesteader membership
base as well as attracting additional advertisers and commerce partners. The
Company intends to use a portion of the net proceeds from the offering to
launch a number of promotional campaigns in traditional media, including
print, radio, billboard and television, all designed to increase traffic and
brand awareness and an understanding of the Company's community model. The
Company also intends to introduce a number of other brand awareness programs
on its own site to leverage its large and growing Homesteader base and visitor
traffic. In addition, the Company plans to launch a number of grassroots
marketing efforts, including, for example, augmenting its existing GeoRewards
affinity program with additional membership affinity programs, as well as
continuing the promotion of its GeoPlus and GeoShops programs.
DISTRIBUTION AGREEMENT WITH YAHOO!
In December 1997, the Company entered into a one-year distribution
relationship with Yahoo! which is renewable for subsequent one-year terms,
subject to the right of either party to terminate the relationship at the end
of any term upon 90-days' notice. In connection with the distribution
agreement, Yahoo! also made a minority equity investment in the Company. As of
June 30, 1998, Yahoo! held 2.6% of the Company's outstanding capital stock.
This Agreement was designed to increase traffic and memberships of both
parties in addition to offering GeoCities' Homesteaders an array of free
personalized member services on Yahoo!. Under the terms of the agreement,
GeoCities agreed to provide its community-based, Web services for free to
registered users of Yahoo!. In addition, Yahoo! agreed to market GeoCities'
branded personal publishing programs on select areas throughout Yahoo!, as
well as provide a GeoCities-specific programming module on My Yahoo! for
GeoCities' Homesteaders. There can be no assurance that the agreement with
Yahoo! will be renewed.
The Company intends to seek additional strategic alliances with distribution
partners to increase the number of gateways into the GeoCities community and
Homesteader Web sites, thus increasing its overall visibility on the Web.
INFRASTRUCTURE AND OPERATIONS
The Company has developed an open standard hardware and software system that
is designed to be reliable and responsive. The Company's third-generation
architecture is a scalable system which includes over five terabytes of raw
disk space and supports over 170 million hits per day, has a peak bandwidth of
over 340 megabits per second and transfers 1.7 terabytes of data each day. The
Company provides its Homesteaders and visitors with a robust content platform
containing an estimated 17 million pages of user-created content that
generated over 925 million page views in June 1998, according to Nielsen
I/PRO.
The Company provides an efficient, responsive user experience through
network servers housed in Santa Clara, California, third-party and public
domain server software optimized internally by the Company and internally
developed tools and utilities. Requests for files to GeoCities are distributed
to the appropriate servers using Resonate Dispatch load distribution and
balancing software. Member-generated content is stored on a redundant array of
independent disks, is backed up to long-term tape storage devices on a daily
basis and copied on a weekly basis to be stored offsite. User profile
information is stored on multiple disk arrays using Informix Dynamic Server
database software and backed up to long-term tape storage devices on a semi-
hourly basis. The Company will continue to upgrade and expand its server and
networking infrastructure in an effort to improve its fast and reliable access
to the Company's community.
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Site connectivity to the Internet is provided via multiple DS-3 and OC-3
links on a 24 hour-a-day, seven days per week basis by Exodus. Exodus also
provides and manages power and environmentals for the Company's networking and
server equipment. The Company manages and monitors its servers and network
remotely from its headquarters in Santa Monica, California. The Company
strives to rapidly develop and deploy high-quality tools and features into its
system without interruption or degradation in service. Any disruption in the
Internet access provided by Exodus, or any interruption in the service that
Exodus receives from other providers, or any failure of Exodus to handle
higher volumes of Internet users to the GeoCities' site could have a material
adverse effect on the Company's business, results of operations and financial
condition.
COMPETITION
The market for members, visitors and Internet advertising is new and rapidly
evolving, and competition for members, visitors and advertisers is intense and
is expected to increase significantly in the future. Barriers to entry are
relatively insubstantial. The Company believes that the principal competitive
factors for companies seeking to create community on the Internet are critical
mass, functionality, brand recognition, member affinity and loyalty, broad
demographic focus and open access to visitors. Other companies who are
primarily focused on creating Web-based community on the Internet are
Tripod/Lycos, Angelfire, Xoom and theglobe. The Company will likely also face
competition in the future from Web directories, search engines, shareware
archives, content sites, commercial online services, sites maintained by ISPs
and other entities that attempt to or establish communities on the Internet by
developing their own or purchasing one of the Company's competitors. In
addition, the Company could face competition in the future from traditional
media companies, a number of which, including Disney, CBS and NBC, have
recently made significant acquisitions of or investments in Internet
companies. Further, there can be no assurance that the Company's competitors
and potential competitors will not develop communities that are equal or
superior to those of the Company or that achieve greater market acceptance
than the Company's community. The Company also competes for visitors with many
Internet content providers and ISPs, including Web directories, search
engines, shareware archives, content sites, commercial online services and
sites maintained by ISPs, as well as thousands of Internet sites operated by
individuals and government and educational institutions. These competitors
include free information, search and content sites or services, such as AOL,
CNET, CNN/Time Warner, Excite, Infoseek, Lycos, Netscape, Microsoft and
Yahoo!, some of whom, such as Yahoo! and Lycos, also have relationships with
GeoCities. The Company also competes with the foregoing companies, as well as
traditional forms of media such as newspapers, magazines, radio and
television, for advertisers and advertising revenue. The Company believes that
the principal competitive factors in attracting advertisers include the amount
of traffic on its Web site, brand recognition, customer service, the
demographics of the Company's members and viewers, the Company's ability to
offer targeted audiences and the overall cost-effectiveness of the advertising
medium offered by the Company. The Company believes that the number of
Internet companies relying on Web-based advertising revenue will increase
greatly in the future. Accordingly, the Company will likely face increased
competition, resulting in increased pricing pressures on its advertising rates
which could in turn have a material adverse effect on the Company's business,
results of operations and financial condition.
Many of the Company's existing and potential competitors, including Web
directories and search engines and large traditional media companies, have
longer operating histories in the Web market, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than the Company. Such competitors are able to undertake more
extensive marketing campaigns for their brands and services, adopt more
aggressive advertising pricing policies and make more attractive offers to
potential employees, distribution partners, commerce companies, advertisers
and third party content providers. There can be no assurance that Internet
content providers and ISPs, including Web directories, search engines,
shareware archives, sites that offer professional editorial content,
commercial online services and sites maintained by ISPs will not be
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perceived by advertisers as having more desirable Web sites for placement of
advertisements. In addition, substantially all of the Company's current
advertising customers and strategic partners also have established
collaborative relationships with certain of the Company's competitors or
potential competitors, and other high-traffic Web sites. Accordingly, there
can be no assurance that the Company will be able to grow its memberships,
traffic levels and advertiser customer base at historical levels or retain its
current members, traffic levels or advertiser customers, or that competitors
will not experience greater growth in traffic than the Company as a result of
such relationships which could have the effect of making their Web sites more
attractive to advertisers, or that the Company's strategic partners will not
sever or will elect not to renew their agreements with the Company. There can
also be no assurance that the Company will be able to compete successfully
against its current or future competitors or that competition will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its technology as proprietary and attempts to protect it
by relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. The
Company currently has no patents or patents pending and does not anticipate
that patents will become a significant part of the Company's intellectual
property in the foreseeable future. The Company also generally enters into
confidentiality or license agreements with its employees and consultants, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's proprietary
information without authorization or to develop similar technology
independently. The Company pursues the registration of its service marks in
the United States and internationally, and has applied for and obtained the
registration in the United States for a number of its service marks, including
"GeoCities". Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which the Company's
services are distributed or made available through the Internet, and policing
unauthorized use of the Company's proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company or other companies
within this market. There can be no assurance that the steps taken by the
Company will prevent misappropriation or infringement of its proprietary
information. Any such infringement or misappropriation, should it occur, might
have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, litigation may be necessary
in the future to enforce the Company's intellectual property rights, to
protect the Company's trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation might result in substantial
costs and diversion of resources and management attention and could have a
material adverse effect on the Company's business, results of operations and
financial condition. Furthermore, there can be no assurance that the Company's
business activities will not infringe upon the proprietary rights of others,
or that other parties will not assert infringement claims against the Company.
From time to time, the Company has been, and expects to continue to be,
subject to claims in the ordinary course of its business including claims of
alleged infringement of the copyrights, trademarks, service marks and other
intellectual property rights of third parties by the Company and the content
generated by its members. Although such claims have not resulted in
significant litigation or had a material adverse effect on the Company's
business to date, such claims and any resultant litigation, should it occur,
might subject the Company to significant liability for damages and might
result in invalidation of the Company's proprietary rights and even if not
meritorious, could be time consuming and expensive to defend and could result
in the diversion of management time and attention, any of which might have a
material adverse effect on the Company's business, results of operations and
financial condition.
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The Company currently licenses from third parties certain technologies
incorporated into the Company's Web site, including a site license for its
database software. The Company relies on the licensed software under this site
license to manage the storage and retrieval of Homesteader information,
including Homesteader names, e-mail addresses, passwords and usage
information. This site license remains in effect until it is terminated by
either party. The site license also terminates in certain other circumstances,
including in the event of a breach by either party. Although the Company
believes that it could obtain an alternative site license for its database
software should this site license terminate for any reason, any such
termination would have a disruptive effect on the Company's ability to manage
the storage and retrieval of Homesteader information for a period of time.
As it continues to introduce new services that incorporate new technologies,
it may be required to license additional technology from others. There can be
no assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms, if at all. The
inability of the Company to obtain any of these technology licenses could
result in delays or reductions in the introduction of new services or could
adversely affect the performance of its existing services until equivalent
technology could be identified, licensed and integrated.
EMPLOYEES
As of June 30, 1998, the Company had 152 full-time employees, including 45
in marketing and sales, 37 in editorial, 23 in finance and administration and
47 in operations and support. The Company's future success will depend, in
part, on its ability to continue to attract, retain and motivate highly
qualified technical and management personnel, for whom competition is intense.
From time to time, the Company also employs independent contractors to support
its research and development, marketing, sales and support and administrative
organizations. The Company's employees are not represented by any collective
bargaining unit, and the Company has never experienced a work stoppage. The
Company believes its relations with its employees are good.
FACILITIES
The Company's headquarters are currently located in a leased facility in
Santa Monica, California, consisting of approximately 13,000 square feet of
office space, a majority of which is under a five-year lease, and has a
renewal option for an additional three years. The Company intends to relocate
its headquarters in the near future to a leased facility in Marina del Rey,
California consisting of approximately 24,000 square feet of office space. The
new facility will be under a five-year lease and will have two renewal
options, each for an additional three years. The Company has also leased
approximately 5,500 square feet of office space in New York and approximately
1,700 square feet of office space in San Francisco for its East and West Coast
sales offices, respectively.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of June 30, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
David C. Bohnett(1)..... 42 Chairman of the Board and Secretary
Thomas R. Evans......... 43 Chief Executive Officer, President and Director
Stephen L. Hansen....... 42 Chief Operating Officer and Chief Financial Officer
Michael G. Barrett...... 36 Vice President, Advertising Sales
Kelly L. Boyer.......... 32 Vice President, Human Resources
James G. Glicker........ 44 Vice President, Marketing
Robert K. Kalok......... 33 Vice President, Business Development
William E. Losch........ 37 Vice President, Finance
Edward J. Pierce........ 46 Vice President, Legal Affairs and General Counsel
John C. Rezner.......... 35 Vice President, Operations and Chief Technical Officer
Richard H. Rygg......... 41 Vice President, General Manager
Jerry D. Colonna(2)..... 34 Director
Eric C. Hippeau(1)...... 46 Director
Harry D. Lambert(3)..... 59 Director
Peter H. Mills(1)(3).... 46 Director
David S. Wetherell(2)... 43 Director
</TABLE>
- --------
(1) Member of Nominating Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
DAVID C. BOHNETT has served as the Company's Chairman of the Board and
Secretary since he founded the Company in November 1994. From November 1994 to
April 1998, Mr. Bohnett also served as the Company's Chief Executive Officer
and President. From November 1994 to November 1997, Mr. Bohnett also served as
the Company's Chief Financial Officer. Prior to founding the Company, from
February 1990 to May 1994, Mr. Bohnett served as Director of Product Marketing
at Goal Systems, which merged with LEGENT, a software company. From 1988 to
1990, Mr. Bohnett was Chief Financial Officer of Essential Software, which
merged with Goal Systems. Mr. Bohnett received his B.S. degree in Business
Administration from the University of Southern California and his M.B.A.
degree in Finance from the University of Michigan.
THOMAS R. EVANS has served as the Company's Chief Executive Officer and
President since April 1998. From 1991 to April 1998, Mr. Evans served as
President and Publisher of U.S. News & World Report, a magazine that reports
on domestic and international current events. From January 1997 to April 1998,
Mr. Evans also served as President and Publisher of The Atlantic Monthly, a
magazine that features articles on art, literature, politics and technology.
In addition, from May 1995 to April 1998, Mr. Evans also served as President
and Publisher of Fast Company, a magazine that showcases business people and
ideas. From 1990 to 1991, Mr. Evans served as Vice President, Advertising
Director of U.S. News & World Report. Mr. Evans received his B.S. degree in
Business Administration from Arizona State University.
STEPHEN L. HANSEN has served as the Company's Chief Operating Officer since
May 1998 and Chief Financial Officer since November 1997. From November 1997
to May 1998, Mr. Hansen also served as the Company's Chief Administrative
Officer. From September 1992 to January 1994, Mr. Hansen served as Senior Vice
President and Chief Financial Officer for Universal Studios Hollywood. From
January 1994 to November 1997, Mr. Hansen served as Senior Vice President and
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Chief Financial Officer for the Recreation Group of Universal Studios, a
studio that produces and distributes films, videos, television shows and
music. From 1979 to 1992, Mr. Hansen was with KPMG Peat Marwick, most recently
as a partner in the Entertainment, Media and Technology Group. Mr. Hansen
received his B.S. degree in Accounting from the University of Southern
California and is a Certified Public Accountant.
MICHAEL G. BARRETT has served as the Company's Vice President, Advertising
Sales since September 1997. From November 1995 to September 1997, Mr. Barrett
served as Vice President, Advertising for Disney Online, the online division
of The Walt Disney Company. From February 1994 to September 1995, Mr. Barrett
served as Associate Publisher at Family PC, a magazine that advises parents on
home computing. Mr. Barrett received his B.A. degree in Economics from College
of the Holy Cross.
KELLY L. BOYER has served as the Company's Vice President, Human Resources
since June 1998. From February 1997 to May 1998, Ms. Boyer was Senior
Director, Human Resources for the strategic catalog marketing start-up
division of EMI-Capital Music Group. From July 1995 to January 1997, Ms. Boyer
served as Director for the Human Resources/Organizational Development team for
the Coach Leatherware/Personal Products subsidiary of the Sara Lee Corporation
in New York. From August 1993 to July 1995, Ms. Boyer served as Senior
Manager, Employee Relations for The Walt Disney Company's Specialty
Retail/Consumer Products division. Ms. Boyer received her M.S. degree in
Organizational Development from Northwestern University and her B.A. degree in
Advertising/Communications from Michigan State University.
JAMES G. GLICKER has served as the Company's Vice President, Marketing since
May 1998. From November 1997 to May 1998, Mr. Glicker served as Vice
President, Sales & Marketing for 1-800-FLOWERS, an online florist. From 1991
to June 1997, Mr. Glicker held various positions at BMG (music subsidiary of
the Bertelsmann Music Group), including Chief Executive Officer and Managing
Director, BMG Australia/New Zealand and Senior Vice President, WorldWide
Marketing and Sales with BMG Classics. Mr. Glicker received his B.A. degree in
English from Yale University and his M.B.A. degree in Finance/Marketing from
the University of Michigan.
ROBERT K. KALOK has served as the Company's Vice President, Business
Development since May 1998. From 1995 to May 1998, Mr. Kalok was Vice
President, Brand Management and Direct Marketing for Charles Schwab Corp., a
discount brokerage company. From 1988 to 1995, Mr. Kalok was employed by MCI,
a telecommunications company, where he last served as Director of Partnership,
Marketing. Mr. Kalok received his B.A. degree in Marketing and his M.B.A.
degree in Finance from George Washington University.
WILLIAM E. LOSCH has served as the Company's Vice President, Finance since
March 1998. From October 1997 to February 1998, Mr. Losch served as Vice
President, Finance and Planning for Universal City Hollywood, the operations
of Universal CityWalk, Universal Studios and Hollywood theme park. From
November 1995 to October 1997, Mr. Losch served as Vice President, Controller
of Universal City Hollywood. From December 1988 to October 1995, Mr. Losch
served as the Chief Financial Officer of MCA Development, the real estate
division of MCA. From March 1984 to November 1988, Mr. Losch served as a
manager with KPMG Peat Marwick. Mr. Losch received his B.A. degree in
Economics from the University of California, Los Angeles, and is a Certified
Public Accountant.
EDWARD J. PIERCE has served as the Company's Vice President, Legal Affairs
and General Counsel since October 1997. From June 1997 to October 1997, Mr.
Pierce served as General Counsel for the Company. From 1987 through April
1997, Mr. Pierce was a partner with the law firm of Seyfarth, Shaw,
Fairweather & Geraldson. From 1982 through 1987, Mr. Pierce was affiliated
with the law firm of Pollard, Bauman, Slome & McIntosh, as an associate from
1982 through 1984, and as a partner from 1985 through 1987. Mr. Pierce
received his B.A. degree in French literature from Yale University, his M.A.T.
degree in English from Brown University and his J.D. degree from Harvard
University.
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<PAGE>
JOHN C. REZNER has served as the Company's Vice President, Operations and
Chief Technical Officer and co-founder since January 1995. From 1986 to
January 1995, Mr. Rezner served in various capacities at McDonnell Douglas, an
aerospace company, last serving as the Head of Information Systems of the AISF
Group. Mr. Rezner received his B.S. degree in Computer Science from California
State Polytechnic University, Pomona and his M.S. degree in Computer Science
from the University of Southern California.
RICHARD H. RYGG has served as the Company's Vice President, General Manager
since March 1997. In April 1996, Mr. Rygg founded Digital City of Los Angeles,
a joint venture of America Online, an online service provider, and the Tribune
Company, a newspaper publisher and owner of television stations. From April
1996 to March 1997, Mr. Rygg served as the General Manager and "Mayor" of
Digital City of Los Angeles. From January 1995 to April 1996, Mr. Rygg served
as President of the Entertainment Communication Network. Mr. Rygg received his
B.S. degree in Engineering Geology from Brigham Young University and his
M.B.A. degree in Finance with an emphasis on management-information systems
from Pennsylvania State University.
JERRY D. COLONNA has served as a director of the Company since January 1998.
In July 1996, Mr. Colonna founded Flatiron Partners LLC ("Flatiron Partners"),
a venture investment program affiliated with Chase Capital Partners and
SOFTBANK Technology Ventures IV L.P. In February 1995, Mr. Colonna joined
CMG@Ventures as a founding partner and currently remains as a profit partner.
From 1985 to 1993, Mr. Colonna served in a variety of positions at
InformationWeek, a technology magazine, including three years as its Editor.
From 1975 to 1985, Mr. Colonna served in various capacities at CMP Media Inc.,
a technology publishing firm, last serving as its Editorial Director,
Interactive Media Group. Mr. Colonna received his B.A. degree in English
Literature from Queens College, CUNY.
ERIC C. HIPPEAU has served as a director of the Company since January 1997.
Since 1993, Mr. Hippeau has served as Chairman of the Board and Chief
Executive Officer of Ziff-Davis Inc. ("Ziff Davis"), an integrated media and
marketing company focused on computing and internet-related technology. Ziff
Davis is a subsidiary of SOFTBANK Holdings, Inc. From 1989 to 1993, Mr.
Hippeau served in a variety of positions at Ziff-Davis, Inc., including
Executive Vice President, President and Chief Operating Officer. Mr. Hippeau
currently serves as a Director of Yahoo! Inc., an Internet media company. Mr.
Hippeau attended The Sorbonne in Paris.
HARRY D. LAMBERT has served as a director of the Company since January 1997.
Mr. Lambert is a General Partner of InnoCal, L.P. ("InnoCal"). Prior to
joining InnoCal, Mr. Lambert was a General Partner of the Edison Venture Fund.
Prior to that, Mr. Lambert was a General Partner of InnoVen. Mr. Lambert
currently serves as a Director of Motiva Software, SalesLogix, a developer of
sales and support automation software, Thinque Systems, a mobile
communications company, and Trega Biosciences, a biotechnology company.
Mr. Lambert received his B.S. degree from the United States Military Academy
at West Point, and he is a graduate of the Columbia University Graduate
Business Administration, Executive Program in Business Administration and the
Harvard Graduate School of Business Administration Advanced Management
Program.
PETER H. MILLS has served as a director of the Company since January 1996.
Since March 1995, Mr. Mills has been a General Partner of CMG@Ventures. Prior
to joining CMG@Ventures, Mr. Mills served as the Chief Executive Officer of
the United States Display Consortium, a non-profit consortium established to
develop and organize the U.S. manufacturing infrastructure required to support
world-class manufacturing of flat panel displays. Prior to that, Mr. Mills
served as Chief Administrative Officer of SEMATECH, a research and development
consortium of U.S. semiconductor manufacturers. In 1982, Mr. Mills co-founded
Softtrend Inc., a microcomputer software publisher, and, after its merger with
BPI Systems, served as Vice President of BPI Systems. Mr. Mills received his
B.S. degree in Communications from Ithaca College and his M.B.A. degree in
Marketing from the Graduate School of Business at Columbia University.
53
<PAGE>
DAVID S. WETHERELL has served as a director of the Company since June 1996.
Mr. Wetherell serves as the Chairman of the Board, Chief Executive Officer,
President and Secretary of CMG Information Services, Inc. In January 1995, Mr.
Wetherell founded CMG@Ventures, a venture capital firm. In 1994, Mr. Wetherell
founded BookLink Technologies, which was later acquired by America Online. In
1982, Mr. Wetherell co-founded Softtrend Inc., a microcomputer software
publisher. Mr. Wetherell is Chairman of the Board of SalesLink Corporation, a
literature fulfillment business, and is a director of Lycos, Inc. Mr. Wetherell
received his B.S. degree in Mathematics and Education from Ohio Wesleyan
University.
There are no family relationships among any of the Company's directors or
executive officers. Currently, all directors hold office until the next annual
meeting of stockholders or until their successors have been duly elected and
qualified.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews and monitors the
corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters that have a significant impact on the Company's financial condition.
The Audit Committee also consults with the Company's management and the
Company's independent accountants prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of the Company's financial affairs. In addition, the Audit Committee
has the responsibility to consider and recommend the appointment of, and to
review fee arrangements with, the Company's independent accountants. The
current members of the Audit Committee are Messrs. Lambert and Mills.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding the Company's compensation policies and
all forms of compensation to be provided to executive officers and directors
of the Company, including, among other things, annual salaries and bonuses and
stock option and other incentive compensation arrangements of the Company. In
addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all other employees of the Company. The current members of
the Compensation Committee are Messrs. Colonna and Wetherell.
The Nominating Committee of the Board of Directors makes recommendations to
the Board of Directors regarding nominees for the Board of Directors. The
current members of the Nominating Committee are Messrs. Bohnett, Hippeau and
Mills.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
The Company does not currently compensate its directors for attending Board
of Directors or committee meetings, but reimburses directors for their
reasonable travel expenses incurred in connection with attending meetings of
the Board of Directors or committees of the Board of Directors.
EXECUTIVE OFFICERS
Executive officers of the Company are appointed by the Board of Directors on
an annual basis and serve until the next annual meeting of the Board of
Directors or until their successors have been duly appointed and qualified.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Colonna and
Wetherell, neither of whom has been an officer or employee of the Company at
any time since the Company's inception.
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<PAGE>
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee. Prior to the formation of the Compensation Committee
in September 1996, the Board of Directors of the Company as a whole made
decisions relating to compensation of the Company's executive officers.
Mr. Colonna is a partner of the Flatiron Fund, a stockholder of the Company
("Flatiron Fund"). The Flatiron Fund is a venture investment program
affiliated with Chase Capital Partners and SOFTBANK Technology Ventures, both
of which are stockholders of the Company. Mr. Colonna is a profit partner and
Mr. Wetherell is a general partner of CMG@Ventures, one of the Company's
stockholders. In January 1996, CMG@Ventures purchased 3,108,000 shares of
Series A Preferred Stock of the Company at a purchase price of $0.3218 per
share. In July 1996, CMG@Ventures purchased 2,900,000 shares of Series B
Preferred Stock of the Company at a purchase price of $0.3793 per share. In
January and February of 1997, CMG@Ventures and certain other current
stockholders of the Company purchased 10,226,718 shares of Series D Preferred
Stock at a purchase price of $0.885 per share. In October 1997, CMG@Ventures
II, LLC, an affiliate of CMG@Ventures and certain other current stockholders
of the Company purchased 1,428,564 shares of Series E Preferred Stock of the
Company at a purchase price of $3.50 per share. All outstanding shares of
Preferred Stock will convert into Common Stock in connection with the
Preferred Stock Conversion upon the closing of the offering. In January 1997,
in connection with the issuance of shares of its preferred stock, the Company
granted CMG@Ventures an immediately exercisable option to purchase up to
1,000,000 shares of Common Stock at an exercise price of $0.885 per share. In
May 1997, the Company entered into a list line management agreement with CMG
Information Services, Inc. ("CMGI"), an affiliate of CMG@Ventures.
See "Principal Stockholders" and "Certain Transactions".
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth for the year ended December 31, 1997, all
compensation received for services rendered to the Company in all capacities
by the Company's Chief Executive Officer and each of the other executive
officers of the Company whose salary and bonus exceeded $100,000 in 1997
(collectively, the "Named Executive Officers"). No executive who would
otherwise have been includable in such table on the basis of salary and bonus
earned for 1997 has resigned or otherwise terminated employment during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------- ------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITIONS(1)(2) SALARY BONUS OPTIONS COMPENSATION(3)
------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
David C. Bohnett................. $160,000 -- 600,000 $ 857
Chairman, President and Chief
Executive Officer
John C. Rezner................... 125,000 $22,672 200,000 1,945
Chief Technical Officer
Paul A. De Braccio............... 172,848 -- -- --
Vice President, Sales
</TABLE>
- --------
(1) Mr. Bohnett resigned from his positions as President and Chief Executive
Officer of the Company in April 1998 upon the appointment of Mr. Evans to
such positions. Mr. De Braccio ceased his employment with the Company in
July 1997.
55
<PAGE>
(2) Mr. Evans, the Company's President and Chief Executive Officer, joined the
Company in April 1998. His 1998 annual base salary is $200,000, and his
bonus for 1998 is $100,000. Mr. Hansen, the Company's Chief Operating
Officer and Chief Financial Officer, joined the Company in November 1997.
His 1998 annual base salary is $200,000, and his bonus for 1998 is
$50,000. In 1997, Mr. Hansen received $33,333 for services rendered to the
Company. Mr. Barrett, the Company's Vice President, Advertising Sales,
joined the Company in September 1997. His 1998 annual base salary is
$200,000 and he was paid a $25,000 bonus in January 1998. In addition,
during the term of his employment agreement, which expires in September
1998, Mr. Barrett is eligible in general to receive certain commissions
based on the Company's net revenues, subject to certain conditions. In
1997, Mr. Barrett received $50,974 for services rendered to the Company.
See "--Employment Agreements and Termination of Employment and Change of
Control Arrangements".
(3) Consists of the Company's matching contribution under its 401(k) Plan.
OPTION GRANTS IN LAST YEAR
The following table sets forth certain information concerning options
granted to the Named Executive Officers during 1997.
OPTION GRANTS DURING YEAR ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL REALIZATION VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------------
NAME(1) GRANTED(2) IN 1997(3) PER SHARE DATE 5% 10%
------- ---------- ---------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David C. Bohnett........ 600,000 21.8% $0.885 1/12/04 $ 216,170 $ 503,769
John C. Rezner.......... 200,000 7.3 0.885 1/12/04 72,057 167,923
Paul A. De Braccio...... -- -- -- -- -- --
</TABLE>
- --------
(1) In April 1998, Mr. Evans was granted two options to purchase up to an
aggregate of 1,632,760 shares of Common Stock at an exercise price of
$2.28 per share. These options expire in April 2005. In November 1997, Mr.
Hansen was granted two options to purchase up to an aggregate of 450,000
shares of Common Stock at an exercise price of $0.825 per share. These
options expire in November 2004. In May 1998, Mr. Hansen was granted an
option to purchase 150,000 shares of Common Stock at an exercise price of
$9.00 per share. This option expires in May 2005. In September 1997, Mr.
Barrett was granted two stock options to purchase up to an aggregate of
280,000 shares of Common Stock at an exercise price of $0.75 per share.
These options expire in September 2004.
(2) Each option represents the right to purchase one share of Common Stock.
The options shown in this column are all nonqualified stock options. The
options become exercisable in four equal annual installments commencing
one year after the date of grant. To the extent not already exercisable,
all of these options will become exercisable in the event of a merger in
which the Company is not the surviving corporation or upon the sale of
substantially all the Company's assets. In addition, upon the termination
of Mr. Bohnett's employment for any reason, his options will, to the
extent not already exercisable, accelerate and become immediately
exercisable.
(3) During 1997, the Company granted employees options to purchase an
aggregate of 2,754,560 shares of Common Stock.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. These amounts represent certain assumed rates of
appreciation in the value of the Company's Common Stock from the exercise
price of such options (which was in excess of the
56
<PAGE>
fair market value of the Common Stock on the date of grant as determined by
the Company's Board of Directors), as determined by the Company's Board of
Directors. Actual gains, if any, on stock option exercises are dependent on
the future performance of the Common Stock and overall stock market
conditions. The amounts reflected in the table may not necessarily be
achieved.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth certain information with respect to the Named
Executive Officers concerning the exercise of options during 1997 and
unexercised options held as of December 31, 1997. No options or stock
appreciation rights were exercised by any Named Executive Officer during such
year, and no stock appreciation rights were outstanding on December 31, 1997.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(2)
------------------------------ -------------------------
NAME(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
David C. Bohnett........ -- 600,000 -- $7,269,000
John C. Rezner.......... 777,000 200,000 $10,101,000 2,423,000
Paul A. De Braccio(3)... -- -- -- --
</TABLE>
- --------
(1) Mr. Hansen had 450,000 shares of Common Stock underlying unexercisable
stock options at December 31, 1997. Mr. Barrett had 280,000 shares of
Common Stock underlying unexercisable stock options at December 31, 1997.
(2) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $13.00 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying such options.
(3) Mr. De Braccio ceased his employment with the Company in July 1997, as a
result of which his options terminated unexercised.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
None of the Named Executive Officers of the Company, other than Mr. Bohnett,
has an employment agreement with the Company.
In January 1996, the Company entered into an employment agreement with Mr.
Bohnett which, as amended, continues until December 31, 1998, unless terminated
earlier by the Company, either for cause, death or certain other circumstances.
Mr. Bohnett served as the Company's President and Chief Executive Officer from
the Company's inception to April 1998, and he currently holds the position of
Chairman of the Board. Effective May 1998, Mr. Bohnett voluntarily reduced his
annual base salary under this agreement to $1.00. Mr. Bohnett is eligible to
receive a bonus of up to $199,999 at the discretion of the Board of Directors
of the Company. Upon the termination of Mr. Bohnett's employment, the options
he holds as of the date of this Prospectus will, to the extent not already
exercisable, become immediately exercisable. In addition, to the extent not
already exercisable, all of such options will become exercisable in the event
of a merger in which the Company is not the surviving corporation or in the
event of a sale of substantially all of the Company's assets.
In November 1997, the Company entered into a two-year employment agreement
with Mr. Hansen providing for his employment as Chief Financial Officer of the
Company. The employment agreement provides for an annual base salary of
$200,000 and an annual bonus of $50,000, payable semi-annually. In connection
with his employment, Mr. Hansen was granted two stock options, the first was
57
<PAGE>
a stock option to purchase up to 300,000 shares of Common Stock at an exercise
price of $0.825 per share which becomes exercisable in four equal annual
installments commencing November 1998, and the second was a stock option to
purchase up to 150,000 shares of Common Stock at an exercise price of $0.825
per share which becomes exercisable in four equal annual installments
commencing on the first anniversary date of the consummation of the offering.
Mr. Hansen was appointed the Company's Chief Operating Officer in May 1998,
and, in connection with such appointment, was granted an additional stock
option to purchase up to 150,000 shares of Common Stock at an exercise price
of $9.00 per share, which option becomes exercisable in four equal annual
installments commencing May 1999. If Mr. Hansen's employment is terminated by
the Company during the term of his agreement other than for cause, including
if Mr. Hansen is terminated other than for cause within 18 months of a change
of control of the Company, the Company, or any successor entity, must pay
Mr. Hansen his base salary for a period of six months and vesting in his
options for 450,000 shares granted in November 1997 shall be partially
accelerated.
In April 1998, Mr. Evans joined the Company as President and Chief Executive
Officer. Mr. Evans is paid an annual base salary of $200,000 and, so long as
he remains employed by the Company, will receive a $100,000 bonus on the first
anniversary of his employment. So long as he remains employed by the Company,
Mr. Evans will also be eligible to receive future annual bonuses of up to
$100,000 subject to the Company achieving certain financial results and
certain other conditions. The Company also agreed to loan Mr. Evans $100,000.
The loan to Mr. Evans was made in July 1998 and is payable by Mr. Evans
six months following the consummation of the offering. The loan is unsecured
and would be forgiven upon the achievement by the Company of certain financial
results for 1998. This loan was approved by a majority of the stockholders of
the Company in May 1998. In connection with his employment, Mr. Evans was also
granted two stock options. The first was an option to purchase up to 979,656
shares of Common Stock at an exercise price of $2.28 per share which becomes
exercisable in four equal annual installments commencing April 1999 and the
second was an option to purchase up to 653,104 shares of Common Stock at an
exercise price of $2.28 per share which becomes exercisable in four equal
annual installments commencing April 2001; provided, that the commencement of
the exercisability of this option will be accelerated if the Company achieves
certain financial results for 1998. If the Company is acquired during his
first year of employment, Mr. Evans will receive credit for one year of
accelerated vesting in his first option and, subject to the Company's
achievement of certain financial results, in his second option as well. In
addition, if Mr. Evans' employment is terminated by the Company prior to the
first anniversary of his employment, other than for cause, the Company must
pay Mr. Evans his base salary for a period of six months and Mr. Evans will
receive credit for one year of accelerated vesting in his first option and,
subject to the Company's achievement of certain financial results, in his
second option as well.
In September 1997, the Company entered into a one-year employment agreement
with Mr. Barrett providing for his employment as Vice President, Advertising
Sales of the Company. The employment agreement provides for an annual base
salary of $200,000 and an annual bonus of $25,000, which was paid in January
1998. In addition, for the one-year term of the agreement, Mr. Barrett is
eligible to receive certain commissions based on the Company's net revenues.
In connection with his employment, Mr. Barrett was granted two stock options.
The first was a stock option to purchase up to 160,000 shares of Common Stock
at an exercise price of $0.75 per share which becomes exercisable in four
equal annual installments commencing in September 1998, and the second was a
stock option to purchase up to 120,000 shares of Common Stock at an exercise
price of $0.75 per share which becomes exercisable in four equal annual
installments commencing September 1999; provided, that the commencement of the
exercisability of the second option will be accelerated if the Company
achieves certain financial results. If Mr. Barrett's employment is terminated
by the Company during the term of his agreement other than for cause,
including if Mr. Barrett is terminated other than for cause within 12 months
of a change of control of the Company, or if the Company elects not to
continue Mr. Barrett's employment beyond the one-year term of his agreement,
the Company, or any successor entity, must pay Mr. Barrett his base salary for
a period of six months.
58
<PAGE>
EMPLOYEE BENEFIT PLANS
1998 STOCK INCENTIVE PLAN
In July 1998, the Company adopted the 1998 Stock Incentive Plan (the "1998
Stock Incentive Plan") as the successor equity incentive program to the
Company's 1997 Stock Option Plan (the "Predecessor Plan"). The 1998 Stock
Incentive Plan was adopted by the Board of Directors of the Company and
approved by the stockholders of the Company in July 1998. The Discretionary
Option Grant and Stock Issuance Programs under the 1998 Stock Incentive Plan
became effective immediately upon the Board's adoption of the plan (the "Plan
Effective Date"). The Automatic Option Grant Program will become effective
immediately upon the execution of the Underwriting Agreement for the offering.
The Common Stock share reserve of 370,940 shares of Common Stock from the
Predecessor Plan and an additional 2,300,000 shares of Common Stock have been
authorized for issuance under the 1998 Stock Incentive Plan. In no event,
however, may any one participant in the 1998 Stock Incentive Plan receive
option grants, separately exercisable stock appreciation rights or direct
stock issuances for more than 500,000 shares of Common Stock in the aggregate
per calendar year.
On the date of the execution of the Underwriting Agreement for the offering,
outstanding options granted under the Predecessor Plan will be incorporated
into the 1998 Stock Incentive Plan, and no further option grants will be made
under the Predecessor Plan. The incorporated options will continue to be
governed by their existing terms, however, unless the Plan Administrator
elects to extend one or more features of the 1998 Stock Incentive Plan to
those options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
Discretionary Option Grant Program of the 1998 Stock Incentive Plan.
The 1998 Stock Incentive Plan is divided into five separate components: (i)
the Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers and consultants) may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price equal to not less than the fair market value
of the Common Stock on the date of grant, (ii) the Stock Issuance Program
under which such individuals may, in the Plan Administrator's discretion, be
issued shares of Common Stock directly, through the purchase of such shares at
a price not less than their fair market value at the time of issuance or as a
bonus tied to the performance of services, (iii) the Salary Investment Option
Grant Program which may, in the Plan Administrator's sole discretion, be
activated for one or more calendar years and, if so activated, will allow
executive officers and other highly compensated employees the opportunity to
apply a portion of their base salary to the acquisition of special below-
market stock option grants, (iv) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to
eligible, non-employee members of the Board of Directors to purchase shares of
Common Stock at an exercise price equal to their fair market value on the
grant date and (v) the Director Fee Option Grant Program which may, in the
Plan Administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the annual retainer fee otherwise payable to
them in cash each year to the acquisition of special below-market option
grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee, as
Plan Administrator, will have the discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any
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<PAGE>
granted option is to remain outstanding. The Compensation Committee will also
have the authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option
Grant Program in the event that program is activated for one or more calendar
years, but neither the Compensation Committee nor the Board of Directors will
exercise any administrative discretion with respect to option grants made
under the Salary Investment Option Grant Program or under the Automatic Option
Grant Program or Director Fee Option Grant Program for the non-employee Board
members. All grants under those three latter programs will be made in strict
compliance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Stock Incentive Plan may be paid in cash or in shares of
Common Stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by
the optionee. In addition, the Plan Administrator may provide financial
assistance to one or more optionees in the exercise of their outstanding
options or the purchase of their unvested shares by allowing such individuals
to deliver a full-recourse, interest-bearing promissory note in payment of the
exercise price and any associated withholding taxes incurred in connection
with such exercise or purchase.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock. None of the
incorporated options from the Predecessor Plan contain any stock appreciation
rights.
In the event that the Company is acquired by merger or sale of substantially
all of its assets or securities possessing more than 50% of the total combined
voting power of the Company's outstanding securities, each outstanding option
under the Discretionary Option Grant Program which is not to be assumed by the
successor corporation or otherwise continued in effect will automatically
accelerate in full, and all unvested shares under the Discretionary Option
Grant and Stock Issuance Programs will immediately vest, except to the extent
the Company's repurchase rights with respect to those shares are assigned to
the successor corporation or otherwise continued in effect. The Plan
Administrator will have complete discretion to grant one or more options under
the Discretionary Option Grant Program which will become exercisable on an
accelerated basis for all of the option shares upon (i) an acquisition or
other change in control of the Company, whether or not those options are
assumed or continued in effect, or (ii) the termination of the optionee's
service within a designated period (not to exceed 18 months) following an
acquisition or other change in control in which those options are assumed or
continued in effect. The vesting of outstanding shares under the Stock
Issuance Program may be accelerated upon similar terms and conditions. The
Plan Administrator is also authorized under the Discretionary Option Grant and
Stock Issuance Programs to grant options and to structure repurchase rights so
that the shares subject to those options or repurchase rights will immediately
vest in connection with a change in the majority of the Board of Directors of
the Company by reason of one or more contested elections for Board membership,
with such vesting to occur either at the time of such change in control or
upon the subsequent termination of the individual's service within a
designated period following such change in control. Some of the options
incorporated from the Predecessor Plan will also vest on an accelerated basis
under certain circumstances. The Plan Administrator has the discretion to
extend one or more of the other acceleration provisions of the 1998 Stock
Incentive Plan to options incorporated from the Predecessor Plan.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employees of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his
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or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Common Stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will become exercisable for the option shares in a series of 12
equal monthly installments over the calendar year for which the salary
reduction is to be in effect and will be subject to full and immediate vesting
upon certain changes in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the completion of the offering,
whether by appointment by the Board of Directors or election of the
stockholders, will automatically receive an option grant for 10,000 shares as
of the date such individual joins the Board, provided such individual has not
been in the prior employ of the Company. In addition, on the date of each
Annual Stockholders Meeting of the Company held after the Plan Effective Date,
each non-employee Board member who is to continue to serve as a non-employee
Board member will automatically be granted an option to purchase 2,500 shares
of Common Stock, provided such individual has served on the Board for at least
six months.
Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the option
will be subject to repurchase by the Company, at the exercise price paid per
share, should the optionee cease Board service prior to vesting in those
shares. The shares subject to each initial 10,000-share automatic option grant
will vest over a four-year period in successive equal annual installments upon
the individual's completion of each year of Board service measured from the
option grant date. Each 2,500-share automatic option grant will vest upon the
individual's completion of one year of Board service measured from the option
grant date. However, the shares subject to each automatic grant will
immediately vest in full upon certain changes in control or ownership of the
Company or upon the optionee's death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of 12 equal monthly installments
over the calendar year for which the election is to be in effect. However, the
option will become immediately exercisable for all the option shares upon (i)
certain changes in the ownership or control of the Company or (ii) the death
or disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant
and Automatic Option Grant and Director Fee Option Grant Programs will
immediately vest upon (i) an acquisition of the Company by merger or asset
sale, (ii) the successful completion of a tender offer for more than 50% of
the Company's outstanding voting stock or (iii) a change in the majority of
the Board effected through one or more contested elections for Board
membership.
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Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option
Grant and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile
tender offer for more than 50% of the Company's outstanding voting stock. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from the Company in an amount per surrendered option share equal
to the excess of (i) the highest price per share of Common Stock paid in
connection with the tender offer over (ii) the exercise price payable for such
share.
The Board of Directors of the Company may amend or modify the 1998 Stock
Incentive Plan at any time, subject to any required stockholder approval. The
1998 Stock Incentive Plan will terminate on the earliest of (i) 10 years after
the Plan Effective Date, (ii) the date on which all shares available for
issuance under the 1998 Stock Incentive Plan have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with
certain changes in control or ownership of the Company.
The Board of Directors has approved an issuance of shares of Common Stock to
the Company's Community Leaders and Liaisons under the Company's 1998 Stock
Incentive Plan. Immediately following the execution of the Underwriting
Agreement, each of the Company's Community Leaders and Liaisons as of July 17,
1998, will be issued 10 fully vested shares of Common Stock (15,840 in the
aggregate), contingent upon the closing of the offering.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company in
July 1998, and will become effective immediately upon the execution of the
Underwriting Agreement for the offering. The Purchase Plan will be designed to
allow eligible employees of the Company and participating subsidiaries to
purchase shares of Common Stock, at semi-annual intervals, through their
periodic payroll deductions under the Purchase Plan, and a reserve of 300,000
shares of Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive six-month
purchase periods.The first purchase period will begin on the date the
Underwriting Agreement is executed and will end on the last business day in
January 1999.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than five calendar months per year) on the start date of any
purchase period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date.
Payroll deductions may not exceed 10% of base salary, and the accumulated
payroll deductions of each participant will be applied to the purchase of
shares on his or her behalf on each semi-annual purchase date at a purchase
price per share equal to 85% of the lower of (i) the fair market value of the
Common Stock on the start date of the purchase period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 1,000 shares, nor may all participants in the
aggregate purchase more than 75,000 shares, on any purchase date.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of such acquisition. The purchase price will be equal to
85% of the lower of (i) the fair market value per share of Common Stock on the
start date of the purchase period in which such acquisition occurs or (ii) the
fair market value per share of Common Stock immediately prior to such
acquisition.
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The Purchase Plan will terminate on the earlier of (i) the last business day
of July 2008, (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.
After adoption, the Board may at any time alter, suspend or discontinue the
Purchase Plan. However, certain amendments to the Purchase Plan may require
stockholder approval.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate provides that, except to the extent prohibited by DGCL, the
Company's directors shall not be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as
directors of the Company. Under the DGCL, the directors have a fiduciary duty
to the Company which is not eliminated by this provision of the Certificate
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of nonmonetary relief will remain available. In addition, each
director will continue to be subject to liability under the DGCL for breach of
the director's duty of loyalty to the Company, for acts or omissions which are
found by a court of competent jurisdiction to be not in good faith or which
involve intentional misconduct, or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited
by DGCL. This provision also does not affect the directors' responsibilities
under any other laws, such as the Federal securities laws or state or Federal
environmental laws. The Company has obtained liability insurance for its
officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out
of their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any
other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate provides that the Company shall, to the fullest extent permitted
by the DGCL, indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that such person is or was a director or officer of the
Company, or is or was serving at the request of the Company as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding.
The Company has entered into indemnification agreements with its directors
and certain of its officers containing provisions that may require the
Company, among other things, to indemnify such directors and officers against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' liability insurance if maintained for other directors
of officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted.
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CERTAIN TRANSACTIONS
Since January 1, 1995, other than as described elsewhere in this Prospectus
there has not been any transaction or series of similar transactions to which
the Company was or is a party in which the amount involved exceeded or exceeds
$60,000 and in which any director, executive officer, holder of more than 5%
of any class of the Company's voting securities, or any member of the
immediate family of any of the foregoing persons had or will have a direct or
indirect material interest, other than the transactions described below. See
"Management--Employment Agreements and Termination of Employment and Change of
Control Arrangements" and "--Limitation of Liability and Indemnification
Matters".
TRANSACTIONS WITH DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Since the Company's inception, the Company has raised capital primarily
through the sale of shares of its preferred stock. In December 1995, the
Company issued 1,200,000 shares of Series C Preferred Stock to Mr. Bohnett in
consideration for $0.3217 per share in the form of the cancellation of shares
of Common Stock and a note payable. In January 1996, the Company sold
3,108,000 shares of Series A Preferred Stock to CMG@Ventures at a price of
$0.3218 per share. In July 1996, the Company sold 2,900,000 shares of Series B
Preferred Stock to CMG@Ventures at a price of $0.3793 per share. From January
1997 through February 1997, the Company sold an aggregate of 10,226,718 shares
of Series D Preferred Stock to CMG@Ventures, SOFTBANK Holdings Inc., Chase
Venture Capital Associates, L.P. ("Chase"), the Flatiron Fund, Innocal and
Intel Corporation ("Intel") at a price of $0.885 per share. In October 1997,
the Company sold an aggregate of 1,428,564 shares of Series E Preferred Stock
to CMG@Ventures II, LLC, SOFTBANK Holdings Inc., the Flatiron Fund, Innocal
and Intel at a price of $3.50 per share. In December 1997, the Company sold an
aggregate of 814,270 shares of Series E Preferred Stock to SOFTBANK Holdings
Inc. at a price of $7.4254 per share. Effective December 1997, the Company
sold an aggregate of 2,552,576 shares of Series F Preferred Stock to Yahoo!
and SOFTBANK Holdings Inc. at a price of $7.4254 per share.
The following table summarizes the shares of Common Stock and Preferred
Stock purchased by executive officers, directors, and 5% stockholders of the
Company and persons associated with them since January 1995. All share numbers
reflect the number of shares of Common Stock purchased by the respective party
on an as-converted basis, and reflects subsequent sales of preferred stock and
transfers of Common Stock among stockholders of the Company and among
stockholders and the Company.
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, COMMON -----------------------------------------------------------------
DIRECTORS AND 5% STOCKHOLDERS STOCK SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F
- ----------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
CMG@Ventures(1)........ -- 3,108,000 2,900,000 -- 2,259,888(2) 504,468 --
Peter H. Mills
David S. Wetherell
Jerry D. Colonna
Entities affiliated with
SOFTBANK Holdings
Inc.(3)................ -- -- -- 1,200,000 4,281,414(4) 1,064,998 2,552,556
Eric C. Hippeau
Entities affiliated with
Chase Venture Capital
Associates, L.P.(4).... -- -- -- -- 1,749,736 -- --
David C. Bohnett........ 2,333,000(5) -- -- 1,200,000(6) -- -- --
</TABLE>
- --------
(1) Represents shares purchased by CMG@Ventures or CMG@Ventures II, LLC, an
affiliate of CMG@Ventures. Messrs. Mills and Wetherell, general partners
of CMG@Ventures, and Mr. Colonna, a profit partner of CMG@Ventures, are
directors of the Company. Messrs. Mills, Wetherell and Colonna disclaim
beneficial ownership of such shares except to the extent of their
pecuniary interest therein.
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(2) Excludes 171,924 shares of Series D Preferred Stock purchased by the
Flatiron Fund, of which Mr. Colonna is a partner. The Flatiron Fund is a
venture investment program affiliated with Chase Capital Partners and
SOFTBANK Technology Ventures IV L.P.
(3) Represents shares purchased by SOFTBANK Holdings Inc., SOFTBANK Technology
Advisors Fund L.P. and SOFTBANK Technology Ventures IV L.P. Mr. Hippeau,
Chairman of the Board and Chief Executive Officer of Ziff-Davis, a
subsidiary of SOFTBANK Holdings Inc., is a director of the Company. Mr.
Hippeau disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.
(4) Includes 171,924 shares of Series D Preferred Stock purchased by the
Flatiron Fund.
(5) Mr. Bohnett originally purchased 4,906,200 shares of Common Stock in
January 1995. In connection with the issuance and sale to Mr. Bohnett of
1,200,000 shares of Series C Preferred Stock in December 1995, Mr. Bohnett
transferred 2,341,000 of Common Stock to the Company.
(6) Represents shares that were subsequently transferred to SOFTBANK Holdings
Inc.
The Company entered into a Joint Venture Agreement in November 1997 (the
"Joint Venture Agreement") with SOFTBANK to form GeoCities Japan, a joint
venture in Japan. SOFTBANK, which owns 60% of GeoCities Japan, is a greater
than five percent stockholder in the Company. Under the terms of the
agreement, the Company purchased a 40% interest in GeoCities Japan for (Yen)80
million or approximately $645,000. SOFTBANK and the Company further agreed not
to engage in any business activities in Japan, other than services or products
in languages other than Japanese, which compete with GeoCities Japan. In
connection with this agreement, the Company agreed to enter into a 20-year
licensing agreement with GeoCities Japan under which the Company is eligible
to receive royalties. In connection with the Joint Venture Agreement, the
Company has entered into a Loan Agreement with SOFTBANK, whereby SOFTBANK
loaned the Company (Yen)80 million or approximately $645,000 for the sole
purpose of purchasing its 40% interest in GeoCities Japan. The loan bears
interest of 5.5% each year and shall be repaid upon GeoCities Japan's non-U.S.
initial public offering or private placement of at least (Yen)1.5 billion. If
neither event occurs by March 31, 2000, then SOFTBANK will forgive the loan on
April 1, 2000. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and Note 5 of Notes to Financial
Statements.
The Company's 20-year license agreement with GeoCities Japan, entered in
November 1997, grants GeoCities Japan the exclusive right to use the Company's
software, content and trademarks (collectively, the "Materials") to provide
services in Japan. The Company also grants GeoCities Japan a license to
translate the Materials into the Japanese language. In consideration of the
license grant, GeoCities Japan will pay the Company a royalty of three percent
of its total revenue.
In January and February of 1997, CMG@Ventures and certain other current
stockholders of the Company purchased 10,226,718 shares of Series D Preferred
Stock at a purchase price of $0.885 per share. The Company received an
aggregate of $2.0 million from CMG@Ventures in connection with its purchase of
2,259,888 shares of the Series D Preferred Stock. In January 1997, in
connection with the issuance of that preferred stock, the Company granted
CMG@Ventures an immediately exercisable option to purchase up to 1,000,000
shares of Common Stock at a price of $0.885 per share.
In May 1997, the Company entered into a list line management agreement with
CMGI providing for the sharing of certain marketing data between the Company
and CMGI. This agreement may be terminated by either party on 30 days notice.
CMGI is an affiliate of CMG@Ventures, a greater than five percent stockholder
in the Company. In addition, the Company and Engage Technologies ("Engage"), a
subsidiary of CMG@Ventures, have been in discussions for a number of months
regarding a potential consulting arrangement. In May 1998, the Company agreed
to pay Engage $100,000 as an advance on such arrangement. Messrs. Mills and
Wetherell, directors of the Company, are general partners of CMG@Ventures. Mr.
Colonna, a director of the Company, is a profit partner of CMG@Ventures and a
partner of the Flatiron Fund. CMG@Ventures is a greater than five percent
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stockholder in the Company and the Flatiron Fund is a stockholder of the
Company. Mr. Hippeau, a director of the Company, is the Chairman of the Board
and Chief Executive Officer of Ziff-Davis, a subsidiary of SOFTBANK Holdings
Inc. SOFTBANK Holdings Inc. is a greater than five percent stockholder in the
Company.
In connection with his employment with the Company, the Company agreed to
loan Mr. Evans $100,000. The loan to Mr. Evans was made in July 1998 and is
repayable by Mr. Evans six months following the consummation of the offering.
The loan is unsecured and will be forgiven upon the achievement by the Company
of certain financial results for 1998.
Mr. Losch, the Company's Vice President, Finance, has entered into an
agreement with the Company which, subject to certain limitations, provides for
a severance payment equal to six months of his base salary in the event his
employment with the Company is terminated without cause during the first two
years of his employment. Mr. Pierce, the Company's Vice President, Legal
Affairs and General Counsel, has entered into an agreement with the Company
which provides for partial acceleration of his options if the Company is
acquired and a severance payment equal to six months of his base salary in the
event his employment with the Company terminates following the acquisition of
the Company. In addition, Mr. Glicker, the Company's Vice President,
Marketing, has entered into an agreement with the Company which provides for
partial acceleration of his options if the Company is acquired.
For a description of certain options granted to the executive officers and
directors of the Company since January 1, 1995, see "Management--Executive
Compensation", "--Employment Agreements and Termination of Employment and
Change of Control Arrangements" and "--Employee Benefit Plans".
All future transactions, including loans (if any), between the Company and
its officers, directors and principal stockholders and their affiliates will
be approved by a majority of the Board of Directors, including a majority of
the independent and disinterested outside directors of the Board of Directors,
and will be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 30, 1998,
regarding beneficial ownership of the Company's Common Stock, by (i) each
person (or group of affiliated persons) known by the Company to own
beneficially more than five percent of the outstanding shares of the Company's
Common Stock, (ii) each of the Company's directors and Named Executive
Officers and (iii) the Company's directors and executive officers as a group.
Unless otherwise indicated, the address for each of the following stockholders
is 1918 Main Street, Suite 300, Santa Monica, California 90405.
<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP(1)
SHARES ------------------------
BENEFICIALLY PRIOR TO THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
- ------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
CMG@Ventures(3).......................... 9,772,356 36.3% 30.9%
Peter H. Mills
David S. Wetherell
Jerry D. Colonna
SOFTBANK Holdings Inc.(4)(5)............. 9,098,968 35.1 29.7
Eric C. Hippeau
Chase Venture Capital Associates, 1,749,736 6.8 5.7
L.P(5)..................................
David C. Bohnett(6)...................... 2,483,000 9.5 8.1
Jerry D. Colonna(7)...................... 171,924 * *
Paul A. De Braccio(8).................... -- * *
Thomas R. Evans(9)....................... -- * *
Harry S. Lambert(10)..................... 1,024,414 4.0 3.3
John C. Rezner(11)....................... 827,000 3.2 2.7
All directors and executive officers as a
group
(16 persons)(12)........................ 23,407,662 86.1% 73.2%
</TABLE>
- --------
*Less than one percent
(1) The shares beneficially owned and percentage of ownership are based on
(i) 25,895,000 shares of Common Stock outstanding and (ii) 30,660,840
shares of Common Stock outstanding upon consummation of the offering.
Gives effect to the shares of Common Stock issuable within 60 days of
June 30, 1998, upon the exercise of all options beneficially owned by the
indicated stockholders on that date. Shares of Common Stock subject to
options which are currently exercisable or exercisable within 60 days of
June 30, 1998, are deemed outstanding for computing the percentages of
the person holding such options, but are not deemed outstanding for
computing the percentages of any other person. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and includes voting and investment power with respect to
shares. Unless otherwise indicated, the persons named in the table have
sole voting and sole investment control with respect to all shares
beneficially owned.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 1,000,000 shares of Common Stock issuable upon the exercise of a
stock option that is currently exercisable and 504,468 shares of Common
Stock held by CMG@Ventures II, LLC, an affiliate of CMG@Ventures. The
address of CMG@Ventures and CMG@Ventures II, LLC is 2420 Sand Hill Road,
Suite 101, Menlo Park, CA 94025. Messrs. Mills and Wetherell, general
partners of CMG@Ventures, and Mr. Colonna, a profit partner of
CMG@Ventures, are directors of the Company. Messrs. Mills, Wetherell and
Colonna disclaim beneficial ownership of such shares except to the extent
of their pecuniary interest therein.
(4) Includes (i) 1,837,732 shares of Common Stock held by SOFTBANK Technology
Ventures IV L.P., an affiliate of SOFTBANK Holdings Inc. (which number
includes 100,000 shares of Common Stock held by SOFTBANK Holdings Inc.
and subject to an option held by Mr. Hippeau to purchase such shares from
SOFTBANK Holdings Inc., which option vests over a three-year
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<PAGE>
period commencing in January 1998) and (ii) 37,504 shares of Common Stock
held by SOFTBANK Technology Advisors Fund L.P., an affiliate of SOFTBANK
Holdings Inc. The address of SOFTBANK Holdings Inc. and the entities
associated with SOFTBANK Holdings Inc. is 10 Langley Road, Newton Center,
MA 02159-1972. Mr. Hippeau, Chairman of the Board and Chief Executive
Officer of Ziff-Davis, a subsidiary of SOFTBANK Holdings Inc., is a
director of the Company.
(5) Includes 171,924 shares of Common Stock held by the Flatiron Fund. The
Flatiron Fund is a venture investment program affiliated with Chase
Capital Partners, an affiliate of Chase Venture Capital Associates, L.P.,
and SOFTBANK Holdings Inc. The address of Chase Venture Capital
Associates, L.P. and the entities associated with Chase Venture Capital
Associates, L.P. is Chase Capital Partners, 380 Madison Avenue, New York,
NY 10017.
(6) Includes 150,000 shares of Common Stock issuable upon the exercise of
stock options that are currently exercisable.
(7) Consists of 171,924 shares of Common Stock held by the Flatiron Fund, of
which Mr. Colonna is a partner. Mr. Colonna disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein. See also note (3) above.
(8) Mr. De Braccio ceased to be employed by the Company in July 1997.
(9) Excludes options to purchase up to 1,632,760 shares of Common Stock that
were issued to Mr. Evans in connection with his employment and which are
not currently exercisable or exercisable within 60 days of June 30, 1998.
(10) Consists of 1,024,413 shares of Common Stock held by InnoCal, of which
Mr. Lambert is a General Partner. Mr. Lambert disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(11) Includes 124,602 shares of Common Stock issuable upon the exercise of
stock options that are currently exercisable.
(12) Includes 1,299,602 shares of Common Stock issuable upon the exercise of
stock options that are currently exercisable or exercisable within 60
days of June 30, 1998.
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DESCRIPTION OF CAPITAL STOCK
The following description of the securities of the Company and certain
provisions of the Company's Certificate of Incorporation (the "Certificate")
and the Company's Bylaws ("Bylaws") are summaries thereof and are qualified by
reference to the Certificate and the Bylaws, copies of which have been filed
with the Commission as exhibits to the Company's Registration Statement, of
which this Prospectus forms a part. The descriptions of the Common Stock and
Preferred Stock reflect changes to the Company's capital structure that will
occur upon the closing of the offering in accordance with the terms of the
Certificate.
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, par value $0.001 per share and 5,000,000 shares of Preferred
Stock, par value $0.001 per share.
COMMON STOCK
As of June 30, 1998, there were 25,895,000 shares of Common Stock
outstanding (on an as-converted basis) and held of record by 29 stockholders.
Based upon the number of shares outstanding as of that date and giving effect
to the issuance of the 4,750,000 shares of Common Stock offered by the Company
hereby and the issuance of 15,840 shares of Common Stock to be issued to
Community Leaders and Liaisons under the 1998 Stock Incentive Plan, there will
be 30,660,840 shares of Common Stock outstanding (on an as-converted basis)
upon the closing of the offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and the Certificate provides that
they do not have cumulative voting rights. Accordingly, holders of a majority
of the shares of Common Stock entitled to vote in any election of directors
may elect all of the directors standing for election. Holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared by
the Board of Directors out of funds legally available therefor, subject to any
preferential dividend rights of any outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive ratably the net assets of the Company available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Preferred Stock. Holders of the Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in the
offering will be, when issued in consideration for payment thereof, fully paid
and nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future without further stockholder approval. Upon
the closing of the offering, there will be no shares of Preferred Stock
outstanding.
PREFERRED STOCK
Upon the closing of the offering, the Board of Directors will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 5,000,000 shares of Preferred Stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. The Company has no present plans to
issue any shares of Preferred Stock. See "--Anti-Takeover Effects of Certain
Provisions of Delaware Law and the Company's Certificate of Incorporation and
Bylaws".
WARRANTS
As of June 30, 1998, the Company had an outstanding warrant to purchase
20,304 shares of Common Stock at an exercise price of $4.695 per share. The
warrant is exercisable in whole or in part at any time on or before September
22, 2004. The warrant contains standard anti-dilution provisions,
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<PAGE>
including anti-dilution protection if the Company issues any shares of Common
Stock at a price per share less than the exercise price of such warrant at the
time in effect or without consideration, subject to certain exceptions.
OPTIONS
As of June 30, 1998, (i) options to purchase a total of 6,531,000 shares
("Option Shares") of Common Stock were outstanding and (ii) up to 797,000
shares of Common Stock were available for grant under the Predecessor Plan.
See "Underwriting" and "Management--Employee Benefit Plans".
TECHNOLOGY PURCHASE AND SALE AGREEMENT
In July 1998, the Company entered into a Technology Purchase and Sale
Agreement (the "Purchase Agreement") pursuant to which the Company purchased
certain Web-page development technology (the "Technology"). Under the terms of
the Purchase Agreement, in partial consideration for the Technology, the
Company agreed to issue $455,000 of its Common Stock to the seller at the
initial public offering price (assuming the offering is consummated within 90
days of the date of the Purchase Agreement; otherwise, the Company is
obligated to pay this amount in cash), if the Technology is successfully
installed and becomes operational on the Company's servers to the Company's
satisfaction within 90 days of the date of the Purchase Agreement, In
addition, if the Technology is successfully installed and is operational
within an agreed upon period prior to the 90-day deadline, the Company has
agreed to issue the seller an additional $145,000 of its Common Stock at the
initial public offering price. Any shares of the Company's Common Stock issued
under the provisions of the Purchase Agreement are subject to the restrictions
on resale imposed by Rule 144 under the Securities Act. The seller has also
entered into a lock-up agreement prohibiting any sales or transfers of such
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Goldman, Sachs & Co.
REGISTRATION RIGHTS
Pursuant to the terms of the Third Amended and Restated Rights Agreement, as
amended (the "Registration Rights Agreement"), after the closing of the
offering, the holders of at least 30% of an aggregate of 22,230,128 shares of
Common Stock will be entitled to certain demand registration rights with
respect to the registration of such shares under the Securities Act, subject
to certain limitations, including the inclusion thereon of a minimum number of
shares held by the initiating holders of the demand registration. The Company
is not required to effect (i) more than two such registrations pursuant to
such demand registration rights; (ii) a registration within 90 days following
the determination of the Board of Directors of the Company to file a
registration statement; provided, that the Company is making a good faith
effort to cause such registration statement to become effective; (iii) a
registration for a period not to exceed 90 days, if the Board of Directors of
the Company has made a good faith determination that it would be seriously
detrimental to the Company or the holders of registration rights for a
registration statement to be filed or (iv) a registration within 270 days of
the effective date of any prior registered offering of the Company's
securities, subject to certain exceptions. In addition, pursuant to the terms
of the Registration Rights Agreement, after the closing of the offering, the
holders of 26,140,128 shares of Common Stock will be entitled to certain
piggyback registration rights in connection with any registration by the
Company of its securities for its own account or the account of other
securityholders. In the event that the Company proposes to register any shares
of Common Stock under the Securities Act, the holders of such piggyback
registration rights are entitled to receive notice of such registration and
are entitled to include their shares therein, subject to certain limitations.
In addition, in the event that the Company proposes to register any shares of
Common
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Stock under the Securities Act to the public in a firm commitment underwritten
public offering, Mr. Bohnett and Mr. Rezner, as well as any other officer or
director designated by the Company's Board of Directors by unanimous vote
shall be entitled to piggyback registration rights if such persons who choose
to include their shares in such registration shall continue to serve the
Company as an officer or director on the effective date of such registration
statement. Further, at any time after the Company becomes eligible to file a
registration statement on Form S-3, certain holders of demand registration
rights may require the Company to file registration statements on Form S-3
under the Securities Act with respect to their shares of Common Stock. The
Company is not required to effect (i) more than two such registrations in any
12-month period; (ii) a registration if the Company gives notice of its bona
fide intention to effect a registration within 60 days; (iii) a registration
within 180 days of the effective date of any prior registered offering of the
Company's securities (subject to certain exceptions) or (iv) a registration
for a period not to exceed 60 days, if the Board of Directors of the Company
has made a good faith determination that it would be seriously detrimental to
the Company or the stockholders for a registration statement to be filed
(subject to certain exceptions). Each of the foregoing registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters in any underwritten offering to limit the number of shares of
Common Stock held by securityholders with registration rights to be included
in such registration. The registration rights with respect to any holder
thereof terminate when the shares held by such holder may be sold under Rule
144 during any three-month period. The Company is generally required to bear
all of the expenses of all such registrations, except underwriting discounts
and commissions. Registration of any of the shares of Common Stock held by
securityholders with registration rights would result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
effectiveness of such registration. The Registration Rights Agreement also
contains a commitment of the Company to indemnify the holders of registration
rights, subject to certain limitations.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (as amended from time to time, the "DGCL"). Subject to
certain exceptions, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
such status with the approval of the board of directors or unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's outstanding voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control attempts
with respect to the Company and, accordingly, may discourage attempts to
acquire the Company.
In addition, certain provisions of the Certificate and Bylaws, which
provisions will be in effect upon the closing of the offering and are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. The Certificate
provides that stockholders may not take action by written consent, but only at
duly called annual or special meetings of stockholders. The Certificate
further provides that special meetings of stockholders of the Company may be
called only by the Chairman of the Board of Directors or a majority of the
Board of Directors.
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ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company, not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the Company's notice of annual meeting provided
with respect to the previous year's annual meeting of stockholders; provided,
that if no annual meeting of stockholders was held in the previous year or the
date of the annual meeting of stockholders has been changed to be more than 30
calendar days earlier than or 60 calendar days after such anniversary, notice
by the stockholder, to be timely, must be so received not more than 90 days
nor later than the later of (i) 60 days prior to the annual meeting of
stockholders or (ii) the close of business on the 10th day following the date
on which notice of the date of the meeting is given to stockholders or made
public, whichever first occurs. The Bylaws also specify certain requirements
as to the form and content of a stockholder's notice. These provisions may
preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors at an annual meeting of
stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of Common
Stock and Preferred Stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of Common Stock and Preferred Stock could
render more difficult or discourage an attempt to obtain control of the
Company by means of a proxy contest, tender offer, merger or otherwise.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
LISTING
An application has been made for quotation of the Common Stock on the Nasdaq
National Market under the trading symbol "GCTY".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its telephone number is (818) 502-1404.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after the offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price of the Common Stock and the
ability of the Company to raise equity capital in the future.
Upon completion of the offering, the Company will have outstanding an
aggregate of 30,660,840 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Of these shares, the 4,750,000 shares
registered in the offering will be freely tradeable without restriction or
further registration under the Securities Act, unless such shares are
purchased by "Affiliates". The 15,840 shares of Common Stock to be issued to
the Community Leaders and Liaisons under the 1998 Stock Incentive Plan will
also be eligible for immediate sale in the public market without restriction,
subject to the filing of the Form S-8 registration statement with respect
thereto as of the date of this Prospectus. The 25,895,000 shares of Common
Stock outstanding as of June 30, 1998, and held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Section 4(1) of the Securities Act or Rules 144, 144(k) or
701 promulgated under the Securities Act, which rules are summarized below. As
a result of the lock-up agreements described below, and subject to the
provisions of Rules 144, 144(k) and 701, the 25,895,000 shares which are
deemed Restricted Shares will be available for sale in the public market 180
days after the date of this Prospectus. Any shares of Common Stock issued
pursuant to the Purchase Agreement will be restricted securities and will also
be subject to a 180 day lock-up agreement. In addition, as of June 30, 1998,
there were outstanding options to purchase up to 6,531,000 shares of Common
Stock which will be eligible for sale in the public market following the
offering from time to time subject to becoming exercisable and, in the case of
certain options, the expiration of the lock-up agreements. There is also a
warrant outstanding to purchase up to 20,304 shares of Common Stock which will
be eligible for sale in the public market following the offering subject to
the expiration of the lock-up agreement applicable thereto.
All officers and directors, and substantially all other stockholders and
holders of options to purchase Common Stock of the Company have agreed not to
sell or otherwise transfer any shares of Common Stock or any other securities
of the Company for a period of 180 days after the date of this Prospectus
without the prior written consent of Goldman, Sachs & Co.; provided, that one
affiliate of the Company who is subject to a lock-up agreement and the volume
restrictions of Rule 144 has been authorized by the representatives of the
Underwriters to sell up to $1.0 million of Common Stock commencing 91 days
after the date of this Prospectus. In addition, Goldman, Sachs & Co. may, in
their sole discretion, and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year (including the holding period of any prior owner except an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately
307,000 shares immediately after the offering) or (ii) the average weekly
trading volume of the Common Stock on the Nasdaq National Market during the
four calendar weeks preceding the filing of a notice on Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least
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two years (including the holding period of any prior owner except an
Affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144; therefore, unless otherwise restricted, and subject to the lock-up
agreements, "144(k) shares" may be sold immediately upon the completion of the
offering. In general, under Rule 701 of the Securities Act as currently in
effect, any employee, consultant or advisor of the Company who purchases
shares from the Company pursuant to Rule 701 in connection with a compensatory
stock or option plan or other written agreement is eligible to resell such
shares, unless contractually restricted, 90 days after the effective date of
the offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to the offering, there has been no public market for the Common Stock,
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the offering. Any future sale of
substantial amounts of Common Stock in the open market may adversely affect
the market price of the Common Stock offered hereby.
The Company intends to file, as of the date of this Prospectus, Form S-8
registration statements under the Securities Act to register all shares of
Common Stock issuable under certain individual stock option agreements and the
1998 Stock Incentive Plan, the shares of Common Stock that will be issued to
the Community Leaders and Liaisons thereunder immediately following the
execution of the Underwriting Agreement and shares of Common Stock issuable
under the Purchase Plan. Such registration statements are expected to become
effective immediately upon filing, and shares covered by those registration
statements will thereupon be eligible for sale in the public markets, subject
to any lock-up agreements applicable thereto and Rule 144 limitations
applicable to affiliates. See "Management--Employee Benefit Plans",
"Description of Capital Stock--Registration Rights", "Shares Eligible for
Future Sale" and "Underwriting".
Pursuant to the Registration Rights Agreement, after the closing of the
offering, subject to certain conditions, the holders of 22,230,128 shares of
outstanding Common Stock will be entitled to certain demand registration
rights and the holders of 26,140,128 shares of outstanding Common Stock
(including shares issuable upon the exercise of certain options to purchase
Common Stock) will be entitled to certain piggyback registration rights.
Registration of such shares under the Securities Act would result in such
shares becoming freely tradeable without restriction under the Securities Act
(except for shares purchased by Affiliates). During the 180-day period after
the date of this Prospectus, the Company has agreed not to file any
registration statement with respect to the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
into Common Stock, other than registration statements on Form S-8 covering
securities issuable under the Company's 1998 Stock Incentive Plan and the
Purchase Plan, without the prior written consent of Goldman, Sachs & Co. See
"Description of Capital Stock--Registration Rights".
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Brobeck, Phleger & Harrison LLP, Irvine, California.
Certain legal matters relating to the offering will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
EXPERTS
The balance sheets as of December 31, 1997 and 1996, and the statements of
operations, stockholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 1997, included in this Prospectus
and Registration Statement have been included herein in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act (the "Registration
Statement") with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge at the principal office
of the Commission in Washington, D.C., and copies of all or any part thereof
may be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
and at the Commission's Regional Offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material may be
obtained at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission. For further information pertaining to the Company and the Common
Stock offered by this Prospectus, reference is hereby made to the Registration
Statement.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and to make available
to its stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
CHANGE IN ACCOUNTANTS
On September 18, 1997, the Company requested and received the resignation of
Arthur Andersen LLP and engaged PricewaterhouseCoopers LLP as its independent
accountants to audit its financial statements as of, and for the year ended,
July 31, 1997. The decision to change independent accountants from Arthur
Andersen LLP to PricewaterhouseCoopers LLP was approved by the Company's Board
of Directors. Subsequently, the Company changed its fiscal year end from July
31 to December 31.
The Company believes, and has been advised by Arthur Andersen LLP that it
concurs in such belief, that, for the period from December 16, 1994
(inception) through July 31, 1996, and for the period from August 1, 1996
through September 18, 1997, the Company and Arthur Andersen LLP did not have
any disagreement on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused it to make reference in connection with its report on the
Company's financial statements to the subject matter of the disagreement.
The report of Arthur Andersen LLP on the Company's financial statements for
the period from December 16, 1994 (inception) through July 31, 1995, and the
year ended July 31, 1996, did not contain an adverse opinion or a disclaimer
of opinion, and was not qualified or modified as to uncertainty, audit scope
or accounting principles. During the period from December 16, 1994 to
September 18, 1997, there were no "reportable events" within the meaning of
Item 304(a)(1)(v) of Regulation S-K promulgated under the Securities Act.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants............. F-2
Balance Sheets at December 31, 1996 and 1997 and June 30, 1998
(unaudited).............................................................. F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 (unaudited) and 1998
(unaudited).............................................................. F-4
Statements of Stockholders' Equity (Deficiency) for the three years in the
period ended December 31, 1997 and the six months ended June 30, 1998
(unaudited).............................................................. F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 (unaudited) and 1998
(unaudited).............................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon the completion
of the two-for-one forward stock split as described in Note 2 of Notes to the
financial statements.
Woodland Hills, California PricewaterhouseCoopers LLP
July , 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GeoCities
We have audited the accompanying balance sheets of GeoCities (the "Company")
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GeoCities as of December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Woodland Hills, California
June 2, 1998, except for
the effects of the stock
split described in Note 2
as to which the date is
July , 1998
F-2
<PAGE>
GEOCITIES
BALANCE SHEETS
(ALL INFORMATION AS OF JUNE 30, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1998 1998
------------ ------------ ------------ ------------
(PRO FORMA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 33,000 $ 3,785,000 $ 1,169,000 $ 1,169,000
Short-term
investments........... 19,219,000 19,219,000
Accounts receivable,
less allowance for
doubtful accounts of
$98,000 and $270,000
for 1997 and 1998,
respectively.......... 262,000 1,206,000 2,447,000 2,447,000
Prepaids and other
current assets........ 57,000 403,000 1,019,000 1,019,000
Subscription
receivable............ 25,000,000
----------- ------------ ------------ ------------
Total current
assets.............. 352,000 30,394,000 23,854,000 23,854,000
Property and
equipment, net........ 879,000 1,216,000 2,977,000 2,977,000
Deposits............... 217,000 613,000 862,000 862,000
Other assets........... 645,000 567,000 567,000
----------- ------------ ------------ ------------
Total assets......... $ 1,448,000 $ 32,868,000 $ 28,260,000 $ 28,260,000
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable....... $ 397,000 $ 1,036,000 $ 353,000 $ 353,000
Accrued expenses....... 199,000 2,289,000 4,928,000 4,928,000
Deferred revenue....... 110,000 225,000 566,000 566,000
Capital lease
obligations, current
portion............... 188,000 393,000 301,000 301,000
Note payable........... 1,100,000
----------- ------------ ------------ ------------
Total current
liabilities......... 1,994,000 3,943,000 6,148,000 6,148,000
Capital lease
obligations, net of
current portion....... 437,000 183,000 112,000 112,000
Related party note
payable............... -- 651,000 668,000 668,000
----------- ------------ ------------ ------------
2,431,000 4,777,000 6,928,000 6,928,000
Commitments and
contingencies (Note 7)
Series A, B, C, D, E and
F mandatory redeemable
convertible preferred
stock, $0.001 par
value; authorized
16,245,000 shares in
1996, 26,526,000 shares
in 1997 and 1998;
issued and outstanding
6,008,000 shares in
1996 and 22,230,000
shares in 1997 and
1998; liquidation
preference of
approximately
$2,100,000 and
$39,129,000 at 1996 and
1997, respectively, and
$40,457,000 at June 30,
1998................... 2,063,000 37,200,000 37,200,000 --
Stockholders' equity
(deficiency):
Convertible preferred
stock, $0.001 par
value; 1,200,000 shares
authorized, issued and
outstanding for 1996... 386,000 -- -- --
Common stock, par value
$0.001; authorized
40,000,000 shares for
1996 and 60,000,000
shares for 1997 and
1998; issued and
outstanding 2,617,000
and 2,641,000 shares
for 1996 and 1997,
respectively, 3,665,000
shares at June 30, 1998
and 25,895,000 shares
on a pro forma basis... 43,000 49,000 253,000 26,000
Additional paid-in
capital................ 23,000 3,903,000 10,577,000 48,004,000
Unearned deferred
compensation........... -- (660,000) (7,044,000) (7,044,000)
Accumulated deficit..... (3,498,000) (12,401,000) (19,654,000) (19,654,000)
----------- ------------ ------------ ------------
Total stockholders'
equity
(deficiency)........ (3,046,000) (9,109,000) (15,868,000) 21,332,000
----------- ------------ ------------ ------------
Total liabilities and
stockholders' equity
(deficiency)........ $ 1,448,000 $ 32,868,000 $ 28,260,000 $ 28,260,000
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GEOCITIES
STATEMENTS OF OPERATIONS
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS
UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 46,000 $ 314,000 $ 4,582,000 $ 1,632,000 $ 5,542,000
Cost of revenues........ 103,000 788,000 4,634,000 1,421,000 3,937,000
--------- ----------- ----------- ----------- -----------
Gross profit (loss).. (57,000) (474,000) (52,000) 211,000 1,605,000
Operating expenses:
Sales and marketing... 117,000 764,000 5,045,000 2,130,000 5,072,000
Product development... 72,000 475,000 1,021,000 437,000 1,325,000
General and
administrative....... 233,000 1,252,000 2,901,000 1,273,000 2,947,000
--------- ----------- ----------- ----------- -----------
Loss from operations.... (479,000) (2,965,000) (9,019,000) (3,629,000) (7,739,000)
Other income (expense):
Interest income....... 19,000 238,000 131,000 540,000
Interest expense...... (2,000) (59,000) (121,000) (62,000) (53,000)
--------- ----------- ----------- ----------- -----------
Loss before provision
for income taxes.... (481,000) (3,005,000) (8,902,000) (3,560,000) (7,252,000)
Provision for income
taxes.................. (1,000) (1,000) (1,000) (1,000) (1,000)
--------- ----------- ----------- ----------- -----------
Net loss.............. $(482,000) $(3,006,000) $(8,903,000) $(3,561,000) $(7,253,000)
========= =========== =========== =========== ===========
Historical basic and
diluted net loss per
share.................. $ (0.11) $ (1.15) $ (3.40) $ (1.36) $ (2.27)
Historical weighted
average shares
outstanding used in
per-share calculation.. 4,431,000 2,617,000 2,620,000 2,617,000 3,194,000
Pro forma basic and
diluted net loss per
share.................. $ (.36) $ (.29)
Weighted average shares
outstanding used in pro
forma per-share
calculation............ 24,850,000 25,425,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GEOCITIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL UNEARNED STOCKHOLDERS'
CONVERTIBLE PAID-IN DEFERRED ACCUMULATED EQUITY
PREFERRED STOCK COMMON STOCK CAPITAL COMPENSATION DEFICIT (DEFICIENCY)
--------------------- ------------------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994............ $ (10,000) $ (10,000)
Issuance of
common stock.... 4,906,000 $ 49,000 49,000
Issuance of
common stock for
services........ 52,000 17,000 17,000
Issuance of
Series C
convertible
preferred stock
in exchange for
common stock and
note payable.... 1,200,000 $ 386,000 (2,341,000) (23,000) $23,000 386,000
Net loss......... (482,000) (482,000)
---------- --------- ---------- ------------ ----------- ----------- ------------ ------------
Balance at
December 31,
1995............ 1,200,000 386,000 2,617,000 43,000 23,000 -- (492,000) (40,000)
Net loss......... (3,006,000) (3,006,000)
---------- --------- ---------- ------------ ----------- ----------- ------------ ------------
Balance at
December 31,
1996............ 1,200,000 386,000 2,617,000 43,000 23,000 -- (3,498,000) (3,046,000)
Additional paid
in capital
related to
issuance of
Series E
mandatory
redeemable
convertible
preferred stock
for cash........ 3,196,000 3,196,000
Conversion of
Series C
convertible
preferred stock
to mandatory
redeemable
convertible
preferred
stock........... (1,200,000) (386,000) (386,000)
Exercise of stock
options......... 24,000 6,000 6,000
Unearned
compensation
related to stock
options
granted......... 684,000 $ (684,000) --
Compensation
related to stock
options
vesting......... 24,000 24,000
Net loss......... (8,903,000) (8,903,000)
---------- --------- ---------- ------------ ----------- ----------- ------------ ------------
Balance at
December 31,
1997............ -- -- 2,641,000 49,000 3,903,000 (660,000) (12,401,000) (9,109,000)
Repurchase of
common stock.... (10,000) (19,000) (19,000)
Exercise of stock
options......... 1,034,000 223,000 223,000
Unearned
compensation
related to stock
options
granted......... 6,674,000 (6,674,000) --
Compensation
related to stock
options
vesting......... 290,000 290,000
Net loss......... (7,253,000) (7,253,000)
---------- --------- ---------- ------------ ----------- ----------- ------------ ------------
Balance at June
30, 1998
(unaudited)..... -- -- 3,665,000 253,000 10,577,000 (7,044,000) (19,654,000) (15,868,000)
Assumed
conversion of
mandatory
redeemable
convertible
preferred
stock........... 22,230,000 40,396,000 (3,196,000) 37,200,000
Delaware
reincorporation
and change in
par value of
common stock.... (40,623,000) 40,623,000 --
---------- --------- ---------- ------------ ----------- ----------- ------------ ------------
Balance at June
30, 1998,
pro forma
(unaudited)..... -- -- 25,895,000 $ 26,000 $48,004,000 $(7,044,000) $(19,654,000) $ 21,332,000
========== ========= ========== ============ =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GEOCITIES
STATEMENTS OF CASH FLOWS
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS
UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
--------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............. $(482,000) $(3,006,000) $ (8,903,000) $(3,561,000) $ (7,253,000)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization...... 7,000 188,000 431,000 177,000 370,000
Issuance of common
stock for
services.......... 17,000
Issuance of warrant
related to note
payable........... 51,000
Deferred
compensation
earned............ 24,000 290,000
Bad debt reserve... 98,000 172,000
Changes in
operating assets
and liabilities:
Accounts
receivable....... (7,000) (255,000) (1,042,000) (735,000) (1,413,000)
Prepaids and other
current assets... 12,000 (56,000) (346,000) (339,000) (616,000)
Deposits and other
assets........... (214,000) (396,000) (166,000) (171,000)
Accounts payable.. 90,000 309,000 639,000 110,000 (683,000)
Accrued expense... 37,000 162,000 2,095,000 684,000 2,656,000
Deferred revenue.. 110,000 115,000 127,000 341,000
--------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities...... (326,000) (2,762,000) (7,234,000) (3,703,000) (6,307,000)
Cash flows used in
investing activities:
Purchase of property
and equipment....... (69,000) (130,000) (674,000) (258,000) (2,131,000)
Investment in
affiliate........... (645,000)
Purchases of
investments......... (19,219,000)
--------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities........ (69,000) (130,000) (1,319,000) (258,000) (21,350,000)
Cash flows from
financing activities:
Payments under
capital-lease
obligations......... (2,000) (239,000) (143,000) (114,000) (163,000)
Proceeds from
exercise of common
stock options....... 49,000 6,000 223,000
Repurchase of common
stock............... (19,000)
Proceeds from
issuance of
mandatory redeemable
convertible
preferred stock..... 2,063,000 37,897,000 8,959,000
Subscription
receivable.......... (25,000,000) 25,000,000
Due to officer....... 349,000
Proceeds from
related-party note
payable............. 645,000
Proceeds from note
payable............. 1,100,000
Repayment on note
payable............. (1,100,000) (1,100,000)
--------- ----------- ------------ ----------- ------------
Net cash provided
by financing
activities........ 396,000 2,924,000 12,305,000 7,745,000 25,041,000
Increase (decrease)
in cash and cash
equivalents....... 32,000 3,752,000 3,784,000 (2,616,000)
Cash and cash
equivalents, beginning
of period............. 1,000 33,000 33,000 3,785,000
--------- ----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period................ $ 1,000 $ 33,000 $ 3,785,000 $ 3,817,000 $ 1,169,000
========= =========== ============ =========== ============
Supplemental disclosure
of cash-flow
information:
Cash paid during the
period for:
Interest............. $ 1,000 $ 71,000 $ 89,000 $ 53,000 $ 52,000
Income taxes......... $ 1,000 $ 1,000 $ 1,000
Supplemental disclosure
of noncash
transactions:
Equipment under
capital leases...... $ 20,000 $ 844,000 $ 94,000
Conversion of Series
C convertible
preferred stock to
mandatory redeemable
convertible
preferred stock..... $ 386,000
Issuance of Series C
convertible
preferred stock
through conversion
of amount due to
officer............. $ 386,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
GeoCities (the "Company") was incorporated as a California corporation on
December 16, 1994, and began operations in 1995. In June 1998, the Board of
Directors approved the reincorporation of the Company in the State of Delaware
and changed the par value of the Company's common stock. The Company offers a
community of personal Web sites on the Internet within 40 themed
neighborhoods. The Company's main source of revenue is from advertising, along
with other revenue streams, including fee-based premium services and commerce.
The Company's business is characterized by rapid technological change, new
product development and evolving industry standards.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Initial Public Offering and Unaudited Pro Forma Balance Sheet
In June 1998, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission ("SEC") that would
permit the Company to sell shares of the Company's common stock in connection
with a proposed initial public offering ("IPO"). If the IPO is consummated
under the terms presently anticipated, upon the closing of the proposed IPO
all of the then outstanding shares of the Company's Mandatory Redeemable
Convertible Preferred Stock will automatically convert into shares of common
stock on a one-for-one basis. The conversion of the Mandatory Redeemable
Convertible Preferred Stock has been reflected in the accompanying unaudited
pro forma balance sheet as if it had occurred on June 30, 1998.
Unaudited Interim Financial Information
The interim financial statements of the Company for the six months ended
June 30, 1997 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at June 30, 1998, and the
results of its operations and its cash flows for the six months ended June 30,
1997 and 1998.
Use of Estimates
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
At December 31, 1997, certificates of deposit totaling approximately
$255,000 were used to collateralize certain of the Company's lease
obligations, and have been included in deposits on the balance sheet.
F-7
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
Investments
Investments consist of debt securities, primarily U.S. government and
corporate debt securities. These investments are stated at cost as it is the
intent of the Company to hold these securities until maturity. The investments
are recorded at their amortized cost on the balance sheet which approximates
fair value. The unamortized discount on investments is approximately $348,000
at June 30, 1998.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based
upon the estimated useful lives of the assets, ranging from three to five
years. Leasehold improvements and equipment under capital leases are amortized
over the shorter of the estimated useful life or the life of the lease. Useful
lives are evaluated regularly by management in order to determine
recoverability in light of current technological conditions. Maintenance and
repairs are charged to expense as incurred while renewals and improvements are
capitalized. Upon the sale or retirement of property and equipment, the
accounts are relieved of the cost and the related accumulated depreciation or
amortization, with any resulting gain or loss included in the Statement of
Operations.
Long-lived Assets
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share
The Company adopted SFAS No. 128, "Computation of Earnings Per Share",
during the year ended December 31, 1997. In accordance with SFAS No. 128,
basic earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of the incremental common shares issuable
upon the conversion of the Mandatory Redeemable Convertible Preferred Stock
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the Treasury Stock method); common equivalent
shares are excluded from the calculation if their effect is anti-dilutive.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued for nominal consideration, prior to the anticipated
effective date of an IPO, are required to be included in the calculation of
basic and diluted net loss per share, as if they were outstanding for all
periods presented. To date, the Company has not had any issuances or grants
for nominal consideration.
Diluted net loss per share for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1998, does not include the effect of
options to purchase 777,000, 1,113,000, 4,605,000 and 6,531,000 shares of
common stock, respectively, 0, 0, 20,304 and 20,304 common stock warrants,
respectively, or 0, 6,008,000, 22,230,000 and 22,230,000 shares of Mandatory
Redeemable Convertible Preferred Stock on an "as if converted" basis,
respectively, as the effect of their inclusion is antidilutive during each
period.
F-8
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1997 and for
the six months ended June 30, 1998, assumes that the common stock issuable
upon conversion of the outstanding Mandatory Redeemable Convertible Preferred
Stock had been outstanding during each such period.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective
vesting period based on the difference, on the date of grant, between the fair
value of the Company's common stock and the grant price.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Revenue Recognition
The Company's revenues are derived principally from the sale of banner
advertisements under short-term contracts; advertising rates are dependent on
whether the impressions are for general rotation throughout the Company's Web
site or premier targeted audiences and properties within specific areas of the
Company's Web site. To date, the duration of the Company's advertising
commitments has generally averaged from one to two months. In December 1997,
the Company also began selling a combination of sponsorship and banner
advertising campaign contracts to select premier commerce partners. In
general, these premier commerce partner contracts have longer terms than
standard banner advertising contracts (generally up to one year) and involve
some integration with the Company's Web site. Advertising revenues on both
banner and premier commerce partner contracts are recognized ratably in the
period in which the advertisement is displayed, provided that no significant
Company obligations remain and collection of the resulting receivable is
probable. Company obligations typically include the guarantee of a minimum
number of "impressions" or times that an advertisement appears in pages viewed
by the users of the Company's online properties.
In addition to advertising revenues, the Company derives revenues from its
GeoPlus program, a premium service for its members (introduced in late 1996)
and GeoShops, a commerce service for its members (introduced in March 1998).
These services require the payment of monthly fees by the customers; revenues
are recognized on a monthly basis as the fees become due. GeoPlus revenues
accounted for 4%, 7% and 9% of revenues for the years ended December 31, 1996
and 1997, and the six months ended June 30, 1998, respectively; to date, the
revenues from GeoShops have been immaterial. The Company also has revenue
sharing agreements with its premier commerce partners. These revenues are
recognized by the Company upon notification by the premier commerce partners
of revenues earned by the Company, and to date, have been immaterial.
Barter transactions are recorded at the lower of estimated fair value of the
goods or services received or the estimated fair value of the advertisements
given. To date, barter transactions have been immaterial.
F-9
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
Advertising
Advertising costs are expensed as incurred, and amounted to approximately
$66,000, $196,000 and $1,742,000 for the years ended December 31, 1995, 1996
and 1997, respectively, and $386,000 for the six months ended June 30, 1998.
Product Development
Product development costs are expensed as incurred. Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. Based upon the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
shareholders' equity during the period except those resulting from investments
by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of earlier
periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments
in annual financial statements, and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
Stock Split
In January 1996, September 1997 and July 1998, the Company authorized and
implemented 1,443-for-one, two-for-one and two-for-one stock splits,
respectively. The share information in the accompanying financial statements
has been retroactively restated to reflect the effect of these stock splits.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments
and trade accounts receivable. The Company maintains cash and cash equivalents
with various domestic financial institutions. The Company performs periodic
evaluations of the relative credit standing of these institutions. From time
to time, the Company's cash balances with any one financial institution may
exceed Federal Deposit Insurance Corporation insurance limits.
F-10
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations, generally does not require collateral and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information; to
date, such losses have been within management's expectations.
For the year ended December 31, 1996, two customers accounted for
approximately 14% and 10%, respectively, of all revenues generated by the
Company and 18% and 0%, respectively, of accounts receivable at December 31,
1996.
For the year ended December 31, 1997, one customer accounted for 12% of all
revenues generated by the Company, and 12% of accounts receivable at December
31, 1997.
For the six months ended June 30, 1998, one customer accounted for 10% of
all revenues generated by the Company and 3% of accounts receivable at June
30, 1998.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment, including assets
under capital leases of $672,000,
$766,000 and $766,000 for 1996, 1997
and 1998, respectively................. $ 794,000 $1,399,000 $3,653,000
Furniture and fixtures, including assets
under capital leases of $172,000,
$172,000 and $172,000 for 1996, 1997
and 1998, respectively................. 200,000 292,000 310,000
Leasehold improvements.................. 80,000 151,000 10,000
---------- ---------- ----------
1,074,000 1,842,000 3,973,000
Less, accumulated depreciation and
amortization, including amounts related
to assets under capital leases of
$145,000, $459,000 and $619,000 for
1996, 1997 and 1998, respectively...... (195,000) (626,000) (996,000)
---------- ---------- ----------
Total............................... $ 879,000 $1,216,000 $2,977,000
========== ========== ==========
</TABLE>
5. RELATED-PARTY TRANSACTIONS:
On November 6, 1997, the Company and SOFTBANK Corporation of Japan
("SOFTBANK"), the parent company of an investor in the Company, formed a joint
venture called GeoCities Japan Corporation ("GeoCities Japan") to create and
manage a Japanese version of GeoCities. In accordance with the joint venture
agreement ("Agreement"), the Company purchased 40% of GeoCities Japan for
approximately $645,000 and licensed certain intellectual properties for the
purpose of localizing the Japanese version of GeoCities to GeoCities Japan.
The Agreement remains in effect perpetually, provided that, if as of April 1,
2001, or any April 1 thereafter; (i) GeoCities Japan has sustained net losses
for the four consecutive fiscal quarters, and (ii) GeoCities and SOFTBANK
differ with respect to the future business plan of GeoCities Japan, then each
party shall have the right to terminate the Joint Venture with 90-days notice.
F-11
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
The Company's investment of approximately $645,000 was funded through a loan
from SOFTBANK. Pursuant to the terms of the loan agreement, the loan bears
interest at 5.5% per annum and is repayable upon occurrence of a Significant
Financing Event, which is defined as a non-U.S. IPO or private placement that
raises at least 1.5 billion yen for GeoCities Japan. In the event that
GeoCities Japan does not have a Significant Financing Event on or prior to
March 31, 2000, SOFTBANK will forgive the repayment of the loan. Interest
expense and accrued interest for the year ended December 31, 1997, were each
$6,000.
In consideration of the licenses granted, GeoCities Japan is required to pay
the Company an amount equal to 3% of total revenue obtained by GeoCities Japan
within 30 days of the end of each quarter. The license expires 20 years from
the date of the Agreement, unless the Agreement is terminated earlier. Upon
termination, GeoCities Japan will cease to use and distribute all licensed
properties. Royalty payments for the year ended December 31, 1997, were
insignificant.
The investment is being accounted for under the equity method and is
included in other assets at December 31, 1997. The loss on affiliate recorded
for the six months ended June 30, 1998, was approximately $86,000.
Advertising revenues at December 31, 1997 and June 30, 1998, include
$107,000 and $51,000, respectively, in revenues received from an entity that
is controlled by a significant shareholder of the Company. At December 31,
1997 and June 30, 1998, $0 and $35,000, respectively, of these amounts are
included in accounts receivable.
In April 1998, the Board of Directors also approved a loan of $100,000 to an
officer/director of the Company.
In December 1997, in conjunction with its financing activities, the Company
entered into a one-year distribution and commerce agreement ("Agreement") with
Yahoo!, which is automatically renewable for subsequent one-year terms,
subject to the right of either party to terminate the relationship at the end
of any term up to 90-days' notice. In connection with the Agreement, Yahoo!
also made a minority equity investment in the Company. The Agreement was
designed to increase traffic and memberships of both parties in addition to
offering GeoCities' Homesteaders an array of free personalized member services
on Yahoo!. Under the terms of the Agreement, GeoCities agreed to provide its
community-based, Web site and other services for free to registered users of
Yahoo!. In addition, Yahoo! agreed to market GeoCities-branded personal
publishing programs on select areas throughout Yahoo!, as well as provide a
GeoCities-specific programming module on My Yahoo! for GeoCities'
Homesteaders. The Agreement did not involve any cash consideration; any
revenues related to the Agreement will be accounted for in accordance with the
Company's barter revenue recognition policy, as appropriate.
6. LINE OF CREDIT:
In August 1997, the Company executed a $2,000,000 revolving line of credit
(the "Line") with a commercial bank. Pursuant to the agreement, the Line
matures on December 1, 1998, bears interest at the bank's prime rate of
interest, plus 0.50% (8.5% at December 31, 1997), and is collateralized by
substantially all of the Company's assets. The Company is required to comply
with certain financial covenants, as defined in the agreement, which include
tangible effective net-worth and quick-ratio agreements. In connection with
the Line, the Company issued a warrant to the bank to purchase up to 20,304
shares of the Company's common stock at the exercise price of $4.695, which
was higher than
F-12
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
the then estimated fair market value of a share of the Company's common stock.
The exercise price is subject to adjustment in limited situations involving
antidilution as defined in the agreement. As a result of such dilution, the
exercise price is $4.695 per share at June 30, 1998. The warrant may be
exercised at any time prior to September 22, 2004. The Company has no
obligations to repurchase the warrants from the bank.
In May 1998, the Company negotiated an increase of the Line to $10,000,000,
including a $7,000,000 revolving facility for working capital and $3,000,000
lease facility, extended the maturity to December 31, 1999, and reduced the
interest rate to prime for the revolving facility and prime plus 0.75% for the
lease facility; all other terms substantially remained the same. In addition,
the commitment letter also includes a non-revolving line of credit for
$3,000,000, which bears interest at the bank's prime rate plus 0.75% per year,
and matures on May 12, 1999, if not renewed. At December 31, 1997 and June 30,
1998, there have been no borrowings under either agreement.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases its facilities and certain computer and office equipment
under noncancelable leases for varying periods through 2002. The Company's
lease obligations are collateralized by certain assets at December 31, 1997.
The following are the minimum lease obligations under these leases at December
31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1998.................................................... $443,000 $1,442,000
1999.................................................... 172,000 1,038,000
2000.................................................... 10,000 297,000
2001.................................................... -- 207,000
2002.................................................... -- 50,000
-------- ----------
Minimum lease payments.................................... 625,000 $3,034,000
==========
Less: Amount representing interest........................ (49,000)
--------
Present value of minimum lease payments................... 576,000
Less: Current portion..................................... 393,000
--------
Long-term portion......................................... $183,000
========
</TABLE>
Rent expense pertaining to operating leases for the years ended December 31,
1995, 1996 and 1997, was approximately $28,000, $229,000 and $1,100,000,
respectively.
Employment Agreements
The Company maintains employment agreements with certain executive officers
of the Company. The employment agreements provide for minimum salary levels,
incentive compensation and severance benefits, among other items.
GeoRewards Program
During 1996, the Company created a marketing program to reward members of the
Company's online community ("Homesteaders") for various activities, allowing
them to earn GeoPoints.
F-13
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
Homesteaders may redeem GeoPoints to upgrade their Web site or purchase goods
from the Company's GeoStore. At December 31, 1996 and 1997, the Company has
accrued $38,000 and $463,000 for possible future redemption of GeoPoints;
these amounts are included in Accrued Expenses.
Contingencies
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in
the normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect on the Company's
business, results of operations, financial condition and cash flows.
8. CAPITALIZATION
As of December 31, 1997, the Company had six series of Mandatory Redeemable
Convertible Preferred Stock (collectively "Preferred Stock") authorized and
outstanding. The holders of the various series of Preferred Stock generally
have the same rights and privileges; significant differences are discussed
below.
The holders of the Preferred Stock are entitled to a discretionary
noncumulative dividend as specified below which is mandatory in the event of a
liquidation (not included in the liquidation preference below), and are
entitled to the number of votes equal to the number of shares of common stock
that could be converted on the date of the vote. Upon liquidation, the holders
of the Preferred Stock receive, prior and in preference to the holders of
common stock their liquidation preference plus accrued dividends at the stated
rate, from the date of issuance to the date payment is made available.
Redemption, at the option of the holders of Preferred Stock, may be elected
beginning on January 1, 2001 at which time, the redemption preference plus
seven percent per annum, on a cumulative basis is due. At the option of the
holders of Preferred Stock, each share of Preferred Stock is convertible at
the stated conversion price per share, subject to adjustment as defined in the
Certificate of Incorporation.
During the year ended December 31, 1995, the Company issued 1,200,000 shares
of Convertible Preferred Stock Series C in consideration for $0.3217 per share
in the form of the cancellation of shares of common stock and conversion of a
note payable of $386,000 to the Company's Chairman and Founder. In connection
with the Series F Stock issuance, the Convertible Preferred Stock Series C
became Mandatory Redeemable Convertible Preferred Stock.
During the year ended December 31, 1996, the Company issued 3,108,000 and
2,900,000 shares of Series A Stock and Series B Stock for $1,000,000 and
$1,100,000, respectively. During January and February 1997, the Company issued
10,169,492 shares of Series D Stock for approximately $9,000,000. In October
and December 1997, the Company issued 1,428,564 and 814,270 shares of Series E
Stock at $3.50 and $7.4254 per share, respectively for total cash
consideration of $9,750,000 and 20,242 shares of Yahoo! stock valued at
approximately $1,300,000 which resulted in the recording of a subscription
receivable for approximately $6,000,000 at December 31, 1997. The subscription
receivable was collected in January 1998 and the Yahoo! stock was subsequently
sold.
In December 1997, the Company sold 2,552,576 shares of Series F Stock for
approximately $19,000,000 which resulted in the recording of a subscription
receivable at December 31, 1997. The subscription receivable was collected in
January 1998.
F-14
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
Rights of Preferred Stock as of December 31, 1997
<TABLE>
<CAPTION>
DIVIDEND LIQUIDATION REDEMPTION
PREFERENCE PREFERENCE PREFERENCE
---------- ----------- ----------
<S> <C> <C> <C>
Series A Stock................................ $0.0225 $0.3218 $0.3218
Series B Stock................................ $0.0275 $0.3793 $0.3793
Series C Stock................................ $ -- $0.3217 $0.3217
Series D Stock................................ $0.0625 $0.885 $0.885
Series E Stock................................ $0.245 $3.50 $3.50
Series F Stock................................ $0.5195 $7.4254 $7.4254
</TABLE>
The shares of Series E Stock sold in December 1997 (814,270 shares at $7.43
per share) have a redemption preference of $3.50 per share. The proceeds
received in excess of the redemption preference ($3,196,000) have been
recorded as additional paid-in capital.
As of December 31, 1997, the holders of Series A through F Stock may, at
their option, on each of January 1, 2001, January 1, 2002 and January 1, 2003,
require the Company to redeem shares equal to one-third of the total number of
shares of all Preferred Stock outstanding as of January 1, 2001. Any shares of
Preferred Stock to be redeemed shall be redeemed ratably among all holders of
Preferred Stock, based upon the respective redemption price of such shares.
Additionally, the holders of not less than 80% of the Preferred Stock then
outstanding, voting as a single class, may, at any time on or after December
31, 1998, require the Company to redeem all of the shares of Preferred Stock
in the event that the Company has not by such time consummated (i) a
"Qualified Public Offering" of its securities (as defined in the Certificate
of Incorporation), or (ii) a sale of the Company that meets certain
requirements.
Each share of Series A through F Stock shall be converted into common stock
automatically upon the closing of the sale of the Company's securities in a
firm commitment underwritten public offering from which the Company receives
gross proceeds of not less than $20,000,000 and which is a Qualified Public
Offering as defined in the Certificate of Incorporation.
At December 31, 1997 and June 30, 1998, the Company has reserved
approximately 22,230,000 shares of common stock for the future conversion of
the Series A through F Stock.
Warrants
In connection with the Series D Stock issuance, the Company issued a warrant
to a bank to purchase 64,972 of the Company's Series D Preferred Stock at
$0.885 per share, exercisable at any time prior to January 12, 2002. On
December 31, 1997, the bank converted this warrant (on a net basis), and the
Company issued 57,226 shares of Series D Preferred Stock. The Bank immediately
sold these shares in connection with the Series E and F Preferred Stock
issuances. Also see Notes 6 and 10 of Notes to Financial Statements for a
warrant issued in connection with a line of credit, and options issued to a
Series D Preferred stockholder and others pursuant to stock option agreements.
F-15
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
9. INCOME TAXES:
The primary components of temporary differences which gave rise to deferred
taxes at December 31 are:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 1,423,000 $ 4,639,000
Bad debt expense................................. -- 40,000
Accrued expenses................................. 7,000 321,000
Other............................................ -- 1,000
----------- -----------
Total deferred tax assets...................... 1,430,000 5,001,000
Valuation allowance.............................. (1,401,000) (4,958,000)
----------- -----------
Net deferred tax assets........................ 29,000 43,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization.................... (29,000) (43,000)
----------- -----------
Total deferred tax liabilities................. (29,000) (43,000)
----------- -----------
Net............................................ $ -- $ --
=========== ===========
</TABLE>
As a result of the Company's loss history, management believes a valuation
allowance for the entire net deferred tax assets, after considering deferred
tax liabilities, is required. The change in the valuation allowance was an
increase of $3,557,000 in 1997. As of December 31, 1997, the Company had
federal and state net operating loss carryforwards of approximately
$11,250,000 and $10,650,000, respectively. Federal and state net operating
loss expirations begin in 2010 and 2002, respectively. Due to changes in
ownership (See Note 8), the Company will be limited in the annual utilization
of its net operating loss carryforwards.
10. STOCK OPTIONS:
From inception through December 31, 1997, the Company has been authorized to
and has granted a total of 5,555,000 options to purchase its common stock; in
April and May 1998, the Board of Directors approved an increase in the total
number of shares issuable under the plan by 2,233,000 and 600,000,
respectively, increasing the total available to 8,388,000 at June 30, 1998.
In 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"), which
provides for issuance of both non-statutory and incentive stock options to
employees, officers, directors and consultants of the Company. Incentive stock
options may be granted at no less than 100% of the fair market value of the
Company's common stock on the date of grant as determined by the Board of
Directors (110% if granted to an employee who owns 10% or more of the common
stock). Options granted to date generally vest ratably over a four-year period
from the date of grant and are generally exercisable for a period of no longer
than seven years from the date of grant (five years if granted to an
individual who owns 10% or more of the common stock). In the event option
holders cease to be employed by the Company, all unvested options are
forfeited and, provided that the employee's employment has not been terminated
for cause, all vested options may be exercised within a period of up to 90
days after termination; the Company and the Company's preferred stockholders
have rights to repurchase any shares purchased through the exercise of an
option.
F-16
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
In connection with its Series D stock offering in early 1997, the Company
granted options to purchase 1,000,000 shares of its common stock at an
exercise price of $0.885 per share to CMG@Ventures; these options vested
immediately and are exercisable by January 13, 2004. The exercise price was in
excess of the then estimated fair market value of a common share. The Company
has no obligation to repurchase the option from CMG@Ventures. At that time,
the Company also granted an option to purchase 1,000,000 shares of its common
stock at an exercise price of $0.885 per share to certain officers, directors
and consultants to the Company. These options generally vest over a four year
period from the date of grant and are generally exercisable by January 13,
2004. In certain circumstances, the vesting of these options may accelerate,
and there are certain participation rights in the event of a liquidation.
A summary of the status of the Company's stock options, as of December 31,
1996 and 1997, and the changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 777,000 $0.01 1,113,000 $0.16
Granted--price equals fair value... 364,000 $0.25 2,648,000 $0.74
Granted--less than fair value...... -- -- 1,307,000 $0.81
Exercised.......................... -- -- (25,000) $0.25
Canceled........................... (28,000) $0.25 (438,000) $0.35
--------- ---------
Outstanding at year-end.............. 1,113,000 $0.16 4,605,000 $0.66
========= =========
Options exercisable at year-end...... 1,939,000 $0.52
Options available for future grant... 926,000
</TABLE>
At December 31, 1997 and June 30, 1998, the Company had reserved a total of
5,531,000 and 7,329,000 shares of common stock for issuance to its stock
option holders.
In connection with its grants of options, the Company has recognized
unearned deferred compensation expense of $684,000 for the year ended December
31, 1997. This amount will be amortized over the vesting periods ranging from
48 to 72 months from the date of grant; $24,000 and $290,000 was expensed
during the year ended December 31, 1997 and the period ended June 30, 1998,
respectively.
For the six months ended June 30, 1998, the Company granted options to
purchase 3,169,000 shares of its common stock to employees and officers of the
Company. In conjunction with these grants, the Company recognized unearned
deferred compensation expense of $6,674,000 to be amortized over 48 to 72
months from the date of grant.
F-17
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 777,000 5.00 $0.01 777,000 $0.01
$0.25--$0.44 744,000 6.14 $0.32 47,000 $0.26
$0.75--$1.25 3,084,000 6.29 $0.88 1,115,000 $0.89
--------- ---------
4,605,000 1,939,000
========= =========
</TABLE>
The fair value of options granted during 1995, 1996 and 1997 is estimated as
$0, $0 and $50,000, respectively, on the dates of grants using the minimum
value method with the following assumptions: (i) dividend yield of 0%, (ii)
expected volatility of 0%, (iii) weighted-average risk-free interest rate
ranging from 6.04% to 6.8% for 1996 and 5.8% to 6.5% for 1997, (iv) weighted-
average expected life of five years for 1996 and 1997, and (v) assumed
forfeiture rate of 10% for 1996 and 1997.
The Company applies APB No. 25 in accounting for its stock options granted
to employees and accordingly, no compensation expense has been recognized in
the financial statements (except for those options issued with exercise prices
at less than fair market value at date of grant). Had the Company determined
compensation expense based on the fair value at the grant date for its stock
options issued to employees under SFAS No. 123, the Company's net loss would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss..................... As reported $(482,000) $(3,006,000) $(8,903,000)
========= =========== ===========
Pro forma $(482,000) $(3,006,000) $(8,950,000)
========= =========== ===========
Basic net loss per common
share....................... As reported $ (.11) $ (1.15) $ (3.39)
========= =========== ===========
Pro forma $ (.11) $ (1.15) $ (.36)
========= =========== ===========
</TABLE>
Pro forma net loss reflects compensation expense under SFAS No. 123 only for
options granted for the years ended December 31, 1995, 1996 and 1997. The
insignificant impact of applying SFAS No. 123 is not indicative of future
amounts.
11. RETIREMENT PLAN:
Effective July 1, 1997, the Company established a qualified 401(k) Profit
Sharing Plan (the "Plan") available to all employees who meet the Plan's
eligibility requirements. Employees may elect to contribute from 1% to 18% of
their eligible earnings to the Plan. This defined contribution plan provides
that the Company will, at its discretion, make contributions to the Plan on a
periodic basis. Additionally, the employer may match 33-1/3% of the first 6%
of the employees' contributions, which amounts vest over five years.
Terminations and forfeitures from the Plan are allocated to Plan participants
at year-end. The Company made contributions to the Plan of approximately
$10,000 in 1997.
F-18
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION WITH RESPECT TO JUNE 30, 1998 AND 1997 IS UNAUDITED)
12. SUBSEQUENT EVENTS (UNAUDITED):
In July 1998, the Company entered into an agreement to buy certain Web-page
development technology for a total consideration of up to $1.45 million; this
transaction is expected to be completed in August 1998, and is not material to
the financial position, results of operations and cashflows of the Company.
In July 1998, the Board adopted the 1998 Stock Incentive Plan and Employee
Stock Purchase Plan and reserved an additional 2,600,000 shares of Common
Stock for issuance thereunder.
In July 1998, the Company signed a lease for approximately 24,000 square
feet to relocate its corporate headquarters. Monthly lease payments will be
$23,700 commencing September 1, 1998.
F-19
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Goldman, Sachs & Co., Donaldson, Lufkin &
Jenrette Securities Corporation and Hambrecht & Quist LLC are acting as
representatives, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co...........................................
Donaldson, Lufkin & Jenrette Securities Corporation...........
Hambrecht & Quist LLC.........................................
--------
Total.......................................................
========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the initial public offering price and other selling terms
may from time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the shares of Common Stock
offered.
The Company, its directors and officers, and substantially all of its other
stockholders and holders of options to purchase Common Stock, have agreed
that, subject to certain exceptions, during the period beginning from the date
of this Prospectus and continuing to and including the date 180 days after the
date of the Prospectus, they will not offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or of any other securities of
the Company (other than, in the case of the Company, pursuant to the Purchase
Agreement related to the purchase of the Technology, or stock incentive and
employee stock purchase plans existing on the date of this Prospectus) which
are substantially similar to the shares of Common Stock or which are
convertible or exchangeable into securities which are substantially similar to
the shares of Common Stock without the prior written consent of the
representatives, except for the shares of Common Stock offered in connection
with the
U-1
<PAGE>
offering; provided, that one affiliate of the Company who is subject to a
lock-up agreement and the volume restrictions of Rule 144 will be permitted to
sell up to $1.0 million of Common Stock commencing 91 days after the date of
this Prospectus.
Prior to the offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuations of companies in related businesses.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered by them.
In connection with the offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock; and
syndicate short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in the offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the securities sold in the
offering for their account may be reclaimed by the syndicate if such shares of
Common Stock are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that
might otherwise prevail in the open market in the absence of such activities.
These transactions may be effected on the Nasdaq National Market, in the over-
the-counter market or otherwise, and these activities, if commenced, may be
discontinued at any time.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, subject to
certain limitations.
U-2
<PAGE>
[Inside Back Cover]
40 themed neighborhoods provide the home for millions
[GRAPHIC COLLAGE OF NEIGHBORHOOD SCREEN SHOTS]
Over 14 million unique visitors in one month*
*Relevant Knowledge June 1998
over 925 million page views in one month+
+Nielsen I/PRO May 1998
third most trafficked Web site on the Internet(degrees)
(degrees)Media Metrix Home Users June 1998
[GRAPHIC OF GEOCITIES LOGO](R)
- --------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 26
Dividend Policy.......................................................... 26
Capitalization........................................................... 27
Dilution................................................................. 28
Selected Financial Data.................................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 39
Management............................................................... 51
Certain Transactions..................................................... 64
Principal Stockholders................................................... 67
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 73
Legal Matters............................................................ 74
Experts.................................................................. 74
Additional Information................................................... 75
Change in Accountants.................................................... 75
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,750,000 SHARES
[LOGO OF GEOCITIES]
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------
[LOGO OF GEOCITIES]
---------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale
and distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD fees. All of the
expenses below will be paid by the Company.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
Registration fee.............................................. $ 22,561
NASD filing fee............................................... 7,745
Nasdaq National Market listing fee............................ 99,000
Blue sky fees and expenses.................................... 5,000
Printing and engraving expenses............................... 250,000
Legal fees and expenses....................................... 350,000
Accounting fees and expenses.................................. 300,000
Transfer Agent and Registrar fees............................. 15,000
Miscellaneous................................................. 694
----------
Total..................................................... $1,050,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the Company's directors shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Company. Under the DGCL, the directors have a
fiduciary duty to the Company which is not eliminated by this provision of the
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the
DGCL for breach of the director's duty of loyalty to the Company, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Company has obtained liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out
of their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any
other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Company shall fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil,
II-1
<PAGE>
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Company, or is or was serving at
the request of the Company as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
The Company, with the approval of the Board of Directors, intends to obtain
directors' and officers' liability insurance prior to the effectiveness of
this offering.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company in which indemnification will be
required or permitted. Moreover, the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification. The Company believes that the foregoing indemnification
provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the Underwriters of the Company and
its officers and directors, and by the Company of the Underwriters, for
certain liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company since January 1,
1995 involving sales of the Company's securities that were not registered
under the Securities Act:
(1) In January 1995, the Company issued and sold an aggregate of
4,906,200 shares of Common Stock to David C. Bohnett at a price per share
of $0.0101.
(2) In December 1995, the Company issued for services rendered an
aggregate of 52,000 shares of Common Stock to certain individuals at a
price per share of $0.1605.
(3) In December 1995, the Company issued 1,200,000 shares of Series C
Preferred Stock to David C. Bohnett in consideration for $0.3217 per share
in the form of the cancellation of shares of Common Stock and a note
payable. Each share of Series C Preferred Stock will convert into one share
of Common Stock upon consummation of the offering.
(4) In January 1996, the Company issued and sold an aggregate of
3,108,000 shares of Series A Preferred Stock to CMG@Ventures at a price per
share of $0.3218. Each share of Series A Preferred Stock will convert into
one share of Common Stock upon consummation of the offering.
(5) In July 1996, the Company issued and sold an aggregate of 2,900,000
shares of Series B Preferred Stock to CMG@Ventures at a price per share of
$0.3793. Each share of Series B Preferred Stock will convert into one share
of Common Stock upon consummation of the offering.
(6) In January 1997, the Company issued a warrant to purchase 64,972
shares of Series D Preferred Stock at a price per share of $0.885 to
Cupertino Bank, of which 57,226 shares of Series D Preferred Stock were
subsequently issued. Each share of Series D Preferred Stock will convert
into one share of Common Stock upon consummation of the offering.
(7) In January 1997 and February 1997, the Company issued and sold an
aggregate of 10,169,492 shares of Series D Preferred Stock to CMG@Ventures,
SOFTBANK Holdings Inc., Chase Venture Capital Associates, L.P., the
Flatiron Fund LLC, InnoCal, L.P. and Intel Corporation at a price per share
of $0.885. Each share of Series D Preferred Stock will convert into one
share of Common Stock upon consummation of the offering.
(8) In September 1997, the Company issued a warrant to purchase 20,304
shares of Common Stock at a price per share of $4.925 (subsequently
adjusted to $4.695) to Comerica Bank-California.
II-2
<PAGE>
(9) In October 1997, the Company issued and sold an aggregate of
1,428,564 shares of Series E Preferred Stock to CMG@Ventures II, LLC,
SOFTBANK Holdings Inc., Chase Venture Capital Associates, L.P., the
Flatiron Fund LLC, InnoCal, L.P. and Intel Corporation at a price per share
of $3.50. Each share of Series E Preferred Stock will convert into one
share of Common Stock upon consummation of the offering.
(10) In December 1997, the Company issued and sold an aggregate of
814,270 shares of Series E Preferred Stock to SOFTBANK Holdings Inc. at a
price per share of $7.425. Each share of Series E Preferred Stock will
convert into one share of Common Stock upon consummation of the offering.
(11) Effective December 1997, the Company sold an aggregate of 2,552,576
shares of Series F Preferred Stock to Yahoo! Inc. and SOFTBANK Holdings
Inc. at a price per share of $7.425. Each share of Series F Preferred Stock
will convert into one share of Common Stock upon consummation of the
offering.
(12) Since January 1, 1995, the Company has granted incentive stock
options and nonqualified stock options to purchase Common Stock under
individual stock option agreements and the Predecessor Plan to eligible
officers, directors, consultants and employees of the Company as described
in the Prospectus. During the period referred to above, the Company issued
1,059,998 shares of Common Stock pursuant to the exercise of options,
including options under each Plan.
(13) In connection with the reincorporation of the Company from
California to Delaware in July 1998, the Company will issue 3,463,498
shares of its Common Stock and 3,108,000, 2,900,000, 1,200,000, 10,226,718,
2,242,834, and 2,552,576 shares of its Series A, B, C, D, E and F Preferred
Stock, respectively, in exchange for the issued and outstanding capital
stock of its predecessor corporation. In addition, in connection with such
reincorporation, all options and warrants to purchase shares of Common
Stock of the Company's California predecessor will be converted into
options or warrants to purchase shares of Common Stock of the Company.
(14) In July 1998, the Company entered into a Technology Purchase and
Sale Agreement (the "Purchase Agreement") pursuant to which the Company
acquired certain Web-page development technology (the "Technology"). Under
the terms of the Purchase Agreement, in partial consideration for the
Technology, the Company agreed to issue the seller $455,000 of its Common
Stock at the initial public offering price (assuming the offering is
consummated within 90 days of the date of the Purchase Agreement, otherwise
the Company is obligated to pay this amount in cash) if the Technology is
successfully installed and becomes operational on the Company's servers, to
the Company's satisfaction, within 90 days of the date of the Purchase
Agreement. In addition, if the Technology is successfully installed and is
operational within an agreed upon period prior to the 90-day deadline, the
Company has agreed to issue to the seller an additional $145,000 of its
Common Stock at the initial public offering price.
None of the foregoing transactions involved any public offering, and the
Company believes that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701, or with respect to paragraph (13) above, in reliance on Rule
145(a)(2) under the Securities Act. The recipients in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof,
and appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Company.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation.*
3.2 Amended and Restated Certificate of Incorporation of the Company.*
3.3 Amended and Restated Certificate of Incorporation of the Company to be
adopted as of the consummation of the offering.*
3.4 Bylaws of the Company.*
3.5 Amended and Restated Bylaws of the Company.*
4.1 Specimen certificate representing shares of Common Stock of the
Company.*
4.2 Warrant to purchase Common Stock of the Company dated September 22,
1997.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.*
10.1 Employment Agreement dated January 1, 1996, as amended, by and between
the Company and David C. Bohnett.*
10.2 Employment Agreement dated as of November 3, 1997, between the Company
and Stephen L. Hansen.*
10.3 Employment Offer Letter dated as of April 9, 1998, between the Company
and Thomas R. Evans.*
10.4 Employment Offer letter dated as of September 5, 1997, between the
Company and Michael G. Barrett.*
10.5 Advertising Agreement dated November 5, 1997, between the Company and
Amazon.com.+**
10.6 Advertising Agreement dated January 5, 1998, between the Company and
CDnow.+**
10.7 Advertising Agreement dated December 15, 1997, between the Company and
Egghead, Inc.+**
10.8 Advertising Agreement dated February 13, 1998, between the Company and
First Credit Card Services USA L.L.C.+**
10.9 Codistribution Agreement effective as of December 31, 1997, between
the Company and Yahoo! Inc.+**
10.10 Master Services Agreement dated November 7, 1997, between the Company
and Exodus Communications, Inc.+**
10.11 Joint Venture Agreement dated as of November 6, 1997, by and between
the Company and SOFTBANK Corporation.+**
10.12 Third Amended and Restated Rights Agreement dated December 31, 1997,
among the Company and certain of its stockholders, as amended.
10.13 Form of Indemnification Agreement for Officers and Directors of the
Company.
10.14 1997 Stock Option Plan, together with Form of Stock Option Agreement.
10.15 1998 Stock Incentive Plan, together with Form of Stock Option
Agreement.
10.16 1998 Employee Stock Purchase Plan.
10.17 Stock Option Agreement dated January 13, 1997 by and between the
Company and CMG@Ventures.
10.18 Stock Option Agreement dated January 13, 1997 by and between the
Company and David C. Bohnett.
10.19 Revolving Credit Loan & Security Agreement dated August 6, 1997, as
modified.*
10.20 License Agreement with GeoCities Japan dated November 6, 1997.
10.21 Promissory Note dated July , 1998.*
10.22 Preferred Stock Purchase Agreement dated as of January 10, 1997, as
amended.
10.23 Preferred Stock Purchase Agreement dated as of October 6, 1997.
10.24 Stock Purchase Agreement dated as of December 31, 1997.
10.25 Standard Office lease dated May 13, 1996 by and between the Company
and Maury Herman, as trustee of the Maury Herman Family Trust #1.*
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.26 Adforce Service Agreement dated as of May 4, 1998, between the Company
and IMGIS, Inc.*
10.27 Software License Agreement between the Company and Informix Software,
Inc.*
16.1 Letter from Arthur Andersen LLP dated June 5, 1998.**
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.*
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit
5.1).*
24.1 Power of Attorney (contained on signature page on page II-6).**
27.1 Financial Data Schedule.*
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES
All such Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreements certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company 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 Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Santa
Monica, State of California, on the 20th day of July, 1998.
GeoCities
/s/ Stephen L. Hansen
By: _________________________________
STEPHEN L. HANSEN
CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
* Chairman of the
- ------------------------------------- Board and Secretary July 20, 1998
DAVID C. BOHNETT
* Chief Executive
- ------------------------------------- Officer, President July 20, 1998
THOMAS R. EVANS and Director
(principal
executive officer)
/s/ Stephen L. Hansen Chief Operating
- ------------------------------------- Officer and Chief July 20, 1998
STEPHEN L. HANSEN Financial Officer
(principal
financial and
accounting officer)
* Director
- ------------------------------------- July 20, 1998
JERRY D. COLONNA
* Director
- ------------------------------------- July 20, 1998
ERIC C. HIPPEAU
* Director
- ------------------------------------- July 20, 1998
HARRY D. LAMBERT
* Director
- ------------------------------------- July 20, 1998
PETER H. MILLS
* Director
- ------------------------------------- July 20, 1998
DAVID S. WETHERELL
/s/ Stephen L. Hansen
*By: __________________________ July 20, 1998
Stephen L. Hansen
(Attorney-in-fact)
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation.*
3.2 Amended and Restated Certificate of Incorporation of
the Company.*
3.3 Amended and Restated Certificate of Incorporation of
the Company to be adopted as of the consummation of the
offering.*
3.4 Bylaws of the Company.*
3.5 Amended and Restated Bylaws of the Company.*
4.1 Specimen certificate representing shares of Common
Stock of the Company.*
4.2 Warrant to purchase Common Stock of the Company dated
September 22, 1997.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.*
10.1 Employment Agreement dated January 1, 1996, as amended,
by and between the Company and David C. Bohnett.*
10.2 Employment Agreement dated as of November 3, 1997,
between the Company and Stephen L. Hansen.*
10.3 Employment Offer Letter dated as of April 9, 1998,
between the Company and Thomas R. Evans.*
10.4 Employment Offer letter dated as of September 5, 1997,
between the Company and Michael G. Barrett.*
10.5 Advertising Agreement dated November 5, 1997, between
the Company and Amazon.com.+**
10.6 Advertising Agreement dated January 5, 1998, between
the Company and CDnow.+**
10.7 Advertising Agreement dated December 15, 1997, between
the Company and Egghead, Inc.+**
10.8 Advertising Agreement dated February 13, 1998, between
the Company and First Credit Card Services USA
L.L.C.+**
10.9 Codistribution Agreement effective as of December 31,
1997, between the Company and Yahoo! Inc.+**
10.10 Master Services Agreement dated November 7, 1997,
between the Company and Exodus Communications, Inc.+**
10.11 Joint Venture Agreement dated as of November 6, 1997,
by and between the Company and SOFTBANK Corporation.+**
10.12 Third Amended and Restated Rights Agreement dated
December 31, 1997, among the Company and certain of its
stockholders, as amended.
10.13 Form of Indemnification Agreement for Officers and
Directors of the Company.
10.14 1997 Stock Option Plan, together with Form of Stock
Option Agreement.
10.15 1998 Stock Incentive Plan, together with Form of Stock
Option Agreement.
10.16 1998 Employee Stock Purchase Plan.
10.17 Stock Option Agreement dated January 13, 1997 by and
between the Company and CMG@Ventures.
10.18 Stock Option Agreement dated January 13, 1997 by and
between the Company and David C. Bohnett.
10.19 Revolving Credit Loan & Security Agreement dated August
6, 1997, as modified.*
10.20 License Agreement with GeoCities Japan dated November
6, 1997.
10.21 Promissory Note dated July , 1998.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
10.22 Preferred Stock Purchase Agreement dated as of January
10, 1997, as amended.
10.23 Preferred Stock Purchase Agreement dated as of October
6, 1997.
10.24 Stock Purchase Agreement dated as of December 31, 1997.
10.25 Standard Office lease dated May 13, 1996 by and between
the Company and Maury Herman, as trustee of the Maury
Herman Family Trust #1.*
10.26 Adforce Service Agreement dated as of May 4, 1998,
between the Company and IMGIS, Inc.*
10.27 Software License Agreement between the Company and
Informix Software, Inc.*
16.1 Letter from Arthur Andersen LLP dated June 5, 1998.**
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.*
23.2 Consent of Brobeck, Phleger & Harrison LLP (contained
in Exhibit 5.1).*
24.1 Power of Attorney (contained on signature page on page
II-6).**
27.1 Financial Data Schedule.*
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.1
GeoCities
Common Stock, $0.001 Par Value Per Share
Underwriting Agreement
(U.S. Version)
-----------------------
, 1998
----------------------
Goldman Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation,
Hambrecht & Quist LLC,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
GeoCities, a Delaware corporation (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the Underwriters named
in Schedule I hereto (the "Underwriters") an aggregate of _____ shares (the
"Firm Shares") and, at the election of the Underwriters, up to ______ additional
shares (the "Optional Shares") of Common Stock, $0.001 par value per share
("Stock") of the Company (the Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof being collectively
called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-56659) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto, to
you for each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement has heretofore
been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has
been issued and no proceeding for that purpose has been initiated or, to
the Company's knowledge, threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary
<PAGE>
Prospectus"; the various parts of the Initial Registration Statement and
the Rule 462(b) Registration Statement, if any, including all exhibits
thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act
in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the time
it was declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as amended
at the time such part of the Initial Registration Statement became
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus".
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein.
(d) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any material loss
or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term
debt of the Company or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus;
(e) The Company has good and marketable title to all personal property
owned by it, in each case free and clear of all liens, encumbrances and
defects except such as
-2-
<PAGE>
are described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and proposed
to be made of such property by the Company; the Company does not own any
real property; and any real property and buildings held under lease by the
Company are held by it under valid, subsisting and enforceable leases with
such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company;
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction; and
GeoCities Japan Corporation ("GeoCities Japan") has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Stock contained in the
Prospectus; and all of the issued shares of capital stock of GeoCities
Japan (except as set forth in the Prospectus) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company hereunder and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the property or
assets of the Company is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or By-laws
of the Company or any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or any
of its properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as may
be required under state or foreign securities or Blue Sky laws in
connection with the purchase and distribution of the
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Shares by the Underwriters;
(j) The Company is not in violation of its Certificate of
Incorporation or By-laws or in default in any material respect in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(l) Other than as set forth or contemplated in the Prospectus, there
are no legal or governmental proceedings pending to which the Company is a
party or of which any property of the Company is the subject which, if
determined adversely to the Company, would individually or in the aggregate
have a material adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(n) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(o) Coopers & Lybrand, L.L.P., who have certified certain financial
statements of the Company, are independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder;
(p) Other than as set forth in the Prospectus or as would not have a
material adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company, the Company
has sufficient interests in all patents, trademarks, service marks, trade
names, copyrights, trade secrets, information, proprietary rights and
processes ("Intellectual Property") necessary for the conduct of its
business as described in the Prospectus, and, to the Company's knowledge,
necessary in connection with the products and services under development,
in each case, to the knowledge of the Company after due inquiry, without
any conflict with or infringement of the interests of others, and have
taken all reasonable steps necessary to secure interests in such
Intellectual Property from their contractors; except as set forth in the
Prospectus, the Company is not aware of outstanding options, licenses or
agreements of any kind relating to the Intellectual Property of the Company
which are required to be set forth in the Prospectus, and, except as set
forth in the Prospectus, the Company is not a party to or bound by any
options, licenses or agreements with respect to the Intellectual Property
of any other person or entity which are required to be set forth in the
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Prospectus; none of the technology employed by the Company has been
obtained or is being used by the Company in violation in any material
respect of any contractual or fiduciary obligation binding on the Company
or any of its directors or executive officers or, to the Company's
knowledge, any of its employees or otherwise in violation of the rights of
any persons; except as disclosed in the Prospectus, the Company has not
received any written or, to the Company's knowledge, oral communications
alleging that the Company has violated, infringed or conflicted with, or,
by conducting its business as set forth in the Prospectus, would violate,
infringe or conflict with any of the Intellectual Property of any other
person or entity other than any such violation, infringement or conflict
which would not have a material adverse effect on the current or future
financial position, stockholders' equity or results of operations of the
Company; neither the execution nor delivery of this Agreement, nor the
operation of the Company's business by the employees of the Company, nor
the conduct of the Company's business as described in the Prospectus will
result in any breach or violation of the terms, conditions or provisions
of, or constitute a default under, any material contract, covenant or
instrument known to the Company under which any of such employees is now
obligated; and the Company has taken and will maintain reasonable measures
to prevent the unauthorized dissemination or publication of its
confidential information and, to the extent contractually required to do
so, the confidential information of third parties in its possession;
(q) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force
and effect;
(r) There are no contracts, other documents or other agreements
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement by the Act or by the rules and
regulations thereunder which have not been described or filed as required;
the contracts so described in the Prospectus are in full force and effect
on the date hereof; and neither the Company nor, to the best of the
Company's knowledge, any other party is in breach of or default in any
material respect under any of such contracts; and
(s) The Company has not been advised, and has no reason to believe,
that it is not conducting business in compliance with all applicable laws,
rules and regulations of the jurisdictions in which it is conducting
business, including, without limitation, all applicable local, state and
federal environmental laws and regulations, except where failure to be so
in compliance would not have a material adverse effect on the current or
future financial position, stockholders' equity or results of operations of
the Company.
(t) The Company does not have any subsidiaries and, except as set
forth in the Prospectus, does not own or control, directly or indirectly,
any interest in any other corporation, association or other business
entity.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $__________, the
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number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto and (b) in the event and to the extent that the Underwriters
shall exercise the election to purchase Optional Shares as provided below, the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ________ Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in
such names as Goldman, Sachs & Co. may request upon at least forty-eight
hours' prior notice to the Company, shall be delivered by or on behalf of
the Company to Goldman, Sachs & Co., through the facilities of the
Depository Trust Company ("DTC"), for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of Federal (same-day) funds to the account
specified by the Company to Goldman, Sachs & Co. at least forty-eight hours
in advance. The Company will cause the certificates representing the
Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto
at the office of DTC or its designated custodian (the "Designated Office").
The time and date of such delivery and payment shall be 9:30 a.m., New York
City time, on _______, 1998 or such other time and date as Goldman, Sachs &
Co. and the Company may agree upon in writing, and, with respect to the
Optional Shares, 9:30 a.m. New York City time, on the date specified by
Goldman, Sachs & Co in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other
time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery", such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is
herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of
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the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(m) hereof, will be delivered at the
offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California
94025 (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at each Time of Delivery. A meeting will be held at
the Closing Location at 6 p.m., New York City time, on the New York
Business Day next preceding each Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding
sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M. New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any event shall have occurred as
a result of which
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<PAGE>
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Prospectus in order to comply with the
Act, to notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies
as you may from time to time reasonably request of an amended Prospectus or
a supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is required
to deliver a prospectus in connection with sales of any of the Shares at
any time nine months or more after the time of issue of the Prospectus,
upon your request but at the expense of such Underwriter, to prepare and
deliver to such Underwriter as many copies as you may request of an amended
or supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its consolidated
subsidiaries (which need not be audited) complying with Section 11(a) of
the Act and the rules and regulations thereunder (including, at the option
of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder and under the International Underwriting Agreement, any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock
option or stock purchase plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the
date of this Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial
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<PAGE>
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement and the International Underwriting Agreement in
the manner specified in the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
(a) the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Selling Agreement, the
Blue Sky Memorandum, closing documents (including compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters (not to exceed $5,000) in connection with such qualification and in
connection with the Blue Sky surveys; (iv) all fees and expenses in connection
with listing the Shares on NASDAQ; and (v) the filing fees incident to, and the
fees and disbursements of counsel for the Underwriters in connection with,
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock
certificates; (vii) the cost and charges of any transfer agent or registrar; and
viii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section. It is understood, however, that, except as provided in this Section,
and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected with
any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of
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such Time of Delivery, true and correct, the condition that the Company shall
have performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Venture Law Group, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions dated such Time of
Delivery, with respect to the matters covered in paragraphs (i), (ii),
(vi), (x) and (xii) of subsection (c) below as well as such other related
matters as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them
to pass upon such matters;
(c) Brobeck, Phleger & Harrison LLP, counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion is
attached as Annex II hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with requisite corporate power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in, and as of the respective dates set forth in, the Prospectus, and
all of the issued shares of capital stock of the Company (including
the Shares being delivered at such Time of Delivery) have been duly
and validly authorized and issued and are fully paid and
nonassessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions and certificates);
(iv) Any real property and buildings held under lease by the
Company are
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held by it under valid, subsisting and enforceable leases;
(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
to which the Company is a party or of which any property of the
Company is the subject which, if determined adversely to the Company,
would individually or in the aggregate have a material adverse effect
on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company; and, to
such counsel's knowledge, except as set forth in the Prospectus, no
such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company
is a party or by which the Company is bound or to which any of the
property or assets of the Company is subject which is filed as an
exhibit to the Registration Statement or is identified by you or in a
certificate of an officer of the Company as being material to the
Company, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties;
(viii) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and
under the Exchange Act of the Stock, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under any foreign laws or any state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters and the International Underwriters;
(ix) To the knowledge of such counsel, the Company is not in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound (such counsel being entitled to rely in respect of the opinion
in this clause upon an opinion of Edward J. Pierce, Vice President,
Legal Affairs and General Counsel of the Company, provided that such
counsel shall state that both you and they are justified in relying
upon such opinion);
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(x) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, constitute an accurate,
fair and reasonable summary;
(xi) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder,
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (x) of this Section 7(c); they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related statements and related schedules therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contains an untrue statement of a material
fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to
the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required.
In rendering such opinion, such counsel may state that they express no
opinion as to any laws other than the laws the States of California and New
York, the Delaware General Corporation law and the federal laws of the
United States;
(d) Each of Seyfarth, Shaw, Fairweather & Geraldson, special counsel
to the Company, and Piper & Marbury, LLP, special counsel to the Company,
shall have
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furnished to you their written opinion (drafts of such opinions
are attached hereto as Annex II(b) and Annex II(c), respectively), dated
such Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) The statements set forth under the caption "Risk Factors--
Government Regulation and Legal Uncertainties" in the Registration
Statement and Prospectus, or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery, insofar as
such statements purport to constitute a summary of legal matters,
documents or proceedings referred to therein, constitute an accurate,
fair and reasonable summary; and
(ii) Such counsel has represented the Company in connection with
specific proceedings before the Federal Trade Commission ("FTC") and
has reviewed the statements set forth under the caption "Risk Factors-
-Government Regulation and Legal Uncertainties" in the Registration
Statement and Prospectus and all amendments or supplements thereto
made by the Company prior to such Time of Delivery. Such counsel has
not independently verified the accuracy, completeness or fairness of
the statements made or the information contained in the Registration
Statement or the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery, and,
except with respect to the statements referred to in the previous
paragraph, such counsel is unable to offer and does not assume any
responsibility therefor. On the basis of the information gained by
such counsel in the course of representation of the Company in
connection with the FTC proceedings described, nothing has come to the
attention of such counsel that leads such counsel to believe that, as
of the effective date of the Registration Statement and as of such
Time of Delivery, the statements set forth under the caption "Risk
Factors--Government Regulation and Legal Uncertainties" in the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction outside the United States;
(e) Nagauhima & Ohno, counsel to GeoCities Japan, shall have furnished
to you their written opinion (a draft of such opinion is attached hereto as
Annex II(d)), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that GeoCities Japan has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the issued
shares of capital stock of GeoCities Japan have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except as
otherwise set forth in the Prospectus) are owned by the Company, and, to
the knowledge of such counsel, such shares are owned free and clear of all
liens, encumbrances, equities or claims;
(f) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective
-13-
<PAGE>
amendment to the Registration Statement filed subsequent to the date of
this Agreement and also at each Time of Delivery, Coopers & Lybrand, L.L.P.
shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex
I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(g) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been
any change in the capital stock or long-term debt of the Company or any
change, or any development involving a prospective change, in or affecting
the general affairs, management, financial position, stockholders' equity
or results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
described in Clause (i) or (ii), is in the judgment of the Representatives
so material and adverse to the Company as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities or preferred stock by
any "nationally recognized statistical rating organization", as that term
is defined by the Commission for purposes of Rule 436(g)(2) under the Act,
and (ii) no such organization shall have publicly announced that it has
under surveillance or review, with possible negative implications, its
rating of any of the Company's debt securities or preferred stock;
(i) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York or California State authorities; or
(iv) the outbreak or escalation of hostilities involving the United States
or the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this Clause (iv) in the judgment
of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(j) The Shares to be sold by the Company at such Time of Delivery
shall have been duly listed for quotation on NASDAQ;
(k) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each securityholder of the Company to
the effect set forth in Subsection 5(e) hereof in form and substance
satisfactory to you; provided, however,
-14-
<PAGE>
that such agreement with John Rezner may allow Mr. Rezner to sell shares of
Stock on Nasdaq resulting in gross proceeds to Mr. Rezner of not more than
$1,000,000 during the period commencing on the date 91 days after the date
of the Prospectus and terminating on the date 180 days after the date of
the Prospectus;
(l) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement;
(m) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, as to the matters set forth
in the introductory paragraph to this Section and subsection (g) of this
Section and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending
any such action or claim as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by
such Underwriter through Goldman, Sachs & Co. expressly for use therein;
and will reimburse the Company for any legal or other expenses
-15-
<PAGE>
reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying
party shall not be liable to such indemnified party under such subsection
for any legal expenses of other counsel or any other expenses, in each case
subsequently incurred by such indemnified party, in connection with the
defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified
party, effect the settlement or compromise of, or consent to the entry of
any judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to
such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act,
by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence
is not permitted by applicable law or if the indemnified party failed to
give the notice required under subsection (c) above, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares
purchased under this Agreement (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the Shares
-16-
<PAGE>
purchased under this Agreement, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this subsection (d)
were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above in this subsection (d)
shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this subsection
(d), no Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several
in proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 8 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of
the Company (including any person who, with his or her consent, is named in
the Registration Statement as about to become a director of the Company)
and to each person, if any, who controls the Company within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery,
you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange
for the purchase of such Shares, then the Company shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms.
In the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the
Company notifies you that it has so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone such Time of
Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and
the Company agrees to file promptly any amendments to the Registration
Statement or the Prospectus which in your
-17-
<PAGE>
opinion may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any person substituted under this Section with
like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of
Delivery, then the Company shall have the right to require each non-
defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro
rata share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery or if the
Company shall not exercise the right described in subsection (b) above to
require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the
Second Time of Delivery, the obligations of the Underwriters to purchase
and of the Company to sell the Optional Shares) shall thereupon terminate,
without liability on the part of any non-defaulting Underwriter or the
Company, except for the expenses to be borne by the Company and the
Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall
relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
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<PAGE>
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Chief Operating Officer; provided, however,
that any notice to an Underwriter pursuant to Section 8(c) hereof shall be
delivered or sent by mail, telex or facsimile transmission to such Underwriter
at its address set forth in its Underwriters' Questionnaire, or telex
constituting such Questionnaire, which address will be supplied to the Company
by you upon request. Any such statements, requests, notices or agreements shall
take effect at the time of receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
-19-
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us seven counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters (U.S. Version), the form of which shall be
submitted to the Company for examination upon request, but without warranty on
your part as to the authority of the signers thereof. Very truly yours,
GEOCITIES
By:
--------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
Accepted as of the date hereof
at New York, New York:
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
By: Goldman, Sachs & Co.
By:
-----------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-20-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- ---------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co. .....................................
Donaldson, Lufkin & Jenrette Securities Corporation.......
Hambrecht & Quist LLC.....................................
--------------- ------------------
Total.............................................
=============== ==================
</TABLE>
<PAGE>
ANNEX I
FORM OF COMFORT LETTER OF COOPERS & LYBRAND, L.L.P.
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published
rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited interim financial statements, selected
financial data, pro forma financial information, financial forecasts and/or
condensed financial statements derived from audited financial statements of
the Company for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been furnished to the representatives
of the Underwriters (the "Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed statements of income, balance sheets and statements
of cash flows included in the Prospectus as indicated in their reports
thereon copies of which are attached hereto; and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited condensed financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that caused them to
believe that the unaudited condensed financial statements do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to
the results of operations and financial position of the Company for each of
the fiscal years included in the Prospectus agrees with the corresponding
amounts (after restatements where applicable) in the audited financial
statements for such fiscal years, copies of which have been furnished to
the Representatives and are attached hereto;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
<PAGE>
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company, inspection of the minute books of the
Company since the date of the latest audited financial statements included
in the Prospectus, inquiries of officials of the Company responsible for
financial and accounting matters and such other inquiries and procedures as
may be specified in such letter, nothing came to their attention that
caused them to believe that:
(A) (i) the unaudited statements of income, balance sheets and
statements of cash flows included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, or (ii) any material modifications should be made to the
unaudited condensed statements of income, balance sheets and
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited financial statements from which such data and
items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited financial statements included in
the Prospectus;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
financial statements included in the Prospectus;
(D) any unaudited pro forma condensed financial statements
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts
in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the capital stock
(other than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance shares and
upon conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements included in
the Prospectus) or any increase in the long-term debt of the Company,
or any decreases in net current assets or stockholders' equity or
other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter; and
<PAGE>
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in net revenues or operating
profit or the total or per share amounts of net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each
case for decreases or increases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company, which appear in the Prospectus,
or in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain of
such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
<PAGE>
EXHIBIT 4.2
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES
ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY
NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
OR REGULATION A NOTIFICATION UNDER SUCH ACT COVERING SUCH SECURITIES OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY)
REASONABLY ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
WARRANT TO PURCHASE COMMON STOCK
of
GEOCITIES
Void after September 22, 2004
This certifies that, for value received, Comerica Bank - California or assign is
entitled, subject to the terms set forth below, to purchase from GeoCities, a
California corporation (the "Company"), shares of the Company's common stock,
$0.005 par value per share (the "Common Stock"), as constituted on the date
hereof (the "Warrant Issue Date"), upon surrender hereof, at the principal
office of the Company referred to below, with the Notice of Exercise attached
hereto duly executed, and simultaneous payment therefor in lawful money of the
United States, or otherwise as hereinafter provided, at the exercise price (the
"Exercise Price") as set forth in Section 2 below. The number of, and exercise
price for, such shares of Common Stock are subject to adjustment as provided
herein.
1. Term of Warrant. Subject to the terms and conditions set forth herein,
---------------
this Warrant shall be exercisable, in whole or in part, during the term
commencing on the Warrant Issue Date and terminating on or before September 22,
2004.
2. Exercise Price. The Exercise Price shall be $9.85 per share, subject to
--------------
adjustment as set forth in Section 3 below.
3. Antidilution Protection. The number and kind of securities purchasable
-----------------------
upon the exercise of this Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) If at any time or from time to time after the Warrant Issue Date the
outstanding shares of the Company's Common Stock shall be subdivided into a
greater number of shares thereof or a dividend in Common Stock shall be paid in
respect of Common Stock, the
1
<PAGE>
Exercise Price in effect immediately prior to such subdivision or at the record
date of such dividend shall, simultaneously with the effectiveness of such
subdivision or immediately after the record date of such dividend, be
proportionately reduced and, conversely, if the outstanding shares of the
Company's Common Stock shall be combined into a smaller number of shares
thereof, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. Such adjustment shall be made successively whenever
any subdivision, combination or dividend in the Company's Common Stock shall
occur.
(b) Subject to the Company's election described below, if at any time or
from time to time after the Warrant Issue Date there shall occur an Acquisition
(as defined below) then, upon the closing of any such Acquisition, the holder
hereof shall have the right thereafter to receive upon the exercise hereof the
kind and amount of shares of stock or other securities or property, or any
combination thereof, which the holder would have been entitled to receive if,
immediately prior to the record date for any such Acquisition the holder had
held the number of shares of Common Stock which were then purchasable upon the
exercise of this Warrant. In any such case, appropriate adjustment (as
determined by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the holder such that the provisions set forth herein
(including provisions with respect the adjustment of the Exercise Price) shall
hereafter be applicable, as nearly as is reasonably practicable, in relation to
any shares of stock or other securities or property, or any combination thereof,
thereafter deliverable upon the exercise of this Warrant. Notwithstanding the
foregoing, the Company may, in its sole and absolute discretion, elect to
purchase the unexercised portion of the Warrant for cash upon the closing of any
Acquisition for an amount equal to (a) the fair market value of any
consideration that would have been received by the holder hereof in
consideration of shares of Common Stock had such holder exercised the
unexercised portion of this Warrant immediately before the record date for
determining the shareholders entitled to participate in the proceeds of the
Acquisition, less (b) the aggregate Warrant Price, but in no event less than
zero. The Company shall provide the holder of this Warrant with notice of such
election at least thirty (30) days prior to the closing of any such Acquisition.
For the purpose of this Warrant, "Acquisition" means a consolidation or merger
of the Company with or into any other corporation or corporations (other than a
wholly-owned subsidiary), or the sale, transfer or other disposition of all or
substantially all of the assets of the Company or the consummation of any
transaction or series of related transactions which results in the Company's
shareholders immediately prior to such transaction not holding at least 50% of
the voting power of the surviving or continuing entity.
(c) If the Company at any time or from time to time after December 31,
1997 shall issue any shares of Common Stock (otherwise than as provided in
subparagraph (a) above) at a price per share less than the Exercise Price in
effect at the time of such issue, or without consideration, then, and thereafter
successively upon each such issue, the Exercise Price shall be, until further
adjusted as herein provided, an amount equal to the quotient, the numerator of
which is the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue multiplied by the Exercise Price in effect
immediately prior to such issue plus (B) the aggregate consideration, if any,
received by the Company in connection with such issue, and
2
<PAGE>
the denominator of which is the number of shares of Common Stock outstanding
immediately after such issue, computed to the nearest even cent.
(d) If the Company at any time or from time to time after the Warrant Issue
Date shall issue (i) any security that is convertible into shares of the
Company's Common Stock or (ii) any rights or options to purchase Common Stock of
the Company, the Company shall be deemed to have issued the maximum number of
shares of Common Stock into which such convertible security may be converted,
and the maximum number of shares of Common Stock deliverable upon the exercise
of such rights or options, for (iii) the consideration received by the Company
for such convertible security or for such rights or options plus (iv) the
minimum consideration to be received by the Company for the Common Stock
issuable upon the conversion of such convertible securities or the exercise of
such rights or options. No further adjustment of the Exercise Price shall be
made as a result of the actual issuance of the shares of the Company's Common
Stock upon conversion of any convertible security or exercise of any rights or
options referred to in this subparagraph (d). On the termination of the right to
convert such convertible security, or on the expiration of such rights or
options, the Exercise Price hereunder shall be readjusted to such as would have
obtained had the adjustment made upon the issuance of such convertible security
or upon the issuance of such rights or options been made upon the basis of the
number of shares of Common Stock actually issued upon the conversion of such
convertible security or the exercise of such rights or options, and of the
consideration actually received by the Company upon such conversion or exercise.
(e) For the purpose of each computation to be made as provided in the
foregoing paragraphs (a) through (d), the following provisions shall be
applicable:
(i) In case of consideration consisting in whole or in part of cash,
the cash consideration shall be deemed to be the amount of cash constituting or
included in such consideration.
(ii) In case of consideration consisting in whole or in part other
than cash, the amount of the consideration other than cash shall be deemed to be
the value of such consideration as determined in good faith by the Board of
Directors of the Company.
(iii) Any securities (other than Common Stock) issued as a dividend on
the Common Stock shall be deemed to have been issued for no consideration.
(iv) The consideration received or deemed to be received by the
Company for any share of Common Stock or other securities issued by it shall be
the amount of the consideration paid therefor by the first purchasers thereof
not acting as underwriters or dealers in connection with such issue, without
deduction for any expenses, commissions or underwriting discounts.
(v) Upon each adjustment of the Exercise Price or the number of shares
purchasable upon exercise of this Warrant, a written instrument signed by the
chief financial officer of the Company setting forth such adjustment and the
computation and a
3
<PAGE>
summary of the facts upon which it is based shall forthwith be prepared and
provided to the holder hereof.
(vi) The number of shares of Common Stock outstanding at any given
time shall include the shares deemed to have been issued under paragraph (d)
above.
(vii) Notwithstanding anything contained in this Section 3 to the
contrary, the issuance of any of the following securities by the Company shall
not constitute an issuance of securities for purposes of this paragraph 3 and
the provisions of this Section 3 shall not be applicable to any such issuance:
(i) options to purchase Common Stock previously granted or currently reserved
for granting to officers, directors, employees or consultants of the Company and
its subsidiaries either pursuant to any stock plan approved by the Company's
Board of directors or as otherwise approved by the Company's Board of Directors
("Stock Options"), (ii) any shares of Common Stock issuable upon exercise of
Stock Options, (iii) up to 500,000 shares of Common Stock issuable under stock
options granted to CMG@Ventures and approved by the Company's Board of
Directors, (iv) up to 500,000 shares of Common Stock issuable under stock
options granted to David Bohnett and certain other persons and approved by the
Company's Board of Directors, and (v) warrants to purchase up to 33,898 shares
of Series D Preferred Stock granted to Cupertino Bank and the shares issuable
upon exercise thereof.
(f) In the event of (i) any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or (ii)
any capital reorganization of the Company, or any reclassification or
recapitalization of the Common Stock of the Company, or (iii) any consolidation
or merger of the Company with or into another corporation, or (iv) any sale of
all or substantially all of the property and assets of the Company to any other
person, or (v) any voluntary or involuntary dissolution, liquidation or winding
up of the Company, the Company shall mail to the holder of this Warrant a notice
specifying (1) the date on which any record is to be taken for the purpose of
determining the persons entitled to participate in such dividend or distribution
and a description of such dividend or distribution, (2) the date on which any
such reorganization, reclassification, recapitalization, consolidation, merger,
sale, dissolution, liquidation or winding up is expected to become effective,
and (3) the time, if any, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger, sale,
dissolution, liquidation or winding up. Such notice shall be mailed at least
fifteen (15) days prior to the date therein specified.
(g) The Company shall not, by any voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holder against impairment.
4. Shares Purchasable. The holder of this Warrant shall have the right, at any
------------------
time or from time to time, to purchase up to 10,152 shares of fully paid and
nonassessable shares of the
4
<PAGE>
Common Stock of the Company, subject, in any event, to the applicable provisions
of Section 3 above.
5. Exercise of Warrant.
-------------------
(a) This Warrant is exercisable by the holder, in whole or in part, at any
time, or from time to time, during the term hereof as described in Section 1
above, by the surrender of this Warrant and the Notice of Exercise annexed
hereto duly completed and executed on behalf of the holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the holder at the address of the holder appearing on the
books of the Company), upon payment (i) in cash or by check acceptable to the
Company, (ii) by cancellation by the holder of indebtedness of the Company to
the holder, or (iii) by a combination of (i) and (ii), for the purchase price of
the shares to be purchased.
(b) This Warrant shall be deemed to have been exercised immediately prior
to the close of business on the date of its surrender for exercise as provided
above, and the person entitled to receive the shares of Common Stock issuable
upon such exercise shall be treated for all purposes as the holder of record of
such shares as of the close of business on such date. As promptly as practicable
on or after such date and in any event within ten (10) days thereafter, the
Company at its expense shall issue and deliver to the person or persons entitled
to receive the same a certificate or certificates for the number of shares
issuable upon such exercise. In the event that this Warrant is exercised in
part, the Company at its expense will execute and deliver a new Warrant of like
tenor exercisable for the number of shares for which this Warrant may then be
exercised.
6. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
7. Replacement of Warrant. On receipt of evidence reasonably satisfactory
----------------------
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor and amount.
8. Rights Of Stockholders.
----------------------
(a) The holder of this Warrant shall not be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company that may at any time be issuable on the exercise hereof for any purpose,
nor shall anything contained herein be construed to confer upon the holder, as
such, any of the fights of a stockholder of the Company or any fight to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issuance of stock, reclassification of stock,
consolidation,
5
<PAGE>
merger or otherwise) or to receive notices of meetings, or to receive dividends
or subscription rights or otherwise until the Warrant shall have been exercised
and the shares of Common Stock purchasable upon the exercise hereof shall have
been issued, as provided herein.
9. Compliance with Securities Laws.
-------------------------------
(a) The holder of this Warrant, by acceptance hereof, acknowledges that
the shares of Common Stock to be issued upon exercise hereof are being acquired
solely for the holder's own account and not as a nominee for any other party,
and for investment, and that the holder will not offer, sell or otherwise
dispose of any shares of Common Stock to be issued upon exercise hereof, except
under circumstances that will not result in a violation of the United States
Securities Act of 1933, as amended (the "Act"), or any foreign or state
securities laws. Upon exercise of this Warrant, the holder shall, if requested
by the Company, confirm in writing, in a form reasonably satisfactory to the
Company, that the shares of Common Stock so purchased are being acquired solely
for the holder's own account and not as a nominee for any other party, for
investment, and not with a view toward distribution or resale.
(b) All shares of Common Stock issued upon exercise hereof may be stamped
or imprinted with one or more of the following legends (in addition to any
legend required by the Act or the securities laws of any state of the United
States) as determined by counsel for the Company:
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
(c) The holder of this Warrant by acceptance hereof agrees that the
transfer of the shares of Common Stock issuable upon the exercise of all or any
portion of this Warrant (the "Securities") is subject to the provisions of this
Warrant, which may include restrictions on transfer of the Securities.
10. Reservation of Stock. The Company covenants that during the term this
--------------------
Warrant is exercisable, the Company shall reserve from its authorized and
unissued shares of Common Stock a sufficient number of shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, from time to
time, will take all steps necessary to amend its Certificate of Incorporation
(the "Certificate") to provide a sufficient reserve of shares of Common Stock
issuable upon exercise of this Warrant. The Company further covenants that all
shares that may be issued upon the exercise of this Warrant, upon such exercise
and payment of the Exercise Price therefor, all as set forth herein, shall be
free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing
6
<PAGE>
stock certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
11. Governing Law. This Warrant shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, as such laws are applied
to contracts entered into and performed in such State, without resort to that
State's conflict-of-laws rules.
12. Attorney's Fees. If any action at law or in equity is necessary to
---------------
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements, in addition to
any other relief to which such party may be entitled.
IN WITNESS WHEREOF, GEOCITIES has caused this Warrant to be executed by its
officers thereunto duly authorized.
Dated as of September 22, 1997
GEOCITIES
By /s/ Stephen Hansen
--------------------------
Name: Stephen Hansen
Title: CFO & COO
7
<PAGE>
NOTICE OF EXERCISE
------------------
To: GeoCities
1918 Main Street, 3rd Floor
Santa Monica, California 90405
Attn: Chief Financial Officer
(1) The undersigned hereby elects to purchase ________ shares of Common Stock
of GeoCities, pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price for such shares.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and that the undersigned will not offer, sell or otherwise dispose
of any such shares of Common Stock, except under circumstances that will not
result in a violation of the United States Securities Act of 1933, as amended,
or any foreign or state securities laws.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
(4) Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name of the undersigned or in such other name as is specified
below:
_____________________________ __________________________
[DATE] [NAME]
8
<PAGE>
EXHIBIT 10.12
GEOCITIES
THIRD AMENDED AND RESTATED
RIGHTS AGREEMENT
This Third Amended and Restated Rights Agreement (the "Agreement") is
entered into as of the 31st day of December, 1997, by and among GeoCities, a
California corporation (the "Company"), the several persons and entities named
in Schedule I and Schedule II hereto (collectively, the "Investors") and David
---------- -----------
Bohnett (sometimes "Bohnett") and John Rezner (collectively, the "Founders" and
singularly, a "Founder"; the Founders and the Investors are hereinafter at times
referred to individually as a "Shareholder" and collectively as the
"Shareholders").
RECITALS
--------
A. The Founders and the Investors listed on Schedule I hereto
----------
(collectively, the "Existing Shareholders") and the Company are parties to a
Second Amended and Restated Rights Agreement dated as of October 6, 1997 (the
"Existing Rights Agreement").
B. The Company proposes to sell to certain Investors listed on Schedule II
-----------
hereto (the "Series E/F Investors") up to 407,135 shares of Series E Preferred
Stock, $0.005 par value ("Series B Preferred Stock") and up to 1,276,288 shares
of Series F Preferred Stock, $0.005 par value ("Series F Preferred Stock"),
pursuant to a Stock Purchase Agreement dated as of December 31, 1997 (the "Stock
Purchase Agreement").
C. The Company and the Existing Shareholders desire to amend and restate the
Existing Rights Agreement to include the Series E Preferred Stock and the Series
F Preferred Stock that is to be acquired by the Existing Shareholders within the
scope of this Agreement, to provide for the addition of Series F Investors who
are not Existing Shareholders, and to provide for certain other rights as set
forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree that the Existing
Rights Agreement is amended and restated in its entirety to read as follows:
1. Registration Rights.
--------------------
1.1 Certain Definitions. As used in this Agreement, the following
-------------------------------------------------------------
terms shall have the following respective meanings:
---------------------------------------------------
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<PAGE>
(a) "Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
(b) "Conversion Stock" means the Common Stock, par value $0.005 per share,
----------------
of the Company, issued or issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock or Series F Preferred Stock.
(c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(d) "Holder" shall mean any Shareholder holding Registrable Securities
(including Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock) and any person holding Registrable Securities to whom the
rights under this Section 1 have been transferred in accordance with Section 6.3
hereof.
(e) "Initiating Holders" shall mean any Holder or Holders of at least
------------------
thirty percent (30%) of the Registrable Securities (adjusted after the original
issuance thereof for stock splits, stock dividends, recapitalizations and the
like).
(f) "Offered Stock" means all Stock proposed to be Transferred by a
-------------
(g) "Qualified Public Offering" means a firm commitment public offering of
-------------------------
securities with gross proceeds to the Company of $20,000,000 or more.
(h) "Registrable Securities" means (i) the Conversion Stock; or (ii) stock
----------------------
issued in respect of the stock referred to in (i) as a result of a stock split,
stock dividend, recapitalization or the like, which has not been sold to the
public. Except for subsections 1.2, 1.4, 1.5, 1.10, 2.1, 3.1, 3.2 and 6.4,
Registrable Securities shall also mean shares of Common Stock of the Company
issued or issuable to the Founders and to those officers and directors of the
Company to whom the Board of Directors of the Company by unanimous vote extends
the registration rights contained in subsection 1.3.
(i) The terms "register," "registered" and "registration" refer to a
---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(j) "Registration Expenses" shall mean all expenses, except as otherwise
---------------------
stated below, incurred by the Company in complying with Sections 1.2, 1.3 and
1.4 hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses,
-2-
<PAGE>
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, the expense of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company) and the reasonable fees
and disbursements of one counsel for all Holders in the event of each
registration provided for in Sections 1.2, 1.3 and 1.4 hereof
(k) "Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
(l) "Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth above, all reasonable fees and
disbursements of counsel for the selling Holders.
(m) "Stock" means and includes all shares of Common Stock issued and
-----
outstanding at the relevant time plus (i) all shares of Common Stock that may be
issued upon exercise of any options, warrants and other rights of any kind that
are then exercisable, and (ii) all shares of Common Stock that may be issued
upon conversion of (A) any convertible securities, including, without
limitation, preferred stock and debt securities then outstanding, which are by
their terms then convertible into or exchangeable for Common Stock or (B) any
such convertible securities issuable upon exercise of options, warrants or other
rights that are then exercisable.
(n) "Transfer" means and includes any sale, assignment, encumbrance,
--------
hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or
descent, or other transfer or disposition of any kind, including but not limited
to transfers to receivers, levying creditors, trustees or receivers in
bankruptcy proceedings or general assignees for the benefit of creditors,
whether voluntary or by operation of law, directly or indirectly, except:
(i) any bona fide pledge if the pledgee executes a counterpart copy
of this Agreement and becomes bound thereby as a Founder;
(ii) any transfers of Stock by a Founder to such Founder's spouse,
lineal descendant or antecedent, father, mother, brother or sister of the
Founder, the adopted child or adopted grandchild of the Founder, or the spouse
of any child, adopted child, grandchild or adopted grandchild of the Founder, to
one individual named by such Founder provided that such transfer is made for no
or nominal consideration, or to a trust or trusts for the exclusive benefit of
such Founder or such Founder's family members as described in this Section, or
transfers of Stock by a Founder by devise or descent, in all cases if the
transferee or other recipient executes a counterpart copy of this Agreement and
becomes bound thereby as a Founder; or
(iii) any transfer of Stock by a Founder made: (A) pursuant to a
merger
-3-
<PAGE>
or consolidation of the Company with or into another corporation or
corporations; (B) pursuant to the winding up and dissolution of the Company; (C)
at, and pursuant to, a firm commitment underwritten public offering; or (D) to
an Investor pursuant to this Agreement.
1.2 Requested Registration
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any registration
with respect to at least twenty percent (20%) of their Registrable Securities,
or any lesser percentage if the reasonably anticipated aggregate receipts to the
Company, net of underwriting discounts and commissions, would exceed $2,000,000,
the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to take
--------- -------
any action to effect any such registration, qualification or compliance pursuant
to this Section 1.2.
(A) In any particular jurisdiction in which the Company would be required
to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(B) At any time prior to January 1, 1998;
(C) Within ninety (90) days following the determination of the Board of
Directors of the Company to file a registration statement pertaining to
securities of the Company (other than (i) a registration of securities in a Rule
145 transaction, (ii) a registration statement on Form S-4 or S-8 or any form
substituting therefor or (iii) with respect to an employee benefit plan),
provided that the Company is then actively employing in good faith all
reasonable efforts to cause such registration statement to become effective;
(D) After the Company has effected two such registrations pursuant to this
Section 1.2(a), any such registration being deemed to be effective when sixty-
six and two-thirds percent (66-2/3%) of all Registrable Securities for which
registration has been requested have been so registered;
-4-
<PAGE>
(E) If the Company shall furnish to such Holders a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors it would be seriously detrimental to the Company or its
Holders for a registration statement to be filed in the near future, then the
Company's obligation to use its best efforts to register, qualify or comply
under this Section 1.2 shall be deferred for a period not to exceed ninety (90)
days from the date of receipt of written request from the Initiating Holders,
provided that the Company may not use this right more than once in any twelve
month period; or
(F) Within two hundred and seventy (270) days of the effective date of
any prior registered offering of the Company's securities (other than (i) a
registration of securities in a Rule 145 transaction, (ii) a registration
statement on Form S-4 or S-8 or any form substituting therefor or (iii) with
respect to an employee benefit plan).
Subject to the foregoing clauses (A) through (F), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable, after receipt of the request or
requests of the Initiating Holders.
(b) Underwriting. In the event that a registration pursuant to this
------------
Section 1.2 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1 .2(a)(i). In such event, the right of any Holder to participate in
such registration shall be conditioned upon such Holder's participation in the
underwriting arrangements required by this Section 1.2, and the inclusion of
such Holder's Registrable Securities in the underwriting to the extent requested
shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders, but subject to the
Company's reasonable approval. Notwithstanding any other provision of this
Section 1.2, if the managing underwriter advises the Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Company shall so advise all participating Holders and
the number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Holders thereof in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders at the time of filing the registration
statement. No Registrable Securities excluded from the underwriting by reason of
the underwriter's marketing limitation shall be included in such registration.
To facilitate the allocation of shares in accordance with the above provisions,
the Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares.
If the underwriter has not limited the number of Registrable Securities
to be underwritten, the Company may include securities for its own account (or
for the account of other purchasers) in such registration if the managing
underwriter so agrees and if the number of Registrable Securities that would
otherwise have been included in such registration and underwriting will not
thereby be limited.
-5-
<PAGE>
1.3 Company Registration
--------------------
(a) Notice of Registration. If at any time or from time to time the
--------- ------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration of securities in a Rule 145 transaction, (ii) a registration
statement on Form S-4 or S-8 or any form substituting therefor or (iii) with
respect to an employee benefit plan, the Company will:
(i) promptly give to each Holder written notice thereof, and
(ii) include in such registration (and any related qualification under
blue sky laws or other compliance), and in any underwriting involved therein,
all the Registrable Securities specified in a written request or requests, made
within twenty (20) days after receipt of such written notice from the Company,
by any Holder.
(b) Underwriting. If the registration of which the Company gives notice is
------------
for a registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section 1
.3(a)(i). In such event the right of any Holder to registration pursuant to
Section 1.3 shall be conditioned upon such Holder's participation in such
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company, but subject to the reasonable
approval of Holders holding a majority in interest of the Registrable Securities
to be included in such registration. Notwithstanding any other provision of this
Section 1.3, if the managing underwriter determines that marketing factors
require limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities to be included in such
registration. The Company shall so advise all Holders and other holders
distributing their securities through such underwriting and the number of shares
of securities that may be included in the registration and underwriting (other
than on behalf of the Company) shall be allocated among all Holders and such
other holders (provided that such other holders have contractual rights to
participate in such registration which are not subordinate to the Holders) in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities or other securities requested to be included in such registration by
such Holders and such other holders; provided, however, in no event shall the
--------- -------
amount of Registrable Securities of the Holders included in the offering be
reduced below thirty percent (30%) of the total amount of securities included in
such offering, unless such offering is the initial public offering of the
Company's securities in which case the Holders may be excluded entirely if the
managing underwriter makes the determination described above or the Holders
holding a majority of the Registrable Securities consent in writing to such a
reduction. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
or holder to the nearest 100 shares. If any Holder or holder disapproves of the
terms of any such underwriting, he may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall not be transferred in a public distribution prior to ninety (90) days
after the effective date of
-6-
<PAGE>
the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
(c) Registration Rights of,Founders, Officers, Directors and Employees.
------------------------------------------------------------------
Upon any sale by the Company of shares of its Common Stock to the public in a
firmly underwritten public offering, the Founders and any other officer or
director designated by the Company's Board of Directors by unanimous vote shall
be entitled to include any of their shares of Common Stock in any registration
by the Company under this subsection 1.3, if such persons who choose to include
any of their securities in such registration shall continue to serve the Company
as officer or director on the effective date of such registration statement, and
such persons agree to be bound by all other provisions of this Agreement and
participate in any such registration on the same basis as each Holder in
accordance with all applicable provisions of this Agreement (such persons are
collectively referred to as "Employee-Holders").
1.4 Registration on Form S-3.
-------------------------
(a) If any Holder or Holders holding in the aggregate not less than five
percent (5%) of the then outstanding Registrable Securities request that the
Company file a registration statement on Form S-3 (or any successor form to Form
S-3) for a public offering of shares of the Registrable Securities the
reasonably anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $500,000, and the Company
is a registrant entitled to use Form S-3 to register the Registrable Securities
for such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form and to
cause such Registrable Securities to be qualified in such jurisdictions as the
Holder or Holders may reasonably request; provided, however, that the Company
--------- -------
shall not be required to effect more than two (2) registrations pursuant to this
Section 1.4 in any twelve (12) month period. The substantive provisions of
Section 1.2(b) shall be applicable to each registration initiated under this
Section 1.4.
(b) Notwithstanding the foregoing, the Company shall not be obligated to
take any action pursuant to this Section 1.4:
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(ii) if the Company, within ten (10) days of the receipt of the
request of the Initiating Holders, gives notice of its bona fide intention to
effect the filing of a registration statement with the Commission within sixty
(60) days of receipt of such request (other than (x) a registration of
securities in a Rule 145 transaction, (y) a registration statement on Form S-4
or S-8 or any form substituting therefor or (z) with respect to any employee
benefit plan);
-7-
<PAGE>
(iii) within one hundred eighty (180) days of the effective date of
any registration referred to in Sections 1.2 and 1.3 above, provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iv) if the Company shall furnish to such Holder a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors it would be seriously detrimental to the Company or the
Investors for registration statements to be filed in the near future, then the
Company's obligation to use its best efforts to file a registration statement
shall be deferred for a period not to exceed sixty (60) days from the receipt of
the request to file such registration by such Holder, provided that the Company
may not use this right more than once in any twelve month period and may not
during such sixty (60) day period file or prepare to file a registration
statement other than one provided for in this Section 1.4 or under Section 1.2
(if requested by the same Holder or Holders who have requested registration of
Registrable Securities under this Section 1.4).
1.5 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date hereof, without the approval of the holders of a majority of the
Registrable Securities, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights superior to those of the Investors. Upon obtaining such approval, the
Company will grant the Investors any rights of first refusal or registration
rights granted to subsequent purchasers of the Company's equity securities to
the extent such subsequent rights are superior, in the good faith judgment of
the Company's Board of Directors, to those rights granted in connection with the
issuance of the Series A Preferred Stock, Series B Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock to the
Investors. Nothing in this Section 1.5 shall be deemed to restrict the Company's
right to grant registration rights to individual Employee-Holders pursuant to
Section 1.3(c) above, or registration rights to other purchasers of the
Company's securities that are on parity with or inferior to those registration
rights granted to the Investors.
1.6 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with all registrations pursuant to Sections 1.2 and 1.3 and for the
first four registrations pursuant to Section 1.4 shall be borne by the Company,
provided, however, that if in order to effect a registration under Section 1.2
the Company would be required to undergo a special audit, the Holders shall bear
any expenses incurred by the Company for such special audit in excess of
$15,000. Unless otherwise stated, all Selling Expenses relating to securities
registered on behalf of the Holders shall be borne by the Holders of such
securities pro rata on the basis of the number of shares so registered.
1.7 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration and as to the completion thereof At its expense the Company
will:
(a) Prepare and file with the Commission a registration statement (which,
in the case of a registration under Section 1.2, shall be on Form S-1 or other
form of general
-8-
<PAGE>
applicability satisfactory to the managing underwriter selected as provided in
such Section) with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for at least one
hundred eighty (180) days or until the distribution described in the
registration statement has been completed;
(b) Furnish to the Holders participating in such registration and to the
underwriters of the securities being registered such reasonable number of copies
of the registration statement, preliminary prospectus, final prospectus and such
other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
(c) Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement, and notify the Holders immediately of the need for a
supplement or amendment.
(d) Use its best efforts to register and qualify the securities covered by
such registration statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holders, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Use its best efforts to furnish, at the request of any Holder
requesting registration of Registrable Securities pursuant to this Section 1, on
the date that such Registrable Securities are delivered to the underwriters for
sale in connection with a registration pursuant to this Section 1, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) an opinion, dated such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities and (ii) a letter
dated such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten
-9-
<PAGE>
public offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
(h) Use its best efforts to list the Registrable Securities covered by
such registration statement on any securities exchange on which the Common Stock
of the Company is then listed.
(i) Make available for inspection by each Holder, any underwriter
participating in any distribution pursuant to such registration statement, and
any attorney, accountant or other agent retained by such Holder or underwriter,
all financial and other records, pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors and employees to supply
all information reasonably requested by any such Holder, underwriter, attorney,
accountant or agent in connection with such registration statement.
(j) Use its best efforts to take all other steps necessary to effect the
registration, offering and sale of the Registrable Securities.
1.8 Indemnification.
----------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners and agents, and each person controlling such person
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 1, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
investigation, claim or litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, including all documents
incorporated by reference therein, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of the Securities Act or any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, partners and agents, and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable to any such person in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission (or alleged untrue
statement or omission), made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder, controlling person or underwriter and stated to be specifically for use
therein or the preparation thereby.
-10-
<PAGE>
(b) Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such Holders,
such directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder and stated to be
specifically for use therein or the preparation thereby. Notwithstanding the
foregoing, the liability of each Holder under this subsection (b) shall be
limited to the proportion of any claim, loss, damage, liability or expense which
is equal to the proportion that the public offering price of the shares sold by
such Holder under such registration statement bears to the total public offering
price of all securities sold thereunder, but not in any event to exceed the net
proceeds received by such Holder from the sale of Registrable Securities covered
by such registration statement, unless such liability arises out of or is based
on willful misconduct by such Holder.
(c) Each party entitled to indemnification under this Section 1.8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further, that the failure of any Indemnified
----------------
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 1 unless the failure to give such notice
is materially prejudicial to an Indemnifying Party's ability to defend such
action and provided further, that the Indemnifying Party shall not assume the
-------- -------
defense for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in paragraphs (a) and (b) of this
Section 1.8 is unavailable or insufficient to hold harmless an indemnified
party under such
-11-
<PAGE>
paragraphs in respect of any losses, claims, damages or liabilities or actions
in respect thereof referred to therein, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or actions in such proportion as appropriate to reflect the relative
fault of the Company, on the one hand, and the Holders of such Registrable
Securities, on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or actions as well as any
other relevant equitable considerations, including the failure to give any
notice under paragraph (c) of this Section 1.8. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact relates to information supplied by the
Company, on the one hand, or the Holders of such Registrable Securities, on the
other hand, and to the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Holders of Registrable Securities agree that it would not be
just and equitable if contributions pursuant to this paragraph were determined
by pro rata allocation (even if all of the Holders of such Registrable
Securities were treated as one entity for such purpose) or by any other method
of allocation which did not take account of the equitable considerations
referred to above in this paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
actions in respect thereof, referred to above in this paragraph, shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph, the Holders of such
Registrable Securities shall not be required to contribute any amount in excess
of the amount, if any, by which the total price at which the Common Stock sold
by each of them was offered to the public exceeds the amount of any damages
which they would have otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the Securities Act),
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
1.9 Information by Holder. The Holders of securities included in any
---------------------
registration shall furnish to the Company such information regarding such
Holders, the Registrable Securities held by them and the distribution proposed
by such Holders as the Company may request in writing and as shall be required
in connection with any registration, qualification or compliance referred to in
this Section 1.
1.10 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, as such Rule may be
amended from time to time, at all times after the effective date that the
Company becomes subject to the reporting requirements of the Securities Act or
the Exchange Act.
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<PAGE>
(b) Use its best efforts to file with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements);
(c) So long as an Investor or Bohnett owns any Registrable Securities to
furnish to such Investor forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as such Investor or Bohnett may reasonably
request in availing itself of any rule or regulation of the Commission allowing
such Investor or Bohnett to sell any such securities without registration.
1.11 Standoff Agreement. Each Holder agrees in connection with the
------------------
Company's initial public offering of the Company's securities that, upon request
of the Company or the underwriters managing any underwritten offering of the
Company's securities, not to sell, make any short sale of; loan, grant any
option for the purchase of; or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of the Company or such underwriters, as the case may be, for such period
of time from the effective date of such registration as is agreed upon by
holders of a majority of the outstanding capital stock of the Company; provided,
that the officers and directors of the Company who own stock of the Company and
any shareholder holding more than five percent (5%) of the outstanding voting
securities of the Company also agree to such restrictions.
1.12 Termination. Any registration rights granted pursuant to this Section
-----------
1 shall terminate with respect to any Holder at such date when all remaining
Registrable Securities held or entitled to be held by such Holder may be sold
under Rule 144 during any three (3) month period.
-13-
<PAGE>
2. Right of First Refusal Upon Issuance of Securities by the Company.
-----------------------------------------------------------------
2.1 Right of First Refusal. Subject to Section 6.3 of this Agreement,
----------------------
the Company hereby grants to each Investor and each Founder (provided the
Founder remains a director, officer or employee of the Company) (collectively,
hereinafter, the "Rights Holders") the right of first refusal to purchase, pro
rata all or any part of New Securities (as defined in this Section 2.1) which
the Company may, from time to time, propose to sell and issue. For purposes of
this right of first refusal, a pro rata share for an Investor is the ratio that
the number of shares of Conversion Stock then held by such Investor bears to the
sum of the total number of shares of Conversion Stock and Common Stock held by
the Rights Holders then outstanding, and purchase, pro rata share for a Founder
is the ratio that the number of shares of Common Stock or Conversion Stock held
by such Founder bears to the sum of the total number of shares of Conversion
Stock and Common Stock held by the Rights Holders then outstanding.
(a) "Equity Securities" shall mean any securities having voting rights
in the election of the Board of Directors not contingent upon default, or any
securities evidencing an ownership interest in the Company, or any securities
convertible into or exercisable for any shares of the foregoing, or any
securities issuable pursuant to any agreement or commitment to issue any of the
foregoing.
(b) Except as set forth below, "New Securities" shall mean any Equity
Securities, whether now authorized or not, and rights, options or warrants to
purchase said Equity Securities. Notwithstanding the foregoing, "New Securities"
does not include (i) options granted and options reserved for grant to officers,
directors, employees or consultants of the Company and its subsidiaries to
purchase up to 1,777,500 shares of Common Stock in the aggregate either pursuant
to any stock plan approved by the Company's Board of Directors or as otherwise
approved by the Company's Board of Directors, (ii) stock options granted to CMG
@Ventures prior to the date of this Agreement to purchase up to 500,000 shares
of Common Stock, (iii) stock options granted to Bohnett and to certain other
founders of the Company designated by Bohnett prior to the date of this
Agreement to purchase up to 500,000 shares of Common Stock, (iv) securities
offered pursuant to a Qualified Public Offering, (v) securities issued pursuant
to the acquisition of another corporation by the Company by merger, purchase of
substantially all of the assets or other reorganization whereby the Company or
its purchasers own not less than fifty-one (51%) percent of the voting power of
the surviving or successor corporation, (vi) the Conversion Stock reserved for
issuance on the date of this Agreement, (vii) a warrant or warrants for the
purchase of shares of capital stock of the Company (and stock issued upon
exercise of such warrant or warrants) which have been unanimously approved by
the Board of Directors of the Company and issued in connection with an equipment
lease, equipment financing or bank line financing, including without limitation
a warrant to purchase up to 33,898 shares of Series D Preferred Stock issued by
the Company to Cupertino Bank and a warrant to purchase up to 44,444 shares of
Common Stock issued or to be issued by the Company to Comerica Bank, (viii)
stock issued pursuant to any rights or agreements including, without limitation,
convertible securities, options and warrants, provided that the right of first
refusal established by this Section 2 applies with respect to the initial sale
or grant by the Company of such rights or agreements, or (ix) stock issued in
connection with any stock split, stock dividend or recapitalization by the
Company.
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<PAGE>
(c) In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Rights Holder written notice of its intention,
describing the type of New Securities, and the price and terms upon which the
Company proposes to issue the same. Each Rights Holder shall have fifteen (15)
days from the date of receipt of any such notice to agree to purchase up to its
respective pro rata share of such New Securities for the price and upon the
applicable terms specified in the notice by giving written notice to the Company
and stating therein the quantity of New Securities to be purchased.
(d) In the event a Rights Holder fails to exercise the right of first
refusal within said fifteen (15) day period, the Company shall have one hundred
twenty (120) days thereafter to sell or enter into an agreement (pursuant to
which the sale of New Securities covered thereby shall be closed, if at all,
within sixty (60) days from the date of said agreement) to sell the New
Securities not elected to be purchased by Rights Holders at the price and upon
the terms no more favorable to the purchasers of such securities than specified
in the Company's notice. In the event the Company has not sold the New
Securities within said one hundred twenty (120) day period (or sold and issued
New Securities in accordance with the foregoing within sixty (60) days from the
date of said agreement), the Company shall not thereafter issue or sell any New
Securities, without first offering such securities in the manner provided above.
(e) The right of first refusal granted under this Agreement shall
expire upon the closing of the first firm commitment underwritten offering of
the Company's securities to the public pursuant to an effective registration
statement under the Securities Act.
(f) The Rights Holders hereby waive their rights of first offer,
including notice provisions thereof, set forth in Section 2 of the Existing
Rights Agreement with respect to the issuance of the Series E Preferred Stock
and the Series F Preferred Stock pursuant to the Stock Purchase Agreement.
3. Rights Upon Transfer by Founders. Each Founder hereby agrees as
----------------------------------------------------------------
follows:
- -------
3.1 Notice of Proposed Transfer. Before any Founder may effect any
---------------------------
Transfer of any Stock (the "Offered Stock"), such Founder (the "Selling
Founder") must give at the same time to the Company and to the Investors a
written notice signed by the Founder (the "Selling Founder's Notice") stating
(a) the Selling Founder's bona fide intention to transfer such Offered Stock;
(b) the number of shares of the Offered Stock; (c) the name, address and
relationship, if any, to the Founder of each proposed purchaser or other
transferee; and (d) the bona fide cash price or, in reasonable detail, other
consideration, per share for which the Selling Founder proposes to transfer such
Offered Stock (the "Offered Price"). The Selling Founder's Notice shall further
state (i) that the Company may acquire, in accordance with the provisions of
this Agreement, any of the Offered Stock for the Offered Price and upon the
other terms and conditions set forth therein, (ii) that if the Company does not
purchase all of the Offered Stock then the Investors may acquire such Offered
Stock not previously purchased (the "Refused Stock") upon the same terms and
conditions and (iii) if all such Offered Stock is not purchased by the Company
and the Investors, the Investors may exercise their rights under Section 3.3
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<PAGE>
hereof. Upon the request of the Company, or any Investor, the Founder will
promptly furnish such information to the Company and to the Investors, as may be
reasonably requested to establish that the offer and proposed transferee are
bona fide.
3.2 Right of First Refusal.
----------------------
(a) Company's Right. Pursuant to this Agreement, the Company and its
---------------
assignees shall have the right of first refusal to purchase all or any part of a
Founder's Offered Stock, if the Company gives written notice of the exercise of
such right to a Selling Founder within thirty (30) days (the "Company's Refusal
Period") after the date of the Selling Founder's Notice to the Company.
(b) Investors' Right. If the Company does not intend to fully
----------------
exercise its right of first refusal referred to in subsection 3.2(a) above or if
the Company is not lawfully able to repurchase the Offered Stock, the Company
will send written notice thereof (the "Company's Expiration Notice") to the
Investors, at least ten (10) days before the expiration of the Company's Refusal
Period. The Company's Expiration Notice will specify the amount of the Refused
Stock. In such event, each Investor will have the right of first refusal to
purchase its pro rata share of the Refused Stock. For purposes of this paragraph
(b), an Investor's pro rata share is the ratio that the number of shares of
Conversion Stock then held by such Investor bears to the sum of the total number
of shares of Conversion Stock then held by all Investors. The Investors shall
have a right of oversubscription such that if any Investor declines to purchase
its pro rata share of Refused Stock, the other Investors shall, among them, have
the right to purchase up to the balance of the Refused Stock not so purchased.
Such right of oversubscription may be exercised by an Investor by accepting the
offer of the Refused Stock as to more than its pro rata share. If as a result
thereof such oversubscriptions exceed the total amount of Refused Stock
available in respect of such oversubscription privilege, the oversubscribing
Investors shall be cut back with respect to their oversubscriptions on a pro
rata basis in accordance with their respective pro rata shares or as they may
otherwise agree among themselves.
If an Investor desires to exercise its right of first refusal to
purchase Refused Stock, such Investor must, within the fifteen (15) day period
(the "Investor Refusal Period") commencing on the date of the Company's
Expiration Notice, give written notice to the Selling Founder and to the Company
of such Investor's election to purchase an amount of the Refused Stock,
indicating the number of shares that such Investor desires to purchase, and if
such Investor desires to exercise a right of oversubscription.
(c) Purchase Price. The purchase price for the Offered Stock to be
--------------
purchased by the Company or for the Refused Stock to be purchased by an Investor
exercising its right of first refusal under this Agreement will be the Offered
Price, but will be payable as set forth in Section 3.2(d) hereof If the Offered
Price includes consideration other than cash, the cash equivalent value of the
non-cash consideration will be determined by the Board of Directors of the
Company in good faith, which determination will be binding upon the Company, the
Investors and the Selling Founder absent fraud or error.
-16-
<PAGE>
(d) Payment. Payment of the purchase price for the Offered Stock
-------
purchased by the Company or for the Refused Stock to be purchased by an Investor
exercising its right of first refusal will be made within seven (7) days after
the date of the last day of the Investor Refusal Period. Payment of the purchase
price will be made, at the option of the Company or, as the case may be, by the
exercising Investor(s) (i) in cash (by cashier's check or wire transfer), (ii)
by cancellation of all or a portion of any outstanding indebtedness of the
Selling Founder to the Company or the Investors, as the case may be or (iii) by
any combination of the foregoing.
(e) Rights as a Shareholder. If the Company and/or the Investor(s)
-----------------------
exercise their rights of first refusal to purchase all of the Offered Stock,
then, upon the date the notice of such exercise is given by the Company, the
Selling Founder will have no further rights as a holder of such Offered Stock
with respect to which a right of first refusal has been exercised, except the
right to receive payment for such Offered Stock from the Company and/or the
Investors(s), as the case may be, in accordance with the terms of this
Agreement, and the Selling Founder will forthwith cause all certificate(s)
evidencing such Offered Stock to be surrendered to the Company for cancellation,
and, as to purchase by the Investor(s), for transfer to the Investor(s).
(f) Selling Founder's Right to Transfer. If the Company and/or the
-----------------------------------
Investors have not elected to purchase all of the Offered Stock, then, subject
to the Right of Co-Sale, the Selling Founder may transfer the Offered Stock
permitted to be sold by the Selling Founder, to any person named as a purchaser
or other transferee in the Selling Founder's Notice, at the Offered Price or at
a higher price, provided that such transfer (i) is consummated within ninety
(90) days after the date of the Selling Founder's Notice and (ii) is in
accordance with all the terms of this Agreement. If the Offered Stock is not so
transferred during such 90 day period, then the Selling Founder may not transfer
any of such Offered Stock without complying again in full with the provisions of
this Agreement.
3.3 Right of Co-Sale.
----------------
(a) The Right. In the event that a Founder proposes to sell shares
---------
of stock of the Company ("Founder Equity Securities"), the Investors shall have
the right, exercisable upon written notice to the Founder within thirty (30)
days after notice by the Company of such proposed sale, to participate in such
sale of securities pursuant to the specified terms and conditions of the notice,
subject to the following limitations. The Company shall provide written notice
to the Investors within thirty (30) days after receiving the notice of the
proposed transfer from the Founder. The notice to the Investors shall state the
terms of the proposed transfer and the date of expiration of the Investors'
rights hereunder. Each Investor shall be entitled to sell the same percentage of
the total number of shares of Conversion Stock then held by such Investor as the
percentage of aggregate holdings of Founder Equity Securities represented by the
Founder Equity Securities proposed to be sold by the Founder. For example, if
the Founder proposes to sell 25% of his aggregate holdings of Founder Equity
Securities, then each Investor shall be entitled to sell up to 25% of the
Conversion Stock then held by such Investor.
(b) Prohibited Transfers. In the event a Founder should sell any
--------------------
Founder Equity Securities in contravention of the participation rights of the
Investors under this Section 3
-17-
<PAGE>
(a "Prohibited Transfer"), each Investor shall have the option (the "Put
Option") to sell to the Founder a number of shares equal to the number of shares
that such Investor would have had the right to sell in connection with the
Prohibited Transfer, had the Founder complied with Section 3, subject to the
following terms and conditions:
(i) The price per share at which such shares are to be sold to the
Founder shall be equal to the price per share paid by the third-party purchaser
or purchasers.
(ii) Such Investor shall deliver to the Founder, within ninety (90)
days after it has received notice from the Founder or otherwise become aware of
the Prohibited Transfer, the certificate or certificates representing the shares
to be sold, each certificate to be properly endorsed for transfer.
(iii) The Founder shall, upon receipt of the certificates for the
repurchased shares, pay the aggregate purchase price therefor, by certified
check or bank draft made payable to the order of such Investor and shall
reimburse such Investor for any additional expenses, including legal fees and
expenses, incurred in effecting such purchase and resale.
(c) Limitations on Rights. Sections 3.2 and 3.3 shall not apply to a sale,
---------------------
assignment or transfer of Founder Equity Securities:
(i) to the Founder's spouse, parents, grandparents, siblings,
children or grandchildren or other members of the Founder's family (including
relatives by marriage), or to a custodian, trustee or other fiduciary for the
account of the Founder or members of his family;
(ii) by way of bequest or inheritance upon death;
(iii) to the Company or the Investors pursuant to the exercise of any
right of first refusal; or
(iv) with respect to the right of co-sale, transfers of up to fifteen
percent (15%) of the Founder Equity Securities held by such Founder on a
cumulative basis (for purposes of this subsection (iv), shares held and/or sold
by the Founder shall include all shares held and/or sold by transferees of the
Founder pursuant to subsection (i)); provided, however, that any transferees
--------- -------
pursuant to subsections (i) or (ii) above shall receive and hold such shares
subject to the provisions of this Section 3 and there shall be no further
transfer of such shares except in accordance herewith.
3.4 Waiver. The Company and the Existing Investors hereby waive their
------
rights of first refusal and the rights of co-sale, including the notice
provisions thereof; set forth in Section 3 of the Existing Rights Agreement,
with respect to the sale and transfer of any Stock owned by any Founder (defined
in Section 3 hereof as "Offered Stock" or "Founder Equity Securities") pursuant
to the Stock Purchase Agreement.
3.5 Stock Legend. All certificates representing shares of Common Stock
------------
of the Company held by the Founders and transferees described in this Section 3
above shall bear
-18-
<PAGE>
the following legend:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL AND CO-SALE, ALL AS SET FORTH IN A THIRD AMENDED AND
RESTATED RIGHTS AGREEMENT AMONG THE COMPANY, THE HOLDERS HEREOF AND CERTAIN
OTHER SHAREHOLDERS OF THE COMPANY, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICES OF THE CORPORATION."
4. Directors and Observers.
-----------------------
4.1 Observers. The Company agrees that one person designated by Intel
---------
Corporation and one person designated by Yahoo! Inc. shall be permitted to
attend as observers at each meeting of the Board of Directors and any committee
thereof, to receive notice of each such meeting and all materials distributed to
each director attending any such meeting (at the time and in the manner that
such notice and materials are delivered to each director), and to participate in
all discussions at such meeting, which designees are currently Matthew Cowan and
either Jeff Mallett or Tim Koogle, respectively.
4.2 Expenses of Outside Directors. The Company agrees to reimburse
-----------------------------
each "outside" director of the Company and each observer for reasonable travel
expenses incurred by each such director or observer, as the case may be, in
respect of the attendance of such director or observer, as the case may be, at
meetings of the Board or any committee thereof.
5. Termination and Amendment. The rights and obligations set forth in
-------------------------
Sections 2, 3, and 4 above and Section 6 below shall expire upon the earlier of
(i) the consummation of a Qualified Public Offering and (ii) January 13, 2007.
6. Regulatory Matters.
------------------
6.1 Cooperation of Shareholders. Each Shareholder agrees to cooperate
---------------------------
with the Company in all reasonable respects in complying with the terms and
provisions of the letter agreement between the Company and Chase Venture Capital
Associates, L.P. ("CVCA"), which is attached as Exhibit G to that certain
Preferred Stock Purchase Agreement dated as of January 10, 1997, with respect to
the issuance of the Series D Preferred Stock, regarding small business matters
(the "Small Business Sideletter"), including without limitation voting to
approve amending the Company's Articles of Incorporation, By-laws or this
Agreement in a manner reasonably requested by CVCA or any Regulated Holder (as
defined in the Small Business Sideletter) entitled to make such request pursuant
to the Small Business Sideletter. Notwithstanding anything contained in this
Section 6 to the contrary, no Shareholder shall be required under this Section 6
to take any action that could reasonably be expected to adversely affect in any
material respect (i) such Shareholder's rights under this Agreement or as a
shareholder of the Company, or (ii) the economic value of the Company or of a
Shareholder's interest in the Company.
-19-
<PAGE>
6.2 Covenant Not to Amend. The Company and each Shareholder agree
---------------------
not to amend or waive the voting or other provisions of the Company's Articles
of Incorporation, By-laws or this Agreement if such amendment or waiver would
cause any Regulated Holder to have a Regulatory Problem (as defined in the Small
Business Sideletter) that arises out of an increase in the voting power or
control of such Regulated Holder as a result of such amendment or waiver,
provided that any such Shareholder notifies the Company that it would have a
Regulatory Problem promptly after it has notice of such amendment or waiver.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as applied to transactions taking place
between California residents and wholly within the State of California.
7.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any Investor and
the closing of the transactions contemplated hereby.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
The rights granted to a Shareholder under Section 1 or to any Investor under any
other provision of this Agreement may be assigned in connection with any
transfer or assignment to a transferee or assignee that (i) is a partner,
shareholder, member or affiliate of the transferor, (ii) is reasonably
acceptable to the Company and either (x) acquires all of the transferor's Stock
not sold to the public or (y) acquires at least 60,000 shares of the
transferor's Stock or (iii) in the case of Chase Venture Capital Associates,
L.P., to Salt Creek Ventures or an affiliate thereof, provided that, in each
case, the transferor provides the Company with written notice of the proposed
transfer.
7.4 Entire Agreement; Amendment. This Agreement constitutes the full
---------------------------
and entire understanding and agreement between the parties with regard to the
subjects hereof; and no party shall be liable or bound to any other party in any
manner by any warranties, representations or covenants except as specifically
set forth herein. With the written consent of the record or beneficial holders
of (i) Investors holding at least two-thirds (2/3) of the Conversion Stock
issued or issuable upon conversion of the Series A Preferred Stock and Series B
Preferred Stock subject to this Agreement, (ii) Investors holding at least
eighty percent (80%) of the Conversion Stock issued or issuable upon conversion
of the Series D Preferred Stock subject to this Agreement, (iii) Investors
holding at least eighty percent (80%) of the Conversion Stock issued or issuable
upon conversion of the Series E Preferred Stock subject to this Agreement, (iv)
Investors holding at least eighty percent (80%) of the Conversion Stock issued
or issuable upon conversion of the Series F Preferred Stock subject to this
Agreement, and (v) the written consent of Founders holding at least two-thirds
(2/3) of the total number of shares of Common Stock held by Founders subject to
this Agreement, the obligations of the Company and the rights of the Holders of
the Registrable Securities under this Agreement may be waived (either generally
or in a particular instance, either retroactively or prospectively, and either
for a specified period of time or indefinitely), and with the same consent the
Company, when
-20-
<PAGE>
authorized by resolution of its Board of Directors, may enter into a
supplementary agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement; provided,
however, that no such modification, amendment or waiver shall reduce the
aforesaid percentages of any Series or combination of Series of Preferred Stock
or Equity Securities held by Investors or Founders needed for a modification,
waiver or amendment pursuant to this Section 7.4 without the consent of all of
the Investors or the Founders, as the case may be. Upon the effectuation of each
such waiver, consent, agreement or amendment or modification, the Company shall
promptly give written notice thereof to the record holders of the Registrable
Securities who have not previously consented thereto in writing. This Agreement
or any provision hereof may be changed, waived, discharged or terminated only by
a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this Section 7.4.
7.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally, via
facsimile, mailed by first class mail, postage prepaid, or delivered by courier
or overnight delivery, addressed (a) in the case of the Shareholders, at their
addresses or to their telecopier numbers as shown on Schedule I hereto, or at
such other addresses or facsimile numbers as the Shareholders shall have
furnished to the Company in writing and (b) in the case of the Company, at its
address set forth at the beginning of this Agreement, or at such other address
or facsimile number as the Company shall have furnished to the Investors in
writing. Notices that are mailed shall be deemed received five (5) days after
deposit in the United States mail.
7.6 Delay or Omissions. Except as expressly provided herein, no
------------------
delay or omission to exercise any right, power or remedy accruing to any
Shareholder, upon any breach or default of the Company under this Agreement,
shall impair any such right, power or remedy of such holder nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by-law or otherwise afforded to any
holder, shall be cumulative and not alternative.
7.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.8 Severability. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable the remainder of this Agreement and application of such provision
to persons or circumstances shall be interpreted so as best to reasonably effect
the intent of the parties hereto, the parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision
-21-
<PAGE>
which will achieve to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
7.9 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
7.10 Stock Option Agreements. The Investors and the Company agree
-----------------------
that, with respect to the rights granted in favor of the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock to purchase shares of the Company's Common Stock under certain
circumstances as holders of "Senior Securities," which such term is defined and
which such rights are set forth in the Stock Option Agreements between the
Company and certain of its employees, officers, directors, consultants and
shareholders, respectively, "Senior Securities" shall be deemed to mean the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
any additional series of the Company's Preferred Stock that may be issued
following the date of this Agreement, and all rights granted in favor of the
holders of Senior Securities in such Stock Option Agreements shall be deemed to
have been granted in favor of the holders of all such series of Preferred Stock.
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY"
GEOCITIES
By: /s/ David C. Bohnett
Name: David Bohnett
Title: CEO
"SERIES E/F INVESTORS"
YAHOO! INC.
By: /s/ Timothy Koogle
Name: Timothy Koogle
Title: President & CEO
SOFTBANK HOLDINGS INC.
By: /s/ Ronald D. Fisher
Name: Ronald D. Fisher
Title: Vice Chairman
-22-
<PAGE>
"INVESTORS"
CHASE VENTURE CAPITAL
ASSOCIATES, L.P.
By: Chase Capital Partners, L.P., its
General Partner
By: /s/ John M.B. O'Connor
Name: John M.B. O'Connor
Title: General Partner
SOFTBANK TECHNOLOGY VENTURE
IV L.P.
By: /s/ Charles R. Lax
Name: Charles R. Lax
Title: Managing Director
SOFTBANK TECHNOLOGY ADVISOR
ADVISORS FUND L.P.
By: /s/ Charles R. Lax
Name: Charles R. Lax
Title: Managing Director
THE FLATIRON FUND LLC
By: /s/ Jerome Colonna
Name: Jerome Colonna
Title: Managing Partner
-23-
<PAGE>
INNOCAL, L.P., A DELAWARE
LIMITED PARTNERSHIP
By: InnoCal Associates, L.P., a
Delaware limited partnership
By: /s/ H.D. Lambert
Name: H.D. Lambert
Title: General Partner
INTEL CORPORATION
By: /s/ Satish Roshi
Name: Satish Roshi
Title: Assistant Treasurer
CMG@VENTURES
By: /s/ Peter Mills
Name: Peter Mills
Title: General Partner
"FOUNDERS"
/s/ David Bohnett
David Bohnett
/s/ John Rezner
John Rezner
-24-
<PAGE>
SCHEDULE I
Existing Investors:
CMG @ VENTURES
2420 Sand Hill Road
Suite 101
Menlo Park, CA 94025
Telecopy No.: (425) 233-0506
SOFTBANK Holdings Inc.
10 Langley Road
Newton Centre, MA 02159
Attn: Ron Fisher
Telecopy No.: (617) 928-9301
SOFTBANK Technology Ventures IV L.P.
c/o STV LLC
10 Langley Road, Suite 403
Newton Center, MA 02159
Attn: Scott Russell
Telecopy No.: (617) 925-9301
SOFTBANK Technology Advisors Fund L.P.
c/o STV LLC
10 Langley Road
Newton Centre, MA 02159
Attn: Scott Russell
Telecopy No.: (617) 925-9301
Chase Venture Capital Associates, L.P.
380 Madison Avenue
New York, NY 10017
Attn: I. Robert Greene
Telecopy No.: (212) 622-3101
-25-
<PAGE>
The Flatiron Fund LLC
380 Madison Avenue
New York, NY 10017
Attn: Jerome Colonna
Fred Wilson
Telecopy No.: (212) 622-3101
INNOCAL, L.P.
600 Anton Boulevard
Suite 1270
Costa Mesa, CA 92626
Attn: Harry Lambert
Telecopy No.: (714) 850-6798
Intel Corporation
2200 Mission College Boulevard/SC4-210
Santa Clara, CA 95052-8119
Attn: George Powlick
Telecopy No.: (408) 765-6037
Founders/Shareholders:
David Bohnett
GeoCities
1918 Main Street, Third Floor
Santa Monica, CA 90405
Telecopy No.: (310) 664-6520
John Rezner
GeoCities
1918 Main Street, Third Floor
Santa Monica, CA 90405
Telecopy No.: (310) 664-6520
-26-
<PAGE>
SCHEDULE II
-----------
Series E/F Investors
Yahoo! Inc.
3400 Central Expressway, Suite 201
Santa Clara, CA 95051
SOFTBANK Holdings Inc.
10 Langley Road
Newton Centre, MA 02159
Attn: Ron Fisher
Telecopy No.: (617) 928-9301
-27-
<PAGE>
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this ____
day of _______________, 1998 between GeoCities, a Delaware corporation (the
"Company") and ____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company have adopted a Second
Amended and Restated Certificate of Incorporation (the "Certificate") permitting
the Board of Directors to indemnify certain officers and employees designated by
the Board of Directors or Chief Executive Officer (the "Officers") and directors
(the "Directors") of the Company; and
WHEREAS, the Certificate and Section 145 of the Delaware General
Corporation Law, as amended ("Law"), by their nonexclusive nature permit
contracts between the Company and the Officers and Directors of the Company with
respect to indemnification of such Officers and Directors; and
WHEREAS, in accordance with the authorization as provided by the Law,
the Company may purchase and maintain a policy or policies of Directors' and
Officers' liability insurance ("D & O Insurance"), covering certain liabilities
which may be incurred by its Officers and Directors in the performance of their
obligations as Officers and Directors of the Company; and
WHEREAS, as a result of recent developments affecting the terms, scope
and availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded the Company's Officers and Directors by such D & O
Insurance and said uncertainty also exists under statutory and bylaw
indemnification provisions; and
WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as an officer and/or a director of the Company,
the Company has determined and agreed to enter into this contract with
Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as
an officer and/or a director after the date hereof, the parties hereto agree as
follows:
1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as such may be amended from time to time, and Article
___ of the Certificate, as such may be amended. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right of the
Company. Indemnitee shall be entitled to the rights of indemnification provided
in this Section 1(a) if, by reason of his Corporate Status (as hereinafter
defined), he is, or is threatened to be made, a party to or participant in any
Proceeding (as hereinafter defined) other than a Proceeding by
<PAGE>
or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall
be indemnified against all Expenses (as hereinafter defined), judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such Proceeding or any claim, issue
or matter therein, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company and, with
respect to any criminal Proceeding, had no reasonable cause to believe his
conduct was unlawful.
(b) Proceedings by or in the Right of the Company. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company to procure a judgment in its favor. Pursuant to this Section 1(b),
Indemnitee shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection with such Proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company; provided, however, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
Court of Chancery of the State of Delaware, or the court in which such
Proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
(c) Indemnification for Expenses of a Party Who is Wholly or
Partly Successful. Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.
2. ADDITIONAL INDEMNITY.
--------------------
(a) Subject only to the exclusions set forth in Section 2(b)
hereof, the Company hereby further agrees to hold harmless and indemnify
Indemnitee against any and all Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with any
Proceeding (including an action by or on behalf of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of his Corporate Status; provided, however, that with respect
to actions by or on behalf of the Company, indemnification of Indemnitee against
any judgments shall be made by the Company only as authorized in the specific
case upon a determination that Indemnitee acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; and
2
<PAGE>
(b) No indemnity pursuant to this Section 2 shall be paid by the
Company:
(i) In respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that
such remuneration was in violation of law;
(ii) On account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or
sale by Indemnitee of securities of the Company pursuant to the provisions
of Section 16(b) of the Securities Exchange Act of 1934 and amendments
thereto or similar provisions of any federal, state or local statutory law;
(iii) On account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct; or
(iv) If a final decision by a court having jurisdiction in
the matter shall determine that such indemnification is not lawful.
3
<PAGE>
3. CONTRIBUTION. If the indemnification provided in Sections 1 and 2
------------
is unavailable and may not be paid to Indemnitee for any reason other than
those set forth in paragraphs (i), (ii) and (iii) of Section 2(b), then in
respect to any Proceeding in which the Company is jointly liable with
Indemnitee (or would be if joined in such Proceeding), the Company shall
contribute to the amount of Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by
Indemnitee in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and by the Indemnitee on
the other hand from the transaction from which such Proceeding arose, and
(ii) the relative fault of the Company on the one hand and of the
Indemnitee on the other hand in connection with the events which resulted
in such Expenses, judgments, fines or settlement amounts, as well as any
other relevant equitable considerations. The relative fault of the Company
on the one hand and of the Indemnitee on the other hand shall be determined
by reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such Expenses, judgments, fines or settlement
amounts. The Company agrees that it would not be just and equitable if
contribution pursuant to this Section 3 were determined by pro rata
allocation or any other method of allocation which does not take account of
the foregoing equitable considerations.
4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any
-----------------------------------------
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of
-----------------------
this Agreement, the Company shall advance all reasonable Expenses incurred by or
on behalf of Indemnitee in connection with any Proceeding by reason of
Indemnitee's Corporate Status within ten days after the receipt by the Company
of a statement or statements from Indemnitee requesting such advance or advances
from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the Expenses
incurred by Indemnitee and shall include or be preceded or accompanied by an
undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and undertakings to repay pursuant to this
Section 5 shall be unsecured and interest free. Notwithstanding the foregoing,
the obligation of the Company to advance Expenses pursuant to this Section 5
shall be subject to the condition that, if, when and to the extent that the
Company determines that Indemnitee would not be permitted to be indemnified
under applicable law, the Company shall be entitled to be reimbursed, within
thirty (30) days of such determination, by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).
4
<PAGE>
6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
-------------------------------------------------------------
(a) To obtain indemnification (including, but not limited to, the
advancement of Expenses and contribution by the Company) under this Agreement,
Indemnitee shall submit to the Chief Executive Officer or Chief Financial
Officer a written request, including therein or therewith such documentation and
information as is reasonably available to Indemnitee and is reasonably necessary
to determine whether and to what extent Indemnitee is entitled to
indemnification. The Secretary or any Assistant Secretary of the Company shall,
promptly upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined) in
a written opinion to the Board of Directors, a copy of which shall be delivered
to Indemnitee (unless Indemnitee shall request that such determination be made
by the Board of Directors or the stockholders, in which case the determination
shall be made in the manner provided in Clause (ii) below), or (ii) if a Change
in Control shall not have occurred, (A) by the Board of Directors by a majority
vote of a quorum consisting of Disinterested Directors (as hereinafter defined),
or (B) if a quorum of the Board of Directors consisting of Disinterested
Directors is not obtainable or, even if obtainable, said Disinterested Directors
so direct, by Independent Counsel in a written opinion to the Board of
Directors, a copy of which shall be delivered to Indemnitee, or (C) if so
directed by said Disinterested Directors, by the stockholders of the Company;
and, if it is determined that Indemnitee is entitled to indemnification, payment
to Indemnitee shall be made within ten (10) days after such determination.
Indemnitee shall cooperate with the person, persons or entity making such
determination with respect to Indemnitee's entitlement to indemnification,
including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to Indemnitee and
reasonably necessary to such determination. Any Independent Counsel, member of
the Board of Directors, or stockholder of the Company shall act reasonably and
in good faith in making a determination under the Agreement of the Indemnitee's
entitlement to indemnification. Any costs or expenses (including attorneys' fees
and disbursements) incurred by Indemnitee in so cooperating with the person,
persons or entity making such determination shall be borne by the Company
(irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) If the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent
Counsel shall be selected as provided in this Section 6(c). If a Change in
Control shall not have occurred, the Independent Counsel shall be selected by
the Board of Directors, and the Company shall give written notice to Indemnitee
advising him of the identity of the Independent Counsel so selected. If a Change
in Control shall have occurred, the Independent Counsel shall be selected by
Indemnitee (unless Indemnitee shall request that such selection be made by the
Board of Directors, in which event the preceding sentence shall apply), and
Indemnitee shall give written
5
<PAGE>
notice to the Company advising it of the identity of the Independent Counsel so
selected. In either event, Indemnitee or the Company, as the case may be, may,
within 10 days after such written notice of selection shall have been given,
deliver to the Company or to Indemnitee, as the case may be, a written objection
to such selection; provided, however, that such objection may be asserted only
on the ground that the Independent Counsel so selected does not meet the
requirements of "Independent Counsel" as defined in Section 14 of this
Agreement, and the objection shall set forth with particularity the factual
basis of such assertion. Absent a proper and timely objection, the person so
selected shall act as Independent Counsel. If a written objection is made and
substantiated, the Independent Counsel selected may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined
that such objection is without merit. If, within 20 days after submission by
Indemnitee of a written request for indemnification pursuant to Section 6(a)
hereof, no Independent Counsel shall have been selected and not objected to,
either the Company or Indemnitee may petition the Court of Chancery of the State
of Delaware or other court of competent jurisdiction for resolution of any
objection which shall have been made by the Company or Indemnitee to the other's
selection of Independent Counsel and/or for the appointment as Independent
Counsel of a person selected by the court or by such other person as the court
shall designate, and the person with respect to whom all objections are so
resolved or the person so appointed shall act as Independent Counsel under
Section 6(b) hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 6(b) hereof, and the Company shall
pay all reasonable fees and expenses incident to the procedures of this Section
6(c), regardless of the manner in which such Independent Counsel was selected or
appointed. Upon the due commencement of any judicial proceeding or arbitration
pursuant to Section 8(a)(iii) of this Agreement, Independent Counsel shall be
discharged and relieved of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of
the Indemnitee to the settlement of any Proceeding which the Company has
undertaken to defend if the Company assumes full and sole responsibility for
such settlement and the settlement grants the Indemnitee a complete and
unqualified release in respect of the potential liability.
7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
----------------------------------------------
(a) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
(b) If the person, persons or entity empowered or selected under
Section 6 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within thirty (30) days
after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of a material fact
necessary to
6
<PAGE>
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 30 day period may be extended for a
reasonable time, not to exceed an additional fifteen (15) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 7(b) shall not apply (i)
if the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat, or (ii) if the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b) of
this Agreement.
(c) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement (with or without court approval),
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful.
(d) For purposes of any determination of good faith, Indemnitee
shall be deemed to have acted in good faith if Indemnitee's action is based on
the records or books of account of the Enterprise (as hereinafter defined),
including financial statements, or on information supplied to Indemnitee by the
Officers and Directors of the Enterprise in the course of their duties, or on
the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. The provisions of this Section 7(d) shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the Indemnitee
may be deemed to have met the applicable standard of conduct set forth in this
Agreement.
8. REMEDIES OF INDEMNITEE.
----------------------
(a) In the event that (i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
7
<PAGE>
(iv) payment of indemnification is not made pursuant to Section 3 or 4 of this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within ten (10) days
after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Delaware, or in any other
court of competent jurisdiction, of his entitlement to such indemnification.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within 180 days following the
date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 8(a). The Company shall not oppose Indemnitee's right
to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 8 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to Section
6(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 8, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 8,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the
Company against, any and all expenses (of the types described in the definition
of Expenses in Section 16 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
sought, the expenses incurred by Indemnitee in connection with such judicial
adjudication or arbitration shall be appropriately prorated. The Company shall
indemnify Indemnitee against any and all expenses and, if requested by
Indemnitee, shall (within ten (10) days after receipt by the Company of a
written request therefor) advance such expenses to Indemnitee, which are
incurred by Indemnitee in connection with any action brought by Indemnitee to
recover under any Directors' and Officers' liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advancement of expenses or
insurance recovery, as the case may be.
(e) The Company shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 8 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any
8
<PAGE>
such court or before any such arbitrator that the Company is bound by all the
provisions of this Agreement.
9. NONEXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.
----------------------------------------------------------
(a) The rights of indemnification as provided by this Agreement
shall not be deemed exclusive of any other rights to which Indemnitee may at any
time be entitled under applicable law, the Certificate, any agreement, a vote of
stockholders or a resolution of Directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee under this Agreement in respect of any action
taken or omitted by such Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal. To the extent that a change in the Law, whether
by statute or judicial decision, permits greater indemnification than would be
afforded currently under the Certificate and this Agreement, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change. No right or remedy herein conferred is
intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy
or policies providing liability insurance for Directors, Officers, employees, or
agents or fiduciaries of the Company or of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise which such
person serves at the request of the Company, Indemnitee shall be covered by such
policy or policies in accordance with its or their terms to the maximum extent
of the coverage available for any such director, officer, employee or agent
under such policy or policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
10. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any
-------------------------------------
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors or (b)
such Proceeding is being brought by the Indemnitee to assert his rights under
this Agreement.
9
<PAGE>
11. DURATION OF AGREEMENT. All agreements and obligations of the
---------------------
Company contained herein shall continue during the period Indemnitee is an
officer and/or a director of the Company (or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 8 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer and/or a director of the Company or
any other enterprise at the Company's request.
12. SECURITY. To the extent requested by the Indemnitee and approved
--------
by the Board of Directors, the Company may at any time and from time to time
provide security to the Indemnitee for the Company's obligations hereunder
through an irrevocable bank line of credit, funded trust or other collateral.
Any such security, once provided to the Indemnitee, may not be revoked or
released without the prior written consent of the Indemnitee.
13. ENFORCEMENT.
-----------
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to serve as an officer and/or a director of the
Company, and the Company acknowledges that Indemnitee is relying upon this
Agreement in serving as an officer and/or a director of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
14. DEFINITIONS. For purposes of this Agreement:
-----------
(a) "Change in Control" means a change in control of the Company
occurring after the date of this Agreement of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is
then subject to such reporting requirement; provided, however, that, without
limitation, such a Change in Control shall be deemed to have occurred if after
the date of this Agreement (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Act, as amended) other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d3 under the Act),
10
<PAGE>
directly or indirectly, of securities of the Company representing 15% or more of
the combined voting power of the Company's then outstanding securities (other
than any such person or any affiliate thereof that is such a 15% beneficial
owner as of the date hereof) without the prior approval of at least two-thirds
of the members of the Board of Directors in office immediately prior to such
person attaining such percentage interest; (ii) there occurs a proxy contest, or
the Company is a party to a merger, consolidation, sale of assets, plan of
liquidation or other reorganization, as a consequence of which members of the
Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter; or (iii)
during any period of two consecutive years, other than as a result of an event
described in clause (a)(ii) of this Section 16, individuals who at the beginning
of such period constituted the Board of Directors (including for this purpose
any new director whose election or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the Directors then
still in office who were Directors at the beginning of such period) cease for
any reason to constitute at least a majority of the Board of Directors. A Change
in Control shall not be deemed to have occurred under item (i) above if the
"person" described under item (i) is entitled to report its ownership on
Schedule 13G promulgated under the Act and such person is able to represent that
it acquired such securities in the ordinary course of its business and not with
the purpose nor with the effect of changing or influencing the control of the
Company, nor in connection with or as a participant in any transaction having
such purpose or effect. If the "person" referred to in the previous sentence
would at any time not be entitled to continue to report such ownership on
Schedule 13G pursuant to Rule 13d1(b)(3)(i)(B) of the Act, then a Change in
Control shall be deemed to have occurred at such time.
(b) "Corporate Status" describes the status of a person who is or
was a director, officer, employee or agent or fiduciary of the Company or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the express written
request of the Company.
(c) "Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
(f) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the Company
or Indemnitee in any matter material
11
<PAGE>
to either such party (other than with respect to matters concerning the
Indemnitee under this Agreement, or of other indemnitees under similar
indemnification agreements), or (ii) any other party to the Proceeding giving
rise to a claim for indemnification hereunder. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. The Company agrees
to pay the reasonable fees of the Independent Counsel referred to above and to
fully indemnify such counsel against any and all Expenses, claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(g) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was an officer and/or a director of the Company, by
reason of any action taken by him or of any inaction on his part while acting as
an officer and/or a director of the Company, or by reason of the fact that he is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise; in each case whether or not he is acting or serving in any such
capacity at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement; including one pending on
or before the date of this Agreement; and excluding one initiated by an
Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under
this Agreement.
15. SEVERABILITY. If any provision or provisions of this Agreement
------------
shall be held by a court of competent jurisdiction to be invalid, void, illegal
or otherwise unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Agreement (including
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent permitted by law; and
(b) to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.
16. MODIFICATION AND WAIVER. No supplement, modification,
-----------------------
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
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<PAGE>
17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the
--------------------
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise.
18. NOTICES. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
(a) If to Indemnitee, to:
__________________________
GeoCities
1918 Main Street, Suite 300
Santa Monica, California 90405
(b) If to the Company, to:
GeoCities
1918 Main Street, Suite 300
Santa Monica, California 90405
Attention: Chief Executive Officer
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
13
<PAGE>
19. IDENTICAL COUNTERPARTS. This Agreement may be executed in one
----------------------
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
20. HEADINGS. The headings of the paragraphs of this Agreement
--------
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
21. GOVERNING LAW. The parties agree that this Agreement shall
-------------
be governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
22. GENDER. Use of the masculine pronoun shall be deemed to include
------
usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
GEOCITIES,
a Delaware corporation
By ___________________________
Thomas R. Evans
Chief Executive Officer
______________________________
__________________, Indemnitee
14
<PAGE>
EXHIBIT 10.14
GEOCITIES
---------
1997 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Stock Option Plan are
--------------------
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means GeoCities, a California corporation.
-------
(g) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and when the Company
registers any class of any equity security pursuant to the Exchange Act, the
term Consultant shall thereafter not include directors who are not compensated
for their services or are paid only a director's fee by the Company.
(h) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" of such Director by
the Company.
<PAGE>
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
a national market system including without limitation the National Market of the
National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq")
System, its Fair Market Value shall be the closing sales price for such stock
(or the closing bid, if no sales were reported), as quoted on such system or
exchange, or the exchange with the greatest volume of trading in Common Stock
for the last market trading day prior to the time of determination, as reported
in The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not on
the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(k) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(l) "Non-Employee Directors" means a "non-employee director," as
----------------------
defined in paragraph (5)(3) of Rule 16b-3, or any successor provision.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable Stock
Option Agreement.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(p) "Optionee" means an Employee or Consultant who receives an Option.
--------
(q) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
2
<PAGE>
(r) "Plan" means this 1997 Stock Option Plan.
----
(s) "Reporting Person" means an officer, director or greater than ten
----------------
percent (10%) shareholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(t) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(u) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Paragraph 6 of the Stock Option Agreement.
(v) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(w) "Stock Option Agreement" means the form of stock option agreement
----------------------
attached hereto as Exhibit "A".
-----------
(x) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provisions.
3. Stock Subject to the Plan. Subject to the provisions of Paragraph 6 of
-------------------------
the Stock Option Agreement, the maximum aggregate number of shares that may be
optioned and sold under the Plan is Two Million Six Hundred Thirty-Five Thousand
Eight Hundred Eighty (2,635,880) shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock. If an option should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares that were subject thereto shall, unless the Plan
shall have been terminated, become available for future grant under the Plan.
In addition, any shares of Common Stock which are retained by the Company upon
exercise of an Option in order to satisfy the exercise or purchase price for
such Option or any withholding taxes due with respect to such exercise shall be
treated as not issued and shall continue to be available under the Plan.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a Committee.
(b) Procedure. If and when the Company becomes subject to the
---------
Exchange Act, the Plan shall be administered in accordance with the following
provisions:
3
<PAGE>
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the
------------------------------
Plan may be administered by different bodies with respect to directors, non-
director officers and Employees or Consultants who are not Reporting Persons.
(ii) Administration With Respect to Reporting Persons. With respect
------------------------------------------------
to grants of Options to Employees who are Reporting Persons, the Plan shall be
administered by (A) the Board, or (B) a Committee designated by the Board to
administer the Plan, which Committee shall be composed solely of two or more
Non-Employee Directors. Once appointed, such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by paragraph (d)(1) of Rule 16b-3.
(iii) Administration With Respect to Consultants and Other Employees.
--------------------------------------------------------------
With respect to grants of Options to Employees or Consultants who are not
Reporting Persons, the Plan shall be administered by (A) the Board or (B) a
Committee designated by the Board, which Committee shall be constituted in such
a manner as to satisfy the legal requirements relating to the administration of
incentive stock option plans, if any, of California corporate and securities
laws, of the Code and of any applicable Stock Exchange (the "Applicable Laws").
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options or any
combination thereof are granted hereunder;
4
<PAGE>
(iv) to determine the number of shares of Common Stock to be
covered by each such option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option granted hereunder;
(vii) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to participants who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
holders of Options.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options may be granted
--------------------
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option may, if he
or she is otherwise eligible, be granted additional Options.
(b) Type of Option. Each Option shall be designated in the applicable
--------------
Stock Option Agreement as either an Incentive Stock Option or a Nonstatutory
Stock Option. However, notwithstanding such designations, to the extent that
the aggregate Fair Market Value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year (under all plans of the Company or any Parent
or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) No Right to Employment. The Plan shall not confer upon any
----------------------
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with such
Optionee's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as
5
<PAGE>
described in Section 16 of the Plan. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 12 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the applicable Stock Option Agreement; provided, however, that the term shall be
no more than ten (10) years from the date of grant thereof or such shorter term
as may be provided in any Stock Option Agreement. However, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Option shall be five (5) years from the date of grant thereof or such
shorter term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration. The per share exercise price
---------------------------------------
for the Shares to be issued pursuant to exercise of an Option shall be such
price as is determined by the Board, but shall be subject to the following:
(a) In the case of an Incentive Stock Option that is:
(i) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(ii) granted to any other Employee, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(b) In the case of a Nonstatutory Stock Option that is:
(i) granted to a person who, at the time of the grant of such Option,
owns stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the per Share
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of the grant.
(ii) granted to any other person, the per Share exercise price shall
be no less than 85% of the Fair Market Value per Share on the date of grant.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided that such Option shall become
6
<PAGE>
exercisable at the rate of at least twenty percent (20%) per year over five (5)
years from the date the Option is granted.
An Option may not be exercised for a fraction of a Share. Exercise of
an Option in any manner shall result in a decrease in the number of Shares that
thereafter may be available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
10. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, (b) out of Optionee's current
compensation, (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of an Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
7
<PAGE>
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is a Reporting Person, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
11. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
12. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend and Terminate. The Board may at any time
--------------------------------
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
shareholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, rule and regulation, including, without limitation,
the Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, the requirements of any Stock Exchange, and
the requirements of any governmental agencies.
8
<PAGE>
Each Option is subject to the requirement that, if at any time the
Board determines, in its absolute discretion, that the listing, registration or
qualification of Common Stock issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition to, or in connection with, the issuance of Common Stock, no such
payment made or Common Stock issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions not acceptable to the Board.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have bene obtained.
15. Agreements. Any Nonstatutory Stock Option granted shall be evidenced
----------
by a stock option agreement substantially similar to the Stock Option Agreement,
as may be amended from time to time by the Board, the terms of which are
incorporated in and deemed to be a part of the Plan. Any Incentive Stock Option
granted shall be evidenced by a stock option agreement substantially similar to
the Stock Option Agreement, as modified to include such terms and conditions
which the Board deems necessary to comply with the provisions of Code Section
422.
16. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange. All Options issued under the Plan shall become
void in the event such approval is not obtained.
17. Information to Optionees. The Company shall provide financial
------------------------
statements at least annually to each Optionee during the period such Optionee
has one or more Options outstanding, and in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares.
9
<PAGE>
Exhibit "A"
-----------
STOCK OPTION AGREEMENT
----------------------
This STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of the _____ day of __________________, 1997, by and between GeoCities, a
California corporation, and ___________________________, an employee of
GeoCities (the "Optionee").
W I T N E S S E T H:
-------------------
WHEREAS, the Optionee is currently employed by GeoCities as
_________________ ________________________; and
WHEREAS, GeoCities desires to grant to the Optionee an option which
[meets/does not meet] the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended, to purchase shares of the common stock of GeoCities
("Common Stock");
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and conditions hereinafter set forth and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. GeoCities hereby grants to the Optionee the option to purchase ______
shares of Common Stock at a price per share of $________ upon the terms and
subject to the conditions set forth herein.
2. Subject to the conditions set forth herein, the right to exercise this
option shall accrue in periodic installments as follows:
(i) commencing with the period of twelve (12) consecutive months
beginning one (1) year after the date of this Agreement, this option may be
exercised to the extent of ___________ shares;
(ii) commencing with the period of twelve (12) consecutive months
beginning two (2) years after the date of this Agreement, this option may
be exercised to the extent of an additional ____________ shares;
(iii) commencing with the period of twelve (12) consecutive months
beginning three (3) years after the date of this Agreement, this option may
be exercised to the extent of an additional _____________ shares; and
(iv) commencing with the period of twelve (12) consecutive months
beginning four (4) years after the date of this Agreement, this option may
be exercised to the extent of an additional ____________ shares.
<PAGE>
This option may be exercised, in whole or in part, subject to the limitations
imposed by the exercise schedule set forth above, at any time and from time to
time commencing with the respective dates on which each portion becomes
exercisable and continuing until the seventh (7th) anniversary of the date of
this Agreement, at which time the entire unexercised portion of this option
shall expire.
3. In the event of termination of the Optionee's employment for cause, as
defined below, this option shall immediately terminate. If the Optionee's
employment is terminated for any reason other than for cause, then this option
may be exercised, to the extent this option was exercisable on the date of such
cessation of employment, within [three (3) months/thirty (30) days] after the
date he ceases to be an employee of GeoCities. An approved leave of absence
shall not be deemed a termination of employment for purposes of this Agreement,
but no option may be exercised during any such leave of absence, except during
the first three (3) months thereof. Solely for purposes of this paragraph 3,
"cause" shall mean any fair and honest cause or reason assigned in good faith by
the Board of Directors or any officer of GeoCities.
4. This option shall be exercisable by the Optionee only during his
lifetime. This option shall be nontransferable by the Optionee, other than by
will or the laws of descent and distribution.
5. In the event of the Optionee's death or permanent and total disability
while in the employ of GeoCities, or during the period following termination of
employment during which the Optionee is permitted to exercise an option pursuant
to Paragraph 3 hereof, this option may be exercised, to the extent that it was
otherwise executable as of the date of such death, disability or termination of
employment, by the Optionee or his transferee within one (1) year after the date
the Optionee dies or becomes permanently and totally disabled. The Optionee's
transferee shall be the person or persons entitled to exercise the option under
the Optionee's will, or, if no testamentary disposition of the option shall have
been made, his legal representative. Any transferee exercising the option must
furnish GeoCities with: (a) written confirmation of his status as transferee;
(b) evidence satisfactory to GeoCities to establish the validity of the transfer
of this option in compliance with this Agreement and with any laws or
regulations pertaining to said transfer; and (c) written acceptance of the terms
and conditions of this option as prescribed in this Agreement.
6. Subject to any required action of GeoCities's stockholders, the
existence of outstanding options hereunder shall not affect GeoCities's right or
power to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in its capital structure or business; to
approve any merger or consolidation, issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock; to elect its
dissolution or liquidation or that of any of its subsidiaries; to sell or
transfer any of its business; or to do any other corporate act whether similar
to the events described above or otherwise. If the number of outstanding shares
of Common Stock is increased or decreased or changed into or exchanged for a
different number or kind of securities, whether of GeoCities or any other
corporation, by reason of recapitalization, reclassification, stock split,
combination of shares, stock dividends or other similar event, the number and
kind of securities as to which outstanding options may be exercised, and the
option price at which outstanding options may be exercised may be adjusted by
the Board of Directors, whose determination shall be binding and final.
-2-
<PAGE>
7. This option may be exercised in accordance with the terms hereof by:
(a) giving written notice of such exercise to GeoCities, specifying the number
of whole shares to be purchased and accompanied by full payment of the purchase
price thereof, either in cash, by check, or by delivery to GeoCities of shares
of Common Stock already owned by the Optionee (duly endorsed in favor of
GeoCities or accompanied by a duly endorsed stock power) together with the
amount of any income tax GeoCities is required by law to withhold by reason of
such exercise, and (b) giving satisfactory assurances in writing, if requested
by GeoCities, signed by the person exercising this option, that the shares to be
purchased upon such exercise are being purchased for investment and not with the
view to distribution thereof.
8. (a) Notwithstanding anything contained herein to the contrary, in the
event that the Optionee ceases to be employed by GeoCities for any reason
(including, without limitation, as a result of resignation, retirement,
dismissal with or without cause, death or disability), GeoCities shall have the
first right and option, and the holders of Senior Securities (as defined below)
shall have the second right and option, to purchase from the Optionee (or, in
the case of death, from the Optionee's legal representative) all shares of
Common Stock held by the Optionee on the date of cessation of employment or
purchased by the Optionee following such date as permitted under Sections 3 and
5 hereof. In the event that GeoCities or any holder of Senior Securities shall
exercise such right and option, then the exercising party shall pay the
Optionee, as the purchase price for such shares of Common Stock, the Fair Market
Value (as defined below) of such shares. GeoCities may exercise its first right
and option by delivering notice to Optionee and to each holder of Senior
Securities within ninety (90) days following the cessation of the Optionee's
employment or the subsequent purchase of shares, as applicable, of its intent to
exercise its repurchase right and the Fair Market Value, and shall have paid for
such shares in cash at the end of such 90th day (unless the Fair Market Value of
the shares has not been conclusively determined as of such date, in which case
GeoCities may, at its sole option, pay the Optionee the estimated Fair Market
Value at the end of such 90th day, subject to adjustment upon the final
determination of the Fair Market Value, or pay the Optionee promptly after the
Fair Market Value is determined in accordance with subparagraph (d) below).
(b) If GeoCities fails to fully exercise its right to repurchase all
of the Optionee's shares of Common Stock after the cessation of the Optionee's
employment or the subsequent purchase of shares, as applicable, then GeoCities
shall give the Optionee and each holder of its Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (other
than those shares of Series D Preferred Stock held by Venture Lending or its
approved transferees), or Common Stock issued upon conversion thereof
(collectively, the "Senior Securities"), notice ("Termination Notice") of such
fact, the number of shares of Common Stock available for purchase by each such
holder and GeoCities' determination of the Fair Market Value of such shares. The
holders of the Senior Securities shall have the right to purchase the Optionee's
Common Stock, on a pro-rata basis, by giving GeoCities notice of their intent to
exercise such option ("Notice of Election") within twenty (20) days after the
receipt of the Termination Notice from GeoCities, together with cash in the
amount of the purchase price (unless the Fair Market Value of the shares has not
been conclusively determined as of such date, in which case each such holder
shall pay the Optionee promptly after the Fair Market Value has been
conclusively determined in accordance with subparagraph (d) below). For
purposes of this subparagraph (b), "pro rata basis" shall be equal to the
product obtained by multiplying (i) the number of the Optionee's shares not
purchased by GeoCities by (ii) a fraction, the numerator of which is the number
of shares of Senior Securities held by such
-3-
<PAGE>
holder (on an as-converted basis) and the denominator of which is the total
number of shares held by all the holders of Senior Securities (on an as-
converted basis).
(c) Any holder of Senior Securities that fails to provide a timely
Notice of Election shall be deemed to have elected to not purchase any shares in
a transaction pursuant to this Paragraph 8. If any holder of Senior Securities
elects (or is deemed to have elected) not to fully participate in a transaction
pursuant to this Paragraph 8, then GeoCities shall so notify the other holders
of Senior Securities who elected to participate (the "Repurchase Holders").
Such notice may be made by telephone if confirmed in writing within two (2)
days. The Repurchase Holders shall have five (5) days from the date such notice
was given to agree to purchase their pro rata share of the unsold portion of the
Optionee's shares. For purposes of this subparagraph (iv), a "pro rata share"
shall be equal to the product obtained by multiplying (i) the number of the
Optionee's shares in the unsold portion by (ii) a fraction, the numerator of
which is the number of shares of Senior Securities held by such Repurchase
Holder (on an as-converted basis) and the denominator of which is the total
number of shares held by all of the Repurchase Holders (on an as-converted
basis).
(d) If the Optionee objects to the Fair Market Value as so proposed,
then the Optionee may request an appraisal by written notice of objection
delivered not later than ten (10) days after receipt of the Fair Market Value
set by GeoCities' Board of Directors. If an appraisal is requested, the
Optionee and GeoCities shall jointly select an appraiser to determine the Fair
Market Value of the Optionee's shares. If the Optionee and GeoCities cannot
agree on an appraiser, each shall select its own appraiser (each, a "Party
Appraiser") and the two Party Appraisers shall jointly select a third appraiser
(the "Arbitrating Appraiser"). Each of the Party Appraisers shall submit its
appraisal to the Arbitrating Appraiser, and the Arbitrating Appraiser shall
select one of such appraisals as the Fair Market Value. All expenses of such
appraisal shall be paid by the Optionee, unless the Fair Market Value as
determined by such appraisal is at least five percent (5%) greater than the Fair
Market Value initially set by the Board of Directors, in which case GeoCities
and the holders of the Senior Securities shall pay for the appraisal in
proportion to each party's purchase of the Optionee's shares.
9. The Optionee may not sell or engage in any transaction which has
resulted in or will result in a change in the beneficial or record ownership of
any shares of Common Stock held by the Optionee, including without limitation a
voluntary or involuntary sale, assignment, transfer, pledge, hypothecation,
encumbrance, disposal, loan, gift, attachment or levy (a "Transfer"), except as
provided in this Agreement, and any such Transfer of shares of Common Stock or
attempted Transfer of shares of Common Stock in contravention of this Agreement
shall be void and ineffective for any purpose or confer on any transferee or
purported transferee any rights whatsoever.
10. (a) Each time the Optionee proposes to Transfer (or is required by
operation of law or other involuntary transfer) any or all of the shares of
Common Stock standing in the Optionee's name or owned by him or her during the
term of this Agreement, the Optionee shall first offer such shares to GeoCities
and the holders of the Senior Securities in accordance with the following
provisions:
(i) The Optionee shall deliver a written notice (a "Notice") to
GeoCities stating (A) the Optionee's bona fide intention to Transfer such
shares, (B) the name
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<PAGE>
and the address of the proposed transferee, (C) the number of shares to be
transferred, and (D) the purchase price per share and terms of payment for
which the Optionee proposes to Transfer such shares.
(ii) Within thirty (30) days after receipt of the Notice, GeoCities
shall have the first right to purchase or obtain such shares, upon the
price and terms of payment designated in the Notice. If the Notice
provides for the payment of non-cash consideration, GeoCities at its option
may pay the consideration in cash equal to GeoCities' good faith estimate
of the present fair market value of the non-cash consideration offered.
(iii) If GeoCities elects not to purchase or obtain all of the shares
designated in the Optionee's Notice, then GeoCities shall promptly provide
written notice of such fact, together with a copy of the Notice, to the
holders of the Senior Securities. The holders of the Senior Securities
shall have an additional thirty (30) days immediately following the receipt
of the Notice from GeoCities in which to purchase the shares not purchased
by GeoCities on a prorata basis upon the terms and conditions specified in
subparagraph (ii) above by giving GeoCities notice of their intent to
exercise such option ("Notice of Purchase") within thirty (30) days after
the receipt of the Termination Notice from GeoCities. For purposes of this
subparagraph (iii), "pro rata" shall be equal to the product obtained by
multiplying (i) the number of the Optionee's shares not purchased by
GeoCities by (ii) a fraction, the numerator of which is the number of
shares of Senior Securities held by such holder (on an as-converted basis)
and the denominator of which is the total number of shares held by all the
holders of Senior Securities (on an as-converted basis).
(iv) Any holder of Senior Securities that fails to provide a timely
Notice of Purchase shall be deemed to have elected to not purchase any
shares in a transaction pursuant to this Paragraph 10. If any holder of
Senior Securities elects (or is deemed to have elected) not to fully
participate in a transaction pursuant to this Paragraph 10, then GeoCities
shall so notify the other holders of Senior Securities who elected to
participate (the "Right of First Refusal Holders"). Such notice may be
made by telephone if confirmed in writing within two (2) days. The Right of
First Refusal Holders shall have five (5) days from the date such notice
was given to agree to purchase their pro rata share of the unsold portion
of the Optionee's shares. For purposes of this subparagraph (iv), a "pro
rata share" shall be equal to the product obtained by multiplying (i) the
number of the Optionee's shares in the unsold portion by (ii) a fraction,
the numerator of which is the number of shares of Senior Securities held by
such Right of First Refusal Holder (on an as-converted basis) and the
denominator of which is the total number of shares of Senior Securities
held by all the Right of First Refusal Holders (on an as-converted basis).
(v) If neither (x) GeoCities nor (y) any of the holders of the Senior
Securities elects to purchase or obtain all of the shares designated in the
Optionee's Notice, then the Optionee may Transfer the unsold shares
referred to in the Notice to the proposed transferee, providing such
Transfer (A) is completed within 180 days
-5-
<PAGE>
after the expiration of the right of GeoCities and the holders of the
Senior Securities to purchase or obtain such shares, (B) is made at the
same price and terms designated in the Notice, and (C) the proposed
transferee agrees to be bound by the terms and provisions of a buy-sell
agreement substantially similar to the terms of Paragraphs 9 through 13 of
this Agreement and to become a party to such an agreement immediately upon
receipt of such shares. If such shares are not so transferred, the Optionee
must give notice in accordance with this paragraph prior to any other or
subsequent Transfer of such shares.
(b) Notwithstanding Paragraph 9(a), the Optionee may Transfer for no or
nominal consideration shares to (i) the Optionee's spouse, parents,
grandparents, siblings, children or grandchildren or other members of the
Optionee's family (including relatives by marriage), or to a custodian, trustee
or other fiduciary for the account of the Optionee or members of his or her
family, or to any one other person designated by the Optionee, or (ii) by way of
bequest or inheritance upon death; provided that the Optionee or his
representative notifies GeoCities of such Transfer not less than ten (10) nor
more than ninety (90) days prior to the Transfer and that the proposed
transferee agrees to be bound by the terms and provisions of a buy-sell
agreement substantially similar to the terms of Paragraphs 8 through 13 of this
Agreement and to become a party to such an agreement immediately upon the
receipt of such shares. Such buy-sell agreement shall provide that, for
purposes of the paragraph in such buy-sell agreement that is analogous to
Paragraph 8 of this Agreement, a cessation of the Optionee's employment with
GeoCities shall be deemed to be a cessation of employment by the transferee.
11. Notwithstanding any provisions to the contrary contained in this
Agreement, GeoCities' obligations to pay or complete payment for any shares to
be purchased by it under this Agreement are subject to its being legally
permitted to do so under the tests contained in Sections 500 and 501 of the
California General Corporation Law or any successor statute applicable thereto.
The inability of GeoCities to validly purchase any shares hereunder by reason of
its failure to meet the tests contained in Sections 500 and 501 of the
California General Corporation Law shall not be deemed to affect or limit in any
way the ability of the holders of the Senior Securities to purchase the shares.
12. Each certificate representing shares owned of record or beneficially
by a party to this Agreement shall be endorsed with the following legend:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A STOCK OPTION
AGREEMENT BETWEEN GEOCITIES AND THE HOLDER OF THE SHARES EVIDENCED BY THIS
CERTIFICATE, PROVIDING FOR, AMONG OTHER MATTERS, THE RIGHT OF GEOCITIES AND
CERTAIN SHAREHOLDERS THEREOF TO REPURCHASE THE SHARES AND THE RIGHT OF
FIRST REFUSAL TO PURCHASE THE SHARES REPRESENTED BY THIS CERTIFICATE. A
COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL BUSINESS OFFICE OF
GEOCITIES.
Under no circumstances shall any Transfer of any shares subject hereto be valid
until the proposed transferee thereof shall have agreed to be bound by the terms
and provisions of a buy-sell agreement
-6-
<PAGE>
substantially similar to the terms of Paragraphs 9 through 13 of this Agreement
and to become a party to such an agreement immediately upon receipt of such
shares; and notwithstanding any other provisions of this Agreement, no such
Transfer of any kind shall in any event result in the non-applicability of the
provisions hereof at any time to any of the shares subject hereto.
13. The restrictions on Transfer of shares set forth in this Agreement
shall terminate upon the consummation of a firm commitment underwritten public
offering from which GeoCities receives gross proceeds of not less than $20
million and in which the offering price per share (prior to underwriting
commissions and expenses) equals at least $10 (as adjusted for stock splits,
stock dividends, reorganizations and the like).
14. This Agreement is made solely for the benefit of the parties to this
Agreement and their respective successors and assigns, and, except as provided
in Paragraphs 8 through 13, no other person or entity shall have or acquire any
right by virtue of this Agreement. Each holder of the Senior Securities shall
be a third-party beneficiary of Paragraphs 8 through 13 of this Agreement.
15. Unless the shares to be issued are at the time of issuance registered
under the Securities Act of 1933, as amended, this option is granted on the
condition that the purchase of stock hereunder shall be for investment purposes
and not with the view to resale or distribution.
16. Neither the Optionee nor any person claiming under or through him
shall be, or have any of the rights or privileges of, a stockholder of GeoCities
with respect to any of the shares issuable upon the exercise of this option,
unless and until certificates representing such shares shall have been issued
and delivered to him.
17. Any notice to be given to GeoCities under the terms of this Agreement
shall be addressed to GeoCities, in care of its President, at 1918 Main Street,
Third Floor, Santa Monica, California 90405-1030, or to such other address as
GeoCities may hereafter designate in writing. Any notice to be given to the
Optionee shall be addressed to the Optionee at the address set forth beneath his
signature hereto, or at any other address as the Optionee may hereafter
designate in writing. Any such notice shall be deemed to have been duly given
if and when personally delivered, or if mailed, two (2) business days following
its being deposited in the United States mails in a properly sealed envelope,
addressed as aforesaid, registered or certified, postage prepaid.
18. Except as otherwise provided herein, this option and the rights and
privileges conferred by this Agreement may not be transferred, assigned, pledged
or hypothecated by the Optionee in any way (whether by operation of law or
otherwise) and shall not be subject to sale under execution, attachment or
similar process. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of this option, or of any right or privilege conferred hereby,
contrary to the provisions hereof, or upon any attempted sale under any
execution, attachment or similar process upon the rights and privileges
conferred hereby, this option and the rights and privileges conferred upon the
Optionee in this Agreement shall immediately become null and void.
19. Subject to the limitations on transferability contained herein, this
Agreement shall be binding upon and inure to the benefit of the heirs, legal
representatives, successors and assigns of the parties hereto.
-7-
<PAGE>
20. Nothing in this Agreement is intended, nor shall it be deemed, to
create any employment agreement between the Optionee and GeoCities or to impose
any obligation on the part of GeoCities to maintain Optionee's employment with
GeoCities, and any rights that the Optionee may have GeoCities with respect to
the Optionee's employment, other than as an at-will employee, shall be as set
forth in a written employment agreement between the Optionee and GeoCities, if
any.
21. The option granted to the Optionee under this Agreement is subject to
the adoption by the Board of Directors and shareholders of GeoCities of
GeoCities' 1997 Stock Option Plan, a copy of which is enclosed herewith.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, as of the day and year first above written.
GEOCITIES
By:
------------------------------
David C. Bohnett, President
ACCEPTED:
[Name]
- -----------------------
[Address]
- -----------------------
-8-
<PAGE>
Consent of Spouse
-----------------
The undersigned spouse of the Optionee acknowledges on his or her own
behalf that: I have read the foregoing Agreement and I know its contents. I am
aware that by its provisions my spouse grants GeoCities and certain other
shareholders an option to purchase all of his or her shares of GeoCities,
including my community interest in them. I hereby consent to the sale, approve
of the provisions of the Agreement, and agree that those shares and my interest
in them are subject to the provisions of the Agreement and that I will take no
action at any time to hinder operation of the Agreement on those shares or my
interest in them.
---------------------------------
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<PAGE>
EXHIBIT 10.15
GEOCITIES
1998 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Incentive Plan is intended to promote the interests of
GeoCities, a California corporation, by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
(i) the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
(ii) the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special options,
(iii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such shares or
as a bonus for services rendered the Corporation (or any Parent or Subsidiary),
(iv) the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive options at periodic intervals
to purchase shares of Common Stock, and
(v) the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to special options.
<PAGE>
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Beginning with the Section 12 Registration Date, the following provisions shall
govern the administration of the Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders but may delegate such authority in whole or in part to the Primary
Committee.
(ii) Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
(iii) The Primary Committee shall have the sole and exclusive
authority to determine which Section 16 Insiders and other highly compensated
Employees shall be eligible for participation in the Salary Investment Option
Grant Program for one or more calendar years. However, all option grants under
the Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
(iv) Administration of the Automatic Option Grant and Director
Fee Option Grant Programs shall be self-executing in accordance with the terms
of those programs.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations, to
construe and interpret the provisions of the Plan and the awards thereunder and
to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible persons
are to receive such awards, the time or times when such awards are to be made,
the number of shares to be covered by each such award, the vesting schedule (if
any) applicable to the award, the status of a granted option as either an
Incentive Option or a Non-Statutory Option and the maximum term for which the
option is to remain outstanding;
2.
<PAGE>
(iii) to amend, modify or cancel any outstanding award with the
consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant and Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open
3.
<PAGE>
market. The maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed 2,670,940 shares.
Such authorized share reserve consists of (i) the number of shares which remain
available for issuance, as of the Plan Effective Date, under the Predecessor
Plan as last approved by the Corporation's stockholders, including the shares
subject to the outstanding options to be incorporated into the Plan and the
additional shares which would otherwise be available for future grant, plus (ii)
an increase authorized by the Board but subject to stockholder approval prior to
the Section 12 Registration Date.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1998 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent options
or direct stock issuances under the Plan. However, should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance. Shares of Common Stock
underlying one or more stock appreciation rights exercised under the Plan shall
NOT be available for subsequent issuance.
D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities by which the share reserve is
to increase each calendar year pursuant to the automatic share increase
provisions of the Plan, (iii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year, (iv) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (iv) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan and (v) the
number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plan. Such
adjustments to the outstanding options are to be effected in a manner
4.
<PAGE>
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section II of
Article Seven and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-approved brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
6.
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. CESSATION OF SERVICE.
--------------------
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate immediately
and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service to such
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
7.
<PAGE>
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-statutory Option may, to the
extent permitted by the Plan Administrator, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during
8.
<PAGE>
any one calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but
not otherwise fully-vested shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise
9.
<PAGE>
price payable per share under each outstanding option, provided the aggregate
--------
exercise price payable for such securities shall remain the same, (ii) the
maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those options are assumed or otherwise continued in full force
and effect pursuant to the terms of the Change in Control. Any such option
shall accordingly become exercisable, immediately prior to the effective date of
such Change in Control, for all of the shares of Common Stock at the time
subject to that option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. In addition, the Plan Administrator may at
any time provide that one or more of the Corporation's repurchase rights shall
not be assignable in connection with such Change in Control and shall terminate
upon the consummation of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
options do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
-------
the option term or (ii) the expiration of the one (1) year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may at any time provide that one or more of the Corporation's
repurchase rights shall immediately terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee's Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.
10.
<PAGE>
H. The portion of any Incentive Option accelerated in connection
with a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a Non-
Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
11.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment Option Grant
Program for one or more calendar years beginning after the Underwriting Date and
select the Section 16 Insiders and other highly compensated Employees eligible
to participate in the Salary Investment Option Grant Program for each such
calendar year. Each selected individual who elects to participate in the Salary
Investment Option Grant Program must, prior to the start of each calendar year
of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than Ten Thousand Dollars
($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary
Committee shall have complete discretion to determine whether to approve the
filed authorization in whole or in part. To the extent the Primary Committee
approves the authorization, the individual who filed that authorization shall be
granted an option under the Salary Investment Grant Program on the first trading
day in January for the calendar year for which the salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
12.
<PAGE>
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. CESSATION OF SERVICE. Each option outstanding at the time of the
--------------------
Optionee's cessation of Service shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the three (3)-year period following the Optionee's cessation of
Service. To the extent the option is held by the Optionee at the time of his or
her death, the option may be exercised by his or her Beneficiary. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Service, each outstanding option shall automatically
accelerate so that each such option shall, immediately prior to the effective
date of the Change in Control or Hostile Take-Over, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as fully-
vested shares of Common Stock. Each such option accelerated in connection with
a Change in Control shall terminate upon the Change in Control, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
13.
<PAGE>
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
14.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening options. Shares
of Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals or Service requirements. Each such
award shall be evidenced by one or more documents which comply with the terms
specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator.
2. Subject to the provisions of Section II of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING/ISSUANCE PROVISIONS.
---------------------------
1. The Plan Administrator may issue shares of Common Stock
which are fully and immediately vested upon issuance or which are to vest in one
or more installments over the Participant's period of Service or upon attainment
of specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
15.
<PAGE>
3. The Participant shall have full stockholder rights with
respect to the issued shares of Common Stock, whether or not the Participant's
interest in those shares is vested. Accordingly, the Participant shall have the
right to vote such shares and to receive any regular cash dividends paid on such
shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock, or should the performance
objectives not be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
6. Outstanding share right awards shall automatically
terminate, and no shares of Common Stock shall actually be issued in
satisfaction of those awards, if the performance goals or Service requirements
established for such awards are not attained. The Plan Administrator, however,
shall have the authority to issue shares of Common Stock in satisfaction of one
or more outstanding share right awards as to which the designated performance
goals or Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a
16.
<PAGE>
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control or Hostile Take-Over in which those repurchase
rights are assigned to the successor corporation (or parent thereof) or
otherwise continue in full force and effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
17.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates specified below:
-----------
1. Each individual serving as a non-employee Board member on
the Underwriting Date shall automatically be granted at that time a Non-
Statutory Option to purchase 10,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 10,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a non-
employee Board member, whether or not that individual is standing for re-
election to the Board, shall automatically be granted a Non-Statutory Option to
purchase 2,500 shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months.
B. EXERCISE PRICE.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
-------------------------------
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. Each initial 10,000-share
option shall vest, and the Corporation's repurchase right shall lapse, in a
series of four (4) successive equal annual installments upon the Optionee's
completion of each year of Board
18.
<PAGE>
service over the four (4)-year period measured from the grant date. Each annual
2,500-share option shall vest, and the Corporation's repurchase right shall
lapse, upon the Optionee's completion of one (1) year of Board service measured
from the grant date.
E. CESSATION OF BOARD SERVICE. The following provisions shall
--------------------------
govern the exercise of any options outstanding at the time of the Optionee's
cessation of Board service:
(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for a
twelve (12)-month period following the date of such cessation of Board
service, but in no event shall such option be exercisable after the
expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) Following the Optionee's cessation of Board service, the
option may not be exercised in the aggregate for more than the number of
shares in which the Optionee was vested on the date of such cessation of
Board service. Upon the expiration of the applicable exercise period or
(if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Board service, terminate and cease to be
outstanding for any and all shares in which the Optionee is not otherwise
at that time vested.
(iv) However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the
time subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control the Hostile
Take-Over, be exercised for all or any portion of those shares as fully-vested
shares of Common Stock. Each such option accelerated in connection with a
Change in Control shall terminate upon the Change in Control, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Each such option accelerated in connection with
19.
<PAGE>
a Hostile Take-Over shall remain exercisable until the expiration or sooner
termination of the option term.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control or Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
--------
exercise price payable for such securities shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for options made under
the Discretionary Option Grant Program.
20.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Board shall have the sole and exclusive authority to implement the
Director Fee Option Grant Program as of the first day of any calendar year
beginning after the Underwriting Date. Upon such implementation of the Program,
each non-employee Board member may elect to apply all or any portion of the
annual retainer fee otherwise payable in cash for his or her service on the
Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to the first day of the calendar year for which the
election is to be in effect. Each non-employee Board member who files such a
timely election shall automatically be granted an option under this Director Fee
Option Grant Program on the first trading day in January in the calendar year
for which the annual retainer fee which is the subject of that election would
otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
21.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each month of Board service during the
calendar year in which the option is granted. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while one or
more of his or her options are outstanding, then each such option shall remain
exercisable, for any or all of the shares for which the option is exercisable at
the time of such cessation of Board service, until the earlier of (i) the
-------
expiration of the option term or (ii) the expiration of the three (3)-year
period measured from the date of such cessation of Board service. However, each
such option outstanding at the time of such cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each of
the Optionee's outstanding options shall immediately become exercisable for all
the shares of Common Stock at the time subject to that option, and the option
may be exercised for any or all of those shares as fully-vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. To the extent the option is held by the Optionee at the time
of his or her death, the option may be exercised by his or her Beneficiary.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Board service, each outstanding option shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Change in Control or Hostile Take-Over, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise expressly continued in full force and effect pursuant to the terms of
the Change in Control. Each such option accelerated in connection with a
Hostile Take-Over shall remain exercisable until the expiration or sooner
termination of the option term.
22.
<PAGE>
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
23.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the Corporation
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Taxes incurred by such holders in connection with the exercise of their
options or the vesting of their shares. Such right may be provided to any such
holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
24.
<PAGE>
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. However, the Salary Investment Option Grant Program and
Director Fee Option Grant Program shall not be implemented until such time as
the Primary Committee or the Board may deem appropriate. Options may be granted
under the Discretionary Option Grant or Automatic Option Grant Program at any
time on or after the Plan Effective Date. However, no options granted under the
Plan may be exercised, and no shares shall be issued under the Plan, until the
Plan is approved by the Corporation's stockholders. If such stockholder
approval is not obtained within twelve (12) months after the Plan Effective
Date, then all options previously granted under this Plan shall terminate and
cease to be outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further options or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options
outstanding under the Predecessor Plan on the Section 12 Registration Date shall
be incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plan which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) _____________],
--------
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
25.
<PAGE>
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained
within twelve (12) months after the date the first such excess issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
26.
<PAGE>
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
27.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under the Plan.
B. BENEFICIARY shall mean, in the event the Plan Administrator implements
-----------
a beneficiary designation procedure, the person designated by an Optionee or
Participant, pursuant to such procedure, to succeed to such person's rights
under any outstanding awards held by him or her at the time of death. In the
absence of such designation or procedure, the Beneficiary shall be the personal
representative of the estate of the Optionee or Participant or the person or
persons to whom the award is transferred by will or the laws of descent and
distribution.
C. BOARD shall mean the Corporation's Board of Directors.
-----
D. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, unless securities representing more than fifty
------
percent (50%) of the total combined voting power of the voting securities
of the successor corporation are immediately thereafter beneficially owned,
directly or indirectly and in substantially the same proportion, by the
persons who beneficially owned the Corporation's outstanding voting
securities immediately prior to such transaction.
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board recommends such
stockholders accept.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
F. COMMON STOCK shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
G. CORPORATION shall mean GeoCities, a California corporation, and its
-----------
successors.
H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
---------------------------------
grant in effect for non-employee Board members under Article Six of the Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under the Plan.
J. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any options made on the Underwriting Date,
the Fair Market Value shall be deemed to be equal to the price per share at
which the Common Stock is to be sold in the initial public offering
pursuant to the Underwriting Agreement.
(iv) For purposes of any options made prior to the Underwriting
Date, the Fair Market Value shall be determined by the Plan Administrator,
after taking into account such factors as it deems appropriate.
A-2.
<PAGE>
M. HOSTILE TAKE-OVER shall mean:
-----------------
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
N. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation or Parent or Subsidiary
employing the individual which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B)
a reduction in his or her level of compensation (including base salary,
fringe benefits and target bonus under any performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a relocation
of such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected by
the Corporation without the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any intentional wrongdoing by such person,
whether by omission or commission, which adversely
A-3.
<PAGE>
affects the business or affairs of the Corporation (or any Parent or Subsidiary)
in a material manner. This shall not limit the grounds for the dismissal or
discharge of any person in the Service of the Corporation (or any Parent or
Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
S. OPTION SURRENDER VALUE shall mean the Fair Market Value per share of
----------------------
Common Stock on the date the option is surrendered to the Corporation or, in the
event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of Common Stock paid by the tender offeror in effecting
such Hostile Take-Over, if greater. However, if the surrendered option is an
Incentive Option, the Option Surrender Value shall not exceed the Fair Market
Value per share.
T. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
X. PLAN shall mean the Corporation's 1998 Stock Incentive Plan, as set
----
forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the
A-4.
<PAGE>
Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance
Programs with respect to one or more classes of eligible persons, to the extent
such entity is carrying out its administrative functions under those programs
with respect to the persons under its jurisdiction. However, the Primary
Committee shall have the plenary authority to make all factual determinations
and to construe and interpret any and all ambiguities under the Plan to the
extent such authority is not otherwise expressly delegated to any other Plan
Administrator.
Z. PLAN EFFECTIVE DATE shall mean July 6, 1998, the date on which the
-------------------
Plan was adopted by the Board.
AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing 1995 Stock
----------------
Option Plan in effect immediately prior to the Plan Effective Date hereunder.
AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program with respect to all
eligible individuals.
AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
--------------------------------------
investment grant program in effect under the Plan.
AD. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
----------------------------
Stock is first registered under Section 12(g) of the 1934 Act.
AF. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AG. SERVICE shall mean the performance of services for the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
AI. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AJ. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the
A-5.
<PAGE>
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
AK. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AL. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AM. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AN. UNDERWRITING DATE shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-6.
<PAGE>
EXHIBIT 10.16
GEOCITIES
1998 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of GeoCities, a California corporation, by providing eligible employees with the
opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll-deduction based employee stock purchase plan designed
to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed Three
Hundred Thousand (300,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant and in the aggregate on any one Purchase Date and (iii) the number
and class of securities and the price per share in effect under each outstanding
purchase right in order to prevent the dilution or enlargement of benefits
thereunder.
<PAGE>
IV. PURCHASE PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive purchase periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each purchase period shall have a duration of six (6) months.
Purchase periods shall run from the first business day in February each year to
the last business day in July of the same year and from the first business day
in August each year to the last business day in January of the following year.
However, the first purchase period shall commence at the Effective Time and
terminate on the last business day in January 1999.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any purchase period under the Plan may enter that purchase period on such start
date.
B. To participate in the Plan for a particular purchase period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before the start date of the purchase period.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock under the Plan may be any multiple of one
percent (1%) of the Base Salary paid to the Participant during each purchase
period, up to a maximum of ten percent (10%). The deduction rate so authorized
shall continue in effect throughout the purchase period. the Participant may
not increase his or her rate of payroll deduction during a purchase period.
However, the Participant may, at any time during the purchase period, reduce his
or her rate of payroll deduction to become effective as soon as possible after
filing the appropriate form with the Plan Administrator. The Participant may
not, however, effect more than one (1) such reduction per purchase period.
B. Payroll deductions shall begin on the first pay day following the
start date of the purchase period and shall (unless sooner terminated by the
Participant) continue through the pay day ending with or immediately prior to
the last day of the purchase period. The amounts so collected shall be credited
to the Participant's book account under the Plan, but no interest shall be paid
on the balance from time to time outstanding in such account. The amounts
collected from the Participant shall not be required to be held in any
segregated account or trust fund and may be commingled with the general assets
of the Corporation and used for general corporate purposes.
2.
<PAGE>
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
-----------------------
separate purchase right on the start date of each purchase period in which he or
she participates. The purchase right shall provide the Participant with the
right to purchase shares of Common Stock on the Purchase Date upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
------------------------------
automatically exercised on the Purchase Date, and shares of Common Stock shall
accordingly be purchased on behalf of each Participant (other than Participants
whose payroll deductions have previously been refunded pursuant to the
Termination of Purchase Right provisions below) on each such Purchase Date. The
purchase shall be effected by applying the Participant's payroll deductions for
the purchase period ending on such Purchase Date to the purchase of whole shares
of Common Stock at the purchase price in effect for that purchase period.
C. PURCHASE PRICE. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date shall
be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value
-----
per share of Common Stock on the start date of the purchase period or (ii) the
Fair Market Value per share of Common Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date shall be the number of
whole shares obtained by dividing the amount collected from the Participant
through payroll deductions during the purchase period ending with that Purchase
Date by the purchase price in effect for that Purchase Date. However, the
maximum number of shares of Common Stock purchasable per Participant on any one
Purchase Date shall not exceed One Thousand (1,000) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
In addition, the maximum aggregate number of shares of Common Stock purchasable
by all Participants on any
3.
<PAGE>
one Purchase Date shall not exceed Twelve Thousand Five Hundred (12,500) shares,
subject to periodic adjustments in the event of certain changes in the
Corporation's capitalization.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the last day of the
purchase period, terminate his or her outstanding purchase right by filing
the appropriate form with the Plan Administrator (or its designate), and no
further payroll deductions shall be collected from the Participant with
respect to the terminated purchase right. Any payroll deductions collected
during the purchase period in which such termination occurs shall, at the
Participant's election, be immediately refunded or held for the purchase of
shares on the next Purchase Date. If no such election is made at the time
such purchase right is terminated, then the payroll deductions collected
with respect to the terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the purchase
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent purchase period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the start date of the new purchase period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the purchase period in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the purchase period in which such leave commences,
to (a) withdraw all the payroll deductions collected to date on his or her
behalf for that purchase period or (b) have such funds held for the
purchase of shares on his or her behalf on the next scheduled Purchase
Date. In no event, however, shall any further payroll deductions be
collected on the Participant's behalf during such leave. Upon the
Participant's return to active
4.
<PAGE>
service (i) within ninety (90) days following the commencement of such
leave or, (ii) prior to the expiration of any longer period for which such
Participant's right to reemployment with the Corporation is guaranteed by
either statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in effect at the time the leave
began. However, should the Participant's leave of absence exceed ninety
(90) days and his or her re-employment rights not be guaranteed by either
statute or contract, then the Participant's status as an Eligible Employee
will be deemed to terminate on the ninety-first (91st) day of that leave,
and such Participant's purchase right for the purchase period in which that
leave began shall thereupon terminate. An individual who returns to active
employment following such a leave shall be treated as a new Employee for
purposes of the Plan and must, in order to resume participation in the
Plan, re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the start date of the new purchase period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control by applying the payroll deductions of each Participant for the
purchase period in which such Change in Control occurs to the purchase of whole
shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
-----
Stock on the start date of the purchase period in which such Change in Control
occurs or (ii) the Fair Market Value per share of Common Stock immediately prior
to the effective date of such Change in Control. However, the applicable
limitation on the number of shares of Common Stock purchasable per Participant
shall continue to apply to any such purchase, but not the limitation applicable
to the maximum number of shares of Common Stock purchasable in the aggregate.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased
5.
<PAGE>
on the Participant's behalf in accordance with the provisions of the Plan and
the Participant has become a holder of record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue on the Purchase Date in effect for the period
on which such right is granted.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular purchase period, then the payroll
deductions which the Participant made during that purchase period with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
6.
<PAGE>
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on July 6, 1998 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial purchase period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2008, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction.
No further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any purchase period.
However, the Plan may be amended or terminated immediately upon Board action, if
and to the extent necessary to assure that the Corporation will not recognize,
for financial reporting purposes, any compensation expense in connection with
the shares of Common Stock offered for purchase under the Plan, should the
financial accounting rules applicable to the Plan at the Effective Time be
subsequently revised so as to require the recognition of compensation expense in
the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan or the
maximum number of shares purchasable per Participant on any one Purchase Date,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
7.
<PAGE>
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
SCHEDULE A
----------
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------
GeoCities
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BASE SALARY shall mean the regular base salary paid to a
-----------
Participant by one or more Participating Companies during such individual's
period of participation in one or more purchase periods under the Plan,
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. The
following items of compensation shall NOT be included in Base Salary: (i) all
overtime payments, bonuses, commissions (other than those functioning as base
salary equivalents), profit-sharing distributions and other incentive-type
payments and (ii) any and all contributions (other than Code Section 401(k) or
Code Section 125 contributions) made on the Participant's behalf by the
Corporation or any Corporate Affiliate under any employee benefit or welfare
plan now or hereafter established.
B. BOARD shall mean the Corporation's Board of Directors.
-----
C. CHANGE IN CONTROL shall mean any of the following transactions
-----------------
effecting a change in ownership or control of the Corporation:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's shareholders.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
E. COMMON STOCK shall mean the Corporation's common stock.
------------
A-1.
<PAGE>
F. CORPORATE AFFILIATE shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. CORPORATION shall mean GeoCities, a California corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of GeoCities which shall by appropriate action adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
--------------
Agreement is executed and finally priced. Any Corporate Affiliate which becomes
a Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
A-2.
<PAGE>
(iii) For purposes of the initial purchase period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
K. 1933 ACT shall mean the Securities Act of 1933, as amended.
--------
L. 1934 ACT shall mean the Securities Exchange Act of 1934, as
--------
amended.
M. PARTICIPANT shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. PLAN shall mean the Corporation's 1998 Employee Stock Purchase
----
Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each purchase
-------------
period. The initial Purchase Date shall be January 29, 1999.
R. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
S. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
EXHIBIT 10.17
STOCK OPTION AGREEMENT
----------------------
This STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of January 13, 1997, by and between GeoCities, a California corporation, and
CMG@VENTURES (the "Optionee").
W I T N E S S T H:
- - - - - - - - -
WHEREAS, the Optionee is currently the sole holder of GeoCities' Series A
Preferred Stock and Series B Preferred Stock and, concurrently with the
execution of this Agreement, is purchasing shares of GeoCities' Series D
Preferred Stock; and
WHEREAS, in connection with the Optionee's purchase of its Series D
Preferred Stock, GeoCities desires to grant to the Optionee an option which does
not meet the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended, to purchase shares of the common stock of GeoCities ("Common
Stock");
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and conditions hereinafter set forth and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. GeoCities hereby grants to the Optionee the option to purchase 250,000
shares of Common Stock at a price per share of $3.54 upon the terms and subject
to the conditions set forth herein.
2. The Optionee shall have right to exercise this option in whole or in
part and at any time and from time to time commencing with the execution and
delivery of this Agreement and continuing until January 13, 2004, at which time
the entire unexercised portion of this option shall expire.
3. This option shall be nontransferable by the Optionee, other than by
operation of law.
4. Subject to any required action of GeoCities' stockholders, the
existence of outstanding options hereunder shall not affect GeoCities' right or
power to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in its capital structure or business; to
approve any merger or consolidation, issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock; to elect its
dissolution or liquidation or that of any of its subsidiaries; to sell or
transfer any of its business; or to do any other corporate at whether similar to
the events described above or otherwise. If the number of outstanding shares of
Common Stock is increased or decreased or changed into or exchanged for a
different number or kind of securities, whether of GeoCities or any other
corporation, by reason of recapitalization, reclassification, stock split,
combination of shares, stock dividends or other similar event, the number and
kind of securities as to which outstanding options may be
1
<PAGE>
exercised, and the option price at which outstanding options may be exercised
may be adjusted by the Board of Directors, whose determination shall be binding
and final.
5. This option may be exercised in accordance with the terms hereof by:
(a) giving written notice of such exercise to GeoCities, specifying the number
of whole shares to be purchased and accompanied by full payment of the purchase
price thereof; either in cash, by check, or by delivery to GeoCities of shares
of Common Stock already owned by the Optionee (duly endorsed in favor of
GeoCities or accompanied by a duly endorsed stock power) together with the
amount of any income tax GeoCities is required by law to withhold by reason of
such exercise, and (b) giving satisfactory assurances in writing, if requested
by GeoCities, signed by the person exercising this option, that the shares to be
purchased upon such exercise are being purchased for investment and not with the
view to distribution thereof. Any Common Stock which the Optionee acquires by
its exercise of this option shall be subject to the rights and restrictions set
forth in that certain Amended and Restated Rights Agreement, dated as of the
date hereof: among the Optionee, GeoCities and certain other shareholders named
therein.
6. Unless the shares to be issued are at the time of issuance
registered under the Securities Act of 1933, as amended, this option is granted
on the condition that the purchase of stock hereunder shall be for investment
purposes and not with the view to resale or distribution.
7. Neither the Optionee nor any person claiming under or through it
shall be, or have any of the rights or privileges of; a stockholder of GeoCities
with respect to any of the shares issuable upon the exercise of this option,
unless and until certificates representing such shares shall have been issued
and delivered to it.
8. Any notice to be given to GeoCities under the terms of this Agreement
shall be addressed to GeoCities, in care of its President, at 1918 Main Street,
Santa Monica, California 90405, or to such other address as GeoCities may
hereafter designate in writing. Any notice to be given to the Optionee shall be
addressed to the Optionee at the address set forth beneath its signature hereto,
or at any other address as the Optionee may hereafter designate in writing. Any
such notice shall be deemed to have been duly given if and when personally
delivered, or if mailed, two (2) business days following its being deposited
in the United States mails in a properly sealed envelope, addressed as
aforesaid, registered or certified, postage prepaid.
9. Except as otherwise provided herein, this option and the rights and
privileges conferred by this Agreement may not be transferred, assigned,
pledged or hypothecated by the Optionee in any way (whether by operation of law
or otherwise) and shall not be subject to sale under execution, attachment or
similar process. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of this option, or of any right or privilege conferred
hereby, contrary to the provisions hereof; or upon any attempted sale under any
execution, attachment or similar process upon the rights and privileges
conferred hereby, this option and the rights and privileges conferred upon the
Optionee in this Agreement shall immediately become null and void.
2
<PAGE>
10. Subject to the limitations on transferability contained herein, this
Agreement shall be binding upon and inure to the benefit of the heirs, legal
representatives, successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, as of the day and year first above written.
GEOCITIES
By: /s/ David C. Bohnett
-----------------------
David C. Bohnett, President
ACCEPTED:
CMG@VENTURES
By: /s/ Peter Mills
---------------
Name: Peter Mills
Title: Managing Director
CMG@Ventures
2420 Sand Hill Road, Suite 101
Menlo Park, CA 94205
[Address]
3
<PAGE>
EXHIBIT 10.18
STOCK OPTION AGREEMENT
----------------------
This STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of January 13, 1997, by and between GeoCities, a California corporation, and
DAVID C. BOHNETT, an employee of GeoCities (the "Optionee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Optionee is currently serving as the president and chief
executive officer, and is a director, of GeoCities; and
WHEREAS, GeoCities desires to grant to the Optionee an option which does
not meet the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended, to purchase shares of the common stock of GeoCities ("Common
Stock");
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and conditions hereinafter set forth and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. GeoCities hereby grants to the Optionee the option to purchase 150,000
shares of Common Stock at a price per share of $3.54 upon the terms and subject
to the conditions set forth herein.
2. Subject to the conditions set forth herein, the right to exercise this
option shall accrue in periodic installments as follows:
(i) commencing January 13, 1998, this option may be exercised to the
extent of 37,500 shares;
(ii) commencing January 13, 1999, this option may be exercised to the
extent of an additional 37,500 shares;
(iii) commencing January 13, 2000, this option may be exercised to the
extent of an additional 37,500 shares; and
(iv) commencing January 13, 2001, this option may be exercised to the
extent of an additional 37,500 shares.
This option may be exercised, in whole or in part, subject to the limitations
imposed by the exercise schedule set forth above, at any time and from time to
time commencing with the respective dates on which each portion becomes
exercisable and continuing until January 13, 2004, at which time the entire
unexercised portion of this option shall expire.
3. For purposes of this Agreement, the Optionee's service as an officer
and director of GeoCities shall be deemed to be the equivalent of the Optionee's
employment with GeoCities,
<PAGE>
and all references to the Optionee's employment and cessation of employment
shall be deemed to refer to the Optionee's service as an officer and director of
GeoCities and his ceasing to be an officer and director of GeoCities,
respectively. In the event of the termination of the Optionee's employment for
any reason, including for cause or without cause, resignation, death or
disability, then (i) the exercise schedule to which this option is subject
pursuant to Paragraph 2 hereof shall be accelerated and such option shall be
immediately exercisable, and (ii) the Optionee must then exercise his option
within thirty (30) days thereafter. The Optionee shall be deemed to have waived
the right to exercise his option as to any shares which the Optionee fails to
purchase within such thirty (30) day period.
4. This option shall be nontransferable by the Optionee, other than by
will or the laws of descent and distribution.
5. Subject to any required action of GeoCities' stockholders, the
existence of outstanding options hereunder shall not affect GeoCities' right or
power to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in its capital structure or business; to
approve any merger or consolidation, issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock; to elect its
dissolution or liquidation or that of any of its subsidiaries; to sell or
transfer any of its business; or to do any other corporate act whether similar
to the events described above or otherwise. If the number of outstanding shares
of Common Stock is increased or decreased or changed into or exchanged for a
different number or kind of securities, whether of GeoCities or any other
corporation, by reason of recapitalization, reclassification, stock split,
combination of shares, stock dividends or other similar event, the number and
kind of securities as to which outstanding options may be exercised, and the
option price at which outstanding options may be exercised may be adjusted by
the Board of Directors, whose determination shall be binding and final.
6. In the event of (i) a liquidation, dissolution or winding up of
GeoCities, (ii) a consolidation or merger of GeoCities with or into any other
corporation or corporations (other than a wholly-owned subsidiary), (iii) the
sale, transfer or other disposition of all or substantially all of the assets of
GeoCities or (iv) the consummation of any transaction or series of related
transactions which results in GeoCities' shareholders immediately prior to such
transaction not holding at least 50% of the voting power of the surviving or
continuing entity (collectively, a "Liquidation"), then in the event of any such
Liquidation, the exercise schedule to which this option is subject pursuant to
Paragraph 2 hereof shall be accelerated, and the option shall be immediately
exercisable upon the consummation of any such Liquidation. Any actions taken
hereunder by the Board of Directors may be done without consideration of any
resulting income tax consequences to GeoCities or the Optionee.
7. This option may be exercised in accordance with the terms hereof by:
(a) giving written notice of such exercise to GeoCities, specifying the number
of whole shares to be purchased and accompanied by full payment of the purchase
price thereof, either in cash, by check, or by delivery to GeoCities of shares
of Common Stock already owned by the Optionee (duly endorsed in favor of
GeoCities or accompanied by a duly endorsed stock power) together with the
amount of any income tax GeoCities is required by law to withhold by reason of
such exercise, and (b) giving satisfactory assurances in writing, if requested
by GeoCities, signed by
<PAGE>
the person exercising this option, that the shares to be purchased upon such
exercise are being purchased for investment and not with the view to
distribution thereof. Any Common Stock which the Optionee acquires by his
exercise of this option shall be subject to the rights and restrictions set
forth in the Optionee's employment agreement dated as of December 28, 1995, as
amended, and that certain Amended and Restated Rights Agreement, dated as of the
date hereof, among the Optionee, GeoCities and certain other shareholders named
therein.
8. Unless the shares to be issued are at the time of issuance registered
under the Securities Act of 1933, as amended, this option is granted on the
condition that the purchase of stock hereunder shall be for investment purposes
and not with the view to resale or distribution.
9. Neither the Optionee nor any person claiming under or through him shall
be, or have any of the rights or privileges of' a stockholder of GeoCities with
respect to any of the shares issuable upon the exercise of this option, unless
and until certificates representing such shares shall have been issued and
delivered to him.
10. Any notice to be given to GeoCities under the terms of this Agreement
shall be addressed to GeoCities, in care of its President, at 1918 Main Street,
Santa Monica, California 90405, or to such other address as GeoCities may
hereafter designate in writing. Any notice to be given to the Optionee shall be
addressed to the Optionee at the address set forth beneath his signature hereto,
or at any other address as the Optionee may hereafter designate in writing. Any
such notice shall be deemed to have been duly given if and when personally
delivered, or if mailed, two (2) business days following its being deposited in
the United States mails in a properly sealed envelope, addressed as aforesaid,
registered or certified, postage prepaid.
11. Except as otherwise provided herein, this option and the rights and
privileges conferred by this Agreement may not be transferred, assigned, pledged
or hypothecated by the Optionee in any way (whether by operation of law or
otherwise) and shall not be subject to sale under execution, attachment or
similar process. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of this option, or of any right or privilege conferred hereby,
contrary to the provisions hereof or upon any attempted sale under any
execution, attachment or similar process upon the rights and privileges
conferred hereby, this option and the rights and privileges conferred upon the
Optionee in this Agreement shall immediately become null and void.
12. Subject to the limitations on transferability contained herein, this
Agreement shall be binding upon and inure to the benefit of the heirs, legal
representatives, successors and assigns of the parties hereto.
13. Nothing in this Agreement is intended, nor shall it be deemed, to
create any employment agreement between the Optionee and GeoCities or to impose
any obligation on the part of GeoCities to maintain Optionee's employment with
GeoCities, and any rights that the Optionee may have GeoCities with respect to
the Optionee's employment, other than as an at-will employee, shall be as set
forth in a written employment agreement between the Optionee and GeoCities, if
any.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
in duplicate, as of the day and year first above written.
GEOCITIES
By: /s/ David C. Bohnett
--------------------
David C. Bohnett, President
ACCEPTED
/s/ David C. Bohnett
- ---------------------
DAVID C. BOHNETT
9000 Clifton Way
Penthouse
Beverly Hills, California 90211
<PAGE>
EXHIBIT 10.20
LICENSING AGREEMENT
This Licensing Agreement is made and entered into this 6th day of November,
1997, by and between GeoCities, a California corporation having its principal
offices at 1918 Main Street, 3rd Floor, Santa Monica, CA 90405-1030
("GeoCities"), and GeoCities Japan Corporation, a Japanese corporation having
its principal offices at 24-1, Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan
(hereinafter "GJC").
Whereas, GeoCities has engaged in the business providing certain services
through its Internet homepage located in the USA (the "Services");
Whereas, GJC desires to be granted the licenses to modify, use, reproduce and/or
sublicense to use certain intellectual properties developed, created and owned
by GeoCities for the purpose of localizing and exploiting the Japanese version
of the Services in Japanese market;
Whereas, GeoCities is willing to grant such licenses to GJC pursuant to the
terms and conditions of this Agreement;
Now, therefore, the parties hereby agree as follows:
1. Definitions.
(1) The term "Licensed Programs" as used hereunder shall mean computer source
code and object code programs developed and owned by GeoCities necessary
for operating GeoCities' servers and homepage by or through which the
Services (including any upgrade versions thereof) are or will be provided.
(2) The term "Licensed Materials" as used hereunder shall mean the copyrighted
materials used by GeoCities for or in connection with the Services
(including any upgrade versions thereof), including, without limitation,
movies, pictures, languages, stories, music, sounds and any other audio
visual materials. The Licensed Programs and the Licensed Materials are
hereinafter collectively called as the "Licensed Properties."
(3) The term "Licensed Trademarks" as used hereunder shall mean the trademarks,
trade names and/or logo marks owned by GeoCities and specified in Exhibit
A, attached hereto.
(4) The term "Japanese Derivatives" as used hereunder shall mean any
translation, modification, revision, enhancement, extensions or improvement
using the Japanese language and derived from any of the Licensed Properties
that are created or developed by GJC under the licenses hereby granted to
GJC.
(5) The term "GJC Services" as used hereunder shall mean the Japanese version
of the Services (including any upgrade versions thereof) created or
developed by GJC under the licenses hereby granted to GJC.
(6) The term "GJC Users" as used hereunder shall mean Internet users to whom
GJC provides access to GJC's homepage, by or through which the GJC Services
are or will be provided.
<PAGE>
2. Grant of License.
(1) Pursuant to the terms and conditions hereunder, GeoCities hereby grants GJC
the exclusive rights to use, copy, reproduce and modify the Licensed
Materials for the purposes of or in connection with developing,
maintenance, improving, providing, marketing, and/or exploiting the GJC
Services.
(2) Pursuant to the terms and conditions hereunder, GeoCities hereby grants GJC
the exclusive rights to use, copy, reproduce, modify, display, perform,
transmit and distribute the Licensed Materials for the purposes of or in
connection with developing, maintenance, improving, providing, marketing,
promoting and/or exploiting the GJC Services.
(3) Pursuant to the terms and conditions hereunder, GeoCities hereby grants GJC
the exclusive rights to use the Licensed Trademarks for the purposes of or
in connection with developing, maintenance, improving, providing,
marketing, promoting and/or exploiting the GJC Services.
(4) GJC shall be entitled to sublicense the rights to use any of the Licensed
Properties as granted by GeoCities hereunder to the GJC Users in connection
with using or utilizing the Services.
3. Royalty Payment.
(1) In consideration of the licenses granted herein, GJC shall pay to GeoCities
three percent (3%) of the total revenue obtained by GJC from the GJC
Services (the "Royalties") during the term of this Agreement.
(2) Within thirty (30) days of the end of each calendar quarter (which calendar
quarter shall commence on January 1, April 1, July 1 and October 1), GJC
shall submit to GeoCities a written statement specifying (i) the amount of
the total revenue obtained by GJC from the GJC Services during the
preceding calendar quarter and (ii) the Royalties accruing during the
preceding calendar quarter, and pay to GeoCities such reported Royalties.
(3) All sums to be paid to GeoCities under this Agreement shall be paid in US
Dollar calculated at the exchange rate in effect on the day of the payment
and remitted by wire transfer to the bank account designated by GeoCities.
(4) If GJC shall be required to deduct any withholding taxes imposed on any
payments owed GeoCities hereunder, GJC may deduct such taxes from the
amount owed GeoCities and will furnish GeoCities tax receipts certifying
the fact that those withholding taxes have been paid.
4. Records and Audit.
GJC shall, during the term hereof and a two (2) year period subsequent thereto,
keep true books and records containing an accurate and complete record of all
data necessary for the computation of the royalties accruing hereunder. GJC
further agrees to permit GeoCities, by using independent certified public
accountants, upon reasonable notice to GJC and during regular business hours, to
inspect such relevant books and records of GJC to such extent as may be
reasonably necessary to allow such accountants to determine the accuracy of any
part of such computation. If any inspection reveals that GJC has underpaid
GeoCities by five percent (5%) or more with respect to any calendar quarter, GJC
shall reimburse GeoCities for the cost of such
2
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inspection and audit promptly upon demand. GeoCities acknowledges and agrees
that any information obtained by GeoCities from such inspection shall be deemed
a part of the Confidential Information of GJC as defined in Section 11 hereof.
5. Copyright and Trademark Notices.
GJC will cause to be noticed conspicuously and legibly on its homepage located
on the Internet through which the GJC Services are or will be provided and any
advertising or promotional materials in connection therewith (i) copyright
notices with respect to the Licensed Properties, (ii) trademark notices with
respect to the Licensed Trademarks, and (iii) any further modification of such
notices, which notices, including any future modification, shall be affixed in
accordance with instructions of GeoCities.
6. Operation and Promotion.
(1) GeoCities shall provide reasonable assistance to GJC in developing the GJC
Services. If GeoCities creates any upgrade version of the Services which
materially modify the format or functionality of the Services, GeoCities
shall provide GJC with the opportunity to review and test each such upgrade
version prior to the public release of such version by GJC.
(2) GJC shall at all times have the sole discretion to set and determine all
terms and conditions of the distribution of the GJC Services.
(3) GJC agrees that it shall use its reasonable efforts, during the term of
this Agreement, to stimulate the demand for the GJC Services in Japan. GJC
shall consider in good faith any suggestions or comments of GeoCities in
the content and design of any and all promotional materials concerning the
GJC Services.
7. Representations and Warranties.
(1) GeoCities represents and warrants solely for the benefit of GJC as follows:
(a) GeoCities has the right, power and authority to enter into this Agreement
and to fully perform its obligations hereunder;
(b) The performance of its obligations under this Agreement shall not be a
breach of any separate agreement by which GeoCities is bound;
(c) Any part of the Licensed Properties or the Licensed Trademarks shall not
infringe on any patents or Japanese registered trademarks owned by any
third party;
(d) Any part of the Services shall not constitute a breach of any applicable
statutes, laws, ordinances and regulations in the USA; and
(e) GeoCities shall not, either directly or indirectly, grant any right or
license, whether exclusive or non-exclusive, to any person or entity, to
use, display, reproduce or permit others to use any of the Licensed
Properties or the Licensed Trademarks in electronic or online form in Japan
for the purposes of or in connection with developing, maintenance, improving
providing, marketing and/or exploiting any services sufficiently similar to
the GJC Services.
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(2) GJC represents and warrants solely for the benefit of GeoCities as follows:
(a) GJC has the right, power and authority to enter into this Agreement and to
fully perform its obligations hereunder.
(b) The performance of its obligations under this Agreement shall not be a
breach of any separate agreement by which GJC is bound; and
(c) GJC shall advertise, promote or distribute the GJC Services in accordance
with any and all applicable statutes, laws, ordinances and regulations in
Japan.
8. Indemnification.
Any party that makes a breach of any of the representations provided in Section
7 above (the "Breaching Party") agrees to indemnify and hold the other party
(the "Nonbreaching Party") harmless from and against any and all claims, losses,
liabilities, damages, expenses and costs (including any court costs and fees for
attorneys) arising from or incurred in connection with a breach made by the
Breaching Party of the representations set forth in Section 7 above.
9. Infringement.
If notified of any claim or action brought against GJC alleging that any part of
the Licensed Properties or the Licensed Trademarks infringes any patent,
copyright or any other intellectual property right, GeoCities shall defend that
action or claim at its expense and shall pay any and all costs and damages
awarded against or incurred by GJC in the action or claim, and, prior to
GeoCities' assuming the defense of such action or claim, any reasonable legal
fees and expenses incurred by GJC in obtaining advice in relation to the action
or claim; provided, that GJC will cooperate with GeoCities at no cost to GJC in
the defense of the action or claim, and that GeoCities shall have no liability
if the action or claim solely results from modification of the Licensed
Properties or the Licensed Trademarks by GJC with or without GeoCities' consent
to such modification.
10. Intellectual Property Rights.
(1) GJC acknowledges and agrees that any and all copyrights, patents,
trademarks or any other intellectual property rights in and to the Licensed
Properties and/or the Licensed Trademarks shall exclusively belong to
GeoCities. In the event GeoCities delivers to GJC upon GJC's request any
artworks or other materials relating to the Services, GJC agrees that any
and all copyrights, patents, trademarks or any other intellectual property
rights in and to such artworks and/or other materials shall be exclusively
owned by GeoCities. Except as expressly granted by GeoCities hereunder,
GJC shall not acquire or retain any title or interest in the Licensed
Properties or the Licensed Trademarks.
(2) Copyrights, patents, trademarks or any other intellectual property rights
in and to the Japanese Derivatives shall be co-owned by GeoCities and GJC.
GeoCities hereby grants GJC the exclusive rights to use, copy, reproduce
and distribute the Japanese Derivatives for the purposes of or in
connection with developing, maintenance, improving, providing, marketing,
promoting and/or exploiting the GJC Services. Except as expressly provided
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herein, the parties hereto shall not use any right in the Japanese
Derivatives without the prior written consent of the other party.
11. Confidentiality.
(1) Both parties agree to keep strictly confidential any information disclosed
in connection with this Agreement by the other party (the "Disclosing
Party") and designated as confidential (the "Confidential Information") and
not to disclose the Confidential Information to any third party without the
prior written approval of the Disclosing Party. The party receiving the
Confidential Information of the Disclosing Party (the "Receiving Party")
further agrees not to use or utilize the Disclosing Party's Confidential
Information for any purpose other than intended under this Agreement. Both
parties hereby agree and acknowledge that any breach of this Section 11
would constitute irreparable harm, and that the Disclosing Party shall be
entitled to specific performance or injunctive relief to enforce any of the
conditions of this Section 11 in addition to whatever remedies the
Disclosing Party may be otherwise entitled to at law or in equity.
(2) The obligations set forth in this Section 11 shall not apply to: (i) any
information that now or later becomes part of the public domain through no
fault of the Receiving Party; (ii) any information the Disclosing Party
discloses to a third party without imposing such obligations concerning
confidentiality as set forth herein; (iii) any information that is
independently developed by the Receiving Party without any reference to any
part of the Disclosing Party's Confidential Information; or (iv) any
disclosure of information required by applicable law or court's order,
provided that the Receiving Party shall give the Disclosing Party the prior
written notice of such requirement or order and cooperate with the
Disclosing Party in connection with such disclosure of the Confidential
Information.
12. Term and Termination.
(1) This Agreement shall become effective upon the date stated at the beginning
hereof and continue, unless terminated in accordance with the provisions of
this Section 12, for a period of twenty (20) years from such date. Both
parties agree to negotiate in good faith with respect to the renewal of the
term hereof at least six (6) months prior to the expiration of the initial
term of this Agreement.
(2) This Agreement shall terminate upon the termination of the Joint Venture
Agreement, between GeoCities and SOFTBANK Corporation, a Japanese
corporation, provided that such termination does not arise from SOFTBANK
Corporation's exercise of its right to terminate the Joint Venture
Agreement under Section 12(a) thereof following a default by GeoCities, as
more specifically described therein.
(3) Any party (the "Non-failing Party") shall have the right to terminate this
Agreement immediately by giving the written notice of such intention to the
other party (the "Failing Party") upon occurrence of any of the following
events:
a) The Failing Party shall make an assignment for the benefit of any of its
creditors, shall file any petition under the bankruptcy or insolvency laws
of any jurisdiction, shall have a receiver or trustee to be appointed for
its business or property, or shall be adjudicated to be bankrupt or
insolvent; or
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b) The Failing Party defaults in compliance with any of the conditions of this
Agreement and such default is not cured within thirty (30) days after
receipt of the written notice of such default.
13. Effect of Termination.
(1) At the expiration or termination of this Agreement, GJC shall cease use,
copy, reproduction and distribution of the Licensed Properties and shall
promptly return to GeoCities any and all materials in its possession and in
conjunction with the Licensed Properties or depicting any of the Licensed
Trademarks, and GJC shall change its corporate name to eliminate GeoCities
therefrom. Any rights and licenses hereby granted to GJC shall promptly
reverted to GeoCities upon the expiration or termination hereof.
(2) Upon the expiration or termination of this Agreement, the Receiving Party
shall at its cost promptly return to the Disclosing Party any and all
documents and materials concerning the Confidential Information under the
control of the Receiving Party, or if requested by the Disclosing Party,
shall destroy such documents or materials and certify in writing such
destruction.
14. Notices.
Any and all notices, requests, demands and other communications required or
otherwise contemplated to be made under this Agreement shall be in writing and
in English and shall be deemed to have been duly given (a) if delivered
personally, when received, (b) if transmitted by facsimile, upon receipt of a
confirmation of receipt, (c) if sent by registered airmail, return receipt
requested, postage prepaid, on the sixth business day following the date of
deposit with such courier service, or such earlier delivery date as may be
confirmed to the sender by such courier service. All such notices, requests,
demands and other communications shall be addressed as follows:
(i) If to GJC:
GeoCities Japan Corporation
24-1, Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103, Japan
Attention: Mr. Masayoshi Son
President and Chief Executive Officer
Telephone: (813) 5642-8020
Facsimile: (813) 5641-3400
(ii) If to GeoCities:
GeoCities
1918 Main Street Third Floor
Santa Monica, CA 90405-1030
USA
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Attention: David Bohnett, President and Chief Executive Officer
Telephone: (310) 664-6500, Ext. 201
Facsimile: (310) 664-6520
With a copy to:
GeoCities
1918 Main Street, Third Floor
Santa Monica, CA 90405-1030
Attention: Ed Pierce, General Counsel
Telephone: (310) 664-6500, Ex. 251
Facsimile: (310) 664-6520
Or in each case to such other address or facsimile number as the party may have
furnished to the other party in writing.
15. General Provisions.
(1) No waiver of either party, whether expressed or implied, of any provision
of this Agreement, or of any breach or default, shall constitute a
continuing waiver of such breach or default of such provision or any other
future breach under this Agreement.
(2) If performance of this Agreement is interfered with, for any length of
time, by Act of God, war, civil commotion, epidemics or other similar
occurrences beyond the reasonable control of the interfered party, neither
party shall be liable for non-performance of this Agreement for such length
of time.
(3) Neither party shall assign any of its rights or obligations under this
Agreement without the other party's prior written consent.
(4) This Agreement shall constitute the entire agreement between the parties
hereto relating to the subject matter hereof, and supercedes any and all
prior negotiation, representations, warranties, undertakings or agreements,
written or oral, between the parties.
(5) This Agreement may be amended, modified or changed only by a written
instrument duly executed by the authorized representatives of both parties.
(6) If any provision or any portion thereof shall be held to be void or
unenforceable in any jurisdiction, the remaining provisions of this
Agreement shall continue in full force and effect.
(7) This Agreement is executed and signed in English, and only such English
version shall be deemed and constitute the original copy of this Agreement.
(8) This Agreement shall be governed by and construed in accordance with the
laws of Japan.
(9) All disputes between the parties hereto arising directly or indirectly out
of this Agreement shall be settled by the parties amicably through good
faith discussions upon the written request of either party. In the event
that any such dispute cannot be resolved thereby within a period of thirty
(30) days after such notice has been given, such dispute shall be finally
settled by arbitration by three arbitrators. If GeoCities commences such
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arbitration, it shall be held in Japan, using the English language, and in
accordance with the rules then in effect of the Japan Commercial
Arbitration Association.
(10) Headings of the Sections used in this Agreement are inserted for
convenience of reference only and shall in no way affect the interpretation
hereof.
(11) Sections 7, 8, 9, 10, 11, 13 and 15 of this Agreement shall survive any
expiration or termination of this Agreement and remain in full force and
effect thereafter.
(12) This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which shall constitute one and the same
agreement.
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In witness whereof, the parties have caused this Agreement to be duly executed
as of the day and year first written above.
GeoCities GeoCities Japan Corporation
By: /s/ David Bohnett By: /s/ Masayoshi Son
------------------------------- ---------------------------------
Name: David Bohnett Name: Masayoshi Son
----------------------------- ---------------------------------
Title: President & CEO Title: President
----------------------------- --------------------------------
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AMENDMENT AGREEMENT
This Amendment Agreement is made and entered into this 22nd day of January,
1998, by and between GeoCities, a California corporation having its principal
offices at 1918 Main Street, 3rd Floor, Santa Monica, CA 90405-1030
("GeoCities"), and GeoCities Japan Corporation, a Japanese corporation having
its principal offices at 24-1, Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan
(hereinafter "GJC") for the purpose of amending and modifying the Licensing
Agreement executed by GeoCities and GJC and dated November 6th, 1997 (the
"Original Agreement").
The parties hereto agree as follows:
1. Except as specifically defined herein, the capitalized terms used hereunder
shall have the same meanings as defined in the Original Agreement.
2. The parties agree that the services specified below shall be added to the
GJC Services as defined in item (5) of Section 1 of the Original Agreement:
Publishing books and magazines relating to the Japanese version of
GeoCities' Internet homepage that GJC operates for the Japanese market under
the license granted by GeoCities pursuant to the terms of the Original
Agreement (the "Additional GJC Services").
3. The royalties for the license granted by GeoCities to GJC hereunder
concerning the Additional GJC Services (the "Additional Royalties") shall be
three percent (3%) of the total revenue obtained by GJC from the Additional
GJC Services and paid to GeoCities by GJC in accordance with the payment
conditions of the Royalties set forth in the Original Agreement.
4. This Amendment Agreement shall be governed by and construed in accordance
with the laws of Japan.
5. This Amendment Agreement shall become effective upon the date first written
above and continue until the expiration or termination of the Original
Agreement.
6. Except as expressly amended herein, any and all terms and conditions of the
Original Agreement shall remain in full force and effect. Any and all
conditions which shall apply to the GJC Services and/or Royalties under the
Original Agreement shall apply to the Additional GJC Services and/or
Additional Royalties respectively unless otherwise agreed upon in writing
between the parties hereto.
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In witness whereof, the parties have caused this Amendment Agreement to be duly
executed by their duly authorized representatives as of the date first written
above.
GeoCities GeoCities Japan Corporation
By: /s/ David Bohnett By: /s/ Masayoshi Son
---------------------------------- -------------------------------
Name: David Bohnett Name: Masayoshi Son
---------------------------------- -------------------------------
Title: President & CEO Title: President
---------------------------------- -------------------------------
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SECOND AMENDMENT AGREEMENT
This Second Amendment Agreement is made and entered into as of February 2nd,
1998, by and between GeoCities, a California corporation having its principal
offices at 1918 Main Street, 3rd Floor, Santa Monica, CA 90405-1030
("GeoCities"), and GeoCities Japan Corporation, a Japanese corporation having
its principal offices at 24-1, Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan
(hereinafter "GJC") for the purpose of amending and modifying the Licensing
Agreement executed by GeoCities and GJC and dated November 6th, 1997, as amended
by the Amendment Agreement by GeoCities and GJC dated January 22nd, 1998 (the
"Original Agreement").
The parties hereto agree as follows:
1. Except as specifically defined herein, the capitalized terms used hereunder
shall have the same meanings as defined in the Original Agreement.
2. The parties agree that the following paragraph shall be added to the
Original Agreement as Subparagraph (3) of Section 11 thereof:
"Notwithstanding the provisions of Subparagraph (1) of Section 11 above, the
Receiving Party shall be permitted to disclose the Disclosing Party's
Confidential Information to third parties solely on a strict need-to-know
basis and solely in the case that such third parties have agreed prior to
such disclosure in writing (the "Written Agreement") comply with the same
confidential obligations imposed on the Receiving Party under Subparagraphs
(1) and (2) of Section 11 concerning such Confidential Information. The
Receiving Party shall submit the Written Agreement to the Disclosing Party
immediately. In the event of a breach made by any of such third parties of
such obligations, such breach shall be deemed a fault of the Receiving Party
under this Agreement and the Receiving Party shall be responsible for any
damage, loss or expenses arising from such third party's breach and incurred
by the Disclosing Party."
3. This Second Amendment Agreement shall be governed by and construed in
accordance with the laws of Japan.
4. This Second Amendment Agreement shall become effective upon the date first
written above and continue until the expiration or termination of the
Original Agreement.
5. Except as expressly amended herein, any and all terms and conditions of the
Original Agreement shall remain in full force and effect.
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In witness whereof, the parties have caused this Second Amendment Agreement to
be executed by their duly authorized representatives as of the date first
written above.
GeoCities GeoCities Japan Corporation
By: /s/ David Bohnett By: /s/ Masayoshi Son
----------------------------- ---------------------------------
Name: David Bohnett Name: Masayoshi Son
----------------------------- ---------------------------------
Title: CEO Title: President
----------------------------- ---------------------------------
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EXHIBIT 10.22
GEOCITIES
PREFERRED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of January 10, 1997, by and between GeoCities, a
California corporation (the "Company"), the several purchasers named in Schedule
I hereto (such purchasers being sometimes hereafter called individually a
"Schedule I Purchaser" and collectively the "Schedule I Purchasers") and the
several purchasers named in Schedule II hereto (such purchasers being sometimes
hereinafter called individually a "Schedule II Purchaser" and collectively the
"Schedule II Purchasers"; the Schedule I Purchasers and the Schedule II
Purchasers are sometimes hereinafter referred to collectively as the
"Purchasers"). The parties hereby agree as follows:
1. Authorization and Sale of the Shares
------------------------------------
1.1 Authorization; Filing of Restated Articles of Incorporation. The
-----------------------------------------------------------
Company has authorized the issuance and sale pursuant to the terms and
conditions hereof of up to 2,542,373 shares of its Series D Preferred Stock (the
"Preferred Shares"), having the rights, restrictions, privileges and preferences
as set forth in the form of the Second Amended and Restated Articles of
Incorporation of the Company (the "Restated Articles") attached hereto as
Exhibit A. The Company shall adopt and file the Restated Articles with the
- ---------
Secretary of State of California on or before the First Closing Date (as defined
below).
1.2 Sale and Issuance of the Initial Preferred Shares. Subject to
-------------------------------------------------
the terms and conditions hereof, at the First Closing, the Company will issue
and sell to each Schedule I Purchaser and each Schedule I Purchaser will
purchase from the Company the number of Preferred Shares set forth opposite the
name of such Purchaser on Schedule I hereto (said aggregate number of shares
being herein collectively called the "Initial Preferred Shares") for the
purchase price of $3.54 per share.
1.3 Sale and Issuance of the Additional Preferred Shares.
----------------------------------------------------
(a) Subject to the terms and conditions hereof, at the Second
Closing, the Company shall issue and sell to CMG@Ventures, and CMG@Ventures
shall purchase from the Company, an aggregate of 282,486 Preferred Shares (the
"Additional CMG Preferred Shares") for the purchase price of $3.54 per share.
(b) In addition to the Additional CMG Preferred Shares, up to an
aggregate of 494,350 Preferred Shares (the "Reserved Shares") have been reserved
by the Company for issuance and sale at the Second Closing to one or more
strategic investors mutually satisfactory to the Company, on the one hand, and
all of the Schedule I Purchasers, on the other hand (each such investor being
referred to herein as an "Additional Purchaser"), for the purchase price of
$3.54 per share, and otherwise on the terms and subject to the
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conditions of this Agreement, and provided further that each such Additional
Purchaser shall execute and deliver to the Company and the Schedule I Purchasers
a written instrument, in form and substance satisfactory to the Company and the
Schedule I Purchasers, by which such Additional Purchaser shall agree to be
bound by the provisions of this Agreement and the Rights Agreement and be
entitled to the rights and benefits, and subject to the obligations, of a
Schedule II Purchaser hereunder and an Investor thereunder.
(c) At the Second Closing, subject to the terms and conditions
hereof, the Company shall issue and sell to each Schedule II Purchaser, and each
Schedule II Purchaser shall purchase from the Company, the percentage of any
Reserved Shares that shall not have been purchased by Additional Purchasers at
the Second Closing ("Remaining Reserved Shares") set forth opposite the name of
such Schedule II Purchaser on Schedule II hereto under the heading "Percentage
of Remaining Reserved Shares", for the purchase price of $3.54 per share,
provided, however, that the purchase obligation of each Schedule II Purchaser
under this paragraph (c) shall not exceed the amount set forth on Schedule II
opposite the name of such Schedule II Purchaser under the heading "Maximum
Amount". The Additional CMG Preferred Shares and any Reserved Shares purchased
at the Second Closing are hereinafter at times collectively referred to as the
"Additional Preferred Shares"; the Initial Preferred Shares and the Additional
Preferred Shares are hereinafter at times collectively referred to as the
"Preferred Shares".
2. Closing Dates; Delivery.
-----------------------
2.1 Closing Date. Each of the closing of the purchase and sale of
------------
the Preferred Shares hereunder (individually a "Closing" and collectively the
"Closing") shall be held at the offices of Brown Raysman Millstein Felder &
Steiner LLP on the dates hereinafter provided:
(a) The First Closing for the purchase and sale of 1,765,537
Preferred Shares to the Schedule I Purchasers (the "First Closing") shall be
held on January 13, 1997, or on such other date as the Purchasers and the
Company may agree (the "First Closing Date").
(b) The Second Closing for the purchase and sale of Additional
Preferred Shares to the Schedule II Purchasers shall be held at such date and
time as may be mutually agreed upon Between the Schedule II purchasers and the
Company (the "SeCond Closing") provided that the Second Closing shall not be
later than January 31, 1997.
2.2 Delivery. Subject to the terms of this Agreement, payment at
--------
each Closing for the preferred Shares purchased at such Closing shall be by
cashier's check or wire transfer for the account of the Company. Each Purchaser
shall pay that amount for the Preferred Shares being acquired by such Purchaser
at such Closing as set forth in Schedule I hereof or Schedule II hereof, as the
case may be. At each Closing, the Company will deliver to each Purchaser one or
more certificates representing the Preferred Shares purchased by such Purchaser
at such Closing, in such denominations as may be requested by
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such Purchaser.
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchasers that except as set forth on a Schedule
of Exceptions attached hereto as Exhibit B, which exceptions shall be deemed to
---------
be representations and warranties as if made hereunder:
3.1 Organization and Standing; Articles and Bylaws. The Company is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its businesses as now conducted and as proposed to be conducted.
The Company is qualified or licensed to do business as a foreign corporation in
all jurisdictions where such qualification or licensing is required, except
where the failure to so qualify would not have a material adverse effect upon
the Company. Copies of the Company's Articles of Incorporation, Bylaws, minutes
and consents of shareholders and of the Board of Directors are available for
inspection at the Company's offices and have been previously provided to special
counsel for the Purchasers.
3.2 Corporate Power. The Company has now, or will have at the First
---------------
Closing, all requisite corporate power necessary for the authorization,
execution and delivery of this Agreement, the Amended and Restated Rights
Agreement in the form attached hereto as Exhibit C (the "Rights Agreement"), to
---------
sell and issue the Preferred Shares and to issue up to the maximum number of
shares of Common Stock, $0.01 par value per share (the "Common Stock"), issuable
upon conversion of the Preferred Shares. This Agreement and the Rights Agreement
are valid and binding obligations of the Company, enforceable in accordance with
their terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium, usury and other laws of
general application affecting the enforcement of creditors' rights.
3.3 Subsidiaries. The Company does not control, directly or
------------
indirectly, any other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of the Company is
--------------
10,000,000 shares of Common Stock and 4,361,322 shares of preferred Stock, of
which 777,000 shares have been designated Series A preferred Stock, 725,000
shares have been. designated Series B Preferred Stock, 300,000 have been
designated Series C preferred Stock and 2,559,322 shares have been designated
Series D Preferred Stock. There are issued and outstanding 777,000 shares of
Series A Preferred Stock, 725,000 shares of Series B Preferred Stock, 300,000
shares of Series C Preferred Stock and 654,250 shares of Common Stock. The
holders of record of the presently issued and outstanding Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock
immediately prior to the First Closing are as set forth on Exhibit D. All such
issued and outstanding shares have been duly authorized and validly issued, are
fully paid,and nonassessable, and were issued in compliance with all applicable
state and federal laws concerning the issuance of securities. There are no
outstanding rights, options, warrants, conversion rights or agreements for the
purchase or acquisition from the Company of any shares of its capital
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stock except that (i) the Company has offered for sale an aggregate of 275,750
shares of Common Stock to those officers, directors and consultants of the
Company, and in such amounts, as set forth on Exhibit D; (ii) 213,000 shares of
Common Stock have been reserved for issuance pursuant to stock option
agreements, which number will be increased to a maximum of 613,000 reserved
shares prior to the First Closing; (iii) 250,000 shares of Common Stock have
been reserved for issuance to CMG@Ventures pursuant to an option being granted
to it on the date hereof; (iv) 250,000 shares of Common Stock have been reserved
for issuance to David Bohnett and persons designated by him prior to the First
Closing pursuant to options that have been granted to them on the date hereof
(the "Founders Options"); (v) 16,949 shares of Series D Preferred Stock have
been reserved for issuance to Cupertino Bank pursuant to warrants being issued
to it on the date hereof; (vi) 9,802,000 shares of the Company's Common Stock
have been reserved for issuance upon conversion of the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock; and (vii)
3,879,795 shares of the Company's Common Stock have been reserved for issuance
upon conversion of the Series D Preferred Stock. Except as provided in the
Rights Agreement, the Company is not a party or subject to any agreement or
understanding between any persons or entities which affects or relates to the
voting or giving of written consents with respect to any securities or by any
director of the Company.
3.5 Authorization.
-------------
(a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and shareholders necessary for the execution
and delivery of this Agreement and the Rights Agreement, the sale and the
issuance of the Preferred Shares, the issuance of the Common Stock issuable upon
conversion of the Preferred Shares (the "Common Shares") and the performance of
the Company's obligations hereunder and under the Rights Agreement has been
taken or will be taken prior to the First Closing.
(b) Valid Issuance. The Preferred Shares, when issued in
--------------
compliance with the provisions of this Agreement, and the Common Shares, when
issued upon conversion of the Preferred Shares in accordance with the provisions
of the Restated Articles, will be validly issued and outstanding, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that all such shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein, and as may be required by
future changes in such laws. The rights, preferences, privileges and
restrictions of the Preferred Shares are as set forth in the Restated Articles.
(c) No Preemptive Rights. Other than as provided in the Rights
--------------------
Agreement, no person has any right of first refusal or any preemptive rights in
connection with the issuance of the Preferred Shares, the issuance of the Common
Shares upon conversion of the Preferred Shares or any future issuances of
securities by the Company.
3.6 Proprietary Rights.
------------------
(a) Exhibits E-1 and E-2 contain, respectively, an accurate and
4
<PAGE>
complete description of all registered and unregistered trademarks and
tradenames in or related to the Company Products, and a list of all licenses and
other agreements relating thereto. Exhibit E-3 sets forth a list of all
licenses and other agreements with third parties (the "Third Party Licenses")
relating to any software, copyrights, technology, know-how or processes that the
Company has licensed or is otherwise authorized by such third parties to use,
market, distribute or incorporate into products distributed by the Company (such
software, technology, know-how and processes are collectively referred to as the
"Third Party Technology"). The Company (i) owns all right, title and interest
in and to or has obtained licenses to use all technology, intellectual property,
software tools, copyrights, know-how, processes, patents, trademarks, trade
secrets, tradenames and other proprietary rights (collectively, "Rights") used
in or necessary for the conduct of its business as conducted to the date hereof
(the "Business") and (ii) will, prior to entering areas of new business
currently being contemplated, own or obtain all Rights used in or necessary for
the conduct of its business as so contemplated, including without limitation
(with respect to both clauses (i) and (ii) above), the technology and all
proprietary rights developed or discovered in connection with or contained in
the Company's products (the "Company Products"), free and clear of all
liabilities, charges, liens, pledges, mortgages, restrictions, adverse claims,
security interests, rights of others and encumbrances (including, without
limitation, distribution rights) (all of which are referred to as "Proprietary
Rights"). The foregoing representation and warranty as it relates to Third
Party Technology is limited to the Company's interest pursuant to the Third
Party Licenses, all of which are valid and enforceable and in full force and
effect and which grant the Company such right to Third Party Technology as are
employed in or necessary to the Business of the Company as conducted or proposed
to be conducted. All of the Company's registered patents, trademarks and
copyrights in any of the Company Products and applications therefor, if any, are
valid and in full force and effect, and consummation of the transactions
contemplated hereby will not alter or impair any such rights. No claims have
been asserted against the Company (and to the best knowledge of the Company
there are no claims which are likely to be asserted against the Company or which
have been asserted against others) by any person challenging the Company's use
or distribution of any patents, trademarks, tradenames, copyrights, trade
secrets, software, technology, know-how or processes utilized by the Company
(inclUding, without limitation, the Third Party Technology) or challenging or
questioning the validity or effectiveness of any license or agreement relating
thereto (including, without limitation, the Third Party Licenses). To the best
knowledge of the Company, none of the Company Products nor the use of any
patents, trademarks, tradenames, copyrights, software, technology, know-how or
processes by the Company in its current Business infringes on the rights of,
constitutes misappropriation of, or in any way involves unfair competition with
respect to, any proprietary information or intangible property right of any
third person or entity, including without limitation, any patent, trade secret,
copyright, trademark or tradename.
(b) The Company has not granted any third party any right to
manufacture, reproduce, distribute, market or exploit any of the Company
Products or any adaptations, translations or derivative works based on the
Company Products or any portion thereof. Except with respect to the rights of
third parties to the Third Party Technology, no
5
<PAGE>
third party has any right to manufacture, reproduce, distribute, market or
exploit any works or materials of which any of the Company products are a
"derivative work" as that term is defined in the United States Copyright Act,
Title 17, U.S.C. Section 101.
(c) All designs, drawings, specifications, source code, object
code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Company Products (the "Company Components"), if any,
constitute original creations of and were written, developed and created solely
and exclusively by employees of the Company without the assistance of any third
party or entity or were created by third parties who assigned ownership of their
rights to the Company in valid and enforceable consultant confidentiality and
invention assignment agreements. The Company has at all times used commercially
reasonable efforts to treat the Company Products and the Company Components as
containing trade secrets and has not disclosed or otherwise dealt with such
items in such a manner as to cause the loss of such trade secrets by release
into the public domain.
(d) No employee of the Company is in violation of any term of any
employment contract, patent disclosure agreement, confidentiality agreement or
any other contract or agreement relating to the relationship of any such
employee with the Company or, to the best knowledge of the Company, any other
party because of the nature of the business conducted by the Company or proposed
to be conducted by the Company.
(e) Notwithstanding the foregoing, the Company states and the
Purchasers acknowledge and agree that the Company is a service provider on the
electronic network commonly known as the Internet, and that the Business is
unique in that the Company has not created, nor does it own, the content of each
Personal Home Page and third-party advertising that may be found within the
Company Products ("Excluded Rights"). The parties agree that the term
Proprietary Rights does not include, and the Company hereby disclaims the
representations and warranties of this Section 3.6 (except for the
representation in Section 3.6(a) as to assertion of claims against the Company
or claims which to the knowledge of the Company are likely to be asserted) as to
Excluded Rights found within the Company Products. Personal Home Pages are
subject to the Company's Personal Home Page Policy, and the Company's rights as
to the Personal Home Pages are set forth in the Personal Home Page Policy (a
copy of which has been provided to special counsel to the Purchasers). The
Company does not own or control the content of any Personal Home Page, except
as set forth in the Personal Home Page Policy. The Purchasers further
acknowledge and agree that the Internet is global in scope, and that the
representations and warranties of the Company made in this Section 3.6 are
limited to the laws of the United States. The Company is unaware, however, of
any third party having rights in the Proprietary Rights under the laws of any
foreign jurisdiction that are superior to those of the Company, or of any
violation by the Company of the laws of any foreign jurisdiction.
3.7 Compliance with Other Instruments, None Burdensome, etc. The
--------------------------------------------------------
Company is not in violation of any term of its Restated Articles or Bylaws, nor
is the Company in violation of or in default in any material respect under the
terms of any mortgage,
6
<PAGE>
indenture, contract, agreement, instrument, judgment or decree, the violation of
which would have a material adverse effect on the Company, and to the best
knowledge of the Company is not in violation of any order, statute, rule or
regulation applicable to the Company. The execution, delivery and performance of
and compliance with this Agreement or the Rights Agreement, the issuance and
sale of the Preferred Shares and the issuance of the Common Shares upon
conversion of the Preferred Shares will not (a) result in any such violation, or
(b) be in conflict with or constitute a default under any such term, or (c)
result in the creation of any mortgage, pledge, lien, encumbrance or charge upon
any of the properties or assets of the Company pursuant to any such term. To the
best knowledge of the Company, there is no such term which adversely affects, or
in the future may materially adversely affect, the business, prospects,
conditions, affairs or operations of the Company or any of its properties or
assets.
3.8 Proprietary Agreements. Each officer, director, employee and
----------------------
consultant of the Company has executed an agreement regarding confidentiality
and proprietary information, the form of which has been approved by special
counsel to the Purchasers. The Company is not aware that any of its officers,
directors or employees is in violation thereof and will use its best efforts to
prevent any such violation. David Bohnett and John Rezner and other key
technical employees have executed an agreement regarding the assignment of
inventions, the form of which has been approved by special counsel to the
Purchasers. The Company is not aware that any of its officers, directors or
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of his or her best efforts to promote the interests of the Company or
that would conflict with the Company's business as conducted or as proposed to
be conducted or that would prevent any such employee from assigning inventions
to the Company. Neither the execution nor delivery of this Agreement or the
Rights Agreement, nor the carrying on of the Company's business as proposed,
will, to the Company's best knowledge, conflict with or result in a breach of
the terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees is now
obligated. The Company does not believe that it is or will be necessary for
the Company to utilize any inventions of any of its employees made prior to
their employment by the Company.
3.9 Litigation, etc. There is no action, proceeding or investigation
----------------
pending against the Company or its officers or directors, or to the best
- --------
knowledge of the Company, against employees or consultants of the Company (or,
to the best knowledge of the Company, any basis therefor or threat thereof): (1)
which might result, either individually or in the aggregate, in (a) any material
adverse change in the business, prospects, conditions, affairs or operations of
the Company or in any of its properties or assets, or (b) any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or (c) any material liability on
the part of the Company; or (2) which questions the validity of this Agreement,
the Rights Agreement or any action taken or to be taken in connection herewith,
including in each case, without limitation, actions pending or threatened
involving the prior employment of any of the Company's employees, the use in
connection with the Company's business of any information or techniques
allegedly proprietary
7
<PAGE>
to any of its former employees, or their obligations under any agreements with
prior employers. The Company is not a party to or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or which the Company currently intends to
initiate.
3.10 Governmental Consent, etc. No consent, approval or
--------------------------
authorization of or designation, registration, declaration or filing with any
governmental authority on the part of the Company is required in connection
with: (a) the valid execution and delivery of this Agreement or the Rights
Agreement, or (b) the offer, sale or issuance of the Preferred Shares, or the
issuance of the Common Shares issuable upon conversion of the Preferred Shares,
or (c) the obtaining of the consents, permits and waivers specified in
subsection 5.1(b) hereof, except the filing of the Restated Articles and, if
required, filings or qualifications under the California Corporate Securities
Law of 1968 (the "Law") or other applicable blue sky laws, which filings or
qualifications, if required, will have been timely filed or obtained after the
sale of the Preferred Shares.
3.11 Offering. In reliance on the representations and warranties of
--------
the Purchasers in Section 4 hereof, the offer, sale and issuance of the
Preferred Shares in conformity with the terms of this Agreement will not result
in a violation of the requirements of Section 5 of the Securities Act of 1933,
as amended (the "Securities Act") or the qualification or registration
requirements of the Law or other applicable blue sky laws.
3.12 Taxes. The Company has filed all tax returns that are required
-----
to have been filed with appropriate federal, state, county and local
governmental agencies or instrumentalities, except where the failure to do so
would not in the aggregate result in additional liability totaling $25,000 or
more. The Company has paid or established reserves for all income, franchise
and other taxes, assessments, governmental charges, penalties, interest and
fines due and payable by it on or before the First Closing. There is no pending
dispute with any taxing authority relating to any of such returns and the
Company has no knowledge of any proposed liability for any tax to be imposed
upon the properties or assets of the Company. There is no tax lien, whether
imposed by any federal, state or local taxing authority, outstanding against the
assets, properties or business of the Company. Neither the Company nor any of
its present or former shareholders has ever filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that
the Company be taxed as an S corporation.
3.13 Title. The Company owns its property and assets free and clear
-----
of all liens, mortgages, loans or encumbrances except liens for current taxes,
and such encumbrances and liens which arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets leased by the Company, the
Company is in compliance with such leases and holds valid leasehold interests
free and clear of any liens, claims or encumbrances.
8
<PAGE>
3.14 Material Contracts and Commitments. All of the contracts,
----------------------------------
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders to the
Company or placed by the Company) which involve obligations of, or payments to,
the Company in excess of Five Thousand Dollars ($5,000) and all agreements
between the Company and its officers, directors, consultants and employees are
either (i) attached as exhibits to this Agreement, or (ii) set forth on the
list attached hereto as Exhibit F (the "Contracts"), copies of which have been
---------
delivered to special counsel to the Purchasers. All of the material provisions
of the Contracts are valid, binding and in full force and effect and enforceable
by the Company in accordance with their respective terms, subject to the effect
of applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium, usury or other laws of general application relating to or affecting
enforcement of creditors' rights and rules or laws concerning equitable
remedies. The Company is not in material default under any of such Contracts.
To the best knowledge of the Company, no other party to any of the Contracts is
in material default thereunder. The Company has not engaged in the past three
(3) months in any discussion (i) with any representative of any corporation or
corporations regarding the consolidation or merger of the Company with or into
any such corporation or corporations, (ii) with any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of, or (iii)
regarding any other form of acquisition, liquidation, dissolution or winding up
of the Company.
3.15 Registration Rights. Other than as granted pursuant to the
-------------------
Rights Agreement, the Company has not granted or agreed to grant any rights to
register, as that term is defined in the Rights Agreement, including piggyback
registration rights, to any person or entity.
3.16 Certain Transactions. The Company is not indebted, directly or
--------------------
indirectly, to any of its officers, directors or shareholders or to their
spouses or children, in any amount whatsoever; and none of said officers,
directors or shareholders, or any member of their immediate families, are
indebted to the Company or (to the best of the Company's knowledge, in the case
of shareholders) have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship (except as a holder of securities of a corporation whose
securities are publicly traded and which is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") to the extent of owning not more than two percent (2%) of the issued and
outstanding securities of such corporation). No such officer, director or
shareholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company. The Company
is not a guarantor or indemnitor of any liability or indebtedness of any other
person, firm or corporation.
3.17 Corporate Documents; Minute Books. Except for amendments
---------------------------------
necessary to satisfy representations and warranties or conditions contained
herein (the form of which
9
<PAGE>
amendments has been approved by the Purchasers), the Restated Articles and
Bylaws of the Company are in the form previously provided to special counsel to
the Purchasers. The minute books of the Company previously provided to special
counsel to the Purchasers contain a complete summary of all meetings of
directors and shareholders since the time of incorporation of the Company.
3.18 Financial Statements. The Company has delivered to the
--------------------
Purchasers copies of the Company's unaudited balance sheet as of October 31,
1996 (the "Company Balance Sheet") and statements of income, changes in
shareholders' equity and cash flow for the period then ended. All such
financial statements (collectively, the "Company Financial Statements") are
complete and in accordance with the books and records of the Company and present
fairly and disclose the financial position of the Company of their respective
dates and the results of operations for the period covered thereby. The Company
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied during the periods covered thereby,
except for the absence of footnotes and year-end adjustments. Since October 31,
1996, there has been no Material Adverse Change (as defined herein) in the
Company's assets or liabilities or in the Business or condition, financial or
otherwise, of the properties or results of operations. "Material Adverse
Change" means any change in, or effect on, the Business (i) that is or is
reasonably likely to be materially adverse to the results of the operations or
the financial condition of the Company or the Business or (ii) that requires or
is reasonably likely to require the expenditure of Fifteen Thousand Dollars
($15,000) or more, individually or in the aggregate.
3.19 Subsequent Events. Except as set forth on the Schedule of
-----------------
Exceptions, since October 31, 1996, the Company has not (i) issued any stock,
bond or other corporate security, (ii) borrowed any amount or incurred or become
subject to any liability (absolute, accrued or contingent), except liabilities
under contracts entered into in the ordinary course of business, (iii)
discharged or satisfied any lien or encumbrance or incurred or paid any
obligation or liability (absolute, accrued or contingent), other than current
liabilities shown on the Company Financial Statements and current liabilities
incurred since the date of the Company Financial Statements in the ordinary
course of business, (iv) declared or made any payment or distribution to
shareholders or purchased or redeemed any shares of its capital stock or other
securities, (v) mortgaged, pledged or subjected to lien any of its assets,
tangible or intangible, other than liens for current real property taxes not yet
due and payable, (vi) sold, assigned or transferred any of its tangible assets
except for fair value in the ordinary course of business, or canceled any debt
or claim, except for fair value in the ordinary course of business, (vii) sold,
assigned, transferred or granted any license with respect to any patent,
trademark, trade name, service mark, copyright, trade secret or other intangible
asset, except pursuant to license or other agreements entered into in the
ordinary course of business, (viii) suffered any loss of property or waived any
right of substantial value whether or not in the ordinary course of business,
(ix) made any change in officer compensation, (x) made any material change in
the manner of business or operations of the Company, (xi) entered into any
transaction except in the ordinary course of business or as otherwise
contemplated hereby, or (xii) entered into any written or oral commitment to any
of the foregoing.
10
<PAGE>
3.20 Employee Benefit Plans. The Company does not have any "employee
----------------------
benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended.
3.21 Real Property Holding Corporation. The Company is not a "real
---------------------------------
property holding corporation" within the meaning of Section 897(c)(2) of the
Code.
3.22 Disclosure. No representation or warranty by the Company in this
----------
Agreement, or in any document or certificate furnished or to be furnished to the
Purchasers pursuant hereto or in connection with the transactions contemplated
hereby, when taken together, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements made herein and therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that with regard to the
operating projections contained in the Company's Business Plan dated August 13,
1996, as supplemented by additional projections, which have been delivered to
the Purchasers, the Company represents only that such projections were prepared
in good faith and that the Company reasonably believes there is a reasonable
basis for such projections. The Company has fully provided the Purchasers with
all the information which the Purchasers and their respective counsel have
requested for deciding whether to purchase the Preferred Shares and all
information that the Company believes is reasonably necessary to make such
decision. There is no material fact known to the Company that has not been
disclosed in this Agreement or in any other agreement, document or written
statement furnished by the Company to the Purchasers or their respective counsel
in connection with the transactions contemplated hereby or which materially
adversely affects or, in the Company's reasonable business judgment, could
materially adversely affect the business, properties, assets or condition
(financial or other) of the Company.
3.23 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, and insurance against other
hazards, risks and liabilities to persons and property, to the extent and in the
manner customary for companies in similar businesses similarly situated. All
premiums due and payable with respect to the policies maintained by the Company
have been paid.
3.24 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties are bound by or subject to) any
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to the best knowledge of the Company, has sought to represent any
of the employees, representatives or agents of the Company. There is no strike
or other labor dispute involving the Company pending, or to the best knowledge
of the Company threatened, which could have a material adverse effect on the
assets, properties, financial condition, operating results, or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees- The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a
11
<PAGE>
present intention to terminate the employment of any of the foregoing. Subject
to general principles related to wrongful termination of employees, the
employment of each officer and employee of the Company is terminable at the will
of the Company.
3.25 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
3.26 Best Knowledge. For purposes of this Agreement, the terms "to
--------------
the best knowledge of the Company" and "to the best of the Company's knowledge"
shall mean to the knowledge of the Company after inquiry of each of David
Bohnett, Laura Rockwell and John Rezner.
4. Representations and Warranties of the Purchasers and Restrictions on
--------------------------------------------------------------------
Transfer Imposed by the Securities Act.
- --------------------------------------
4.1 Representations and Warranties by the Purchasers. Each
------------------------------------------------
Purchaser, severally and not jointly, represents and warrants to the Company as
follows:
(a) Investment Intent. This Agreement is made with such
-----------------
Purchaser in reliance upon such Purchaser's representations to the Company,
evidenced by such Purchaser's execution of this Agreement, that such Purchaser
is acquiring the Preferred Shares and the Common Shares issuable upon conversion
of the Preferred Shares (collectively the "Securities") for investment for such
Purchaser's own account, for investment and not with a view to, nor for resale
in connection with, any distribution or public offering thereof within the
meaning of the Securities Act and the Law. Such Purchaser has the full right,
power and authority to enter into and perform this Agreement and the Rights
Agreement, and this Agreement and the Rights Agreement constitute valid and
binding obligations upon such Purchaser.
(b) Shares Not Registered. Such Purchaser understands and
---------------------
acknowledges that the offering of the Preferred Shares pursuant to this
Agreement will not be registered under the Securities Act or qualified under the
Law on the grounds that the offering and sale of securities contemplated by this
Agreement are exempt from registration under the Securities Act and exempt from
qualification pursuant to Section 25102(f) of the Law, and that the Company's
reliance upon such exemptions is predicated upon such Purchaser's
representations set forth in this Agreement. Such Purchaser acknowledges and
understands that the Securities must be held indefinitely unless the Securities
are subsequently registered under the Securities Act and qualified under the Law
or an exemption from such registration and such qualification is available.
(c) No Transfer. Such Purchaser covenants that in no event will
-----------
it dispose of any of the Securities (other than in conjunction with an effective
registration statement for the Securities under the Act or in compliance with
Rule 144 promulgated under
12
<PAGE>
the Act) unless and until (i) such Purchaser shall have notified the Company of
the proposed disposition and shall have furnished the Company with a statement
of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Purchaser shall have furnished the
Company with an opinion of counsel reasonably satisfactory in form and substance
to the Company to the effect that (x) such disposition will not require
registration under the Securities Act and (y) appropriate action necessary for
compliance with the Securities Act, the Law and any other applicable state,
local or foreign law has been taken. It is agreed that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144.
(d) Permitted Transfers. Notwithstanding the provisions of
-------------------
subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser to one or more partners or departing
partners of a Purchaser (in the case of a Purchaser that is a partnership), or
to one or more members or departing members of a Purchaser (in the case of a
Purchaser that is a limited liability company) or to an affiliated corporation
(in the case of a Purchaser that is a corporation), or to one or more affiliated
partnerships managed by such Purchaser, or in the case of Chase Venture Capital
Associates, L.P. to Salt Creek Ventures or an affiliate thereof, or to the
estate of any such partner or member or former partner or member, or the
transfer by gift, will or intestate succession of any partner or member to his
spouse or lineal descendants or ancestors, if the transferee agrees in writing
to be bound by the terms of this Agreement to the extent as if he were an
original Purchaser hereunder.
(e) Knowledge and Experience. Such Purchaser (i) has such
------------------------
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of its prospective investment in the Securities;
(ii) has the ability to bear the economic risks of such Purchaser's prospective
investment; (iii) has been furnished with and has had access to such information
as it has considered necessary to make a determination as to the purchase of the
Securities, together with such additional information as is necessary to verify
the accuracy of the information supplied; (iv) has had all questions which have
been asked by it satisfactorily answered by the Company; and (v) has not been
offered the Securities by any form of advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any such media.
(f) Not Organized to Purchase. Such Purchaser has not been
-------------------------
organized for the purpose of purchasing the Securities.
(g) Holding Requirements. Such Purchaser understands that if the
--------------------
Company does not (i) register its Common Stock with the Securities and Exchange
Commission ("SEC") pursuant to Section 12 of the Exchange Act, (ii) become
subject to Section 15(d) of the Exchange Act, (iii) supply information pursuant
to Rule 15c2-11 thereunder, or (iv) have a registration statement covering the
Securities (or a filing pursuant to the exemption from registration under
Regulation A of the Securities Act covering the
13
<PAGE>
Securities) under the Securities Act in effect when such Purchaser desires to
sell the Securities, such Purchaser may be required to hold the Securities for
an indeterminate period. Such Purchaser also understands that any sale of the
Securities that might be made by such Purchaser in reliance upon Rule 144 under
the Securities Act may be made only in limited amounts in accordance with the
terms and conditions of that rule.
4.2 Legends. Each certificate representing the Securities may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
(iii) PURSUANT TO AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR
DISTRIBUTION.
(b) Other Legends. Any other legends required by the Law or
-------------
other applicable state blue sky laws.
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in each of the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed
-------------------------------------------
on a certificate pursuant to subsection 4.2(a) and the stop transfer
instructions with respect to such legended securities shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Securities if such Securities are registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k) and, where
reasonably deemed necessary by the Company, the holder of the Securities
provides the Company with an opinion of counsel for such holder, reasonably
satisfactory to the Company, to the effect that (i.) such holder meets the
requirements of Rule 144(k) or (ii) a public sale, transfer or assignment of
such Securities may be made without registration.
4.4 Rule 144. Such Purchaser is aware of the adoption of Rule 144 by
--------
the SEC promulgated under the Securities Act, which permits limited public
resales of securities acquired in a nonpublic offering, subject to the
satisfaction of certain conditions. Such Purchaser understands that under Rule
144, the conditions include, among other things: the availability of certain
current public information about the issuer and the resale occurring not less
than two (2) years after the party has purchased and paid for the securities to
be sold.
14
<PAGE>
5. Conditions to Closing.
---------------------
5.1 Conditions to Schedule I Purchasers' Obligations at the First
-------------------------------------------------------------
Closing. The obligation of each Schedule I Purchaser to purchase the Initial
- -------
Preferred Shares to be purchased by it at the First Closing is subject to the
fulfillment to such Schedule I Purchaser's satisfaction, on or before the First
Closing Date, of the following conditions, any of which may be waived in
accordance with the provisions of Section 7.1 hereof (provided, however, that
the condition set forth in paragraph (n) below shall be a condition to the
obligations of all Schedule I Purchasers other than CMG@Ventures):
(a) Representations and Warranties Correct; Performance of
------------------------------------------------------
Obligations. The representations and warranties made by the Company in Section 3
hereof shall be true and correct when made, and shall be true and correct in all
material respects on the First Closing Date with the same force and effect as if
they had been made on and as of said date. The Company's business and assets
shall not have been adversely affected in any material way prior to the First
Closing Date. The Company shall have performed in all material respects all
obligations and conditions herein required to be performed or observed by it on
or prior to the First Closing Date.
(b) Consents and Waivers. The Company shall have obtained in a
--------------------
timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement
(including without limitation waivers of preemptive rights).
(c) Board of Directors. The number of directors constituting the
------------------
entire Board of Directors shall have been fixed at seven and the following
persons shall have been elected as the directors and shall hold such positions
as of the First Closing: David Bohnett and William Bohnett, as the directors
elected by the holders of Common Stock, David Wetherell and Peter Mills, as the
directors elected by the holders of Series A and Series B Preferred Stock, Eric
Hippeau and Harry Lambert, as the directors elected by the holders of Series D
Preferred Stock (the "Series D Directors") and Stanley Newman, as the director
with industry expertise elected by the holders of a majority of the Common
Stock, voting on an as-converted basis.
(d) Filing of the Restated Articles. The Restated Articles
-------------------------------
shall have been filed with the Secretary of State of the State of California and
shall be in full force and effect.
(e) Rights Agreement. The Company, the Schedule I Purchasers
----------------
and the Founders of the Company (as defined in the Rights Agreement) shall have
executed the Rights Agreement in the form attached as Exhibit C hereto.
---------
(f) Employment Agreement Amendment. The Company and David
------------------------------
Bohnett shall have executed and delivered an Amendment No. 1 to Employment
Agreement in
15
<PAGE>
form and substance satisfactory to the Purchasers.
(g) Option Agreement Amendments. The Company and each party to a
---------------------------
stock option agreement with the Company (other than David Bohnett and
CMG@Ventures) shall have executed and delivered an amendment to each such option
agreement, in form and substance satisfactory to the Purchasers providing for a
first right by the Company, and a second right to the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, pro rata, to repurchase shares issuable upon exercise of
--- ----
options granted under such agreements upon termination of employment.
(h) Compliance Certificate. The Company shall have delivered a
----------------------
Certificate, executed by the President of the Company, dated the Closing Date,
certifying to the fulfillment of the conditions specified in subsections (a),
(b), (d), (e), (f) and (g) of this Section 5.1.
(i) SBA Side Letter. The Company shall have delivered to Chase
---------------
Venture Capital Associates, L.P. the Letter Agreement regarding Small Business
Administration regulatory matters in the form attached as Exhibit G hereto.
---------
(j) Opinion of Counsel. The Schedule I Purchasers shall have
------------------
received an opinion from Seyfarth, Shaw, Fairweather & Geraldson, the Company's
counsel, in substantially the form attached hereto as Exhibit H.
---------
(k) Fees of Purchasers' Counsel. The Company shall have paid
---------------------------
the fees and disbursements of Purchasers' counsel in accordance with Section 7.9
hereof.
(l) By-Laws. The Company's By-laws shall have been amended, if
-------
necessary, to provide that (i) unless otherwise required by the laws of the
State of California, (A) any two directors and (B) any holder or holders of at
least one million (1,000,000) shares of Series D Preferred Stock, shall have the
right to call a meeting of the Board of Directors or shareholders and (ii) the
number of directors fixed in accordance therewith shall in no event conflict
with any of the terms or provisions of the Series D Preferred Stock as set forth
in the Restated Articles.
(m) Option Grants. The Company shall have granted an option to
-------------
purchase up to 250,000 shares of Common Stock at a price of $3.54 per share to
each of (i) CMG@Ventures and (ii) David Bohnett and his designees.
(n) Amendment to Series A and B Purchase Agreement. The Company
----------------------------------------------
and CMG@Ventures shall have amended the Preferred Stock Purchase Agreement dated
as of January 16, 1996, to delete Section 6.8 thereof.
5.2 Conditions to Purchasers' Obligations at the Second Closing. The
-----------------------------------------------------------
obligation of each Schedule II Purchaser to purchase the Additional Preferred
Shares to be
16
<PAGE>
purchased by it at the Second Closing is subject to the fulfillment to such
Schedule II Purchaser's satisfaction, on or prior to the Second Closing Date, of
the following conditions, any of which may be waived in accordance with the
provisions of Section 7.1 hereof:
(a) Representations and Warranties Correct, Performance of
------------------------------------------------------
Obligations. The representations and warranties made by the Company in Section
- -----------
3 hereof shall be true and correct when made, and shall be true and correct in
all material respects on the Second Closing Date with the same force and effect
as if they had been made on and as of said date. The Company's business and
assets shall not have been adversely affected in any material way prior to the
Second Closing Date. The Company shall have performed in all material respects
all obligations and conditions herein required to be performed or observed by it
on or prior to the Second Closing Date.
(b) Consents and Waivers. The Company shall have obtained in a
--------------------
timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement.
(c) Compliance Certificate. The Company shall have delivered a
----------------------
Certificate, executed by the President of the Company, dated the Closing Date,
certifying to the fulfillment of the conditions specified in subsections (a) and
(b) of this Section 5.2.
(d) Opinion of Counsel. The Schedule II Purchasers shall have
------------------
received an opinion from Seyfarth, Shaw, Fairweather & Geraldson, the Company's
counsel, in substantially the form attached hereto as Exhibit H.
---------
5.3 Conditions to Obligations of the Company at the First Closing.
-------------------------------------------------------------
The Company's obligation to sell and issue the Initial Preferred Shares at the
First Closing is subject to the fulfillment to the satisfaction of the Company
on or prior to the First Closing Date of the following conditions, any of which
may be waived by the Company:
(a) Representations and Warranties Correct. The representations
--------------------------------------
and warranties made by the Schedule I Purchasers in Section 4 hereof shall be
true and correct when made, and shall be true and correct on the First Closing
Date with the same force and effect as if they had been made on and as of said
date.
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsections (b), (d) and (e) of Section 5.1 shall have been fulfilled.
5.4 Conditions to Obligations of the Company at the Second Closing.
--------------------------------------------------------------
The Company's obligation to sell and issue the Additional Preferred Shares at
the Second Closing is subject to the fulfillment to the satisfaction of the
Company on or prior to the Second Closing Date of the following conditions, any
of which may be waived by the Company:
(a) Representations and Warranties Correct. The representations
--------------------------------------
and
17
<PAGE>
warranties made by the Schedule II Purchasers in Section 4 hereof shall be true
and correct when made, and shall be true and correct on the Second Closing Date
with the same force and effect as if they had been made on and as of said date.
(b) Conditions Fulfilled. The conditions set forth in subsection
--------------------
(b) of Section 5.2 shall have been fulfilled.
(c) Rights Agreement. The Schedule II Purchasers shall have
----------------
executed a written instrument, in form and substance satisfactory to the
Company, the Founders and the Schedule I Purchasers, by which the Schedule II
Purchasers become parties to the Rights Agreement.
6. Affirmative Covenants of the Company. The Company hereby covenants
------------------------------------
and agrees as follows:
6.1 Financial Information. Until the consummation by the Company of
---------------------
a firm commitment public offering of securities with gross proceeds to the
Company of $20,000,000 or more and at a price per share equal to $10.00 or
higher, the Company will furnish to each Purchaser, so long as such Purchaser or
its permitted transferees (as described in Section 4.1(d)) own any of the
Preferred Shares or Common Shares issued upon conversion of the Preferred
Shares:
(i) as soon as practicable after the end of each fiscal year,
and in any event within 90 days thereafter, consolidated balance sheets of the
Company and its subsidiaries, if any, as at the end of such fiscal year, and
consolidated statements of operations and consolidated statements of changes in
financial position (or equivalent cash flow statements if required by the
Financial Accounting Standards Board) of the Company and its subsidiaries, if
any, for such year, prepared in accordance with generally accepted accounting
principles, all in reasonable detail and certified by independent public
accountants of recognized national standing selected by the Company, and
(ii) as soon as practicable after the end of each month (except
the last month of the fiscal year), and in any event within 20 days thereafter,
consolidated balance sheets of the Company and its subsidiaries, if any, as of
the end of such month; and consolidated statements of income (or equivalent cash
flow statements if required by the Financial Accounting Standards Board), for
such month and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles (except for required footnotes), all in
reasonable detail and signed, subject to changes resulting from year-end audit
adjustments, by the principal financial officer or chief executive officer of
the Company, and
(iii) as soon as practicable, but in no event later than 30 days
prior to the commencement of such fiscal year, an annual plan for each fiscal
year which shall include monthly capital and operating expense budgets, cash
flow statements, projected balance sheets and profit and loss projections for
each such month and for the end of the year, itemized in
18
<PAGE>
such detail as the Board of Directors may reasonably determine.
6.2 Conflicts of Interests. The Company shall use its best efforts
----------------------
to ensure that the Company's employees, during the term of their employment with
the Company, do not engage in activities which would result in a conflict of
interest with the Company. The Company's obligations hereunder include, but are
not limited to, requiring that the company's employees devote their primary
productive time, ability and attention to the business of the Company (provided,
however, the Company's employees may engage in other professional activity if
such activity does not materially interfere with their obligations to the
Company), requiring that the Company's employees enter into agreements regarding
proprietary information and confidentiality and inventions, and preventing the
Company's employees from engaging or participating in any business that is in
competition with the business of the Company.
6.3 Qualified Small Business. The Company shall use its best efforts
------------------------
to qualify as a "Qualified Small Business" as defined in Section 1202(d) of the
Code, and covenants that so long as the Preferred Shares are held by any of
CMG@Ventures, Chase Venture Capital Associates, L.P., The fl@tiron Fund LLC,
SOFTBANK Holdings Inc. or InnoCal, L.P. (or a transferee or assignee of any of
said Purchasers), it will use reasonable commercial efforts to cause the
Preferred Shares to qualify as Qualified Small Business Stock.
6.4 Proprietary Agreements. The Company will use its best efforts to
----------------------
prevent any employee from violating the confidentiality and proprietary
information agreement entered into between the Company and each of its
employees.
6.5 Payment of Dividends. The Company shall not pay dividends on or
--------------------
repurchase any shares of its Common Stock or Series C Preferred Stock so long as
the Preferred Shares are outstanding, except that the Company shall be entitled
to repurchase shares of its Common Stock and Series C Preferred Stock in
connection with the termination of an employee, director or consultant of the
Company or the proposed transfer by an employee, director or consultant of
shares of its Common Stock or Series C Preferred Stock, or pursuant to the terms
of the Rights Agreement.
6.6 Business Relationships. The Company shall not sell, license or
----------------------
enter into any business relationship, other than the purchase of goods or
services, with any Internet or World Wide Web technology or service provider
without the consent of the Company's Board of Directors.
6.7 Use of Proceeds. The Company shall use the proceeds from the
---------------
sale of the Preferred Shares for working capital.
6.8 Inspection. The Company shall permit each Purchaser, at such
----------
Purchaser's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its
19
<PAGE>
officers, all at such reasonable times as may be requested by the Purchaser;
provided, however, that the Company shall not be obligated pursuant to this
Section 6.8 to provide access to any information which it reasonably considers
to be a trade secret or similar confidential information.
6.9 Reserve for Conversion Shares. The Company shall at all times
-----------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of the Preferred Shares and
otherwise complying with the terms of this Agreement, such number of its duly
authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of the Preferred Shares or otherwise to comply with the terms of
this Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
6.10 Key Person Insurance. The Company shall procure within 30 days
--------------------
following the First Closing, and maintain in effect thereafter, "key person"
life insurance policies, payable to the Company, on the life of David Bohnett
(so long as he remains an employee of the Company), in the amount of $2,000,000
(the "Key Person Insurance"). The Company shall not cause or permit any
assignment or change in beneficiary and shall not borrow against any such
policy. If requested by Purchasers holding at least a majority of the
outstanding Preferred Shares, the Company will add one designee of the
Purchasers as a notice party for each such policy and shall request that the
issuer of each policy provide such designee with ten (10) days' notice before
such policy is terminated (for failure to pay premiums or otherwise) or assigned
or before any change is made in the beneficiary thereof.
6.11 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, neither the Company nor any of its subsidiaries shall enter into any
transaction with any director, officer, employee or holder of more than 5% of
the outstanding capital stock of any class or series of capital stock of the
Company or any of its subsidiaries, member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person, or
member of the family of any such person, is a director, officer, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof,
except for transactions on customary terms related to such person's employment.
6.12 Vesting and Repurchase of Reserved Employee Shares. Without the
--------------------------------------------------
unanimous approval of the members of the Compensation Committee (as defined in
Section 6.13 below), except for the Founders' Options and options previously
granted to William
20
<PAGE>
Bohnett and Stanley Newman to purchase 5,000 shares of Common Stock each, the
Company shall not grant to any of its employees, officers or directors options
to purchase shares of Common Stock unless (i) such options will become
exercisable at a rate not in excess of 25% per annum from the date of such grant
and (ii) the shares issuable upon exercise of such option are subject to
repurchase, first by the Company and second, by the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, pro rata, upon termination of employment.
--- ----
6.13 Committees. The Company shall, by amending its By-laws or
----------
otherwise, establish and maintain a Compensation Committee (the "Compensation
Committee") and an Audit Committee (the "Audit Committee") of the Board of
Directors. Each of the Audit Committee and the Compensation Committee shall at
all times consist of three non-management directors. The members of the
Compensation Committee shall initially be Eric Hippeau, Stanley Newman and David
Wetherell. No increase in compensation, bonuses or other remuneration shall be
paid to, and no capital stock of the Company shall be issued or granted to, any
director or executive officer of the company or any of its subsidiaries, without
the approval of the Compensation Committee. No employee stock option plan,
employee stock purchase plan, employee restricted stock plan or other employee
stock plan shall be established without the approval of the Compensation
Committee. The members of the Audit Committee will initially be Stanley Newman,
Harry Lambert and Peter Mills. The Audit Committee shall select (subject to the
approval of the Board of Directors) and provide instructions to the Company's
auditors and shall approve the Company's annual audit prior to its issuance each
year.
6.14 Board of Directors Meetings. The Company shall use its best
---------------------------
efforts to ensure that meetings of the Board of Directors are held at least six
times per year.
7. Miscellaneous.
-------------
7.1 Waivers and Amendments. With the written consent of the record
----------------------
holders of at least eighty percent (80%) of the Preferred Shares, the rights of
the holders of the Preferred Shares under this Agreement may be waived or
amended (either generally or in a particular instance), provided, however, that
no such waiver or amendment shall reduce the aforesaid proportion of Preferred
Shares, the holders of which are required to consent to any waiver or
supplemental agreement, without the consent of the record holders of all of the
Preferred Shares. Upon the effectuation of each such waiver or amendment, the
Company shall promptly give written notice thereof to the record holders of the
Preferred Shares who have not previously consented thereto in writing. Except
to the extent provided in this Section 7.1, this Agreement or any provision
hereof may be amended, waived, discharged or terminated only by a statement in
writing signed by the party against which enforcement of the amendment, waiver,
discharge or termination is sought.
7.2 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California
21
<PAGE>
residents entered into and to be performed entirely within California.
7.3 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by the Purchasers.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
7.4 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. Without limiting the generality of the foregoing, all
representations, covenants and agreements benefiting the Purchasers shall inure
to the benefit of any and all subsequent holders from time to time of Preferred
Shares or Common Shares.
7.5 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
7.6 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be delivered personally, via
facsimile, mailed by first class mail, postage prepaid, or delivered by courier
or overnight delivery, addressed (a) if to the Purchasers, at each of the
addresses listed on Schedule I or Schedule II hereto, as the case may be, or at
such other address or facsimile number as the Purchasers shall have furnished to
the Company in writing or (b) if to the Company, at its address set forth at
the beginning of this Agreement, or at such other address as the Company shall
have furnished to the Purchasers in writing. Notices that are mailed shall be
deemed received five (5) days after deposit in the United States mail.
7.7 Severability. In case any provision of this Agreement shall be
------------ --
found by a court of law to be invalid, illegal or unenforceable, the validity,
- ------
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
7.8 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and, (ii) hereby agrees to indemnify and to hold the Purchasers
harmless from and against any liability for commission or compensation in the
nature of a finder's fee to any broker or other person
22
<PAGE>
or firm (and the costs and expenses of defending against such liability or
asserted liability) for which the Company, or any of its employees or
representatives, is responsible.
(b) Each Purchaser, severally and not jointly, (i) represents and
warrants that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement and (ii) hereby agrees to indemnify
and to hold the Company harmless from and against any liability for any
commission or compensation in the nature of a finder's fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which each of the Purchasers, or any of
their employees or representatives, are responsible.
7.9 Expenses. The Company and the Purchasers shall each bear their
--------
own expenses and legal fees in connection with the consummation of this
transaction; provided, however, that the Company will pay the reasonable fees,
up to $35,000, of counsel for the Purchasers, together with disbursements and
expenses incurred by Purchasers' counsel in connection with all transactions
leading up to and including the Closing.
7.10 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.12 Delays or Omissions. No delay or omission to exercise to right,
-------------------
power or remedy accruing to the Company or to any holder of any securities
issued or to be issued hereunder shall impair any such right, power or remedy of
the Company or such holder, nor shall it be construed to be a waiver of any
breach or default under this Agreement, or an acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any delay or
omission to exercise any right, power or remedy or any waiver of any single
breach or default be deemed a waiver of any other right, power or remedy or
breach' or default theretofore or thereafter occurring. All remedies, either
under this Agreement, or by law otherwise afforded to the Company or any holder,
shall be cumulative and not alternative.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GEOCITIES
By: /s/ David Bohnett
Name: David Bohnett
Title: Chairman & CEO
CMG@VENTURES
By: /s/ Peter Miller
Name: Peter Miller
Title: General Partner
SOFTBANK Holdings Inc.
By: /s/ Charles Lax
Name: Charles Lax
Title: Vice President
CHASE VENTURE CAPITAL
ASSOCIATES, L.P.
By: Chase Capital
Partners, L.P.,
its General Partner
By: /s/ Chase Capital Partners, L.P.
The fl@tiron Fund LLC
By: /s/ Jerry Colonna
Name: Jerry Colonna
Title: Managing Partner
INNOCAL, L.P., A DELAWARE
LIMITED PARTNERSHIP
By: /s/ H.D. Lambert
Name: H.D. Lambert
Title: General Partner
24
<PAGE>
CONSENT AND
FIRST AMENDMENT TO
PREFERRED STOCK PURCHASE AGREEMENT AND
FIRST AMENDMENT TO AMENDED AND RESTATED RIGHTS AGREEMENT
This Consent and First Amendment to Preferred Stock Purchase Agreement and
First Amendment to Amended and Restated Rights Agreement (this "Amendment") is
entered into as of January 31, 1997, by and among GeoCities, a California
corporation (the "Company"), and the Schedule I Purchasers named in that certain
Preferred Stock Purchase Agreement, dated as of January 13, 1997 (the
"Agreement"), as well as David C. Bohnett and John Rezner (collectively, the
"Founders") in respect of the Rights Agreement (as hereinbelow defined), with
reference to the following:
A. GeoCities and the Schedule I Purchasers have entered into the
Agreement, pursuant to which the Company issued and sold, and the Schedule I
Purchasers purchased, 1,765,537 shares of Series D Preferred Stock. The Company,
the Schedule I Purchasers and the Founders have entered into an Amended and
Restated Rights Agreement, dated as of January 13, 1997 (the "Rights
Agreement").
B. The Agreement provides, among other things, that the Company may issue
and sell the Reserved Shares to one or more strategic investors mutually
satisfactory to the Company and each of the Schedule I Purchasers for the
purchase price of $3.54 per share. The Company desires to issue and sell to
Intel Corporation ("Intel"), and Intel wishes to purchase, all of the Reserved
Shares on the terms and subject to the conditions set forth in the Agreement.
C. The Company and the Schedule I Purchasers desire to consent to Intel's
purchase of all of the Reserved Shares, and to amend the Agreement in the manner
set forth in this Amendment, and the Company, the Schedule I Purchasers and the
Founders desire to amend the Rights Agreement in the manner set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, conditions and
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Defined Terms. Capitalized terms used but not defined herein shall
-------------
have the meanings ascribed to them in the Agreement or the Rights Agreement, as
applicable.
2. Consent to Purchase by Intel. The Company and each of the Schedule I
----------------------------
Purchasers hereby consent to the issuance and sale by the Company to Intel, and
the purchase by Intel, of all of the Reserved Shares for a purchase price of
$3.54 per share, subject to the terms and conditions of the Agreement, and
conditioned upon Intel's executing and delivering a copy of this Amendment
pursuant to which Intel agrees to be bound by the provisions of the Agreement
and the Rights Agreement, as amended hereby.
3. Section 2.l(b). Section 2.1(b) of the Agreement shall be amended by
--------------
replacing "January 31, 1997" with "February 14, 1997."
<PAGE>
4. Section 3.4. Section 3.4 of the Agreement is hereby amended by
-----------
replacing "275,750" with "349,500" in subclause (i) of that section. Section
3.4 of the Agreement is hereby further amended by replacing "213,000" and
"613,000" with "139,250" and "539,250", respectively, in subclause (ii) of that
section.
5. Exhibit "D". That portion of Exhibit "D" to the Agreement consisting
-----------
of a table setting forth the number of shares of Common Stock which the Company
has offered for sale to certain of its officers, employees, directors and
consultants is hereby amended in full as attached to this Amendment.
6. Section 2.1,(b) of the Rights Agreement. Section 2.1(b) of the Rights
---------------------------------------
Agreement is hereby amended by replacing "275,750" with "349,500" in subclause
(i) of that section. Section 2.l(b) of the Rights Agreement is further amended
by replacing "613,000" with "539,250" in subclause (ii) of that section.
7. Effect of Amendment. Except as expressly amended herein, the
-------------------
Agreement and the Rights Agreement shall remain unmodified and in full force and
effect.
8. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of California.
9. Counterparts. This Amendment may be executed in any number of
------------
identical counterparts, any set of which signed by all of the parties hereto
shall be deemed and constitute a complete executed original for all purposes.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date first written above.
GEOCITIES
By: /s/David C. Bhohnett
David C. Bohnett, President
CMG@VENTURES
By: /s/Peter Mills
Peter Mills, Managing Director
SOFTBANK HOLDINGS, INC.
By: /s/Charles Lax
Charles Lax, Vice President
2
<PAGE>
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: CHASE CAPITAL PARTNERS, L.P., its
General Partner
By: /s/Mitch Bluff
Name: Mitch Bluff
Title: Executive Partner
THE FL@TIRON FUND, LLC
By: /s/Jerome Colonna
Name: Jerome Colonna
Title: Managing Member
INNOCAL, L.P.
By: INOCAL ASSOCIATES, L.P., its General
Partner
By: /s/H.D. Lambert
Name: H.D. Lambert
Title: General Partner
/s/David C. Bohnett
DAVID C. BOHNETT
/s/John Rezner
JOHN REZNER
3
<PAGE>
SECOND AMENDMENT TO
PREFERRED STOCK PURCHASE AGREEMENT
AND
SECOND AMENDMENT TO
AMENDED AND RESTATED RIGHTS AGREEMENT
This Second Amendment to Preferred Stock Purchase Agreement and Second
Amendment to Amended and Restated Rights Agreement (this "Amendment") is entered
into as of February 14, 1997, by and among GeoCities, a California corporation
(the "Company"), and the Purchasers named in that certain Preferred Stock
Purchase Agreement, dated as of January 10, 1997, as amended by that certain
Consent and First Amendment to Preferred Stock Purchase Agreement and First
Amendment to Amended and Restated Rights Agreement, dated as of January 31, 1997
(the "Agreement"), as well as David C. Bohnett and John Rezner (collectively,
the "Founders") in respect of the Rights Agreement (as herein below defined),
with reference to the following:
A. GeoCities and the Schedule I Purchasers have entered into the
Agreement, pursuant to which the Company issued and sold, and the Schedule I
Purchasers purchased, 1,765,537 shares of Series D Preferred Stock. The Company,
the Schedule I Purchasers and the Founders have entered into an Amended and
Restated Rights Agreement, dated as of January 13, 1997, as amended by that
certain Consent and First Amendment to Preferred Stock Purchase Agreement and
First Amendment to Amended and Restated Rights Agreement, dated as of January
31, 1997 (the "Rights Agreement").
B. The Agreement provides, among other things, that the Company may issue
and sell the Reserved Shares to one or more strategic investors mutually
satisfactory to the Company and each of the Schedule I Purchasers for the
purchase price of $3.54 per share. The Company desires to issue and sell to
Intel Corporation ("Intel"), and Intel wishes to purchase, all of the Reserved
Shares on the terms and subject to the conditions set forth in the Agreement.
The Company and the Schedule I Purchasers have previously consented to Intel's
purchase of all of the Reserved Shares.
C. The Company and the Purchasers now wish to amend the Agreement and the
Rights Agreement in the manner provided for in this Amendment, and Intel wishes
to become a party to the Agreement and the Rights Agreement and bind itself to
the respective provisions of such agreements.
1
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants, conditions and
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Defined Terms. Capitalized terms used but not defined herein shall
-------------
have the meanings ascribed to them in the Agreement or the Rights Agreement, as
applicable.
2. Section 6.3. Section 6.3 of the Agreement is hereby amended by adding
-----------
"Intel Corporation," to section before the word "of" and before "CMG" in the
third line of that section.
3. Section 4(a)(iii) of the Rights Agreement. Section 4(a)(iii) of the
-----------------------------------------
Rights Agreement is hereby amended to read in full as follows:
one person designated by The fl@tiron Fund LLC and one person
designated by Intel Corporation, to be permitted to attend as
observers each meeting of the Board of Directors and any committee
thereof, to receive notice of each such meeting and all materials
distributed to each director attending any such meeting (at the time
and in the manner that such notice and materials are delivered to each
director), and to participate in all discussions at such meeting,
which designees shall initially be Jerome Colonna and Matthew Cowan,
respectively;
4. Effect of Amendment. Except as expressly amended herein, the
-------------------
Agreement and the Rights Agreement shall remain unmodified and in full force and
effect.
5. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of California.
6. Counterparts. This Amendment may be executed in any number of
------------
identical counterparts, any set of which signed by all of the parties hereto
shall be deemed and constitute a complete executed original for all purposes.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as
of the date first written above.
GEOCITIES
By: /s/ David C. Bohnett
David C. Bohnett, President
CMG@VENTURES
By: /s/ Peter Mills
Peter Mills, Managing Director
SOFTBANK HOLDINGS INC.
By: /s/ Charles Lax
Charles Lax, Vice President
CHASE VENTURE CAPITAL ASSOCIATES, L.P.
By: CHASE CAPITAL PARTNERS, L.P., its
General Partner
By: /s/ Mitch Bluff
Name: Mitch Bluff
Title: Executive Partner
THE FL@TIRON FUND LLC
By: /s/ Frederick Wilson
Name: Frederick Wilson
Title: Managing Member
3
<PAGE>
INNOCAL, L.P.
By: INNOCAL ASSOCIATES, L.P., its
General Partner
By: /s/ H.D. Lambert
Name: H.D. Lambert
Title: General Partner
/s/ David C. Bohnett
-------------------------------
DAVID C. BOHNETT
/s/ John Rezner
--------------------------------
JOHN REZNER
The undersigned Intel Corporation, by its signature herein below, agrees to
be bound by the provisions of the Agreement and the Rights Agreement (each as
defined herein above), in each instance as amended by the foregoing Amendment
(as herein above defined) and to purchase all of the Reserved Shares (as defined
in the Agreement). Upon the consummation of such purchase, the undersigned shall
become entitled to the rights and benefits and subject to all of the other
obligations of a Schedule II Purchaser under the Agreement and an Investor under
the Rights Agreement.
INTEL CORPORATION
By: /s/ Arvind Sodhani
Name: Arvind Sodhani
Title: Vice President and Treasurer
Dated: As of February ___, 1997
4
<PAGE>
EXHIBIT 10.23
EXECUTION COPY
GEOCITIES
PREFERRED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of October 6, 1997, by and among GeoCities, a
California corporation (the "Company"), and the several purchasers named in
Schedule I hereto (such purchasers being sometimes hereafter called individually
a "Schedule I Purchaser" and collectively the "Schedule I Purchasers"); the
Schedule I Purchasers, together with any Additional Purchasers (as defined
below) are sometimes hereinafter referred to collectively as the "Purchasers").
The parties hereby agree as follows:
1. Authorization and Sale of the Shares
------------------------------------
1.1 Authorization; Filing of Restated Articles of Incorporation. The
----------------------------------------------------------------
Company has authorized the issuance and sale pursuant to the terms and
conditions hereof of up to 2,857,142 shares of its Series E Preferred Stock (the
"Preferred Shares"), having the rights, restrictions, privileges and preferences
as set forth in the form of the Third Amended and Restated Articles of
incorporation of the Company (the "Restated Articles") attached hereto as
Exhibit A. The Company shall adopt and file the Restated Articles the Secretary
- ---------
of State of California on or before the First Closing Date (as defined below).
1.2 Sale and Issuance of the Initial Preferred Shares. Subject to the
-------------------------------------------------
terms and conditions hereof, at the First Closing (as determined below), the
Company will issue and sell to each Schedule I Purchaser and each Schedule I
Purchaser will purchase from the Company the number of Preferred Shares set
forth opposite the name of such Purchaser on Schedule I hereto (said aggregate
number of shares being herein collectively called the "Initial Preferred
Shares") for the purchase price of $7.00 per share.
1.3 Sale and Issuance of the Additional Preferred Shares. At the Second
----------------------------------------------------
closing (as defined below), subject to the terms and conditions hereof, the
Company shall issue and sell some or all of the remaining Preferred Shares, for
the purchase price of $7.00 per share, to one or more strategic investors
mutually satisfactory to the Company, on the one hand, and all of the Schedule I
Purchasers, on the other hand, and/or to some or all of the Schedule I
Purchasers, in such amounts as shall be agreed upon by the Company, on the one
hand, and all of the Schedule I Purchasers, on the other hand. The Preferred
Shares purchased at the Second Closing are referred to as the "Additional
Preferred Shares"; the Initial Preferred Shares and the Additional Preferred
Shares are hereinafter at times collectively referred to as the "Preferred
Shares". The Additional Preferred Shares shall be issued on the terms and
subject to the conditions of this Purchase Agreement, provided that each
purchaser of Additional Shares (the "Additional Purchasers") shall execute and
deliver to the Company and the Schedule I Purchasers a written instrument, in
form and substance which such Additional Purchaser shall agree to be bound by
the provisions of this Agreement and the Rights Agreement and be entitled to the
rights and benefits, and subject to the obligations, of a Purchaser hereunder
and an Investor thereunder.
1
<PAGE>
2. Closing Dates; Delivery
-----------------------
2.1 Closing Date. Each of the closings of the purchase and sale of the
------------
Preferred Shares hereunder (individually a "Closing" and collectively the
"Closings") shall be held at the offices of the Company on the dates hereinafter
provided:
(a) The First Closing for the purchase and sale of Preferred
Shares to the Schedule I Purchasers in the respective amounts set forth on
Schedule I (the "First Closing") shall be held on October 8, 1997, or on such
other date as the Purchasers and the Company may agree (the "First Closing
Date").
(b) The Second Closing for the purchase and sale of Additional
Preferred Shares to the Additional Purchasers shall be held at such date and
time as may be mutually agreed upon between the Additional Purchasers and the
Company (the "Second Closing") provided that the Second Closing shall not be
later than October 31, 1997 (the "Second Closing Date").
2.2 Delivery. Subject to the terms of this Agreement, payment at each
--------
Closing for the Preferred Shares purchased at such Closing shall be by cashier's
check or wire transfer for the account of the Company. Each Purchaser shall pay
that amount for the Preferred Shares being acquired by such Purchaser at such
Closing as set forth in Schedule I hereof or in the schedule to be prepared in
respect of the Additional Purchasers. At each Closing, the Company will deliver
to each Purchaser one or more certificates representing the Preferred Shares
purchased by such Purchaser at such Closing, in such denominations as may be
requested by such Purchaser.
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchasers that, except as set forth on a
Schedule of Exceptions attached hereto as Exhibit B, which exceptions shall be
---------
deemed to be representations and warranties as if made hereunder:
3.1 Organization and Standing; Articles and Bylaws. The Company is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its businesses as now conducted and as proposed to be conducted
Company is qualified or licensed to do business as a foreign corporation in all
jurisdictions where such qualification or licensing is required, except where
the failure to so qualify would not have a material adverse effect upon the
Company. Copies of the Company's Articles of Incorporation and Bylaws, each as
amended to date, and minutes and consents of shareholders and of the Board of
Directors are available for inspection at the Company's offices and have been
previously provided to special counsel for the Purchasers.
3.2 Corporate Power. The Company has now, or will have at the First
---------------
Closing, all requisite corporate power necessary for the authorization,
execution and delivery of this Agreement, the Second Amended and Restated Rights
Agreement in the form attached hereto as Exhibit C (the "Rights Agreement"), to
---------
sell and issue the Preferred Shares and to issue up to the maximum number of
shares of Common Stock, S0.005 par value per share (the
2
<PAGE>
"Common Stock"), issuable upon conversion of the Preferred Shares. This
Agreement and the Rights Agreement are valid and binding obligations of the
Company, enforceable in accordance with their terms, except as the same may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium, usury and other laws of general application affecting the
enforcement of creditors' rights.
3.3 Subsidiaries. The Company does not control, directly or
------------
indirectly, any other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of the Company is
--------------
20,000,000 shares of Common Stock and 11,579,786 shares of Preferred Stock, of
which 1,554,000 shares have been designated Series A Preferred Stock, 1,450,000
shares have been designated Series B Preferred Stock, 600,000 have been
designated Series C Preferred Stock, 5,118,644 shares have been designated
Series D Preferred Stock and 2,857,142 shares have been designated Series E
Preferred Stock. There are issued and outstanding 1,554,000 shares of Series A
Preferred Stock, 1,450,000 shares of Series B Preferred Stock, 600,000 shares of
Series C Preferred Stock, 5,084,746 shares of Series D Preferred Stock and
1,309,750 shares of Common Stock. The holders of record of the presently issued
and outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Common Stock immediately prior to
the First Closing are as set forth on Exhibit D-1. All such issued and
-----------
outstanding shares have been authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities. There are no outstanding
rights, options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company of any shares of its capital stock except that (i)
the Company has offered for sale shares of Common Stock to those employees,
officers, directors and consultants of the Company, and in such amounts, as set
forth on Exhibit D-2 which Exhibit D-2 also lists those shares described in
----------- -----------
(iii) and (iv) hereinbelow; (ii) ,777,500 shares of Common Stock have been
reserved for issuance pursuant to the Company's 1997 Stock Option Plan or
otherwise pursuant to grants approved by the Company's Board of Directors; (iii)
500,000 shares of Common Stock have been reserved for issuance to CMG @Ventures
pursuant to an option previously granted to it; (iv) 500,000 shares of Common
Stock have been reserved for issuance to David Bohnett and certain other persons
pursuant to options previously granted to them (the "Founders Options"); (v)
33,898 shares of Series D Preferred Stock have been reserved for issuance to
Cupertino Bank pursuant to a warrant issued to it; (vi) 44,444 shares of Common
Stock have been reserved for issuance to Comerica Bank pursuant to a warrant
issued or to be issued to it; (vii) 8,722,644 shares of the Company's Common
Stock have been reserved for issuance upon conversion of the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series
D Preferred Stock; and (vii) 2,857,142 shares of the Company's Common Stock
have been reserved for issuance upon conversion of the Series E Preferred Stock.
Except as provided in the rights Agreement, the Company is not a party or
subject to any agreement or understanding between any persons or entities which
affects or relates to the voting or giving of written consents with respect to
any securities or by any director of the Company.
3
<PAGE>
3.5 Authorization.
-------------
(a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and shareholders necessary for the execution
and delivery of this Agreement and the Rights Agreement, the sale and the
issuance of the Preferred Shares, the issuance of the Common Stock issuable upon
conversion of the Preferred Shares (the "Common Shares") and the performance of
the Company's obligations hereunder and under the Rights Agreement has been
taken or will be taken prior to the First Closing.
(b) Valid Issuance. The Preferred Shares, when issued in
--------------
compliance with the provisions of this Agreement, and the Common Shares, when
issued upon conversion of the Preferred Shares in accordance with the provisions
of the Restated Articles, will be validly issued and outstanding, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that all such shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein, and as may be required by
future changes in such laws. The rights, preferences, privileges and
restrictions of the Preferred Shares are as set forth in the Restated Articles.
(c) No Preemptive Rights. Other than as provided in the Rights
--------------------
Agreement, no person has any right of first refusal or any preemptive rights in
connection with the issuance of the Preferred Shares, the issuance of the Common
Shares upon conversion of the Preferred Shares or any future issuances of
securities by the Company.
3.6 Proprietary Rights.
------------------
(a) Exhibits E-1 and E-2 contain, respectively, an accurate and
complete description of all registered and unregistered trademarks and
tradenames in or related to the Company Products, and a list of all licenses and
other agreements relating thereto. Exhibit E-3 sets forth a list of all licenses
-----------
and other agreements with third parties (the "Third Party Licenses") relating to
any software, copyrights, technology, know-how or processes that the Company has
licensed or is otherwise authorized by such third parties to use, market,
distribute or incorporate into products distributed by the Company (such
software, technology, know-how and processes are collectively referred to as the
"Third Party Technology"). The Company (i) owns all right, title and interest in
and to or has obtained licenses to use all technology, intellectual property,
software tools, copyrights, know-how, processes, patents, trademarks, trade
secrets, tradenames and other proprietary rights (collectively, "Rights") used
in or necessary for the conduct of its business as conducted to the date hereof
(the "Business") and (ii) will, prior to entering areas of new business
currently being contemplated, own or obtain all Rights used in or necessary for
the conduct of its business as so contemplated, including without limitation
(with respect to both clauses (i) and (ii) above), the technology and all
proprietary rights developed or discovered in connection with or contained in
the Company's products (the "Company Products"), free and clear of all
liabilities, charges, liens, pledges, mortgages, restrictions, adverse claims,
security interests, rights of others and encumbrances (including, without
limitation, distribution rights) (all of which are referred to as "Proprietary
Rights"). The foregoing representation and warranty as it relates to Third Party
Technology is limited to the Company's interest pursuant to the Third Party
Licenses, all of which are valid and enforceable and in full force and effect
and which grant the Company such right to Third Party Technology
4
<PAGE>
as are employed in or necessary to the Business of the Company as conducted or
proposed to be conducted. All of the Company's registered patents, trademarks
and copyrights in any of the Company Products and applications therefor, if any,
are valid and in full force and effect, and consummation of the transactions
contemplated hereby will not alter or impair any such rights. No claims have
been asserted against the Company (and to the best knowledge of the Company
there are no claims which are likely to be asserted against the Company or which
have been asserted against others) by any person challenging the Company's use
or distribution of any patents, trademarks, tradenames, copyrights, trade
secrets, software, technology, know-how or processes utilized by the Company
(including, without limitation, the Third Party Technology) or challenging or
questioning the validity or effectiveness of any license or agreement relating
thereto (including, without limitation, the Third Party Licenses). To the best
knowledge of the Company, none of the Company Products nor the use of any
patents, trademarks, tradenames, copyrights, software, technology, know-how or
processes by the Company in its current Business infringes on the rights of,
constitutes misappropriation of, or in any way involves unfair competition with
respect to, any proprietary information or intangible property right of any
third person or entity, including without limitation, any patent, trade secret,
copyright, trademark or tradename.
(b) The Company has not granted any third party any right to
manufacture, reproduce, distribute, market or exploit any of the Company
Products or any adaptations, Translations or derivative works based on the
Company Products or any portion thereof. Except with respect to the rights of
third parties to the Third party Technology, no third party has any right to
manufacture, reproduce, distribute, market or exploit any works or materials of
which any of the Company Products are a "derivative work" as that term is
defined in the United States Copyright act, Title 17, U.S.C. Section 101.
(c) All designs, drawings, specifications, source code, object
code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Company Products (the "Company Components"), if any,
constitute original creations of and were written, developed and created solely
and exclusively by employees of the Company without the assistance of any third
party or entity or were created by third parties who assigned ownership of their
rights to the Company in valid and enforceable consultant confidentiality and
invention assignment agreements. The Company has at all times used commercially
reasonable efforts to treat the Company Products and the Company Components as
containing trade secrets and has not disclosed or otherwise dealt with such
items in such a manner as to cause the loss of such trade secrets by release
into the public domain.
(d) No employee of the Company is in violation of any term of any
employment contract, patent disclosure agreement, confidentiality agreement or
any other contract or agreement relating to the relationship of any such
employee with the Company or, to the best knowledge of the Company, any other
party because of the nature of the business conducted by the Company or proposed
to be conducted by the Company.
(e) Notwithstanding the foregoing, the Company states and the
Purchasers acknowledge and agree that the Company is a service provider on the
electronic network commonly known as the Internet, and that the Business is
unique in that the Company has not created, nor does it own, the content of each
Personal Home Page and third-party
5
<PAGE>
advertising that may be found within the Company Products ("Excluded Rights").
The parties agree that the term Proprietary Rights does not include, and the
Company hereby disclaims the representations and warranties of this Section 3.6
(except for the representation in Section 3.6(a) as to assertion of claims
against the Company or claims which to the knowledge of the Company are likely
to be asserted) as to Excluded Rights found within the Company Products.
Personal Home Pages are subject to the Company's Personal Home Page Policy, and
Company's rights as to the Personal Home Pages are set forth in the Personal
Home Page Policy (a copy of which has been provided to special counsel to the
Purchasers). The Company does not own or control the content of any Personal
Home Page, except as see forth in the Personal Home Page Policy. The Purchasers
further acknowledge and agree that the Internet is global in scope, and that the
representations and warranties of the Company made in this Section 3.6 are
limited to the laws of the United States. The Company is unaware, however, of
any third party having rights in the Proprietary Rights under the laws of any
foreign jurisdiction that are superior to those of the Company, or of any
violation by the Company of the laws of any foreign jurisdiction.
3.7 Compliance with Other Instruments, None Burdensome, etc. The
--------------------------------------------------------
Company is not in violation of any term of its Restated Articles or Bylaws, nor
is the Company in violation of or in default in any material respect under the
terms of any mortgage, indenture, contract, agreement, instrument, judgment or
decree, the violation of which would have a material adverse effect on the
Company, and to the best knowledge of the Company is not in violation of any
order, statute, rule or regulation applicable to the Company. The execution,
delivery and performance of and compliance with this Agreement or the Rights
Agreement, [he issuance and sale of the Preferred Shares and the issuance of the
Common Shares upon conversion of the Preferred Shares will not (a) result in any
such violation, or (b) be in conflict with or constitute a default under any
such term, or (c) result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company
pursuant to any such term. To the best knowledge of the Company, there is no
such term which adversely affects, or in the future may materially adversely
affect, the business, prospects, conditions, affairs or operations of the
Company or any of its properties or assets.
3.8 Proprietary Agreements. Each officer, director, employee and
----------------------
consultant of the Company has executed an agreement regarding confidentiality
and proprietary information, the form of which has been approved by special
counsel to the Purchasers. The Company is not aware that any of its officers,
directors or employees is in violation thereof and will use its best efforts to
prevent any such violation. David Bohnett and John Rezner and other key
technical employees have executed an agreement regarding the assignment of
inventions, the form of which has been approved by special counsel to the
Purchasers. The Company is not aware that any of its officers, directors or
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of his or her best efforts to promote the interests of the Company or
that would conflict with the Company's business as conducted or as proposed to
be conducted or that would prevent any such employee from assigning inventions
to the Company. Neither the execution nor delivery of this Agreement or the
Rights Agreement, nor the carrying on of the Company's business as proposed,
will, to the Company's best knowledge, conflict with or result in a breach of
the terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees is now
obligated. The Company does not believe that it is or
6
<PAGE>
will be necessary for the Company to utilize any inventions of any of its
employees made prior to their employment by the Company.
3.9 Litigation, etc. There is no action, proceeding or investigation
----------------
pending against the Company or its officers or directors, or to the best
knowledge of the Company, against employees or consultants of the Company (or,
to the best knowledge of the Company, any basis therefor or threat thereof): (1)
which might result, either individually or in the aggregate, in (a) any material
adverse change in the business, prospects, conditions, affairs or operations of
the Company or in any of its properties or assets, or (b) any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or (c) any material liability on
the part of the Company; or (2) which questions the validity of this Agreement,
the Rights Agreement or any action taken or to be taken in connection herewith,
including in each case, without limitation, actions pending or threatened
involving the prior employment of any of the Company's employees, the use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of its former employees, or their obligations under
any agreements with prior employers. The Company is not a party to or subject to
the provisions of any order, writ, injunction, judgment or decree of any court
or government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company currently
intends to initiate.
3.10 Governmental Consent, etc. No consent, approval or authorization
--------------------------
of or designation, registration, declaration or filing with any governmental
authority on the part of the Company is required in connection with: (a) the
valid execution and delivery of this Agreement or the Rights Agreement, or (b)
the offer, sale or issuance of the Preferred Shares, or the issuance of the
Common Shares issuable upon conversion of the Preferred Shares, or (c) the
obtaining of the consents, permits and waivers specified in subsection 5.1(b)
hereof, except the filing of the Restated Articles and, if required, filings or
qualifications under the California Corporate Securities Law of 1968 (the "Law")
or other applicable blue sky laws, which filings or qualifications, if required,
will have been timely filed or obtained after the sale of the Preferred Shares.
3.11 Offering. In reliance on the representations and warranties of
--------
the Purchasers in Section 4 hereof, the offer, sale and issuance of the
Preferred Shares in conformity with the terms of this Agreement will not result
in a violation of the requirements of Section 5 of the Securities Act of 1933,
as amended (the "Securities Act") or the qualification or registration
requirements of the Law or other applicable blue sky laws.
3.12 Taxes. The Company has filed all tax returns that are required
-----
to have been filed with appropriate federal, state, county and local
governmental agencies or instrumentalities, except where the failure to do so
would not in the aggregate result in additional liability totaling $25,000 or
more. The Company has paid or established reserves for all income, franchise and
other taxes, assessments, governmental charges, penalties, interest and fines
due and payable by it on or before the First Closing. There is no pending
dispute with any taxing authority relating to any of such returns and the
Company has no knowledge of any proposed liability for any tax to be imposed
upon the properties or assets of the Company. There is no tax lien, whether
imposed by any federal, state or local taxing authority, outstanding against the
7
<PAGE>
assets, properties or business of the Company. Neither the Company nor any of
its present or former shareholders has ever filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that
the Company be taxed as an S corporation.
3.13 Title. The Company owns its property and assets free and clear
-----
of all liens, mortgages, loans or encumbrances except liens for current taxes,
and such encumbrances and liens which arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets leased by the Company, the
Company is in compliance with such leases and holds valid leasehold interests
free and clear of any liens, claims or encumbrances.
3.14 Material Contracts and Commitments. All of the contracts,
----------------------------------
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders to the
Company or placed by the Company) which involve obligations of, or payments to,
the Company in excess of Five Thousand Dollars ($5,000) and all agreements
between the Company and its officers, directors, consultants and employees are
either (i) attached as exhibits to this Agreement, or (ii) set forth on the list
attached hereto as Exhibit F (the "Contracts"), copies of which have either been
---------
delivered to special counsel to the Purchasers or will be delivered to them upon
request. All of the material provisions of the Contracts are valid, binding and
in full force and effect and enforceable by the Company in accordance with their
respective terms, subject to the effect of applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium, usury or other laws of
general application relating to or affecting enforcement of creditors' rights
and rules or laws concerning equitable remedies. The Company is not in material
default under any of such Contracts. To the best knowledge of the Company, no
other party to any of the Contracts is in material default thereunder.
3.15 Registration Rights. Other than as granted pursuant to the
-------------------
Rights Agreement, the Company has not granted or agreed to grant any rights to
register, as that term is defined in the Rights Agreement, including piggyback
registration rights, to any person or entity.
3.16 Certain Transactions. The Company is not indebted, directly or
--------------------
indirectly, to any of its officers, directors or shareholders or to their
spouses or children, in any amount whatsoever; and none of said officers,
directors or shareholders, or any member of their immediate families, are
indebted to the Company or (to the best of the Company's knowledge, in the case
of shareholders) have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship (except as a holder of securities of a corporation whose
securities are publicly traded and which is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") to the extent of owning not more than two percent (2%) of the issued and
outstanding securities of such corporation). No such officer, director or
shareholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company. The Company
is not a guarantor or indemnitor of any liability or indebtedness of any other
person, firm or corporation.
3.17 Corporate Documents; Minute Books. Except for amendments
---------------------------------
necessary to satisfy representations and warranties or conditions contained
herein (the form of which
8
<PAGE>
amendments has been approved by the Purchasers), the Restated Articles and
Bylaws of the Company are in the form previously provided to special counsel to
the Purchasers. The minute books of the Company previously provided to special
counsel to the Purchasers contain a complete summary of all meetings of
directors and shareholders since the time of incorporation of the Company.
3.18 Financial Statements. The Company has delivered to the
--------------------
Purchasers copies of the Company's unaudited balance sheet as of July 31, 1997
(the "Company Balance Sheet") and statements of income, changes in shareholders'
equity and cash flow for the period then ended. All such financial statements
(collectively, the "Company Financial Statements") are complete and in
accordance with the books and records of the Company and present fairly and
disclose the financial position of the Company as of their respective dates and
the results of operations for the period covered thereby. The Company Financial
Statements have been prepared in accordance with generally accepted accounting
principles consistently applied during the periods covered thereby, except for
the absence of footnotes and year-end adjustments. Since July 31, 1997, there
has been no Material Adverse Change (as defined herein) in the Company's assets
or liabilities, or in the Business or condition, financial or otherwise, of the
properties or results of operations. "Material Adverse Change" means any change
in, or effect on, the Business (i) that is or is reasonably likely to be
materially adverse to the results of the Operations Or the financial condition
of the Company or the Business or (ii) that requires or is reasonably likely to
require the expenditure of Fifteen Thousand Dollars ($15,000) or more,
individually or in the aggregate.
3.19 Subsequent Events. Except as set forth on the Schedule of
-----------------
Exceptions, since July 31, 1997, the Company has not (i) issued any stock, bond
or other corporate security, (ii) borrowed any amount or incurred or become
subject to any liability (absolute, accrued or contingent), except liabilities
under contracts entered into in the ordinary course of business, (iii)
discharged or satisfied any lien or encumbrance or incurred or paid any
obligation or liability (absolute, accrued or contingent), other than current
liabilities shown on the Company Financial Statements and current liabilities
incurred since the date of the Company Financial Statements in the ordinary
course of business, (iv) declared or made any payment or distribution to
shareholders or purchased or redeemed any shares of its capital stock or other
securities, (v) mortgaged, pledged or subjected to lien any of its assets,
tangible or intangible, other than liens for current real property taxes not yet
due and payable, (vi) sold, assigned or transferred any of its tangible assets
except for fair value in the ordinary course of business, or canceled any debt
or claim, except for fair value in the ordinary course of business, (vii) sold,
assigned, transferred or granted any license with respect to any patent,
trademark, trade name, service mark, copyright, trade secret or other intangible
asset, except pursuant to license or other agreements entered into in the
ordinary course of business, (viii) suffered any loss of property or waived any
right of substantial value whether or not in the ordinary course of business,
(ix) made any change in officer compensation, (x) made any material change in
the manner of business or operations of the Company, (xi) entered into any
transaction except in the ordinary course of business or as otherwise
contemplated hereby, or (xii) entered into any written or oral commitment to any
of the foregoing.
3.20 Employee Benefit Plans. The Company does not have any
----------------------
"employee benefit plan" as defined in the Employee Retirement Income Security
Act of 1974, as amended.
9
<PAGE>
3.21 Real Property Holding Corporation. The Company is not a "real
---------------------------------
property holding corporation" within the meaning of Section 897(c)(2) of the
Code.
3.22 Disclosure. No representation or warranty by the Company in this
----------
Agreement, or in any document or certificate furnished or to be furnished to the
Purchasers pursuant hereto or in connection with the transactions contemplated
hereby, when taken together, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements made herein and therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that with regard to the
operating projections, dated September 19, 1997, which have been delivered to
the Purchasers and which supersede any prior projections that may have been
delivered to the Purchasers, the Company represents only that such projections
were prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such projections. The Company has fully provided the
Purchasers with all the information which the Purchasers and their respective
counsel have requested for deciding whether to purchase the Preferred Shares and
all information that the Company believes is reasonably necessary to make such
decision. There is no material fact known to the Company that has not been
disclosed in this Agreement or in any other agreement, document or written
statement furnished by the Company to the Purchasers or their respective counsel
in connection with the transactions contemplated hereby or which materially
adversely affects or, in the Company's reasonable business judgment, could
materially adversely affect the business, properties, assets or condition
(financial or other) of the Company.
3.23 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, and insurance against other
hazards, risks and liabilities to persons and property, to the extent and in the
manner customary for companies in similar businesses similarly situated. All
premiums due and payable with respect to the policies maintained by the Company
have been paid.
3.24 Labor Agreements and Actions. The Company is not bound by or
subject to (and none of its assets or properties are bound by or subject to) any
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to the best knowledge of the Company, has sought to represent any
of the employees, representatives or agents of the Company. There is no strike
or other labor dispute involving the Company pending, or the best knowledge of
the Company threatened, which could have a material adverse effect on the
assets, properties, financial condition, operating results, or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general principles
related to wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.
3.25 Brokers. The Company has no contract, arrangement or
-------
understanding any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
10
<PAGE>
3.26 Best Knowledge. For purposes of this Agreement, the Terms "to
--------------
the knowledge of the Company" and "to the best of the Company's knowledge" shall
mean to the knowledge of the Company after inquiry of each of David Bohnett,
Laura Rockwell, John Rezner, Rich Rygg, Jim Rea and Ed Pierce.
3.27 Qualified Small Business. The Company qualifies as a
------------------------
"Qualified Small Business" as defined in Section 1202(d) of The Internal Revenue
Code of 1986, as amended (the "Code").
4. Representations and Warranties of the Purchasers and Restrictions on
--------------------------------------------------------------------
Transfer Imposed by the Securities Act.
- --------------------------------------
4.1 Representations and Warranties by the Purchasers. Each Purchaser,
------------------------------------------------
severally and not jointly, represents and warrants to the Company as follows:
(a) Investment Intent. This Agreement is made with such
-----------------
Purchaser in reliance upon such Purchaser's representations to the Company,
evidenced by such Purchaser's execution of this Agreement, that such Purchaser
is acquiring the Preferred Shares and the Common Shares issuable upon conversion
of the Preferred Shares (collectively the "Securities") for investment for such
Purchaser's own account, for investment and not with a view to, nor for resale
in connection with, any distribution or public offering thereof within the
meaning of the Securities Act and the Law. Such Purchaser has the full right,
power and authority to enter into and perform this Agreement and the Rights
Agreement, and this Agreement and the Rights Agreement constitute valid and
binding obligations upon such Purchaser.
(b) Shares Not Registered. Such Purchaser understands and
---------------------
acknowledges that the offering of the Preferred Shares pursuant to this
Agreement will not be registered under the Securities Act or qualified under the
Law on the grounds that the offering and sale of securities contemplated by this
Agreement are exempt from registration under the Securities Act and exempt from
qualification pursuant to Section 25102(f) of the Law, land that the Company's
reliance upon such exemptions is predicated upon such Purchaser's
representations set forth in this Agreement. Such Purchaser acknowledges and
understands that the Securities must be held indefinitely unless the Securities
are subsequently registered under the Securities Act and qualified under the Law
or an exemption from such registration and such qualification is available.
(c) No Transfer. Such Purchaser covenants that in no event
-----------
will it dispose of any of the Securities (other than in conjunction with an
effective registration statement for the Securities under the Act or in
compliance with Rule 144 promulgated under the Act) unless and until (i) such
Purchaser shall have notified the Company of the proposed disposition and shall
have furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and (ii) if reasonably requested by the Company, such
Purchaser shall have furnished the Company with an opinion of counsel reasonably
satisfactory in form and substance to the Company to the effect that (x) such
disposition will not require registration under the Securities Act and (y)
appropriate action necessary for compliance with the Securities Act, the Law and
any other applicable state, local or foreign law has been taken. It is agreed
that the Company will not require opinions of counsel for transactions made
pursuant to Rule 144.
11
<PAGE>
(d) Permitted Transfers. Notwithstanding the provisions of
-------------------
subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser to one or more partners or departing
partners of a Purchaser (in the case of a Purchaser that is a partnership), or
to one or more members or departing members of a Purchaser (in the case of a
Purchaser that is a limited liability company) or to an affiliated corporation
(in the case of a Purchaser that is a corporation), or to one or more affiliated
partnerships managed by such Purchaser, or in the case of Chase Venture Capital
Associates, L.P. to Salt Creek Ventures or an affiliate thereof, or to the
estate of any such partner or member or former partner or member, or the
transfer by gift, will or intestate succession of any partner or member to his
spouse or lineal descendants or ancestors, if the transferee agrees in writing
to be bound by the terms of this Agreement to the extent as if he were an
original Purchaser hereunder.
(e) Knowledge and Experience. Such Purchaser (i) has such
------------------------
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of its prospective investment in the Securities;
(ii) has the ability to bear the economic risks of such Purchaser's prospective
investment; (iii) has been furnished with and has had access to such information
as it has considered necessary to make a determination as to the purchase of the
Securities, together with such additional information as is necessary to verify
the accuracy of the information supplied; (iv) has had all questions which have
been asked by it satisfactorily answered by the Company; and (v) has not been
offered the Securities by any form of advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any such media.
(f) Not Organized to Purchase. Such Purchaser has not been
-------------------------
organized for the purpose of purchasing the Securities.
(g) Holding Requirements. Such Purchaser understands that if
--------------------
the Company does not (i) register its Common Stock with the Securities and
Exchange Commission ("SEC") pursuant to Section 12 of the Exchange Act, (ii)
become subject to Section 15(d) of the Exchange Act, (iii) supply information
pursuant to Rule 15c2-11 thereunder, or (iv) have a registration statement
covering the Securities (or a filing pursuant to the exemption from registration
under Regulation A of the Securities Act covering the Securities) under the
Securities Act in effect when such Purchaser desires to sell the Securities,
such Purchaser may be required to hold the Securities for an indeterminate
period. Such Purchaser also understands that any sale of the Securities that
might be made by such Purchaser in reliance upon Rule 144 under the Securities
Act may be made only in limited amounts in accordance with the terms and
conditions of that rule.
4.2 Legends. Each certificate representing the Securities may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN
12
<PAGE>
CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE
ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR (iii) PURSUANT TO AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS
NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by the Law or
-------------
other applicable state blue sky laws.
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in each of the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend
-------------------------------------------
endorsed on a certificate pursuant to subsection 4.2(a) and the stop transfer
instructions with respect to such legended Securities shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Securities if such Securities are registered under the Securities Act and a
prospectus meeting the requirements of section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k) and, where
reasonably deemed necessary by the Company, the holder of the Securities
provides the Company with an opinion of counsel for such holder, reasonably
satisfactory to the Company, to the effect that (i) such holder meets the
requirements of Rule 144(k) or (ii) a public sale, transfer or assignment of
such Securities may be made without registration.
4.4 Rule 144. Such Purchaser is aware of the adoption of Rule 144
--------
by the SEC promulgated under the Securities Act, which permits limited public
resales of securities acquired in a nonpublic offering, subject to the
satisfaction of certain conditions. Such Purchaser understands that under Rule
144, the conditions include, among other things: the availability of certain
current public information about the issuer and the resale occurring not less
than one (1) year after the party has purchased and paid for the securities to
be sold.
5. Conditions to Closing.
---------------------
5.1 Conditions to Schedule I Purchasers' Obligations at the First
-------------------------------------------------------------
Closing. The obligation of each Schedule I Purchaser to purchase the Initial
- -------
Preferred Shares to be purchased by it at the First Closing is subject to the
fulfillment to such Schedule I Purchaser's satisfaction, on or before the First
Closing Date, of the following conditions, any of which may be waived in
accordance with the provisions of Section 7.1 hereof:
(a) Representations and Warranties Correct; Performance of
------------------------------------------------------
Obligations. The representations and warranties made by the Company in Section 3
- -----------
hereof shall be true and correct when made, and shall be true and correct in all
material respects on the First Closing Date with the same force and effect as if
they had been made on and as of said date. The Company's business and assets
shall not have been adversely affected in any material way prior to the First
Closing Date. The Company shall have performed in all material respects all
obligations and conditions herein required to be performed or observed by it on
or prior to the first Closing Date.
13
<PAGE>
(b) Consents and Waivers. The Company shall have obtained in
--------------------
a timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement
(including without limitation waivers of preemptive rights).
(c) Board of Directors. The number of directors constituting
------------------
the entire Board of Directors shall continue to be fixed at seven and the
following persons shall continue to hold their positions as directors as of the
first Closing: David Bohnett and William Bohnett, as the directors elected by
the holders of Common Stock, David Wetherell and Peter Mills, as the directors
elected by the holders of Series A and Series B Preferred Stock, Eric Hippeau
and Harry Lambert, as the directors elected by the holders of Series D Preferred
Stock (the "Series D Directors") and Stanley Newman, as the director with
industry expertise elected by the holders of a majority of the Common Stock, the
Series A, Series B, Series C, Series D and Series E Preferred Stock, voting as a
single class on an as-converted basis.
(d) Filing of the Restated Articles. The Restated Articles
-------------------------------
shall have been filed with the Secretary of State of the State of California and
shall be in full force and effect.
(e) Rights Agreement. The Company, the Schedule I Purchasers
----------------
and the Founders of the Company (as defined in the Rights Agreement) shall have
executed the Rights Agreement in the form attached as Exhibit C hereto, which is
---------
designated therein as the Second Amended and Restated Rights Agreement.
(f) [Intentionally omitted.]
(g) [Intentionally omitted.]
(h) Compliance Certificate. The Company shall have delivered
----------------------
a Certificate, executed by the President of the Company, dated the Closing Date,
certifying to the fulfillment of the conditions specified in subsections (a),
(b), (d) and (e) of this Section 5.1.
(i) SBA Side Letter. Reference is made to the letter
---------------
agreement dated January 13, 1997, between the Company and Chase Venture Capital
Associates, L.P. ("CVCA"), regarding Small Business Administration matters (the
"SBA Letter"). The Company acknowledges and agrees that the representations and
warranties of the Company set forth in the SBA Letter are true and correct as of
the date hereof with respect to the sale of the Series E Preferred Stock to CVCA
and the use of the proceeds therefrom, and the Company agrees to comply with the
covenants and obligations of the Company therein with respect to the sale of
such Series E Preferred Stock.
(j) Opinion of Counsel. The Schedule I Purchasers shall have
------------------
received an opinion from Seyfarth, Shaw, Fairweather & Geraldson, the Company's
counsel, in substantially the form attached hereto as Exhibit G.
---------
5.2 Conditions to Purchasers' Obligations at the Second Closing. The
-----------------------------------------------------------
obligation of each Additional Purchaser to purchase the Additional Preferred
Shares to be purchased by it at the Second Closing is subject to the fulfillment
to such Additional Purchaser's
14
<PAGE>
satisfaction, on or prior to the Second Closing Date, of the following
conditions, any of which may be waived in accordance with the provisions of
Section 7.1 hereof:
(a) Representations and Warranties Correct, Performance of
------------------------------------------------------
Obligations. The representations and warranties made by the Company in Section
- -----------
3 hereof shall be true and correct when made, and shall be true and correct in
all material respects on the Second Closing Date with the same force and effect
as if they had been made on and as of said date. The Company's business and
assets shall not have been adversely affected in any material way prior to the
Second Closing Date. The Company shall have performed in all material respects
all obligations and conditions herein required to be performed or observed by it
on or prior to the Second Closing Date.
(b) Consents and Waivers. The Company shall have obtained in
--------------------
a timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement.
(c) Compliance Certificate. The Company shall have delivered a
Certificate, executed by the President of the Company, dated the Closing Date,
certifying to the fulfillment of the conditions specified in subsections (a) and
(b) of this Section 5.2.
(d) Opinion of Counsel. The Additional Purchasers shall have
------------------
received an opinion from Seyfarth, Shaw, Fairweather & Geraldson, the Company's
counsel, in substantially the form attached hereto as Exhibit G.
---------
5.3 Conditions to Obligations of the Company at the First Closing.
-------------------------------------------------------------
The Company's obligation to sell and issue the Initial Preferred Shares at the
First Closing is subject to the fulfillment to the satisfaction of the Company
on or prior to the First Closing Date of the following conditions, any of which
may be waived by the Company:
(a) Representations and Warranties Correct. The
--------------------------------------
representations and warranties made by the Schedule I Purchasers in Section 4
hereof shall be true and correct when made, and shall be true and correct on the
First Closing Date with the same force and effect as if they had been made on
and as of said date.
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsections (b), (d) and (e) of Section 5.1 shall have been fulfilled.
5.4 Conditions to Obligations of the Company at the Second Closing.
--------------------------------------------------------------
The Company's obligation to sell and issue the Additional Preferred Shares at
the Second Closing is subject to the fulfillment to the satisfaction of the
Company on or prior to the Second Closing Date of the following conditions, any
of which may be waived by the Company:
(a) Representations and Warranties Correct. The
--------------------------------------
representations and warranties made by the Additional Purchasers in Section 4
hereof shall be true and correct when made, and shall be true and correct on the
Second Closing Date with the same force and effect as if they had been made on
and as of said date.
15
<PAGE>
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsection (b) of Section 5.2 shall have been fulfilled.
(c) Rights Agreement. The Additional Purchasers shall have
----------------
executed a written instrument, in form and substance satisfactory to the
Company, the Founders and the Schedule I Purchasers, by which the Additional
Purchasers become parties to the Rights Agreement.
6. Affirmative Covenants of the Company. The Company hereby covenants and
------------------------------------
agrees as follows:
6.1 Financial Information. Until the consummation by the Company of
---------------------
a firm commitment public offering of securities with gross proceeds to the
Company of $20,000,000 or more and at a price per share equal to $7.00 or
higher, the Company will furnish to each Purchaser, so long as such Purchaser or
its permitted transferees (as described in Section 4.1(d)) own any of the
Preferred Shares or Common Shares issued upon conversion of the Preferred
Shares:
(i) as soon as practicable after the end of each fiscal year, and
in any event within 90 days thereafter, consolidated balance sheets of
the Company and its subsidiaries, if any, as at the end of such fiscal
year, and consolidated statements of operations and consolidated
statements of changes in financial position (or equivalent cash flow
statements if required by the Financial Accounting Standards Board) of
the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles, all in
reasonable detail and certified by independent public accountants of
recognized national standing selected by the Company, and
(ii) as soon as practicable after the end of each month (except
the last month of the fiscal year), and in any event within 20 days
thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as of the end of such month; and consolidated
statements of income (or equivalent cash flow statements if required
by the Financial Accounting Standards Board), for such month and for
the current fiscal year to date, prepared in accordance with generally
accepted accounting principles (except for required footnotes), all in
reasonable detail and signed, subject to changes resulting from year-
end audit adjustments, by the principal financial officer or chief
executive officer of the Company, and
(iii) as soon as practicable, but in no event later than 30 days
prior to the commencement of such fiscal year, an annual plan for each
fiscal year which shall include monthly capital and operating expense
budgets, cash flow statements, projected balance sheets and profit and
loss projections for each such month and for the end of the year,
itemized in such detail as the Board of Directors may reasonably
determine.
6.2 Conflicts of Interests. The Company shall use its best efforts
----------------------
to ensure that the Company's employees, during the term of their employment with
the Company, do not
16
<PAGE>
engage in activities which would result in a conflict of interest with the
Company. The Company's obligations hereunder include, but are not limited to,
requiring that the Company's employees devote their primary productive time,
ability and attention to the business of the Company (provided, however, the
Company's employees may engage in other professional activity if such activity
does not materially interfere with their obligations to the Company), requiring
that the Company's employees enter into agreements regarding proprietary
information and confidentiality and inventions, and preventing the Company's
employees from engaging or participating in any business that is in competition
with the business of the Company.
6.3 Qualified Small Business. The Company shall use its best
------------------------
efforts to qualify as a "Qualified Small Business" as defined in Section 1202(d)
of the Code, and covenants that so long as the Preferred Shares are held by any
of CMG @Ventures, Chase Venture Capital Associates, L.P., The fl@tiron Fund LLC,
SOFTBANK Holdings Inc. or InnoCal, L.P. (or a transferee or assignee of any of
said Purchasers), it will use reasonable commercial efforts to cause the
Preferred Shares to qualify as Qualified Small Business Stock.
6.4 Proprietary Agreements. The Company will use its best efforts
----------------------
to prevent any employee from violating the confidentiality and proprietary
information agreement entered into between the Company and each of its
employees.
6.5 Payment of Dividends. The Company shall not pay dividends on or
--------------------
repurchase any shares of its Common Stock or Series C Preferred Stock so long as
the Preferred Shares are outstanding, except that the Company shall be entitled
to repurchase shares of its Common Stock and Series C Preferred Stock in
connection with the termination of an employee, director or consultant of the
Company or the proposed transfer by an employee, director or consultant of
shares of its Common Stock or Series C Preferred Stock, or pursuant to the terms
of the Rights Agreement.
6.6 Business Relationships. The Company shall not sell, license or
----------------------
enter into any business relationship, other than the purchase of goods or
services, with any Internet or World Wide Web technology or service provider
without the consent of the Company's Board of Directors.
6.7 Use of Proceeds. The Company shall use the proceeds from the
---------------
sale of the Preferred Shares for working capital.
6.8 Inspection. The Company shall permit each Purchaser, at such
----------
Purchaser's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Purchaser; provided, however, that the Company shall not be obligated
pursuant to this Section 6.8 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
6.9 Reserve for Conversion Shares. The Company shall at all times
-----------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of the Preferred Shares and
otherwise complying with the terms of this Agreement, such number of its duly
authorized shares of Common Stock as shall be sufficient to
17
<PAGE>
effect the conversion of the Preferred Shares from time to time outstanding or
otherwise to comply with the terms of this Agreement. If at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of the Preferred Shares or otherwise to comply with the
terms of this Agreement, the Company will forthwith take such corporate action
as may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes. The
Company will obtain any authorization, consent, approval or other action by or
make any filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
6.10 Key Person Insurance. The Company shall procure within 30 days
--------------------
following the First Closing and maintain in effect thereafter "key person" life
insurance policies, payable to the Company, on the life of David Bohnett (so
long as he remains an employee of the Company), in the amount of $2,000,000 (the
"Key Person Insurance"). The Company shall not cause or permit any assignment or
change in beneficiary and shall not borrow against any such policy. If requested
by Purchasers holding at least a majority of the outstanding Preferred Shares,
the Company will add one designee of the Purchasers as a notice parry for each
such policy and shall request that the issuer of each policy provide such
designee with ten (10) days' notice before such policy is terminated (for
failure to pay premiums or otherwise) or assigned or before any change is made
in the beneficiary thereof.
6.11 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, neither the Company nor any of its subsidiaries shall enter into any
transaction with any director, officer, employee or holder of more than 5% of
the outstanding capital stock of any class or series of capital stock of the
Company or any of its subsidiaries, member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person, or
member of the family of any such person, is a director, officer, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof,
except for transactions on customary terms related to such person's employment.
6.12 Vesting and Repurchase of Reserved Employee Shares. Without the
--------------------------------------------------
unanimous approval of the members of the Compensation Committee (as defined in
Section 6.13 below), except for the previously granted Founders' Options and
options previously granted to William Bohnett and Stanley Newman to purchase
10,000 shares of Common Stock each, the Company shall not grant to any of its
employees, officers or directors options to purchase shares of Common Stock
unless (i) such options will become exercisable at a rate not in excess of 25%
per annum from the date of such grant and (ii) the shares issuable upon exercise
of such option are subject to repurchase, first by the Company and second, by
the holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, rata, upon termination of
employment or upon the attempted transfer of such shares by a holder thereof.
6.13 Committees. The Company shall continue to maintain a
----------
Compensation Committee (the "Compensation Committee") and an Audit Committee
(the "Audit Committee") of the Board of Directors. Each of the Audit Committee
and the Compensation Committee shall at all times consist of three non-
management directors. The current members of the
18
<PAGE>
Compensation Committee are Eric Hippeau, Stanley Newman and David Wetherell. No
increase in compensation, bonuses or other remuneration shall be paid to, and no
capital stock of the Company shall be issued or granted to, any director or
executive officer of the company or any of its subsidiaries, without the
approval of the Compensation Committee. No employee stock option plan, employee
stock purchase plan, employee restricted stock plan or other employee stock plan
shall be established without the approval of the Compensation Committee. The
current members of the Audit Committee are Stanley Newman, Harry Lambert and
Peter Mills. The Audit Committee shall select (subject to the approval of the
Board of Directors) and provide instructions to the Company's auditors and shall
approve the Company's annual audit prior to its issuance each year.
6.14 Board of Directors Meetings. The Company shall use its best
---------------------------
efforts to ensure that meetings of the Board of Directors are held at least six
times per year.
7. Miscellaneous.
-------------
7.1 Waivers and Amendments. With the written consent of the record
----------------------
holders of at least eighty percent (80%) of the Preferred Shares, the rights of
the holders of the Preferred Shares under this Agreement may be waived or
amended (either generally or in a particular instance), provided, however, that
no such waiver or amendment shall reduce the aforesaid proportion of Preferred
Shares, the holders of which are required to consent to any waiver or
supplemental agreement, without the consent of the record holders of all of the
Preferred Shares. Upon the effectuation of each such waiver or amendment, the
Company shall promptly give written notice thereof to the record holders of the
Preferred Shares who have not previously consented thereto in writing. Except to
the extent provided in this Section 7.1, this Agreement or any provision hereof
may be amended, waived, discharged or terminated only by a statement in writing
signed by the party against which enforcement of the amendment, waiver,
discharge or termination is sought.
7.2 Governing Law. This Agreement shall be governed in all
-------------
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
7.3 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by the Purchasers.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the dare of such
certificate or instrument.
7.4 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. Without limiting the generality of the foregoing, all
representations, covenants and agreements benefiting the Purchasers shall inure
to the benefit of any and all subsequent holders from time ~0 rime of Preferred
Shares or Common Shares.
19
<PAGE>
7.5 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
7.6 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally, via
facsimile, mailed by first class mail, postage prepaid, or delivered by courier
or overnight delivery, addressed (a) if to the Purchasers, at each of the
addresses listed on Schedule I or on the schedule to be prepared in respect of
the Additional Purchasers, as the case may be, or at such other or facsimile
number as the Purchasers shall have furnished to the Company in writing or (b)
if to the Company, at its address set forth at the beginning of this Agreement,
or at such other address as the Company shall have furnished to the Purchasers
in writing. Notices that are mailed shall be deemed received five (5) days after
deposit in the United States mail.
7.7 Severability. In case any provision of this Agreement shall be
------------
found by a court of law to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
7.8 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and, (ii) hereby agrees to indemnify and to hold the Purchasers
harmless from and against any liability for commission or compensation in the
nature of a finder's fee to any broker or other person or firm {and the costs
and expenses of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, is responsible.
(b) Each Purchaser, severally and not jointly, (i) represents and
warrants that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement and (ii) hereby agrees to indemnify
and ~0 hold the Company harmless from and against any liability for any
commission or compensation in the nature of a finder's fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which each of the Purchasers, or any of
their employees or representatives, are responsible.
7.9 Expenses. The Company and the Purchasers shall each bear their
--------
expenses and legal fees in connection with the consummation of this transaction.
7.10 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
20
<PAGE>
7.12 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to any holder of any
securities issued or to be issued hereunder shall impair any such right, power
or remedy of the Company or such holder, nor shall it be construed to be a
waiver of any breach or default under this Agreement, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any delay or omission to exercise any right, power or remedy or any waiver
of any single breach or default be deemed a waiver of any other right, power or
remedy or breach or default theretofore or thereafter occurring. All remedies,
either under this Agreement, or by law otherwise afforded to the Company or any
holder of any securities issued or to be issued hereunder, shall be cumulative
and not alternative.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GEOCITIES
By: /s/David Bohnett
------------------------------
Name: David Bohnett
Title: CEO
CMG @ VENTURES
By: /s/Peter Miller
------------------------------
Name: Peter Miller
Title: Managing Partner
SOFTBANK Holdings Inc.
By: /s/Charles Lax
------------------------------
Name: Charles Lax
Title: Vice President
CHASE VENTURE CAPITAL
ASSOCIATES, L.P.
By:Chase Capital Partners, L.P.
its General Partner
By: /s/Donald Hofmann
------------------------------
Name: Donald Hoffman
Title: General Partner
The fl@tiron Fund LLC
By: /s/Jerome Colonna
------------------------------
Name: Jerome Colonna
Title: Managing Partner
21
<PAGE>
INNOCAL, L.P., a Delaware limited
partnership
By:InnoCal Associates, L.P.,
a Delaware limited partnership
By: /s/Harry D. Lambert
------------------------------
Name: Harry D. Lambert
Title: General Partner
INTEL CORPORATION
By: /s/Arvind Sodhani
------------------------------
Name: Arvind Sodhani
Title: Vice President and Treasurer
22
<PAGE>
EXHIBIT 10.24
GEOCITIES
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of December 31, 1997 by and among (i) GeoCities,
a California corporation (the "Company"), (ii) Yahoo! Inc., a California
corporation ("Yahoo"), and SOFTBANK Holdings Inc., a Delaware corporation
("Softbank"), as purchasers named in Schedule I hereto (such purchasers being
sometimes hereafter called individually a "Purchaser" and collectively the
"Purchasers") and (iii) each of the individuals or entities named in Schedule II
hereto (such individuals or entities being sometimes hereafter called
individually a "Seller" and collectively the "Sellers"). The parties hereby
agree as follows:
1. Authorization and Sale of the Shares.
------------------------------------
1.1 Authorization; Filing of Restated Articles of Incorporation. The
-----------------------------------------------------------
Company has authorized the issuance and sale pursuant to the terms and
conditions hereof of up to 407,135 shares of its Series E Preferred Stock and
1,276,288 shares of its Series F Preferred Stock (the "Preferred Shares"),
having the rights, restrictions, privileges and preferences as set forth in the
currently effective Third Amended and Restated Articles of Incorporation of the
Company and in the form of the Fourth Amended and Restated Articles of
Incorporation of the Company (the "Restated Articles") attached hereto as
Exhibit A. The Company shall adopt and submit for filing the Restated Articles
- ---------
with the Secretary of State of California on or before the First Closing Date
(as defined below).
1.2 Primary Shares. Subject to the terms and conditions hereof (as
--------------
determined below), the Company will issue and sell to each Purchaser and each
Purchaser will purchase from the Company the number of Preferred Shares set
forth opposite the name of such Purchaser on Schedule I hereto (said shares
being herein collectively called the "Primary Shares") for the purchase price of
$14.8507 per share to be paid in Common Stock of Yahoo! Inc. ("Yahoo Stock")
and/or in cash, as determined by the Purchasers in their sole discretion at the
time of the First and Third Closings.
1.3 Secondary Shares. Subject to the terms and conditions hereof (as
----------------
determined below), each of the Sellers shall sell to each Purchaser, and each
Purchaser shall purchase from the Sellers, the number of shares of the Company's
preferred stock (the "Preferred Stock") set forth by such Seller's name on
Schedule II hereto (said shares being herein collectively called the "Secondary
Shares") in the amounts allocated to each Purchaser as set forth on Schedule IIA
hereto for the purchase price of $14.8507 per share to be paid in Yahoo Stock
and/or in cash, as determined by the Purchasers in their sole discretion at the
time of each of the First and Second Closings. The Primary Shares and the
Secondary Shares are herein collectively called the "Shares."
1.4 Payment in Yahoo Stock. On the First Closing Date, the Company and
----------------------
the Sellers will deliver to Softbank 407,135 Primary Shares and an aggregate of
1,448,155 Secondary Shares, in the respective amounts set forth on Schedules I
and II, against receipt of 356,079 shares of Yahoo Stock valued at $64.0375 per
share and a check in the amount of $4,750,000. On the Second and Third Closing
Dates, in the event Yahoo and/or Softbank elects
-1-
<PAGE>
to pay for Shares in Yahoo Stock, the value of such Yahoo Stock shall be the
average of the closing sale prices of Yahoo Stock on the NASDAQ National Market,
as reported in The Wall Street Journal, for the five trading days immediately
preceding such Closing Date, provided, however, that the amount of Yahoo Stock
delivered in payment of the purchase price for the Primary Shares on the Third
Closing Date shall be such that the Company shall receive net proceeds equal to
$ 18,953,770 million after sale of such Yahoo Stock pursuant to the Registration
Statement (as defined in Section 8.1).
2. Closing Dates; Delivery.
-----------------------
2.1 Closing Date. Each of the closings for the purchase and sale of
------------
the Shares hereunder (individually a "Closing" and collectively the "Closings")
shall be held at the offices of Venture Law Group, A Professional Corporation,
on the dates hereinafter provided:
(a) The First Closing for the purchase and sale of the Primary
and Secondary Shares in the respective amounts set forth on Schedules I, II and
IIA (the "First Closing") shall be held on December 31, 1997, or such other date
as the parties may agree (the "First Closing Date").
(b) The Second Closing for the purchase and sale of the Secondary
Shares in the respective amounts set forth on Schedules II and IIA (the "Second
Closing") shall be held on the latest of (i) the sixth trading day after Yahoo
publicly announces its final results for the fourth quarter ended December 31,
1997, (ii) the effective date of the Registration Statement and (iii) January
14, 1998, or on such other date as the Purchasers and the Sellers may agree (the
"Second Closing Date").
(c) The Third Closing for the purchase and sale of the Primary
Shares in the respective amounts set forth on Schedule I (the "Third Closing")
shall be held on the later of (i) January 27, 1998 and (ii) the effective date
of the Registration Statement, or on such other date as the Purchasers and the
Company may agree (the "Third Closing Date").
2.2 Delivery.
--------
(a) The Company shall deliver to the Purchasers at the First and
Third Closings the certificates representing the Primary Shares being purchased
thereby against delivery to the Company by the Purchasers of cash as set forth
on Schedule I hereto or, in the event Yahoo Stock is used as consideration for
the Primary Shares, against delivery to the Company of the number of Shares of
Yahoo Stock as determined pursuant to Section 1.4. In the event a Purchaser is
buying the Primary Shares in exchange for shares of Yahoo Stock, such Purchaser
shall deliver to the Company certificates evidencing the shares of Yahoo Stock
determined in accordance with Section 1.4, together, in the case of Softbank,
with an executed assignment substantially in the form agreed to by the parties
and deliver all other documents required to be delivered by such Purchaser to
transfer such Yahoo Stock to the Company.
(b) At the First and Second Closings, each Seller at such Closing
shall deliver to the Purchasers a certificate or certificates representing the
Secondary Shares to be purchased by the Purchasers, registered in the name of
such Seller, duly endorsed by such Seller for transfer to the Purchasers or
accompanied by an assignment of the Secondary Shares duly
-2-
<PAGE>
executed by such Seller, against delivery to the Sellers by the Purchasers of
cash or Yahoo Stock for the purchase price set forth on Schedule II hereto. On
submission of the certificate or certificates to the Company for transfer, the
Company shall issue to the Purchasers certificates representing the Secondary
Shares, registered in the name of the Purchasers. In the event a Purchaser is
buying the Secondary Shares in exchange for shares of Yahoo Stock, such
Purchaser shall deliver to the Sellers, concurrently with the Closing,
certificates evidencing the shares of Yahoo Stock determined in accordance with
Section 1.4, together, in the case of Softbank, with an executed assignment
substantially in the form agreed to by the parties and deliver all other
documents required to be delivered by such Purchaser to transfer such Yahoo
Stock to the Sellers. On submission of certificates to Yahoo for transfer, Yahoo
shall issue to the Sellers certificates representing the Yahoo Stock, registered
in the name of the Sellers.
3. Representations and Warranties of the Company and David Bohnett. The
Company and David Bohnett hereby represent and warrant to the Purchasers,
severally and not jointly, that, except as set forth on a Schedule of Exceptions
attached hereto as Exhibit B, which exceptions shall be deemed to be
---------
representations and warranties as if made hereunder.
3.1 Organization and Standing; Articles and Bylaws. The Company is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its businesses as now conducted and as proposed to be conducted. The
Company is qualified or licensed to do business as a foreign corporation in all
jurisdictions where such qualification or licensing is required, except where
the failure to so qualify would not have a material adverse effect upon the
Company. Copies of the Company's Articles of Incorporation and Bylaws, each as
amended to date, and minutes and consents of shareholders and of the Board of
Directors are available for inspection at the Company's offices and have been
previously made available to Venture Law Group, special counsel for Yahoo.
3.2 Corporate Power. The Company has now, or will have at the First
---------------
Closing, all requisite corporate power necessary for the authorization,
execution and delivery of this Agreement, the Third Amended and Restated Rights
Agreement in the form attached hereto as Exhibit C-1 (the "Rights Agreement"),
-----------
the Shareholders Agreement in the form attached hereto as Exhibit C-2 (the
-----------
"Shareholders Agreement"), the Codistribution Agreement in the form attached
hereto as Exhibit C-3 (the "Codistribution Agreement") and collectively with
this Agreement, the Rights Agreement and the Shareholders Agreement, the
"Transaction Agreements"), to sell and issue the Preferred Shares and to issue
up to the maximum number of shares of Common Stock, $0.005 par value per share
(the "Common Stock"), issuable upon conversion of the Preferred Shares. The
Transaction Agreements are valid and binding obligations of the Company,
enforceable in accordance with their terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, usury
and other laws of general application affecting the enforcement of creditors'
rights.
3.3 Subsidiaries. The Company does not control, directly or
------------
indirectly, any other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of the Company is
--------------
30,000,000 shares of Common Stock and 13,263,203 shares of Preferred Stock, of
which 1,554,000 shares
-3-
<PAGE>
have been designated Series A Preferred Stock, 1,450,000 shares have been
designated Series B Preferred Stock, 600,000 have been designated Series C
Preferred Stock, 5,118,644 shares have been designated Series D Preferred Stock,
2,857,142 shares have been designated Series E Preferred Stock and 1,683,417
shares have been designated Series F Preferred Stock. There are issued and
outstanding 1,554,000 shares of Series A Preferred Stock, 1,450,000 shares of
Series B Preferred Stock, 600,000 shares of Series C Preferred Stock, 5,113,359
shares of Series D Preferred Stock, 714,282 shares of Series E Preferred Stock
and 1,320,750 shares of Common Stock. The holders of record of the presently
issued and outstanding Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Common Stock immediately prior to the First Closing are as set forth on Exhibit
-------
D-1. All such issued and outstanding shares have been duly authorized and
- ---
validly issued, are fully paid and nonassessable, and were issued in compliance
with all applicable state and federal laws concerning the issuance of
securities. There are no outstanding rights, options, warrants, conversion
rights or agreements for the purchase or acquisition from the Company of any
shares of its capital stock except that (i) the Company has offered for sale
shares of Common Stock to those employees, officers, directors and consultants
of the Company, and in such amounts, as set forth on Exhibit D-2, which Exhibit
-----------
D-2 also lists those shares described in (iii) and (iv) herein below; (ii)
1,777,500 shares of Common Stock have been reserved for issuance pursuant to the
Company's 1997 Stock Option Plan or otherwise pursuant to grants approved by the
Company's Board of Directors; (iii) 500,000 shares of Common Stock have been
reserved for issuance to CMG@Ventures pursuant to an option previously granted
to it; (iv) 500,000 shares of Common Stock have been reserved for issuance to
David Bohnett and certain other persons pursuant to options previously granted
to them (the "Founders Options"); (v) 33,898 shares of Series D Preferred Stock
have been reserved for issuance to Cupertino Bank pursuant to a warrant issued
to it; (vi) 44,444 shares of Common Stock have been reserved for issuance to
Comerica Bank pursuant to a warrant issued or to be issued to it; (vii)
11,579,786 shares of the Company's Common Stock have been reserved for issuance
upon conversion of the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock, the Series D Preferred Stock and the Series E
Preferred Stock; and (viii) 1,683,417 shares of the Company's Common Stock have
been reserved for issuance upon conversion of the Series F Preferred Stock.
Except as provided in the Rights Agreement, the Company is not a party or
subject to any agreement or understanding between any persons or entities which
affects or relates to the voting or giving of written consents with respect to
any securities or by any director of the Company.
3.5 Authorization.
-------------
(a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and shareholders necessary for the execution
and delivery of the Transaction Agreements, the sale and the issuance of the
Preferred Shares, the issuance of the Common Stock issuable upon conversion of
the Preferred Shares (the "Common Shares") and the performance of the Company's
obligations hereunder and under the Transaction Agreements have been taken or
will be taken prior to the Second Closing.
(b) Valid Issuance. The Preferred Shares, when issued in
--------------
compliance with the provisions of this Agreement, and the Common Shares, when
issued upon conversion of the Preferred Shares and other Preferred Stock in
accordance with the provisions of the Restated Articles, will be validly issued
and outstanding, fully paid and nonassessable, provided, however,
-4-
<PAGE>
that all such shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein, and as may be required by
future changes in such laws. The rights, preferences, privileges and
restrictions of the Shares are as set forth in the Restated Articles.
(c) No Preemptive Rights. Other than as provided in the Rights
--------------------
Agreement, no person has any right of first refusal or any preemptive rights in
connection with the issuance of the Preferred Shares, the issuance of the Common
Shares upon conversion of the Preferred Shares or any future issuances of
securities by the Company.
3.6 Proprietary Rights.
------------------
(a) Exhibits El and E-2 contain, respectively, an accurate and
-------------------
complete description of all registered and unregistered trademarks and trade
names in or related to the Company Products, and a list of all licenses and
other agreements relating thereto. Exhibit E-3 sets forth a list of all licenses
-----------
and other agreements with third parties (the "Third Party Licenses") relating to
any software, copyrights, technology, know-how or processes that the Company has
licensed or is otherwise authorized by such third parties to use, market,
distribute or incorporate into products distributed by the Company (such
software, technology, know-how and processes are collectively referred to as the
"Third Party Technology"). The Company (i) owns all right, title and interest in
and to or has obtained licenses to use all technology, intellectual property,
software tools, copyrights, know-how, processes, patents, trademarks, trade
secrets, trade names and other proprietary rights (collectively, "Rights") used
in or necessary for the conduct of its business as conducted to the date hereof
(the "Business") and (ii) will, prior to entering areas of new business
currently being contemplated, own or obtain all Rights used in or necessary for
the conduct of its business as so contemplated, including without limitation
(with respect to both clauses (i) and (ii) above), the technology and all
proprietary rights developed or discovered in connection with or contained in
the Company's products (the "Company Products"), free and clear of all
liabilities, charges, liens, pledges, mortgages, restrictions, adverse claims,
security interests, rights of others and encumbrances (including, without
limitation, distribution rights) (all of which are referred to as "Proprietary
Rights"). The foregoing representation and warranty as it relates to Third Party
Technology is limited to the Company's interest pursuant to the Third Party
Licenses, all of which are valid and enforceable and in full force and effect
and which grant the Company such right to Third Party Technology as are employed
in or necessary to the Business of the Company as conducted or proposed to be
conducted. All of the Company's registered patents, trademarks and copyrights in
any of the Company Products and applications therefor, if any, are valid and in
full force and effect, and consummation of the transactions contemplated hereby
will not alter or impair any such rights. No claims have been asserted against
the Company (and to the best knowledge of the Company there are no claims which
are likely to be asserted against the Company or which have been asserted
against others) by any person challenging the Company's use or distribution of
any patents, trademarks, trade names, copyrights, trade secrets, software,
technology, know-how or processes utilized by the Company (including, without
limitation, the Third Party Technology) or challenging or questioning the
validity or effectiveness of any license or agreement relating thereto
(including, without limitation, the Third Party Licenses). To the best knowledge
of the Company, none of the Company Products nor the use of any patents,
trademarks, trade names, copyrights, software, technology, know-how or processes
by the Company in its current Business infringes on the rights of, constitutes
misappropriation of, or in any way involves unfair
-5-
<PAGE>
competition with respect to, any proprietary information or intangible property
right of any third person or entity, including without limitation, any patent,
trade secret, copyright, trademark or trade name.
(b) The Company has not granted any third party any right to
manufacture, reproduce, distribute, market or exploit any of the Company
Products or any adaptations, translations or derivative works based on the
Company Products or any portion thereof Except with respect to the rights of
third parties to the Third Party Technology, no third party has any right to
manufacture, reproduce, distribute, market or exploit any works or materials of
which any of the Company Products are a "derivative work" as that term is
defined in the United States Copyright Act, Title 17, U.S.C. Section 101.
(c) All designs, drawings, specifications, source code,
object code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Company Products (the "Company Components"), if any,
constitute original creations of and were written, developed and created solely
and exclusively by employees of the Company without the assistance of any third
party or entity or were created by third parties who assigned ownership of their
rights to the Company in valid and enforceable consultant confidentiality and
invention assignment agreements. The Company has at all times used commercially
reasonable efforts to treat the Company Products and the Company Components as
containing trade secrets and has not disclosed or otherwise dealt with such
items in such a manner as to cause the loss of such trade secrets by release
into the public domain.
(d) No employee of the Company is in violation of any term
of any employment contract, patent disclosure agreement, confidentiality
agreement or any other contract or agreement relating to the relationship of any
such employee with the Company or, to the best knowledge of the Company, any
other party because of the nature of the business conducted by the Company or
proposed to be conducted by the Company.
(e) Notwithstanding the foregoing, the Company states and
the Purchasers acknowledge and agree that the Company is a service provider on
the electronic network commonly known as the Internet, and that the Business is
unique in that the Company has not created, nor does it own, the content of each
Personal Home Page and third-party advertising that may be found within the
Company Products ("Excluded Rights"). The parties agree that the term
Proprietary Rights does not include, and the Company hereby disclaims the
representations and warranties of this Section 3.6 (except for the
representation in Section 3.6(a) as to assertion of claims against the Company
or claims which to the knowledge of the Company are likely to be asserted) as to
Excluded Rights found within the Company Products. Personal Home Pages are
subject to the Company's Personal Home Page Policy, and the Company's rights as
to the Personal Home Pages are set forth in the Personal Home Page Policy (a
copy of which has been provided to Venture Law Group). The Company does not own
or control the content of any Personal Home Page, except as set forth in the
Personal Home Page Policy. The Purchasers further acknowledge and agree that the
Internet is global in scope, and that the representations and warranties of the
Company made in this Section 3.6 are limited to the laws of the United States.
The Company is unaware, however, of any third party having rights in the
Proprietary Rights under the laws of any foreign jurisdiction that are superior
to those of the Company, or of any violation by the Company of the laws of any
foreign jurisdiction.
-6-
<PAGE>
3.7 Compliance with Other Instruments, None Burdensome, etc. The
-------------------------------------------------------
Company is not in violation of any term of its Restated Articles or Bylaws, nor
is the Company in violation of or in default in any material respect under the
terms of any mortgage, indenture, contract, agreement, instrument, judgment or
decree, the violation of which would have a material adverse effect on the
Company, and to the best knowledge of the Company is not in violation of any
order, statute, rule or regulation applicable to the Company. The execution,
delivery and performance of and compliance with the Transaction Agreements, the
issuance and sale of the Preferred Shares and the issuance of the Common Shares
upon conversion of the Preferred Shares or other shares of Preferred Stock will
not (a) result in any such violation, or (b) be in conflict with or constitute a
default under any such term, or (c) result in the creation of any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of the
Company pursuant to any such term. To the best knowledge of the Company, there
is no such term which adversely affects, or in the future may materially
adversely affect, the business, prospects, conditions, affairs or operations of
the Company or any of its properties or assets.
3.8 Proprietary Agreements. Each officer, director, employee and
----------------------
consultant of the Company has executed an agreement regarding confidentiality
and proprietary information. The Company is not aware that any of its officers,
directors or employees is in violation thereof and will use its best efforts to
prevent any such violation. All employees have executed an agreement regarding
the assignment of inventions, the form of which has been approved by Venture Law
Group. The Company is not aware that any of its officers, directors or employees
is obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business as conducted or as proposed to be conducted or that
would prevent any such employee from assigning inventions to the Company.
Neither the execution nor delivery of this Agreement or the Rights Agreement,
nor the carrying on of the Company's business as proposed, will, to the
Company's best knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe that it is or will be necessary for the Company to
utilize any inventions of any of its employees made prior to their employment by
the Company.
3.9 Litigation, etc. There is no action, proceeding or
---------------
investigation pending against the Company or its officers or directors, or to
the best knowledge of the Company, against employees or consultants of the
Company (or, to the best knowledge of the Company, any basis therefor or threat
thereof: (1) which might result, either individually or in the aggregate, in (a)
any material adverse change in the business, prospects, conditions, affairs or
operations of the Company or in any of its properties or assets, or (b) any
material impairment of the right or ability of the Company to carry on its
business as now conducted or as proposed to be conducted, or (c) any material
liability on the part of the Company; or (2) which questions the validity of
this Agreement, the Rights Agreement or any action taken or to be taken in
connection herewith, including in each case, without limitation, actions pending
or threatened involving the prior employment of any of the Company's employees,
the use in connection with the Company's business of any information or
techniques allegedly proprietary to any of its former employees, or their
obligations under any agreements with prior employers. The Company is not a
party to or subject to the provisions of any order, writ, injunction, judgment
or
-7-
<PAGE>
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or which the
Company currently intends to initiate.
3.10 Governmental Consent, etc. Except for any filings required
-------------------------
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Hart Scott
Act"), no consent, approval or authorization of or designation, registration,
declaration or filing with any governmental authority on the part of the Company
is required in connection with: (a) the valid execution and delivery of this
Agreement or the Rights Agreement, or (b) the offer, sale or issuance of the
Shares, or the issuance of the Common Shares issuable upon conversion of the
Shares, or (c) the obtaining of the consents, permits and waivers specified in
subsection 5.1(b) hereof, except the filing of the Restated Articles and, if
required, filings or qualifications under the California Corporate Securities
Law of 1968 (the "Law") or other applicable blue sky laws, which filings or
qualifications, if required, will have been timely filed or obtained after the
sale of the Shares.
3.11 Offering. In reliance on the representations and warranties
--------
of the Purchasers in Section 4 hereof, the offer, sale and issuance of the
Shares in conformity with the terms of this Agreement will not result in a
violation of the requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act") or the qualification or registration requirements
of the Law or other applicable blue sky laws.
3.12 Taxes. The Company has filed all tax returns that are
-----
required to have been filed with appropriate federal, state, county and local
governmental agencies or instrumentalities, except where the failure to do so
would not in the aggregate result in additional liability totaling $25,000 or
more. The Company has paid or established reserves for all income, franchise and
other taxes, assessments, governmental charges, penalties, interest and fines
due and payable by it on or before the First Closing. There is no pending
dispute with any taxing authority relating to any of such returns and the
Company has no knowledge of any proposed liability for any tax to be imposed
upon the properties or assets of the Company. There is no tax lien, whether
imposed by any federal, state or local taxing authority, outstanding against the
assets, properties or business of the Company. Neither the Company nor any of
its present or former shareholders has ever filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that
the Company be taxed as an S corporation.
3.13 Title. The Company owns its property and assets free and
-----
clear of all liens, mortgages, loans or encumbrances except liens for current
taxes, and such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets leased by the
Company, the Company is in compliance with such leases and holds valid leasehold
interests free and clear of any liens, claims or encumbrances.
3.14 Material Contracts and Commitments. All of the contracts,
----------------------------------
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders to the
Company or placed by the Company) which involve obligations of, or payments to,
the Company in excess of Five Thousand Dollars ($5,000) and all agreements
between the Company and its officers, directors, consultants and
-8-
<PAGE>
employees are either (i) attached as exhibits, to this Agreement, or (ii) set
forth on the list attached hereto as Exhibit F (the "Contracts"). All of the
---------
material provisions of the Contracts are valid, binding and in full force and
effect and enforceable by the Company in accordance with their respective terms,
subject to the effect of applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium, usury or other laws of general application
relating to or affecting enforcement of creditors' rights and rules or laws
concerning equitable remedies. The Company is not in material default under any
of such Contracts. To the best knowledge of the Company, no other party to any
of the Contracts is in material default thereunder.
3.15 Registration Rights. Other than as granted pursuant to the
-------------------
Rights Agreement, the Company has not granted or agreed to grant any rights to
register, as that term is defined in the Rights Agreement, including piggyback
registration rights, to any person or entity.
3.16 Certain Transactions. The Company is not indebted, directly
--------------------
or indirectly, to any of its officers, directors or shareholders or to their
spouses or children, in any amount whatsoever; and none of said officers,
directors or shareholders, or any member of their immediate families, are
indebted to the Company or (to the best of the Company's knowledge, in the case
of shareholders) have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship (except as a holder of securities of a corporation whose
securities are publicly traded and which is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") to the extent of owning not more than two percent (2%) of the issued and
outstanding securities of such corporation). No such officer, director or
shareholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company. The Company is
not a guarantor or indemnitor of any liability or indebtedness of any other
person, firm or corporation.
3.17 Corporate Documents; Minute Books. Except for amendments
---------------------------------
necessary to satisfy representations and warranties or conditions contained
herein (the form of which amendments has been approved by the Purchasers), the
Restated Articles and Bylaws of the Company are in the form previously provided
to special counsel to the Purchasers. The minute books of the Company previously
provided to Venture Law Group contain a complete summary of all meetings of
directors and shareholders since the time of incorporation of the Company.
3.18 Financial Statements. The Company has delivered to the
--------------------
Purchasers copies of the Company's unaudited balance sheet as of October 31,
1997 (the "Company Balance Sheet") and statements of income, changes in
shareholders' equity and cash flow for the period then ended. All such financial
statements (collectively, the "Company Financial Statements") are complete and
in accordance with the books and records of the Company and present fairly and
disclose the financial position of the Company as of their respective dates and
the results of operations for the period covered thereby. The Company Financial
Statements have been prepared in accordance with generally accepted accounting
principles consistently applied during the periods covered thereby, except for
the absence of footnotes and year-end adjustments. Since October 31, 1997, there
has been no Material Adverse Change (as defined herein) in the Company's assets
or liabilities, or in the Business or condition, financial or otherwise, of the
properties or results of operations. "Material Adverse Change" means any change
in, or effect
-9-
<PAGE>
on, the Business that is or is reasonably likely to be materially adverse to the
results of the operations or the financial condition of the Company or the
Business.
3.19 Subsequent Events. Since October 31, 1997, the Company has
-----------------
not (i) issued any stock, bond or other corporate security, (ii) borrowed any
amount or incurred or become subject to any liability (absolute, accrued or
contingent), except liabilities under contracts entered into in the ordinary
course of business, (iii) discharged or satisfied any lien or encumbrance or
incurred or paid any obligation or liability (absolute, accrued or contingent),
other than current liabilities shown on the Company Financial Statements and
current liabilities incurred since the date of the Company Financial Statements
in the ordinary course of business, (iv) declared or made any payment or
distribution to shareholders or purchased or redeemed any shares of its capital
stock or other securities, (v) mortgaged, pledged or subjected to lien any of
its assets, tangible or intangible, other than liens for current real property
taxes not yet due and payable, (vi) sold, assigned or transferred any of its
tangible assets except for fair value in the ordinary course of business, or
canceled any debt or claim, except for fair value in the ordinary course of
business, (vii) sold, assigned, transferred or granted any license with respect
to any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, except pursuant to license or other agreements entered
into in the ordinary course of business, (viii) suffered any loss of property or
waived any right of substantial value whether or not in the ordinary course of
business, (ix) made any change in officer compensation, (x) made any material
change in the manner of business or operations of the Company, (xi) entered into
any transaction except in the ordinary course of business or as otherwise
contemplated hereby, or (xii) entered into any written or oral commitment to any
of the foregoing.
3.20 Employee Benefit Plans. The Company does not have any
----------------------
"employee benefit plan" as defined in the Employee Retirement Income Security
Act of 1974, as amended.
3.21 Real Property Holding Corporation. The Company is not a
---------------------------------
"real property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
3.22 Disclosure. No representation or warranty by the Company in
----------
this Agreement, or in any document or certificate furnished or to be furnished
to the Purchasers pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements made herein and therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that with regard to the operating projections that have been delivered to the
Purchasers, the Company represents only that the projections dated December 19,
1997 were prepared in good faith and that the Company reasonably believes there
is a reasonable basis for such projections. The Company makes no other
representations or warranties with respect to such projections or any other
projections and makes no representations or warranties with respect to changes
to such projections subsequent to the date of this Agreement.
3.23 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, and insurance against other
hazards, risks and liabilities to persons and property, to the extent and in the
manner customary for companies in
-10-
<PAGE>
similar businesses similarly situated. All premiums due and payable with respect
to the policies maintained by the Company have been paid.
3.24 Labor Agreements and Actions. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties are bound by or subject to) any
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to the best knowledge of the Company, has sought to represent any
of the employees, representatives or agents of the Company. There is no strike
or other labor dispute involving the Company pending, or to the best knowledge
of the Company threatened, which could have a material adverse effect on the
assets, properties, financial condition, operating results, or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. Subject to general principles
related to wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company.
3.25 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement other than Wasserstein Perella &
Co., Inc.
3.26 Best Knowledge. For purposes of this Agreement, the terms
--------------
"to the best knowledge of the Company" and "to the best of the Company's
knowledge" shall mean to the knowledge of the Company after inquiry of each of
David Bohnett, Laura Rockwell, John Rezner, Rich Rygg, Jim Rea, Ed Pierce and
Stephen Hansen. Wherever the representations and warranties of the Company in
this Section 3 are limited "to the best knowledge of the Company" or "to the
best of the Company's knowledge" or words of similar import, such limitation
shall also apply to the representations and warranties of David Bohnett made in
this Section 3.
3.27 Qualified Small Business. The Company qualifies as a
------------------------
"Qualified Small Business" as defined in Section 1202(d) of The Internal Revenue
Code of 1986, as amended (the "Code").
4. Representations and Warranties of the Sellers. Each of the
---------------------------------------------
Sellers, severally and not jointly, represents and warrants to the Purchasers,
it being understood that each Seller represents only as to himself or itself and
as to the Secondary Shares owned by such Seller, that:
4.1 Title to Secondary Shares. Such Seller is the owner,
-------------------------
beneficially and of record, of all the Secondary Shares to be sold by such
Seller under this Agreement free and clear of all liens, encumbrances, security
agreements, equities, options, claims, charges and restrictions (other than
pursuant to the Securities Act or state securities laws) ("Liens"), except that
the Secondary Shares are subject to the terms and conditions of the Second
Amended and Restated Rights Agreement dated as of October 6, 1997; and, upon
delivery of such Secondary Shares and payment therefor pursuant hereto, good and
valid title to such Secondary Shares, free and clear of all Liens, will pass to
the Purchasers, except as contemplated under the Transaction Agreements.
-11-
<PAGE>
4.2 Authority and Consents. Such Seller has the right, power,
----------------------
legal capacity and authority to transfer lawfully the Secondary Shares to the
Purchaser and to enter into and perform such Seller's obligations under this
Agreement, and, except for any filings required under the Hart Scott Act, no
approvals or consent of, or declaration, filing or registration with, any
governmental or regulatory authority or other person other than such Seller is
necessary in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby. In the
event that the Seller is a corporation or partnership, all corporate or
partnership action has been taken to authorize the execution, delivery, and
performance of this Agreement by such Seller.
4.3 Execution, Delivery and Performance. This Agreement has been
-----------------------------------
duly authorized, executed and delivered by such Seller, and is valid, binding
and enforceable against such Seller in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, usury and other laws of general application affecting
the enforcement of creditors' rights.
4.4 Representations and Warranties Relating to Yahoo Stock. Each
------------------------------------------------------
Seller, severally and not jointly, represents and warrants as follows (provided
that nothing contained in this Section 4.4 shall affect in any way the
obligation of Yahoo pursuant to Section 8 hereof to file and maintain the
effectiveness of the Registration Statement with respect to the Yahoo Stock):
(a) Investment Intent. This Agreement is made with such
-----------------
Seller in reliance upon such Seller's representations to Yahoo, evidenced by
such Seller's execution of this Agreement, that such Seller is acquiring the
Yahoo Stock for such Seller's own account, for investment and not with a view
to, nor for resale in connection with, any distribution or public offering
thereof within the meaning of the Securities Act and the Law, except pursuant to
the Registration Statement.
(b) Shares Not Registered. Such Seller understands and
---------------------
acknowledges that the sale of the Yahoo Stock pursuant to this Agreement will
not be registered under the Securities Act or qualified under the Law on the
grounds that the offering and sale of securities contemplated by this Agreement
are exempt from registration under the Securities Act and exempt from
qualification pursuant to Section 25102(f) of the Law, and that Yahoo's reliance
upon such exemptions is predicated upon such Seller's representations set forth
in this Agreement. Such Seller acknowledges and understands that the Yahoo Stock
must be held indefinitely unless such securities are registered under the
Securities Act and qualified under the Law or an exemption from such
registration and such qualification is available.
(c) No Transfer. Such Seller covenants that in no event will
-----------
it dispose of any of the Yahoo Stock (other than in conjunction with an
effective registration statement for the Yahoo Stock under the Act or in
compliance with Rule 144 promulgated under the Act) unless and until (i) such
Seller shall have notified Yahoo of the proposed disposition and shall have
furnished Yahoo with a statement of the circumstances surrounding the proposed
disposition, and (ii) if reasonably requested by Yahoo, such Seller shall have
furnished Yahoo with an opinion of counsel reasonably satisfactory in form and
substance to Yahoo to the effect that (x) such disposition will not require
registration under the Securities Act and (y) appropriate
-12-
<PAGE>
action necessary for compliance with the Securities Act, the Law and any other
applicable state, local or foreign law has been taken. It is agreed that Yahoo
will not require opinions of counsel for transactions made pursuant to Rule 144.
(d) Permitted Transfers. Notwithstanding the provisions of
-------------------
subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Seller to one or more partners or departing
partners of a Seller (in the case of a Seller that is a partnership), or to one
or more members or departing members of a Seller (in the case of a Seller that
is a limited liability company) or to an affiliated corporation (in the case of
a Seller that is a corporation), or to one or more affiliated partnerships
managed by such Seller, or to the estate of any such partner or member or former
partner or member, or the transfer by gift, will or intestate succession of any
partner or member to his spouse or lineal descendants or ancestors, if the
transferee agrees in writing to be bound by the terms of this Agreement to the
extent as if he were an original Seller hereunder.
(e) Knowledge and Experience. Such Seller (i) has such
------------------------
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of its prospective investment in the Yahoo
Stock; (ii) has the ability to bear the economic risks of such Seller's
prospective investment; (iii) has been furnished with and has had access to such
information as it has considered necessary to make a determination as to the
purchase of the Yahoo Stock, together with such additional information as is
necessary to verify the accuracy of the information supplied; (iv) has had all
questions which have been asked by it satisfactorily answered by Yahoo; and (v)
has not been offered the Yahoo Stock by any form of advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any such media.
(f) Not Organized to Purchase. Such Seller has not been
-------------------------
organized for the purpose of purchasing the Yahoo Stock.
(g) Holding Requirements. Such Seller understands that if
--------------------
Yahoo does not have a registration statement covering the securities with the
Securities and Exchange Commission ("SEC") (or a filing pursuant to the
exemption from registration under Regulation A of the Securities Act covering
the Seller) under the Securities Act in effect when such Seller desires to sell
the securities, such Seller may be required to hold the Yahoo Stock for an
indeterminate period. Such Seller also understands that any sale of the Yahoo
Stock that might be made by such Seller in reliance upon Rule 144 under the
Securities Act may be made only in limited amounts in accordance with the terms
and conditions of that rule.
4.5 Legends. Each certificate representing the Yahoo Stock may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN
-13-
<PAGE>
CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR (iii), WITH LIMITED EXCEPTIONS
AGREED TO BY YAHOO, PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY
TO YAHOO, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE,
OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by the Law or
-------------
other applicable state blue sky laws. Yahoo need not register a transfer of
legended Yahoo Stock, and may also instruct its transfer agent not to register
the transfer of the Yahoo Stock, unless the conditions specified in each of the
foregoing legends are satisfied.
4.6 Removal of Legend and Transfer Restrictions. Any legend
-------------------------------------------
endorsed on a certificate pursuant to subsection 4.5(a) and the stop transfer
instructions with respect to such legended Yahoo Stock shall be removed, and
Yahoo shall issue a certificate without such legend to the holder of such Yahoo
Stock if such Yahoo Stock is registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k) and, where
reasonably deemed necessary by Yahoo, the holder of the Yahoo Stock provides
Yahoo with an opinion of counsel for such holder, reasonably satisfactory to
Yahoo, to the effect that (i) such holder meets the requirements of Rule 144(k)
or (ii) a public sale, transfer or assignment of such Yahoo Stock may be made
without registration.
4.7 Rule 144. Such Seller is aware of the adoption of Rule 144 by
--------
the SEC promulgated under the Securities Act, which permits limited public
resales of securities acquired in a nonpublic offering, subject to the
satisfaction of certain conditions. Such Seller understands that under Rule 144,
the conditions include, among other things: the availability of certain current
public information about the issuer and the resale occurring not less than one
(1) year after the party has purchased and paid for the securities to be sold.
5. Representations and Warranties of the Purchasers and Restrictions
-----------------------------------------------------------------
on Transfer Imposed by the Securities Act.
- -----------------------------------------
5.1 Representations and Warranties by the Purchasers. Each
------------------------------------------------
Purchaser, severally and not jointly, represents and warrants to the Company and
the Sellers as follows:
(a) Investment Intent. This Agreement is made with such
-----------------
Purchaser in reliance upon such Purchaser's representations to the Company,
evidenced by such Purchaser's execution of this Agreement, that such Purchaser
is acquiring the Shares and the shares of the Common Stock issuable upon
conversion of the Preferred Shares or Preferred Stock for investment for such
Purchaser's own account and not with a view to, nor for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act and the Law. Such Purchaser has the full right, power and
authority to enter into and perform the Transaction Agreements and the
Transaction Agreements constitute valid and binding obligations upon such
Purchaser.
-14-
<PAGE>
(b) Shares Not Registered. Such Purchaser understands and
---------------------
acknowledges that the offering of the Shares (and the Shares of Common Stock
issuable upon conversion of the Preferred Shares or Preferred Stock) pursuant to
this Agreement will not be registered under the Securities Act or qualified
under the Law on the grounds that the offering and sale of Shares (and the
Shares of Common Stock issuable upon conversion of the Preferred Shares or
Preferred Stock) contemplated by this Agreement are exempt from registration
under the Securities Act and exempt from qualification pursuant to Section
25102(f) of the Law, and that the Company's reliance upon such exemptions is
predicated upon such Purchaser's representations set forth in this Agreement.
Such Purchaser acknowledges and understands that the Shares (and the Shares of
Common Stock issuable upon conversion of the Preferred Shares or Preferred
Stock) must be held indefinitely unless the Shares (and the Shares of Common
Stock issuable upon conversion of the Preferred Shares or Preferred Stock) are
subsequently registered under the Securities Act and qualified under the Law or
an exemption from such registration and such qualification is available.
(c) No Transfer. Such Purchaser covenants that in no event
-----------
will it dispose of any of the Shares (other than in conjunction with an
effective registration statement for the Shares under the Act or in compliance
with Rule 144 promulgated under the Act) unless and until (i) such Purchaser
shall have notified the Company of the proposed disposition and shall have
furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and (ii) if reasonably requested by the Company, such
Purchaser shall have furnished the Company with an opinion of counsel reasonably
satisfactory in form and substance to the Company to the effect that (x) such
disposition will not require registration under the Securities Act and (y)
appropriate action necessary for compliance with the Securities Act, the Law and
any other applicable state, local or foreign law has been taken. It is agreed
that the Company will not require opinions of counsel for transactions made
pursuant to Rule 144.
(d) Permitted Transfers. Notwithstanding the provisions of
-------------------
subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser to one or more partners or departing
partners of a Purchaser (in the case of a Purchaser that is a partnership), or
to one or more members or departing members of a Purchaser (in the case of a
Purchaser that is a limited liability company) or to an affiliated corporation
(in the case of a Purchaser that is a corporation), or to one or more affiliated
partnerships managed by such Purchaser, or to the estate of any such partner or
member or former partner or member, or the transfer by gift, will or intestate
succession of any partner or member to his spouse or lineal descendants or
ancestors, if the transferee agrees in writing to be bound by the terms of this
Agreement to the extent as if he were an original Purchaser hereunder.
(e) Knowledge and Experience. Such Purchaser (i) has such
------------------------
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of its prospective investment in the Shares;
(ii) has the ability to bear the economic risks of such Purchaser's prospective
investment; (iii) has been furnished with and has had access to such information
as it has considered necessary to make a determination as to the purchase of the
Shares, together with such additional information as is necessary to verify the
accuracy of the information supplied; (iv) has had all questions which have been
asked by it satisfactorily answered by the Company; and (v) has not been offered
the Shares by any form of advertisement, article, notice or other communication
published in any newspaper, magazine, or
-15-
<PAGE>
similar media or broadcast over television or radio, or any seminar or meeting
whose attendees have been invited by any such media.
(f) Not Organized to Purchase. Such Purchaser has not been
-------------------------
organized for the purpose of purchasing the Shares.
(g) Holding Requirements. Such Purchaser understands that if
--------------------
the Company does not (i) register its Common Stock with the SEC pursuant to
Section 12 of the Exchange Act, (ii) become subject to Section 15(d) of the
Exchange Act, (iii) supply information pursuant to Rule 15c2-1 1 thereunder, or
(iv) have a registration statement covering the Shares (or a filing pursuant to
the exemption from registration under Regulation A of the Securities Act
covering the Shares) under the Securities Act in effect when such Purchaser
desires to sell the Shares, such Purchaser may be required to hold the Shares
for an indeterminate period. Such Purchaser also understands that any sale of
the Shares that might be made by such Purchaser in reliance upon Rule 144 under
the Securities Act may be made only in limited amounts in accordance with the
terms and conditions of that rule.
5.2 Legends. Each certificate representing the Shares may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
(iii), WITH LIMITED EXCEPTIONS AGREED TO BY THE COMPANY, PURSUANT TO AN OPINION
OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS
NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by the Law or
-------------
other applicable state blue sky laws.
The Company need not register a transfer of legended Shares, and
may also instruct its transfer agent not to register the transfer of the Shares,
unless the conditions specified in each of the foregoing legends are satisfied.
5.3 Removal of Legend and Transfer Restrictions. Any legend
-------------------------------------------
endorsed on a certificate pursuant to subsection 5.2(a) and the stop transfer
instructions with respect to such legended Shares shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Shares if such Shares are registered under the Securities Act and a prospectus
meeting the requirements of Section 10 of the Securities Act is available or if
such holder satisfies the requirements of Rule 144(k) and, where reasonably
deemed necessary by the Company, the holder of the Shares provides the Company
with an opinion of counsel for such holder, reasonably satisfactory to the
Company, to the effect that (i) such holder meets the
-16-
<PAGE>
requirements of Rule 144(k) or (ii) a public sale, transfer or assignment of
such Shares may be made without registration.
5.4 Rule 144. Such Purchaser is aware of the adoption of Rule 144
--------
by the SEC promulgated under the Securities Act, which permits limited public
resales of securities acquired in a nonpublic offering, subject to the
satisfaction of certain conditions. Such Purchaser understands that under Rule
144, the conditions include, among other things: the availability of certain
current public information about the issuer and the resale occurring not less
than one (1) year after the party has purchased and paid for the securities to
be sold.
6. Representations and Warranties of Yahoo relating to Yahoo Stock.
---------------------------------------------------------------
Yahoo represents and warrants to the Company and the Sellers that:
6.1 Organization of Yahoo. Yahoo is a corporation duly organized,
---------------------
validly existing and in good standing under the laws of the State of California
and has all requisite corporate power to own, lease and operate its property and
to carry on its business as now being conducted and is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the failure to be so qualified or licensed would have a material adverse effect
on Yahoo and its subsidiaries, taken as a whole.
6.2 Yahoo Stock. The shares of Yahoo Common Stock (including any
-----------
shares of Yahoo Common Stock previously issued to Softbank) which may be used as
consideration for the purchase of the Shares pursuant to the terms of this
Agreement are or will be at the time of the Closing duly authorized, validly
issued, fully paid, and non-assessable and have been or will be issued in
compliance with all applicable federal or state securities laws.
6.3 Authority; No Conflict; Required Filings and Consents.
-----------------------------------------------------
(a) Yahoo has all requisite corporate power and authority to
enter into the Transaction Agreements to which it is a party and to consummate
the transactions contemplated by the Transaction Agreements. The execution and
delivery of the Transaction Agreements and the consummation of the transactions
contemplated by the Transaction Agreements have been duly authorized by all
necessary corporate action on the part of Yahoo. The Transaction Agreements have
been duly executed and delivered by Yahoo. Each of the Transaction Agreements to
which Yahoo is a party constitutes the valid and binding obligation of Yahoo,
enforceable in accordance with its terms.
(b) The execution and delivery by Yahoo of the Transaction
Agreements to which it is a party does not, and consummation of the transactions
contemplated by the Transaction Agreements to which it is a party will not, (i)
conflict with, or result in any violation or breach of any provision of the
Articles of Incorporation or Bylaws of Yahoo, (ii) result in any violation or
breach of, or constitute (with or without notice or lapse of time, or both) a
default (or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any material benefit) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, contract
or other agreement, instrument or obligation to which Yahoo is a party or by
which it or any of its properties or assets may be bound, or (iii) conflict or
violate any permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule
-17-
<PAGE>
or regulation applicable to Yahoo or any of its properties or assets, except in
the case of (ii) and (iii) for any such conflicts, violations, defaults,
terminations, cancellations or accelerations which would not have a material
adverse effect on Yahoo and its subsidiaries, taken as a whole.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental entity is required by
or with respect to Yahoo in connection with the execution and delivery of the
Transaction Agreements to which it is a party or the consummation of the
transactions contemplated hereby or thereby, except for such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws and the
applicable foreign securities laws, and such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, could not
be expected to have a material adverse effect on Yahoo and its subsidiaries,
taken as a whole.
6.4 SEC Filings; Financial Statements.
---------------------------------
(a) Yahoo has filed with the SEC and made available to the
Company and the Sellers or their representatives all forms, reports and
documents required to be filed by Yahoo with the SEC since December 31, 1996
(collectively, the "Yahoo Commission Reports"). The Yahoo Commission Reports (i)
at the time filed, complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
(ii) 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 in such Yahoo Commission Reports or necessary in order to
make the statements in such Yahoo Commission Reports, in the light of the
circumstances under which they were made, not misleading.
(b) Each of the financial statements (including, in each
case, any related notes) contained in the Yahoo Commission Reports, including
any Yahoo Commission Reports filed after the date of this Agreement until the
Closing, complied or will comply as to form in all material respects with the
applicable published rules and regulations of the Commission with respect
thereto, was prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved (except
as may be indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted by Form 10-Q of the Commission) and fairly
presented the consolidated financial position of Yahoo and its subsidiaries as
at the respective dates and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount.
6.5 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
a public filing with the SEC prior to the date hereof, since September 30, 1997
Yahoo and its subsidiaries have conducted their business only in the ordinary
course and there has not been (i) any material adverse change in the business or
financial position of Yahoo and its subsidiaries, taken as a whole; or (ii) any
damage, destruction or loss (whether or not covered by insurance) with respect
to Yahoo or any of its subsidiaries having a material adverse effect on Yahoo
and its subsidiaries, taken as a whole.
-18-
<PAGE>
6.6 Compliance with Laws. Except as disclosed in a public filing
--------------------
with the SEC prior to the date hereof, Yahoo has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
federal, state or local statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for
failures to comply or violations which would not, alone or in the aggregate,
have a material adverse effect on Yahoo and its subsidiaries, taken as a whole.
6.7 Agreements Regarding the Company. Except as set forth in the
--------------------------------
Transaction Agreements, there are no agreements, understandings, arrangements or
commitments of any nature whatsoever concerning the Company or any of its
securities between Yahoo or any of its affiliates, on the one hand, and Softbank
or any of its affiliates, on the other hand.
6.8 Disclosure. No statements by Yahoo contained in this
----------
Agreement, its exhibits and schedules, nor any of the certificates or documents,
including any of the Transaction Agreements, required to be delivered by Yahoo
under this Agreement contains any untrue statement of material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made.
7. Representations and Warranties of Softbank. Softbank represents
------------------------------------------
and warrants to the Company and the Sellers that:
7.1 Title to Yahoo Stock. Softbank is the owner, beneficially and
--------------------
of record, of any and all shares of Yahoo Stock to be delivered by Softbank to
the Sellers and the Company under this Agreement free and clear of all Liens
and, upon delivery of such Yahoo Stock and payment therefor pursuant hereto,
good and valid title to such Yahoo Stock, free and clear of all Liens, will pass
to the Sellers and the Company. Yahoo Stock to be delivered hereunder by
Softbank has been duly authorized and validly issued, and is fully paid and
nonassessable. Softbank has full power to transfer lawfully Yahoo Stock to the
Sellers and the Company without obtaining the consent or approval of any other
person or governmental authority.
7.2 Authority and Consents. Softbank has the right, power, legal
----------------------
capacity and authority to enter into and perform its obligations under the
Transaction Agreements, and no approvals or consent of, or declaration, filing
or registration with, any governmental or regulatory authority or other persons
is necessary in connection with the execution, delivery and performance of the
Transaction Agreements and the consummation of the transactions contemplated
hereby and thereby. All necessary corporate or partnership actions have been
taken to authorize the execution, delivery, and performance of the Transaction
Agreements by Softbank.
7.3 Execution, Delivery and Performance. The Transaction
-----------------------------------
Agreements have been duly authorized, executed and delivered by Softbank, and
are valid, binding and enforceable against Softbank in accordance with their
terms.
7.4 Agreements Regarding the Company. Except as set forth in the
--------------------------------
Transaction Agreements, there are no agreements, understandings, arrangements or
-19-
<PAGE>
commitments of any nature whatsoever concerning the Company or any of its
securities between Softbank or any of its affiliates, on the one hand, and Yahoo
or any of its affiliates, on the other hand.
8. Registration of Yahoo Stock.
---------------------------
8.1 Registration.
------------
(a) Registrable Shares. For purposes of this Agreement,
------------------
"Registrable Shares" shall mean any and all shares of Yahoo Stock delivered at
any of the Closings by any of the Purchasers as payment of the purchase price
for the Shares to the Company and the Sellers (individually, a "Holder", and
collectively, the "Holders"), including any shares of Yahoo Stock that have been
sold or otherwise transferred by the Company or the Sellers who initially
received such Yahoo Stock. The transferees of such Yahoo Stock shall be entitled
to the same rights under this Section 8.1 as the initial Holder from which the
Registrable Shares were received and shall be deemed a Holder for the purposes
of this Section 8.1.
(b) Required Registration. As soon as practicable following
---------------------
the signing of this Agreement (and no later than January 8, 1998), Yahoo shall
prepare and file with the Commission a registration statement on Form S-3 (or
such successor or other appropriate form) under the Securities Act with respect
to the Registrable Shares (the "Registration Statement"), use its best efforts
to cause such Registration Statement to become effective as soon as practicable
thereafter and effect all such registrations, qualifications and compliances
(including, without limitation, obtaining appropriate qualifications under
applicable state securities or "blue sky" laws and compliance with any other
applicable governmental requirements or regulations) to permit or facilitate the
public resale of Registrable Shares (provided however that Yahoo shall not be
required in connection therewith to qualify to do business or to file a general
consent to service of process in any such state or jurisdiction), in each case
so that such Registration Statement and all other such registrations,
qualifications and compliances may become effective as soon as practical
thereafter.
(c) Effectiveness; Suspension Right.
-------------------------------
(i) Yahoo will use its best efforts to maintain the
effectiveness of the Registration Statement and other applicable registrations,
qualifications and compliances until at least the expiration of six (6) months
from the Third Closing Date (the "Registration Effective Period"), and from time
to time will amend or supplement the Registration Statement and the prospectus
contained therein as and to the extent necessary to comply with the Securities
Act, the Exchange Act and any applicable state securities statute or regulation,
subject to the following limitations and qualifications.
(ii) Following the date on which the Registration
Statement is first declared effective, the Holders will be permitted (subject in
all cases to Section 8.2 below) to offer and sell Registrable Shares during the
Registration Effective Period in the manner described in the Registration
Statement provided that the Registration Statement remains effective and has not
been suspended.
-20-
<PAGE>
(iii) Notwithstanding any other provision of this
Section 8.1 but subject to Section 8.2, Yahoo shall have the right at any time
to require that all Holders suspend further open market offers and sales of
Registrable Shares whenever, and for so long as, in the reasonable judgment of
Yahoo after consultation with counsel there is or may be in existence material
undisclosed information or events with respect to Yahoo (the "Suspension
Right"). In the event Yahoo exercises the Suspension Right, such suspension will
continue for the period of time reasonably necessary for disclosure to occur at
a time that is not detrimental to Yahoo and its shareholders or until such time
as the information or event is no longer material, each as determined in good
faith by Yahoo after consultation with counsel. Yahoo will promptly give the
Holders notice of any such suspension and will use all reasonable efforts to
minimize the length of the suspension.
(d) Expenses. The costs and expenses to be borne by Yahoo
--------
for purposes of this Section 8.1 shall include, without limitation, printing
expenses (including such number of prospectuses for circulation by each selling
Holder as may be reasonably requested by such selling Holder), legal fees and
disbursements of counsel for Yahoo, "blue sky" expenses, accounting fees and
filing fees, but shall not include underwriting commissions or similar charges,
legal fees and disbursements of counsel for the selling Holders.
(e) Indemnification.
---------------
(i) To the extent permitted by law, Yahoo will
indemnify and hold harmless each Holder, any underwriter (as defined in the
Securities Act) for such Holder, each such Holders' and underwriters' officers,
directors, shareholders or partners and each person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (A) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (B) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (C) any violation or alleged violation by Yahoo of
the Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law; and Yahoo will pay to each such Holder, each such underwriter
(and each holder's and underwriter's respective officers, directors,
shareholders or partners), and to each such controlling person, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 8.1 (e)(i) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of Yahoo; nor shall
Yahoo be liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon (a) a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in the Registration Statement by any such Holder, or
(b) a Violation that would not have occurred if such Holder had delivered to the
purchaser the
-21-
<PAGE>
version of the Prospectus most recently provided by Yahoo to the Holder as of
the date of such sale.
(ii) To the extent permitted by law, each selling
Holder will indemnify and hold harmless Yahoo, each of its directors, each of
its officers who has signed the Registration Statement, each person, if any, who
controls Yahoo within the meaning of the Securities Act, any underwriter, any
other Holder selling securities pursuant to the Registration Statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation
(which includes without limitation the failure of the Holder to comply with the
prospectus delivery requirements under the Securities Act, and the failure of
the Holder to deliver the most current prospectus provided by Yahoo prior to
such sale), in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in the Registration Statement or such
Violation is caused by the Holder's failure to deliver to the purchaser of the
Holder's Registrable Shares a prospectus (or amendment or supplement thereto)
that had been made available to the Holder by Yahoo; and each such Holder will
pay any legal or other expenses reasonably incurred by any person intended to be
indemnified pursuant to this Section 8.1(e)(ii) in connection with investigating
or defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this Section 8.1(e)(ii) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld. The aggregate
indemnification and contribution liability of each Holder under this Section
8.1(e)(ii) shall not exceed the net proceeds received by such Holder in
connection with sale of shares pursuant to the Registration Statement.
(iii) Each person entitled to indemnification under this
Section 8.1(e) (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought and shall permit the Indemnifying Party to assume the defense of any such
claim and any litigation resulting therefrom, provided that counsel for the
Indemnifying Party who conducts the defense of such claim or any litigation
resulting therefrom shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld), and the Indemnified Party may participate
in such defense at such party's expense, and provided further that the failure
of any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 8.1 unless the
Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in
the defense of any such claim or litigation, shall (except with the consent of
each Indemnified Party, which consent shall not be unreasonably withheld)
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with the defense of such claim and litigation resulting therefrom.
-22-
<PAGE>
(iv) To the extent that the indemnification provided for
in this Section 8.1(e) is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any loss, liability, claim,
damage or expense referred to herein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party hereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such loss, liability,
claim, damage or expense in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party on the one hand and of the Indemnified
Party on the other in connection with the statements or omissions which resulted
in such loss, liability, claim, damage or expense, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
8.2 Procedures for Sale of Shares Under Registration Statement.
----------------------------------------------------------
(a) Notice and Approval. If any Holder shall propose to sell
-------------------
any Registrable Shares pursuant to the Registration Statement, it shall notify
Yahoo of its intent to do so (including the proposed manner and timing of all
sales) at least two (2) full trading days prior to such sale, and the provision
of such notice to Yahoo shall conclusively be deemed to reestablish and
reconfirm an agreement by such Holder to comply with the registration provisions
set forth in this Agreement. Unless otherwise specified in such notice, such
notice shall be deemed to constitute a representation that any information
previously supplied by such Holder in writing expressly for inclusion in the
Registration Statement (as the same may have been superseded by subsequent such
information supplied by such Holder in writing) is accurate as of the date of
such notice. At any time within such two (2) trading-day period, Yahoo may
refuse to permit the Holder to resell any Registrable Shares pursuant to the
Registration Statement; provided, however, that in order to exercise this right,
Yahoo must deliver a certificate in writing to the Holder to the effect that a
delay in such sale is necessary because a sale pursuant to the Registration
Statement in its then-current form without the addition of material, non-public
information about Yahoo, could constitute a violation of the federal securities
laws. Notwithstanding the foregoing, Yahoo will ensure that in any event (i) the
Holders shall have at least twenty (20) trading days available to sell
Registrable Shares during each calendar quarter for a period of six (6) months
immediately following the Third Closing Date (with such minimum time period
being prorated for partial quarters to the extent reasonably practical to do
so), and (ii) the Holders shall have at least ten (10) consecutive trading days
available to sell Registrable Shares after each of the Second and Third Closing
Dates, commencing immediately after each Closing Date.
(b) Delivery of Prospectus. For any offer or sale of any of
----------------------
the Registrable Shares by a Holder in a transaction that is not exempt under the
Securities Act, the Holder, in addition to complying with any other federal
securities laws, shall deliver a copy of the final prospectus (or amendment of
or supplement to such prospectus) of Yahoo covering the Registrable Shares in
the form furnished to the Holder by Yahoo to the purchaser of any of the
Registrable Shares on or before the settlement date for the purchase of such
Registrable Shares.
-23-
<PAGE>
(c) Copies of Prospectuses. Subject to the provisions of
----------------------
this Section 8.2, when a Holder is entitled to sell and gives notice of its
intent to sell Registrable Shares pursuant to the Registration Statement, Yahoo
shall, within two (2) trading days following the request, furnish to such Holder
a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Shares, such prospectus shall not as of the date
of delivery to the Holder include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing.
9. Conditions to Closing.
---------------------
9.1 Conditions to Purchasers' Obligations at the First Closing.
----------------------------------------------------------
The obligation of each Purchaser to purchase the Shares to be purchased by it at
the First Closing is subject to the fulfillment to such Purchaser's
satisfaction, on or before the First Closing Date, of the following conditions,
any of which may be waived by the Purchasers.
(a) Representations and Warranties Correct; Performance of
------------------------------------------------------
Obligations. The representations and warranties made by the Company and the
- -----------
Sellers in Sections 3 and 4 hereof shall be true and correct when made. The
Company shall have performed in all material respects all obligations and
conditions herein required to be performed or observed by it on or prior to the
First Closing Date.
(b) Consents and Waivers. The Company shall have obtained in
--------------------
a timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement
(including without limitation waivers of preemptive rights).
(c) Board of Directors. The number of directors constituting
------------------
the entire Board of Directors shall continue to be fixed at seven and the
following persons shall continue to hold their positions as directors as of the
First Closing: David Bohnett, William Bohnett, David Wetherell, Peter Mills,
Eric Hippeau, Gary Reischel and Harry Lambert.
(d) Filing of the Restated Articles. The Restated Articles
-------------------------------
shall have been submitted for filing with the Secretary of State of the State of
California.
(e) Rights Agreement and Shareholders Agreement. The
-------------------------------------------
Company, the Purchasers and the Founders of the Company (as defined in the
Rights Agreement) shall have executed the Rights Agreement in the form attached
as Exhibit C-1 hereto and the Company and the Shareholders (as defined in the
-----------
Shareholders Agreement) shall have executed the Shareholders Agreement in the
form attached as Exhibit C-2.
-----------
(f) Codistribution Agreement. The Company and Yahoo shall
------------------------
have signed and delivered the Codistribution Agreement (the "Codistribution
Agreement") on the form attached as Exhibit C-3.
(g) Shareholder Approval. The shareholders of the Company
--------------------
entitled to vote on or consent to the Transaction Agreements and the
transactions contemplated thereby
-24-
<PAGE>
in accordance with the Law and the Company's Articles of Incorporation shall
have approved the Transaction Agreements and the transactions contemplated
thereby.
(h) Compliance Certificate. The Company shall have delivered
----------------------
a Certificate, executed by the President of the Company, dated the Closing Date,
certifying to the fulfillment of the conditions specified in subsections (a),
(b), (d) (e), (f) and (g) of this Section 9.1.
(i) Opinion of Counsel. The Purchasers shall have received
------------------
an opinion from Skadden, Alps, Slate, Meagher & Flom, LLP, special counsel to
the Company, in substantially the form attached hereto as Exhibit G.
---------
9.2 Conditions to Purchasers' Obligations at the Second and Third
-------------------------------------------------------------
Closings. The obligation of each Purchaser to purchase the Shares to be
- --------
purchased by it at the Second and Third Closings is subject to the fulfillment
to such Purchaser's satisfaction, on or prior to the Closing Date, of the
following conditions, any of which may be waived by the Purchasers:
(a) Representations and Warranties Correct Performance of
-----------------------------------------------------
Obligations. The representations and warranties made by the Company and the
- -----------
Sellers in Sections 3 and 4 hereof shall be true and correct when made. Since
December 31, 1997 there shall have occurred no material adverse change (other
than (y) changes which affect advertising-supported Internet companies
generally, and (z) continued operating losses) in the Company's business, assets
and financial condition which materially impairs the value to Yahoo or to the
Softbank Parties of the business and commercial transactions contemplated by the
Transaction Agreements. The Company shall have performed in all material
respects all obligations and conditions herein required to be performed or
observed by it on or prior to the Closing Date.
(b) Consents and Waivers. The Company shall have obtained in
--------------------
a timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement.
(c) Hart Scott Act. Any waiting period imposed by the Hart
--------------
Scott Act shall have terminated, or a waiver or approval under the Hart Scott
Act shall have been obtained.
(d) Compliance Certificate. The Company shall have delivered
----------------------
a Certificate, executed by the President of the Company, dated the Closing Date,
certifying to the fulfillment of the conditions specified in subsections (a),
(b) and (c) of this Section 9.2.
(e) Opinion of Counsel. The Purchasers shall have received
------------------
(with such changes necessary to reflect prior Closings) an opinion from Skadden,
Arps, Slate, Meagher & Flom, LLP, special counsel to the Company, in
substantially the form attached hereto as Exhibit G.
9.3 Conditions to Obligations of the Company and the Sellers at
-----------------------------------------------------------
the First Closing. The obligations of the Company and the Sellers to sell the
- -----------------
Shares at the First Closing is subject to the fulfillment to their satisfaction
on or prior to the First Closing Date of the following conditions, any of which
may be waived by the Company and the Sellers:
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<PAGE>
(a) Representations and Warranties Correct. The
--------------------------------------
representations and warranties made by the Purchasers in Sections 5, 6 and 7
hereof shall be true and correct when made. The Purchasers shall have performed
in all material respects all obligations and conditions herein required to be
performed or observed by them on or prior to the First Closing Date.
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsections (b), (c), (d), (e), (f) and (g) of Section 9.1 shall have been
fulfilled.
(c) Material Adverse Change. There shall have been, since
-----------------------
the date of this Agreement, no material adverse change in Yahoo's business,
assets and financial condition, other than changes which affect advertising-
supported Internet companies generally.
(d) Compliance Certificate. Yahoo shall have delivered a
----------------------
Certificate, executed by an officer of the Company, dated the Closing Date,
certifying to the conditions in subsections (a) and (c) of this Section 9.3.
(e) Opinion of Counsel. The Sellers shall have received an
------------------
opinion from Venture Law Group, counsel to Yahoo, in the form attached hereto as
Exhibit H.
- ---------
9.4 Conditions to Obligations of the Sellers and the Company at
-----------------------------------------------------------
the Second and Third Closings. The obligation of the Sellers and the Company to
- -----------------------------
sell the Shares at the Second and Third Closings is subject to the fulfillment
to the satisfaction of the Sellers and the Company on or prior to the Closing
Date of the following conditions, any of which may be waived by the Sellers and
the Company:
(a) Representations and Warranties Correct. The
--------------------------------------
representations and warranties made by the Purchasers in Sections 5, 6 and 7
hereof shall be true and correct when made. The Purchasers shall have performed
in all material respects all obligations and conditions herein required to be
performed or observed by it on or prior to the Second and Third Closing Dates.
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsection (b) and (c) of Section 9.2 shall have been fulfilled.
(c) Material Adverse Change. There shall have been, since
-----------------------
the date of this Agreement, no material adverse change in Yahoo's business,
assets and financial condition, other than changes which affect advertising-
supported Internet companies generally.
(d) Compliance Certificate. Yahoo shall have delivered a
----------------------
Certificate, executed by an officer of the Company, dated the Closing Date,
certifying to the conditions in subsections (a) and (c) of this Section 9.4.
(e) Opinion of Counsel. If Yahoo or Softbank elects to
------------------
deliver Yahoo Stock, the Company and the Sellers shall have received (with such
changes necessary to reflect prior Closings) an opinion from Venture Law Group,
counsel to Yahoo, in the form attached hereto as Exhibit H.
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<PAGE>
10. Affirmative Covenants of the Company. Until the consummation by
------------------------------------
the Company of an initial public offering, the Company hereby covenants and
agrees as follows:
10.1 Financial Information. The Company will furnish to each
---------------------
Purchaser, so long as such Purchaser or its permitted transferees (as described
in Section 4.1(d)) own any of the Preferred Shares or Common Shares issued upon
conversion of the Preferred Shares:
(i) as soon as practicable after the end of each
fiscal year, and in any event within 90 days thereafter, consolidated balance
sheets of the Company and its subsidiaries, if any, as at the end of such fiscal
year, and consolidated statements of operations and consolidated statements of
changes in financial position (or equivalent cash flow statements if required by
the Financial Accounting Standards Board) of the Company and its subsidiaries,
if any, for such year, prepared in accordance with generally accepted accounting
principles, all in reasonable detail and certified by independent public
accountants of recognized national standing selected by the Company, and
(ii) as soon as practicable after the end of each month
(except the last month of the fiscal year), and in any event within 20 days
thereafter, consolidated balance sheets of the Company and its subsidiaries, if
any, as of the end of such month; and consolidated statements of income (or
equivalent cash flow statements if required by the Financial Accounting
Standards Board), for such month and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles (except for
required footnotes), subject to changes resulting from year-end audit
adjustments, all in reasonable detail and signed by the principal financial
officer or chief executive officer of the Company, and
(iii) as soon as practicable, but in no event later than
30 days prior to the commencement of such fiscal year, an annual plan for each
fiscal year which shall include monthly capital and operating expense budgets,
cash flow statements, projected balance sheets and profit and loss projections
for each such month and for the end of the year, itemized in such detail as the
Board of Directors may reasonably determine.
10.2 Conflicts of Interests. The Company shall use its best
----------------------
efforts to ensure that the Company's employees, during the term of their
employment with the Company, do not engage in activities which would result in a
conflict of interest with the Company. The Company's obligations hereunder
include, but are not limited to, requiring that the Company's employees devote
their primary productive time, ability and attention to the business of the
Company provided, however, the Company's employees may engage in other
professional activity if such activity does not materially interfere with their
obligations to the Company), requiring that the Company's employees enter into
agreements regarding proprietary information and confidentiality and inventions,
and preventing the Company's employees from engaging or participating in any
business that is in competition with the business of the Company.
10.3 Qualified Small Business. The Company shall use its best
------------------------
efforts to qualify as a "Qualified Small Business" as defined in Section 1202(d)
of the Code, and covenants that so long as the Preferred Shares are held by any
of Yahoo, CMG@Ventures, Chase Venture Capital Associates, L.P., The fl@tiron
Fund LLC, SOFTBANK Holdings Inc. or
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<PAGE>
InnoCal, L.P. (or a transferee or assignee of any of said Purchasers), it will
use reasonable commercial efforts to cause the Preferred Shares to qualify as
Qualified Small Business Stock.
10.4 Proprietary Agreements. The Company will use its best
----------------------
efforts to prevent any employee from violating the confidentiality and
proprietary information agreement entered into between the Company and each of
its employees.
10.5 Payment of Dividends. The Company shall not pay dividends on
--------------------
or repurchase any shares of its Common Stock so long as the Preferred Shares are
outstanding, except that the Company shall be entitled to repurchase shares of
its Common Stock in connection with the termination of an employee, director or
consultant of the Company or the proposed transfer by an employee, director or
consultant of shares of its Common Stock, or pursuant to the terms of the Rights
Agreement.
10.6 Use of Proceeds. The Company shall use the proceeds from the
---------------
sale of the Preferred Shares for working capital and to find the operations of
the Company.
10.7 Inspection. The Company shall permit each Purchaser, at such
----------
Purchaser's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Purchaser; provided, however, that the Company shall not be obligated
pursuant to this Section 10.7 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
10.8 Reserve for Conversion Shares. The Company shall at all
-----------------------------
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred
Shares and Preferred Stock and otherwise complying with the terms of this
Agreement, such number of its duly authorized shares of Common Stock as shall be
sufficient to effect the conversion of the Preferred Shares and Preferred Stock
from time to time outstanding or otherwise to comply with the terms of this
Agreement. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of the Preferred Shares
and Preferred Stock or otherwise to comply with the terms of this Agreement, the
Company will forthwith take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes. The Company will obtain any
authorization, consent, approval or other action by or make any filing with any
court or administrative body that may be required under applicable state
securities laws in connection with the issuance of shares of Common Stock upon
conversion of the Preferred Shares.
10.9 Key Person Insurance. The Company shall procure within 30
--------------------
days following the First Closing and maintain in effect thereafter "key person"
life insurance policies, payable to the Company, on the life of David Bohnett
(so long as he remains an employee of the Company), in the amount of $2,000,000
(the "Key Person Insurance"). The Company shall not cause or permit any
assignment or change in beneficiary and shall not borrow against any such
policy. If requested by Purchasers holding at least a majority of the
outstanding Preferred Shares, the Company will add one designee of the
Purchasers as a notice party for each such policy and shall request that the
issuer of each policy provide such designee with ten (10) days' notice
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<PAGE>
before such policy is terminated (for failure to pay premiums or otherwise) or
assigned or before any change is made in the beneficiary thereof.
10.10 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, neither the Company nor any of its subsidiaries shall enter into any
transaction with any director, officer, employee or holder of more than 5% of
the outstanding capital stock of any class or series of capital stock of the
Company or any of its subsidiaries, member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person, or
member of the family of any such person, is a director, officer, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof,
except for transactions on customary terms related to such person's employment.
10.11 Vesting and Repurchase of Reserved Employee Shares. Without
--------------------------------------------------
the unanimous approval of the members of the Compensation Committee (as defined
in Section 10.12 below), except for the previously granted Founders' Options and
options previously granted to William Bohnett and Stanley Newman to purchase
10,000 shares of Common Stock each, the Company shall not grant to any of its
employees, officers or directors options to purchase shares of Common Stock
unless (i) such options will become exercisable at a rate not in excess of 25%
per annum from the date of such grant and (ii) the shares issuable upon exercise
of such option are subject to repurchase, first by the Company and second, by
the holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock, pro rata, upon termination of employment or upon the attempted
transfer of such shares by a holder thereof.
10.12 Committees. The Company shall continue to maintain a
----------
Compensation Committee (the "Compensation Committee") and an Audit Committee
(the "Audit Committee") of the Board of Directors. Each of the Audit Committee
and the Compensation Committee shall at all times consist of three non-
management directors. No increase in compensation, bonuses or other remuneration
shall be paid to, and no capital stock of the Company shall be issued or granted
to, any director or executive officer of the company or any of its subsidiaries,
without the approval of the Compensation Committee. No employee stock option
plan, employee stock purchase plan, employee restricted stock plan or other
employee stock plan shall be established without the approval of the
Compensation Committee. The Audit Committee shall select (subject to the
approval of the Board of Directors) and provide instructions to the Company's
auditors and shall approve the Company's annual audit prior to its issuance each
year.
10.13 Board of Directors Meetings. The Company shall use its best
---------------------------
efforts to ensure that meetings of the Board of Directors are held at least six
times per year.
10.14 Repurchase, Recapitalization and Redemption. The Company
-------------------------------------------
will not acquire, redeem or recapitalize its capital stock, or take any similar
action affecting its capital stock, that would cause the ownership by Yahoo
(together with any transferee of Yahoo that is controlled by Yahoo) of the
Company's outstanding voting stock to increase by more than 25% from the date of
the Third Closing except to the extent approved in writing by Yahoo.
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<PAGE>
11. Miscellaneous.
11.1 Waivers and Amendments. The rights of the holders of the
----------------------
Shares under this Agreement may be waived or amended only with the written
consent of the record holders of at least eighty percent (80%) of the Shares
(either generally or in a particular instance), provided, however, that no such
waiver or amendment shall reduce the aforesaid proportion of Shares, the holders
of which are required to consent to any waiver or supplemental agreement,
without the consent of the record holders of all of the Shares; provided,
further, that no waiver or amendment may be made with respect to any Seller in
connection with any matter under, or any provision of, Article 8 without the
written consent of such Seller. Upon the effectuation of each such waiver or
amendment, the Company shall promptly give written notice thereof to the record
holders of the Shares who have not previously consented thereto in writing.
Except to the extent provided in this Section 11.1, this Agreement or any
provision hereof may be amended, waived, discharged or terminated only by a
statement in writing signed by the party against which enforcement of the
amendment, waiver, discharge or termination is sought.
11.2 Governing Law. This Agreement shall be governed in all
-------------
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
11.3 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closings of the transactions
contemplated hereby for a period one (1) year from the Third Closing Date,
notwithstanding any investigation made by the parties to this Agreement. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of a party pursuant hereto or in connection
with the transactions contemplated hereby shall be deemed to be representations
and warranties by such party hereunder as of the date of such certificate or
instrument.
11.4 Successors and Assigns. Except as otherwise expressly
----------------------
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto. Without limiting the generality of the foregoing, all
representations, covenants and agreements benefitting the Purchasers shall inure
to the benefit of any and all subsequent holders from time to time of Shares.
11.5 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
11.6 Notices, etc. All notices and other communications required
------------
or permitted hereunder shall be in writing and shall be delivered personally,
via facsimile, mailed by first class mail, postage prepaid, or delivered by
courier or overnight delivery, addressed as follows:
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<PAGE>
(a) if to the Purchasers, to:
Yahoo! Inc.
3400 Central Expressway, Suite 201
Santa Clara, CA 95051
Attention: Timothy Koogle, President and CEO
Facsimile: (408) 731-3301
SOFTBANK Holdings Inc.
10 Langley Road
Newton Center, MA 02159
Attention: Ron Fisher, Vice Chairman
Facsimile: (617) 928-9301
(b) if to the Company, to:
GeoCities
1918 Main Street, Third Floor
Santa Monica, CA 90405
Attention: David Bohnett, President
Facsimile: (310) 664-6520
(c) if to the Sellers, at their addresses stated on their
respective signature pages to this Agreement;
or at such other address or facsimile number as the party shall have furnished
to the other parties in writing and each of the Sellers. Notices that are mailed
shall be deemed received five (5) days after deposit in the United States mail.
11.7 Severability. In case any provision of this Agreement shall be
------------
found by a court of law to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
11.8 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement, other than Wasserstein Perella & Co., Inc., and, (ii) hereby agrees
to indemnify and to hold the Purchasers and the Sellers harmless from and
against any liability for commission or compensation in the nature of a finder's
fee to any broker or other person or firm (and the costs and expenses of
defending against such liability or asserted liability) for which the Company,
or any of its employees; or representatives, is responsible. The consideration
payable by the Company to Wasserstein Perella & Co., Inc. in connection with the
transactions contemplated by this Agreement and the Codistribution Agreement
will not exceed the amount set forth in the Schedule of Exceptions.
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<PAGE>
(b) Each Purchaser, severally and not jointly, (i) represents
and warrants that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement and (ii) hereby agrees to indemnify
and to hold the Company and the Sellers harmless from and against any liability
for any commission or compensation in the nature of a finder's fee to any broker
or other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which each of the Purchasers, or any of
their employees or representatives, are responsible.
11.9 Expenses. The Company, the Sellers and the Purchasers shall each
--------
bear their own expenses and legal fees in connection with the consummation of
this transaction.
11.10 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
11.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
11.12 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to the Company or to any holder of any securities
issued or to be issued hereunder shall impair any such right, power or remedy of
the Company or such holder, nor shall it be construed to be a waiver of any
breach or default under this Agreement, or an acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any delay or
omission to exercise any right, power or remedy or any waiver of any single
breach or default be deemed a waiver of any other right, power or remedy or
breach or default theretofore or thereafter occurring. All remedies, either
under this Agreement, or by law otherwise afforded to the Company or any holder
of any securities issued or to be issued hereunder, shall be cumulative and not
alternative.
11.13 Certain Liability Matters. The Purchasers agree that with
-------------------------
respect to any claim of breach by the Company or Bohnett of any of the
representations and warranties set forth in Section 3 of this Agreement, no
amounts shall be recovered from Bohnett unless there has been rendered by a
court of competent jurisdiction a final non-appealable judgment against the
Company with respect to such claim, and the Company has failed to fully satisfy
such judgment within 90 days from the date of entry of such judgment, and in any
event the amount recoverable from Bohnett with respect to any such claim,
individually, and all such claims, in the aggregate, shall not exceed the gross
proceeds of $8,910,420 received by him in connection with his sale of Secondary
Shares hereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
GEOCITIES
By: /s/ GeoCities
Name: GeoCities
YAHOO! INC.
By: /s/ Yahoo! Inc.
Name: Yahoo! Inc.
SOFTBANK HOLDINGS INC.
By: /s/ Ronald D. Fisher
Name: Ronald D. Fisher
Title: Vice Chairman
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
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<PAGE>
INNOCAL, L.P., a Delaware limited
partnership
By: InnoCal Associates, L.P.,
a Delaware limited partnership
SELLERS
By: /s/ H.D. Lambert
--------------------------
Name: H.D. Lambert
--------------------------
Title: General Partner
-------------------------
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
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