<PAGE>
As filed with the Securities and Exchange Commission on June 4, 1999
Registration No. 333-77455
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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TALK CITY, INC.
(Exact name of Registrant as specified in its charter)
---------------
California 7375 77-0426524
(prior to (Primary Standard (I.R.S Employer
reincorporation) Industrial Identification No.)
Classification Code
Delaware Number)
(after
reincorporation)
(State or other
jurisdiction of
incorporation or
organization)
307 Orchard City Drive, Suite 350
Campbell, CA 95008
(408) 871-5200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
PETER H. FRIEDMAN
President and Chief Executive Officer
Talk City, Inc.
307 Orchard City Drive, Suite 350
Campbell, CA 95008
(408) 871-5200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
PAGE MAILLIARD KENNETH L. GUERNSEY
JULIE A. BELL KARYN R. SMITH
CAROLYNN W. JONES VIRGINIA C. EDWARDS
Wilson Sonsini Goodrich & Rosati LAURIE J. HAUBER
Professional Corporation Cooley Godward LLP
650 Page Mill Road One Maritime Plaza, 20th Floor
Palo Alto, CA 94304 San Francisco, CA 94111
(650) 493-9300 (415) 693-2000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Amount Maximum Proposed Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share Offering Price(1) Registration Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 5,175,000 $10.00 $51,750,000 $14,387
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933.
(2) $13,900 was previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated June 4, 1999
PROSPECTUS
4,500,000 Shares
[TALK CITY LOGO]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
4,500,000 shares.
We have applied to list the shares on the Nasdaq National Market under the
symbol "TCTY."
Anticipated Price Range $8.00 to $10.00 per share.
Investing in the shares involves risks. Risk Factors begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds to Talk City............................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 675,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
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Lehman Brothers
Volpe Brown Whelan & Company
U.S. Bancorp Piper Jaffray
Internet distribution by
E*TRADE Securities
, 1999
<PAGE>
[INSIDE FRONT COVER]
Center Caption: The Talk City Partner Network
[LOGOS OF VARIOUS PARTNERS]
Text: Talk City provides community services for 35 partners. These
partners, in turn, drive user volume to our network and
provide broad exposure for the Talk City brand. We share costs
to produce and market our partners' online community offerings
and share the resulting revenue. Our agreements with our
partners range in duration from six months to three years. No
individual partner was responsible for a material amount of
our revenue for the three months ended March 31, 1999, except
WebTV Network, which was responsible for 17% of our revenues
for that quarter.
<PAGE>
[INSIDE FRONT COVER GATEFOLD]
Caption: Talk City Business Services
Text: We offer businesses interactive services that help them develop and
expand relationships with customers and employees. These services range
from producing online events to hosting customized online communities.
[This page will contain three business client screen shots.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 52
Certain Transactions....................................................... 62
Principal Stockholders..................................................... 66
Description of Capital Stock............................................... 69
Shares Eligible for Future Sale............................................ 72
Underwriting............................................................... 74
Legal Matters.............................................................. 77
Experts.................................................................... 77
Available Information...................................................... 77
Index to Financial Statements.............................................. F-1
</TABLE>
Corporate Information
Our principal office is located at 307 Orchard City Drive, Suite 350,
Campbell, CA 95008. Our telephone number at that location is (408) 871-5200 and
our Internet addresses are www.talkcity.com and www.onnow.com. Information
contained on our Web sites does not constitute part of this prospectus.
About This Prospectus
Unless stated otherwise, the information contained in this prospectus:
. assumes a one for two reverse stock split of the preferred stock and
common stock, which is subject to stockholder approval, prior to the
closing of this offering;
. reflects the automatic conversion of all outstanding shares of preferred
stock into shares of common stock and the conversion of all outstanding
warrants to purchase preferred stock into warrants to purchase common
stock prior to the closing of this offering;
. assumes no exercise of the underwriters' over-allotment option; and
. reflects our reincorporation in Delaware prior to the closing of this
offering.
See the section of this prospectus entitled "Risk Factors" for a discussion
of factors that you should consider before investing in the common stock
offered in this prospectus.
TALK CITY and LIVEWORLD are our registered trademarks. We are in the process
of registering ONNOW as a trademark. All trademarks and tradenames appearing in
this prospectus are the property of their respective holders.
You should only rely on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus. References in this prospectus to "we," "our" and
"us" refer to Talk City, Inc., unless the context otherwise requires.
Until 1999, all dealers selling shares of the common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
Prospectus Summary
Talk City, Inc.
We provide online communities and interactive services for businesses and
consumers. An online community is a group of people who interact via the
Internet with each other around common areas of interest. We have over 2,000
trained community leaders and moderators who facilitate this interaction,
maintain our standards of conduct and supervise our online events, chats, home
pages and message boards. We believe Talk City has one of the largest and best
trained groups of community leaders and moderators on the Internet. Based on
the average minutes spent per user per day on community sites, we are one of
the leading community sites on the Internet.
We offer businesses a wide range of moderated interactive services to help
them develop and expand online relationships with customers, suppliers and
employees. These services include designing fully integrated, customized
communities, producing online events, conducting online market research and
facilitating online meetings. In delivering our business services, our trained
community leaders and moderators direct the flow of the interaction to maintain
the quality and focus of programming desired by the client.
For consumers, we operate a network of online communities located at
www.talkcity.com. Our network is organized into 20 topical categories and
includes over 50 themed communities. A topical category corresponds to common
human interests, such as sports or collectibles, or broad characteristics, such
as age or locale. A themed community is a particular Talk City online forum
with a distinctive style, personality, mission statement and regularly
returning participants.
In March 1999, we had approximately 2.6 million unique visitors to our
community, according to Internet Profiles Corporation or I/PRO. These users
generated over 6.6 million hours of activity on www.talkcity.com in March 1999.
During our peak periods, which tend to be early evening hours, we had over
18,000 users simultaneously chatting or engaging in other interactive
activities. Our users spend a significant amount of time on our site, averaging
approximately 2.5 hours per user in the month of March. We believe that these
statistics demonstrate the attractiveness of our community services.
We provide online community services for over 50 Internet sites managed by 35
companies whom we refer to as our partners. We provide our partners with a co-
branded Web site linked to our community, including our community building
tools, chats, home pages and other community services, and the services of our
trained community leaders and moderators. A co-branded Web site means that the
brands of both the partner and Talk City receive equal treatment in use or
placement of logos. Our partners provide us with content, access to their users
and advertising for the Talk City Web site and brand. We share advertising
revenues on our co-branded Web sites with our partners. Our partners include
three Fortune 500 media companies, multiple Internet service providers, or
distribution partners, and numerous Internet content companies. Our major media
partners are Cox Interactive Media, Inc., Hearst Communications, Inc. and
National Broadcasting Company, Inc. Our distribution partners include @Home
Corporation, AT&T WorldNet Service, BellSouth.Net,
4
<PAGE>
Concentric Networks and WebTV Network, Inc., a wholly-owned subsidiary of
Microsoft Corporation. For the quarter ended March 31, 1999, none of our
partners drove user volume responsible for more than 1% of our revenues, except
for WebTV Network which was responsible for approximately 17% of our revenues
during that quarter.
We believe our business services and online community network provide
significant benefits to businesses, consumers, advertisers and partners, as
summarized below:
<TABLE>
<CAPTION>
Customers Benefits
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<C> <S>
Businesses .Online community-based marketing, sales and support solutions
.Professional production and moderated environment
.Reduced customer acquisition and maintenance costs
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Consumers .Welcoming and friendly culture
.Family-oriented environment
.Variety of interactive programming
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Advertisers .Positive, effective branding venue
.Segmented, targetable and mainstream audience
.Loyal, engaged viewers
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Partners .Professional production and moderated environment
.Critical mass of traffic and variety of programming
.Co-branding and customization of community services
</TABLE>
The Company was incorporated in California in March 1996 and expects to
reincorporate in Delaware in June 1999. The Company has incurred significant
losses since inception.
The Offering
<TABLE>
<C> <S>
Common stock offered by us................ 4,500,000 shares
Common stock to be outstanding after the
offering................................. 23,675,763 shares
Excludes 2,523,951 shares of common
stock that have been reserved for
issuance under our stock plans and
1,318,246 shares of common stock
that have been reserved for
issuance upon exercise of
outstanding warrants
Use of proceeds........................... For general corporate purposes,
principally brand promotion,
expansion of our sales and
marketing operations and our
partner and moderator networks
Proposed Nasdaq National Market Symbol.... TCTY
</TABLE>
5
<PAGE>
Summary Financial Information
(in thousands, except per share data)
The following table summarizes the financial data for our business. The pro
forma net loss per share data reflects our sale in April 1999 of additional
preferred stock for aggregate proceeds of $20.0 million, our issuance of
preferred stock and warrants in connection with the NBC and Hearst agreements
in April 1999, and the automatic conversion of all outstanding shares of our
redeemable convertible preferred stock into shares of our common stock.
<TABLE>
<CAPTION>
Three Months
March 29, 1996 Years Ended Ended
(Inception) to December 31, March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Business services.......... $ -- $ 25 $ 522 $ 60 $ 357
Advertising and
sponsorships.............. 14 183 931 65 623
------- ------- -------- ------- -------
Total revenues........... 14 208 1,453 125 980
Operating expenses,
including noncash
advertising and
promotional charges....... 1,358 6,938 16,745 3,026 8,033
------- ------- -------- ------- -------
Loss from operations....... (1,344) (6,730) (15,292) (2,901) (7,053)
Net loss applicable to
common stockholders....... (1,316) (6,429) (16,217) (2,911) (6,971)
Net loss per share:
Basic and diluted......... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90)
Weighted average shares... 2,679 3,068 3,295 3,332 3,661
Pro forma net loss per
share:
Basic and diluted......... $ (1.66) $ (0.47)
Weighted average shares... 9,762 14,741
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
data reflects our sale in April 1999 of additional preferred stock for
aggregate proceeds of $20.0 million, our issuance of preferred stock and
warrants in connection with the NBC and Hearst agreements in April 1999, and
the automatic conversion of all outstanding shares of our redeemable
convertible preferred stock into shares of our common stock. The as adjusted
column reflects the sale of 4,500,000 shares of common stock in this offering
at an assumed public offering price of $9.00 per share after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................. $ 9,224 $29,223 $65,788
Working capital............................... 7,768 39,250 75,815
Total assets.................................. 14,572 46,403 82,968
Long-term obligations, net of current
portion...................................... 237 237 237
Redeemable convertible preferred stock and
warrants..................................... 39,979 -- --
Total stockholders' equity (deficit).......... (28,359) 43,451 80,017
</TABLE>
6
<PAGE>
Risk Factors
You should carefully consider the following factors and other information in
this prospectus before you decide to invest in our shares of common stock. If
any of the negative events referred to below occur, our business could suffer.
We have incurred losses since inception and we may be unable to achieve
profitability or generate positive cash flow
We incurred net losses of $1.3 million in 1996, $6.4 million in 1997, $15.7
million in 1998 and $6.9 million for the three months ended March 31, 1999 and
we may be unable to achieve profitability in the future. If we continue to
incur net losses in future periods, we may be unable to achieve one or more key
elements of our strategy, including the following:
. increase the number of business services personnel;
. increase our sales and marketing activities, including increasing the
number of our sales personnel;
. expand our content and community offerings for our consumers;
. expand our moderator network; or
. introduce additional ecommerce services.
We expect to continue to incur significant operating expenditures, as well as
noncash advertising and promotional charges, and as a result we will need to
generate significant revenues to achieve and maintain profitability. As of
March 31, 1999, we had an accumulated deficit of approximately $30.3 million,
including noncash advertising and promotional charges of $4.3 million. We may
not achieve profitability if our revenues increase more slowly than we expect,
or if operating expenses exceed our expectations or cannot be adjusted to
compensate for lower than expected revenues. If we do achieve profitability, we
may be unable to sustain or increase profitability on a quarterly or annual
basis. Any of the factors discussed above could cause our stock price to
decline.
Fluctuations in our quarterly operating results may cause our stock price to
decline
It is likely that our operating results in one or more future quarters may be
below the expectations of securities analysts or our investors, and as a result
the price of our common stock could decline. We have historically experienced
fluctuating quarterly operating results. Our net loss decreased from $2.9
million as of March 31, 1998 to $2.4 million as of June 30, 1998. However, our
net loss increased from $2.4 million as of June 30, 1998 to $5.0 million as of
September 30, 1998. We expect that our quarterly operating results will
continue to fluctuate significantly due to many factors, including:
. our dependence on increased business services and advertising and
sponsorship revenues;
. expansion of our sales force;
. uncertain adoption of the Internet as an advertising medium;
. the length of our sales cycle, particularly our business services sales
cycle;
. our dependence on our partner network;
. our ability to increase our audience of loyal, engaged users;
. management of growth;
7
<PAGE>
. intense competition; and
. potential technical difficulties or system down time affecting the
Internet generally or us specifically.
These factors are described in more detail in the risk factors described
below. Many of these factors are beyond our control.
Our revenue model is new and unproven and we must continue to generate and
develop multiple revenue streams
The success of our revenue model will depend on our ability to generate
multiple revenue streams through our community network. To be successful, we
must, among other things, develop and market products and services that achieve
broad market acceptance by our users, business clients and advertisers. Our
inability to generate multiple revenue streams will harm our business.
We rely heavily on business services revenue, and our growth will depend on our
ability to increase our business services revenues
We derive a substantial portion of our revenues from the sale of business
services and we expect to continue to rely on these revenues for the
foreseeable future. If we do not continue to develop business services
revenues, our business could suffer. Business services represented 12% of our
total revenues in 1997, 36% of our total revenues in 1998 and 36% of our total
revenues in the three months ended March 31, 1999. Our growth and future
success will depend on our ability to increase the number of our business
services clients, expand our business services offerings, effectively implement
these services and increase the average revenue per project and per client. We
have only recently begun to hire business services sales personnel.
Our ability to generate significant business services revenues will also
depend, in part, on our ability to create new business services offerings
without diluting the value of our existing programs. In addition, our business
clients must accept the Internet as an attractive and sustainable substitute
medium for the traditional methods to which they are accustomed. The market for
business services may not continue to develop and may not be sustainable. The
Internet as a business services solution has not been available for a
sufficient period of time for us to gauge its effectiveness as compared with
traditional methods, such as trade shows, phone and mail surveys and video
conferencing.
We rely heavily on advertising and sponsorship revenues, and if our advertising
and sponsorship revenues decline due to lack of acceptance of the Internet as
an advertising medium, our business would suffer
We currently derive a substantial portion of our revenues from sponsorships
and advertising, and expect to continue to do so. As a result, our success is
highly dependent on the increased use of the Internet as an advertising medium.
Our business would be harmed if the market for Internet advertising fails to
develop or develops slower than expected. Most of our current or potential
advertising customers have little or no experience using the Internet for
advertising purposes and they have allocated only a limited portion of their
advertising budgets to Internet advertising. Use of the Internet by consumers
is at a very early stage of development, and market acceptance of the Internet
as a medium for advertising is subject to a high level of uncertainty. No
standards are widely accepted to measure the effectiveness of Internet
advertising. If these standards do not develop, existing
8
<PAGE>
sponsors or advertisers may not continue their current level of Internet-based
programming, and sponsors or advertisers who are not currently advertising on
the Internet may be reluctant to do so.
The terms of our advertising contracts generally range from one week to six
months. Our advertising contracts guarantee the advertiser a minimum number of
impressions, or times that an advertisement is seen by users of our sites. If
minimum impression levels are not achieved for any reason, we may be required
to provide additional impressions after the contract term, which could reduce
the availability of advertising inventory and harm our business. If minimum
guaranteed impressions are not met, we defer recognition of the corresponding
revenues until guaranteed impression levels are achieved.
We rely on our partner network for user volume and increased revenues
Our partners currently drive approximately 52% of the volume of our sites,
which is defined as the number of Internet page views or Internet advertisement
views seen by our users. The volume is considered to be "driven" by the partner
if the user comes to our sites via the partner's site. If we were to terminate
or otherwise lose the benefit of all of our partner contracts, we would risk
losing as much as 55% of our volume. Our partner contracts typically have terms
of six months to three years each.
For the quarter ended March 31, 1999, none of our partners individually drove
more than 3% of our volume, except for WebTV Network, which was responsible for
approximately 47% of our volume. We have a two-year contract with WebTV Network
which runs through June 2000. If this contract were to be terminated or not
renewed, we could lose as much as 47% of our volume. We would need to replace
this volume with volume from our other partners or with volume generated
through other means, such as increased marketing.
We sell advertisements based on the volume of our sites, a portion of which
volume is provided by our partners. Of our total revenues for the quarter ended
March 31, 1999, approximately 20% were generated through advertisements that
ran based on volume provided by our partners. If we were to terminate or
otherwise lose the benefit of all of our partner contracts, we could lose as
much as 20% of our revenues. We would need to replace these revenues with
increased revenues from our other product lines, such as business services or
ecommerce. For the quarter ended March 31, 1999, none of our partners
individually drove volume responsible for more than 1% of our revenues, except
WebTV Network which was responsible for approximately 17% of our revenues for
that quarter.
Our uncertain sales cycle could harm our business
Our sales cycle, particularly with our business clients, is generally lengthy
and uncertain. During the sales cycle, we may expend substantial funds and
management resources without generating corresponding revenues, which would
harm our business. The time between the date of our initial contact with a
potential client and the execution of a contract with that potential client
typically ranges from a few weeks for smaller agreements to several months for
larger agreements. Our sales cycle is also subject to delays as a result of
factors over which we have little or no control, including the following:
. budgetary constraints;
. internal acceptance reviews;
9
<PAGE>
. the success and continued internal support of advertisers', business
services clients' and partners' own development efforts; and
. the possibility of cancellation or delay of projects by advertisers,
business services clients or partners.
The length and uncertainty of our sales cycle also may harm our billing and
collection efforts. The length of the sales cycle prevents us from rendering
our services on a more accelerated basis, which slows our cash flow and reduces
our ability to fund the expenditures we incur during the sales cycle.
We depend on our users for content, promotion and sustaining an engaged
audience, and if our users become dissatisfied or do not become engaged with
our service, our business could be harmed
We depend largely on our users for content, word-of-mouth promotion and for
sustaining an involved audience for our advertisers and, to a lesser extent,
our business clients. If our users become dissatisfied or do not become engaged
with our service, they will not generate significant content or promote our
site and we will have to increase the expenditure of our own resources for
these activities. In addition, dissatisfied or disengaged users would not
continue to attract other users to our site. Loss of our users and failure to
increase our number of engaged users would hurt our efforts to generate
increased revenues. Our users may become dissatisfied with our services if we
do not maintain our structured environment, if we experience system failures or
we do not continually upgrade our software functionality. In addition, users
may visit our community for a single event, such as a live event regarding the
Grammy Awards, or to explore our community and not return.
We depend on our trained community leaders and moderators to engage our users
and maintain our structured and moderated programming
We depend on our network of trained community leaders and moderators, which
consisted of approximately 2,000 individuals as of March 31, 1999, to draw our
users into our community and maintain our structured and moderated programming.
Most of our trained community leaders and moderators are volunteers. These
people volunteer because they like to meet and help people from all over the
world, enjoy the recognition they receive in a community leadership position
and generally have fun participating in such a novel form of communication. As
the Internet evolves and online communication becomes more common, our trained
community leaders and moderators may view moderating as less exciting or less
of a novelty than it is now. Loss of our trained community leaders and
moderators, or loss of our ability to attract these individuals to our service,
could harm our business.
Maintaining and promoting our brand identity is a critical aspect of
maintaining and expanding our user base, business clients and partner network
We intend to substantially increase our financial commitment to the
maintenance and promotion of our brand loyalty through advertising campaigns in
several forms of media, including television, print and billboards. These
campaigns may not successfully enhance our brand, and we may incur excessive
expenses in connection with our efforts to promote and maintain our brand
without generating a corresponding increase in revenues, which would harm our
business. We spent
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<PAGE>
approximately $7.4 million in 1998 and $4.2 million in the quarter ended March
31, 1999 on these activities. We expect to significantly increase these amounts
in the next two to three years, consisting of a combination of cash and noncash
in-kind advertising. We also intend to engage in co-branding, partner
ingredient branding, where the Talk City brand receives a less prominent
position than the partner's brand, usually as an ingredient of the overall
service offered, such as "chat powered by Talk City," and other marketing
activities with our partner network. These other marketing activites will
consist of activities in which we work with our partners to promote the
services in a way which highlights both brands' involvement in the services
offered.
Promotion and enhancement of our brand also will depend, in part, on our
ability to continue to provide a clean, well lighted community experience. The
value of our brand could diminish if businesses, users, partners and
advertisers do not perceive the www.talkcity.com community experience to be of
high quality or if we introduce new services or enter into new business
ventures that are not well received.
We are growing rapidly and must effectively manage and support our growth in
order for our business strategy to succeed
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Managing and sustaining
our growth will place significant demands on management as well as on our
administrative, operational and financial systems and controls. If we are
unable to do this effectively, our business could suffer. We had 31 employees
as of March 31, 1998 compared to 82 employees as of March 31, 1999. We
anticipate further significant increases in the number of our employees,
especially in our sales and marketing departments in order to take full
advantage of our relationships with Cox, Hearst and NBC. This rapid growth has
caused us to potentially outgrow our current principal office facilities sooner
than we expected. As a result, we are currently considering leasing additional
space in the very competitive Silicon Valley office leasing market.
Our chief executive officer and vice president of community are critical to our
business and they may not remain with us in the future
Our future success will depend to a significant extent on the continued
services of Peter Friedman, our Chairman of the Board, Chief Executive Officer
and President, and Jenna Woodul, our Vice President of Community. The loss of
the services of Mr. Friedman or Ms. Woodul could harm our business. We do not
have long-term employment agreements with Mr. Friedman or Ms. Woodul and we do
not maintain any key person life insurance policies.
We must continually attract and retain our sales, technical, marketing and
other personnel or we will be unable to execute our business strategy
Our future success also will depend on our ability to attract, retain and
motivate other highly skilled sales, technical, managerial, marketing and
customer support personnel. Competition for these personnel is intense,
especially in the Internet industry, and we may be unable to successfully
attract, integrate or retain sufficiently qualified personnel. We have in the
past experienced, and we expect to continue to experience, difficulty in hiring
and retaining highly skilled employees with appropriate qualifications as a
result of our rapid growth and expansion.
11
<PAGE>
Our growth strategy and business may be harmed if we are unable to consummate
potential acquisitions or investments or successfully integrate them with our
business
As part of our continued strategy to expand the range of our community
applications and features, to acquire additional community audiences and to
expand our business services products, we may acquire or make investments in
complementary businesses, technologies, services or products if appropriate
opportunities arise. We may be unable to identify suitable acquisition or
investment candidates at reasonable prices or on reasonable terms.
Additionally, regardless of whether suitable candidates are available, we may
be unable to consummate future acquisitions or investments, which could harm
our growth strategy. If we do acquire a company or make other types of
acquisitions, we could have difficulty integrating the acquired products,
personnel or technologies. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
We will need to raise additional capital to achieve our business objectives
We will need to raise additional capital to continue to develop our business.
If adequate funds are not available or are not available on acceptable terms,
we would be unable to continue to develop our business, take advantage of
acquisition opportunities, develop or enhance our services and products or do
one or more of the following:
. expand our business services;
. expand our partner network;
. develop our brand;
. expand our moderator base;
. grow our traffic;
. increase our revenues; or
. respond to competitive pressures.
If we raise additional capital through the issuance of new securities, our
stockholders will be subject to additional dilution. In addition, any new
securities issued may have rights, preferences or privileges senior to those
securities held by our stockholders. Additional financing may not be available
on favorable terms or at all.
Our paid moderators could be viewed as employees rather than independent
contractors which could subject us to adverse tax and employee benefit
consequences
We treat our 270 paid moderators as independent contractors. Our paid
moderators sign independent contractor agreements and are paid a flat monthly
fee or per hour. One or more jurisdictions may deem our paid moderators to be
employees rather than independent contractors and seek to impose taxes, and any
applicable interest and penalties, on us. The law regarding the distinction
between independent contractors and employees is not entirely clear. We could
be subject to substantial tax and employee benefit liabilities if it were
ultimately determined that our paid moderators are actually employees.
12
<PAGE>
Our volunteer community leaders could be viewed as employees, which would
substantially increase our operating expenses
If our volunteer community leaders, consisting of approximately 1,800
individuals, were viewed as employees, we could be subject to payment of back
wages and other penalties and our operating expenses could substantially
increase. Former volunteers of America Online, Inc. recently filed a complaint
with the Labor Department and a class action lawsuit claiming they were treated
like employees and should have been paid.
System failures or slow downs would harm our reputation and thus reduce our
attractiveness to our current and future business clients, users, partners and
advertisers
System failures could harm our reputation and reduce our attractiveness to
businesses, users, partners and advertisers. Our ability to attract potential
business clients, users, partners and advertisers to promote our brand will
depend significantly on the performance of our network infrastructure. A key
element of our strategy is to generate a high volume of user volume. An
increase in the volume of user traffic could strain the capacity of our
infrastructure, resulting in a slowing or outage of our services and reduced
traffic to our Web sites.
We also may be unable to improve our technical infrastructure in relation to
increased user volume. Our users depend on Internet service providers, online
service providers and other Web site operators for access to our Web sites.
Many of these providers and operators have also experienced significant outages
in the past, and they could experience outages, delays and other difficulties
due to system failures unrelated to our systems.
Fire, floods, earthquakes, power loss, telecommunications failures, break-ins
and similar events could damage our communications hardware and other computer
hardware operations which are located at Frontier Global Centers facilities in
Sunnyvale, California. In addition, computer viruses, electronic break-ins or
other similar disruptions also could harm our Web sites. Our insurance policies
may not adequately compensate us for any losses that may occur due to any
failures or interruptions in our systems.
Our business is largely dependent on the development and growth of the
Internet, which may not grow, or if it does grow, may be unable to support the
demands placed on it by this growth
Our market is new and rapidly evolving. Our business will be harmed if
Internet usage does not continue to grow. If Internet usage does continue to
grow, the Internet infrastructure may be unable to support the demands placed
on it by this growth and its performance and reliability may decline. Varying
factors could inhibit future growth in Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. unavailability of cost effective, high speed service.
Many Web sites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. Internet usage, as well as the usage of our Web sites, could
decline or grow at a slower rate than expected if these outages or delays
frequently occur in the future.
13
<PAGE>
We must keep pace with rapid technological change and the intense competition
of the Internet industry in order to succeed
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of the Internet and intense competition in our industry exacerbate these
market characteristics. To succeed, we will need to effectively integrate the
various software programs and tools required to enhance and improve our product
offerings and manage our business. Any enhancements or new services or features
must meet the requirements of our current and prospective users and must
achieve significant market acceptance. Our success also will depend on our
ability to adapt to rapidly changing technologies by continually improving the
performance features and reliability of our services. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. We could also incur
substantial costs if we need to modify our services or infrastructure to adapt
to these changes.
We may be liable for misappropriation by others of our users' personal or
credit card information
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information or credit card information, we
could be subject to liability. These could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims.
We may be liable for our use or sale of our users' personal information
We could be subject to liability claims by our users for misuses of personal
information, such as for unauthorized marketing purposes. In addition, the
Federal Trade Commission has been investigating various Internet companies
regarding their use of personal information. We could incur additional expenses
if new regulations regarding the use of personal information are introduced or
if our privacy practices are investigated. We currently use our users' personal
information internally to determine how to improve our service, applications
and features and to target our advertisements and communications. We also use
this information externally to provide our advertisers with the demographics of
our user base. We may, in the future, sell our user information on an
aggregate, not individual, basis.
We may be subject to liability for products sold through our Web sites
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user. Liability claims
resulting from our sale of products could require us to spend significant time
and money in litigation or to pay significant damages. To date, we have had
very limited experience in the sale of products online and the development of
relationships with manufacturers or suppliers of such products. We plan to
develop a range of ecommerce opportunities, such as shopping events hosted by
celebrity guests to promote particular products.
Year 2000 problems with our internal systems and third-party systems of our
suppliers and Web infrastructure could require significant time and expense and
could reduce our future revenues
We may be exposed to a loss of revenues and our operating expenses could
increase if the systems on which we are dependent to conduct our operations are
not year 2000 compliant. Our
14
<PAGE>
potential areas of exposure include products purchased from third parties,
computers, software telephone systems and other equipment used internally. The
reasonably likely worst case scenario for year 2000 issues would be if a
significant defect exists in key hardware or software and if a solution for
this problem were not immediately available. If a problem is detected in these
subsystems during our year 2000 compliance testing process, these components
will need to be revised or replaced. If our present efforts to address the year
2000 compliance issues are not successful, or if suppliers and other third
parties with which we do business do not successfully address these issues, our
business could be harmed.
In the event that our Web-hosting facilities are not year 2000 compliant, our
production Web sites would be unavailable and we would be unable to deliver
services to our users. In the event that our production and operational
facilities that support our Web sites are not year 2000 compliant, portions of
our Web site may become inaccessible. A prolonged disruption in our operations
could cause our business clients and partners to stop doing business with us.
Internet security and concerns could hinder ecommerce
The need to securely transmit confidential information over the Internet has
been a significant barrier to ecommerce and communications over the Internet.
We may incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by breaches like this. Our insurance
policies carry coverage limits that may not be adequate to reimburse us for
losses caused by security breaches. Any well publicized compromise of security
could deter people from using the Internet or using it to conduct transactions
that involve transmitting confidential information.
Changes in government regulation could limit our Internet activities or result
in additional costs of doing business on the Internet
Currently few laws or regulations exist that specifically regulate
communications or commerce on the Internet, but we expect more stringent laws
and regulations to be enacted due to the increasing popularity and use of the
Internet. Any new legislation or regulations or the application of existing
laws and regulations to the Internet, could limit our user volume, increase our
operating expenses or otherwise harm our business. In addition, the application
of existing laws to the Internet is uncertain, may take years to resolve and
could expose us to substantial liability for which we might not be indemnified
by the content providers or other third parties. Existing laws and regulations
currently, and new laws and regulations are likely to, address a variety of
issues, including the following:
. user privacy and expression;
. the rights and safety of children;
. intellectual property;
. information security;
. anticompetitive practices;
. the convergence of traditional channels with Internet commerce;
. taxation and pricing; and
. the characteristics and quality of products and services.
15
<PAGE>
Those laws that do reference the Internet, such as the recently passed
Digital Millennium Copyright Act, have not yet been interpreted by the courts
and their applicability and reach are not defined. The Federal Trade Commission
has submitted proposals to the Internet industry regarding the rights and
safety of children using the Internet and is expected to issue regulations in
this area.
In addition, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers.
Increased use of the Internet has also burdened the existing telecommunications
infrastructure and led to interruptions in phone service in areas with high
Internet use. In response, local telephone carriers, such as Pacific Bell, have
petitioned the FCC to regulate Internet service providers in a manner similar
to long distance telephone carriers and to impose access fees. If this were to
occur, the costs of communicating on the Internet could increase substantially,
potentially slowing the growth in use of the Internet. Any new laws or
regulations relating to the Internet could harm our business.
We may be subject to liability for publishing or distributing content over the
Internet
We may be subject to claims relating to content that is published on or
downloaded from our sites. We also could be subject to liability for content
that is accessible from our Web sites through links to other Web sites or that
is posted by members in chat rooms or bulletin boards. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type, such as defamation or trademark infringement, or may not be adequate
to cover all costs incurred in defense of potential claims or to indemnify us
for all liability that may be imposed. In addition, any claims like this, with
or without merit, would result in the diversion of our financial resources and
management personnel.
Current and potential competitors could decrease our market share and harm our
business
Increases in the number of Web sites competing for the attention and spending
of businesses, users and advertisers could result in price reductions, reduced
margins or loss of market share, any of which could harm our business. We
compete for business clients, users and advertisers with numerous companies,
including the following:
. online services or Web sites that produce business services, such as
market research, customized communities or online events, including Well
Engaged and broadcast.com, Inc.;
. online services or Web sites with a focus on community services, such as
America Online, GeoCities, Inc., a subsidiary of Yahoo! Inc., Tripod,
Inc., a subsidiary of Lycos, Inc., Delphi, theglobe.com, Inc., Xoom Inc.,
Fortune City, Homestead.com, WBS.net and Angelfire;
. vertical community online services that focus on specific market or
demographic segments, such as iVillage Inc., which is focused on women,
or iTurf, which is focused on teens;
. Web retrieval and other Web portal companies that offer community
applications, such as chat and home pages, as part of their site,
including Excite, Inc., Infoseek Corporation, Lycos and Yahoo!; and
. publishers and distributors of traditional media, such as television,
radio and print.
None of the above identified competitors is dominant in its respective area
of operation. The barriers to entry in the Internet services market are low and
we expect the number of our competitors to continue to increase. Any company or
individual can establish and maintain a Web site for minimal cost. See
"Business--Competition."
16
<PAGE>
We depend on third-party software to measure user demographics and other
related services
It is important to advertisers that we accurately measure the demographics of
our user base and the delivery of advertising impressions on our Web sites.
Companies may choose not to advertise on our Web sites or may be less willing
to pay the fees we intend to charge for advertising if they do not perceive our
measurements to be reliable. We have purchased third-party software from Oracle
Corporation and Net Gravity, Inc. for these measurement services. We may be
unable to accurately evaluate the demographic characteristics of our users if
the third-party software does not function properly or is not enhanced to
support our needs.
Our ability to deliver our services to our users may also be harmed if other
software we have purchased from third parties, such as Microsoft Exchange for
real-time chat and Netscape Web for ad serving and management, is not reliable
or does not function properly. If software we have purchased from third parties
to perform our services does not function properly or is not updated, we would
need to purchase new software or write such software ourselves, each of which
would require an unplanned increase in the expenditure of resources.
Possible infringement or misappropriation of our intellectual property rights
could harm our business
We are dependent on the trademarks "Talk City" and "OnNow." We have not yet
received trademark registration of "OnNow." If we were prevented from using the
trademarks "Talk City" or "OnNow," we would need to reimplement our Web sites
and devise new hard copy materials, such as letterhead and merchandise. We
would also need to re-build our brand identity with our business clients,
users, partner network and advertisers. The steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. Any infringement or
misappropriation could harm our business.
In addition, other parties may assert claims of infringement of intellectual
property or other proprietary rights against us. These claims, even if without
merit, could require us to expend significant financial and managerial
resources. Further, if claims like this are successful, we may be required to
change our trademarks, alter our content or pay financial damages, any of which
could harm our business. We also may be required to obtain licenses from others
to refine, develop, market and deliver new services. We may be unable to obtain
any needed license on commercially reasonable terms or at all and rights
granted under any licenses may not be valid and enforceable. We have been
subject to claims and expect to be subject to legal proceedings and claims from
time to time in the ordinary course of our business, including claims of
alleged infringement of trademarks and other intellectual property rights of
third parties by us and our licensees.
The allocation of proceeds from this offering may not yield significant returns
for our stockholders
Our management will have the discretion to allocate the net proceeds of this
offering to uses that our stockholders may not deem desirable. Pending any
specific needs, we expect to invest the net proceeds in short-term, interest-
bearing, investment grade securities for an indefinite period of time. We
cannot guarantee that any invested proceeds will yield a significant return.
See "Use of Proceeds."
17
<PAGE>
Our stock price is likely to be extremely volatile
The market price of our common stock is likely to be extremely volatile as
the market for Internet-related and technology companies has experienced
extreme price and volume fluctuations in recent months. Despite the strong
pattern of operating losses of Internet-related companies, the market demand,
valuation and trading prices of these companies has been high. At the same
time, the share prices of these companies' stocks have been highly volatile and
have recorded lows well below their historical highs. Historically, we have
experienced significant losses, which totaled $15.7 million in 1998. In
addition, we have experienced fluctuations in our volume of users and usage
patterns, which could also lead to extreme volatility of our stock price. We
cannot assure you that our stock will trade at the same levels as other
Internet stocks or that Internet stocks in general will sustain current market
prices. Volatility in the market price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
We expect our stock price to be subject to wide fluctuations in response to a
variety of factors, including factors beyond our control. These include:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new programming by us or
our competitors;
. changes in our financial estimates by securities analysts;
. conditions or trends in the Internet and online services industries;
. changes in the market valuations of other Internet companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel; and
. sales of substantial amounts of our common stock or other securities in
the open market.
These broad market and industry factors could harm the market price of our
common stock, regardless of our performance. General political and economic
conditions, such as recession or interest rate or currency rate fluctuations,
also could harm the market price of our common stock.
An active public market for our common stock may not develop
An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
You will incur immediate and substantial dilution in the net tangible book
value of the stock you purchase
The assumed initial public offering price is substantially higher than the
net tangible book value of $3.38 per share that our outstanding common stock
will have immediately after this offering. Accordingly, if you purchase shares
of our common stock, you will incur immediate and substantial dilution of $5.62
per share. If the holders of outstanding options or warrants exercise those
options or warrants, you will suffer further dilution. See "Dilution."
18
<PAGE>
A large number of shares becoming eligible for sale after this offering could
cause our stock price to decline
Sales of a substantial number of shares of common stock in the public market
following this offering, or the perception that sales could occur, could cause
the market price of our common stock to decline. See "Shares Eligible for
Future Sale."
Exercise of registration rights after this offering could adversely affect our
stock price
If holders of registration rights exercise those rights after this offering,
a large number of securities could be registered and sold in the public market,
which could result in a decline in the price of our common stock. If we were to
include in a company-initiated registration shares held by these holders
pursuant to the exercise of their registration rights, our ability to raise
needed capital could suffer. After this offering, the holders of 17,569,709
shares of common stock and warrants to purchase 1,318,246 shares of our common
stock, which will represent a total of approximately 80% of our outstanding
stock after completion of this offering, will be entitled to rights with
respect to registration under the Securities Act of 1933.
Our undesignated preferred stock may inhibit potential acquisition bids for us,
cause the market price for our common stock to fall and diminish the voting
rights of the holders of our common stock
If our board of directors issues preferred stock, potential acquirors may not
make acquisition bids for us, our stock price may fall and the voting rights of
existing stockholders may diminish as a result. Our board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series. Our board of directors can fix the price, rights, preferences,
privileges and restrictions of the preferred stock without any further vote or
action by our stockholders. See "Description of Capital Stock--Preferred
Stock."
We have anti-takeover defenses that could delay or prevent an acquisition of
our company
Provisions of our certificate of incorporation, bylaws and Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. See "Description of Capital Stock."
19
<PAGE>
Use of Proceeds
Our net proceeds from the sale of 4,500,000 shares of common stock in this
offering at an assumed initial public offering price of $9.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, will be approximately $36.6 million. If the underwriters'
over-allotment option is exercised in full, our net proceeds will be
approximately $42.2 million.
We currently expect to use approximately $18.0 million of the net proceeds of
this offering for marketing, including brand development and promotion and
growth of our user volume, $9.0 million for expansion of our sales
infrastructure and the remaining $9.6 million will be used for working capital
and general corporate purposes, including expansion of our trained community
leader and moderator network, development of software and content for user
services, relocation of our offices and additional personnel. We believe
opportunities may exist to expand our current business through acquisitions or
investments in complementary businesses, technologies, services or products,
and we may utilize a portion of the net proceeds for this purpose. Pending
these uses, our net proceeds from this offering will be invested in short-term,
interest-bearing, investment grade securities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying any cash dividends for the foreseeable future.
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<PAGE>
Capitalization
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis after giving effect to the proposed one for two
reverse stock split of the common stock and preferred stock;
. on a pro forma basis to reflect the sale of $20.0 million of
preferred stock and issuance of preferred stock and warrants in
connection with the NBC and Hearst agreements during April 1999 and
the automatic conversion of all outstanding shares of preferred
stock into common stock upon the closing of this offering; and
. on an as adjusted basis to reflect the sale of the 4,500,000 shares
of common stock at an assumed initial public offering price of $9.00
per share in this offering, less estimated underwriting discounts
and commissions and estimated offering expenses to be paid by us.
Please see "Use of Proceeds."
You should read this information together with the financial statements and
the notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Notes payable, less current portion............ $ 237 $ 237 $ 237
Redeemable convertible preferred stock: $0.001
par value, 19,000,000 shares authorized,
actual; 11,101,212 shares issued and
outstanding, actual; no shares issued or
outstanding, pro forma and as adjusted......... 39,979 -- --
Stockholders' equity:
Preferred stock, $0.001 par value: no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, pro forma and
as adjusted; no shares issued or
outstanding, pro forma and as adjusted...... -- -- --
Common stock, $0.001 par value: 60,000,000
shares authorized, actual; 100,000,000
shares authorized, pro forma and as
adjusted; 4,314,904 shares issued and
outstanding, actual; 19,175,763 shares
issued and outstanding, pro forma;
23,675,763 shares issued and outstanding, as
adjusted.................................... 4 19 24
Additional paid-in capital..................... 3,959 75,754 112,315
Deferred compensation.......................... (1,144) (1,144) (1,144)
Notes receivable from stockholders............. (921) (921) (921)
Accumulated deficit............................ (30,257) (30,257) (30,257)
-------- -------- --------
Total stockholders' equity (deficit)......... (28,359) 43,451 80,017
-------- -------- --------
Total capitalization....................... $ 11,857 $ 43,688 $ 80,254
======== ======== ========
</TABLE>
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<PAGE>
Dilution
Our pro forma net tangible book value as of March 31, 1999, after giving
effect to the one for two reverse stock split of all the outstanding common
stock and preferred stock, the sale of $20.0 million of preferred stock, the
issuance of preferred stock and warrants in connection with the NBC and Hearst
agreements and the conversion of all outstanding shares of preferred stock, was
$43.5 million, or $2.27 per share. Pro forma net tangible book value per share
represents total tangible assets less total liabilities, divided by the number
of outstanding shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the shares of
common stock offered by this prospectus and after deducting estimated
underwriting discounts and commissions and estimated offering expenses to be
paid by us, our net tangible book value at March 31, 1999 would have been $80.0
million, or $3.38 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $1.11 per share and an
immediate dilution to new public investors of $5.62 per share. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $9.00
Pro forma net tangible book value per share as of March 31,
1999.......................................................... $2.27
Increase per share attributable to new public investors........ 1.11
-----
Pro forma net tangible book value per share after offering..... 3.38
-----
Dilution per share to new public investors..................... $5.62
=====
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1999,
after giving effect to a one for two reverse stock split of all the outstanding
common stock and preferred stock, the sale of $20.0 million of preferred stock,
the issuance of preferred stock and warrants in connection with the NBC and
Hearst agreements and the conversion of all outstanding preferred stock into
common stock, the number of shares of common stock purchased from us, the total
price paid, and the average price per share paid by the existing stockholders
and new public investors, after deducting estimated underwriting discounts and
commissions and estimated offering expenses to be paid by us, at an assumed
initial public offering price of $9.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 19,175,763 81.0% $39,314,000 51.8% $2.05
New public investors... 4,500,000 19.0 36,565,000 48.2 8.13
---------- ----- ----------- -----
Total................ 23,675,763 100.0% $75,879,000 100.0%
========== ===== =========== =====
</TABLE>
The above discussion assumes no exercise of outstanding options or warrants.
You will experience additional dilution in the event these warrants or options
are exercised.
22
<PAGE>
Selected Financial Data
(in thousands, except per share data)
The following selected financial data are qualified by reference to, and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto included elsewhere in this prospectus. The selected balance sheet
data as of December 31, 1996, 1997 and 1998 and selected statement of
operations data for the period from March 29, 1996 (inception) through December
31, 1996, and the years ended December 31, 1997 and 1998 have been derived from
our audited financial statements and the notes thereto included elsewhere in
this prospectus. The statement of operations data for each of the three-month
periods ended March 31, 1998 and 1999, and the balance sheet data at March 31,
1999, are derived from our unaudited interim financial statements included
elsewhere in this prospectus. In management's opinion, the unaudited financial
statements have been prepared on substantially the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods.
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months ended
(Inception) to December 31, March 31,
December 31, ----------------- --------------------
1996 1997 1998 1998 1999
-------------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues:
Business services..... $ -- $ 25 $ 522 $ 60 $ 357
Advertising and
sponsorships......... 14 183 931 65 623
------- ------- -------- --------- ---------
Total revenues...... 14 208 1,453 125 980
Operating expenses:
Product development
and programming...... 771 3,472 5,383 1,175 2,224
Sales and marketing... 252 2,492 6,668 476 3,425
General and
administrative....... 335 974 1,804 336 974
Noncash advertising
and promotional
charges.............. -- -- 2,890 1,039 1,410
------- ------- -------- --------- ---------
Total operating
expenses........... 1,358 6,938 16,745 3,026 8,033
------- ------- -------- --------- ---------
Loss from
operations......... (1,344) (6,730) (15,292) (2,901) (7,053)
Interest income
(expense), net......... 36 339 (367) 10 154
------- ------- -------- --------- ---------
Net loss............ $(1,308) $(6,391) $(15,659) $ (2,891) $ (6,899)
Accretion of redeemable
convertible preferred
stock and warrants..... 8 38 558 20 72
------- ------- -------- --------- ---------
Net loss applicable
to common
stockholders....... $(1,316) $(6,429) $(16,217) $ (2,911) $ (6,971)
======= ======= ======== ========= =========
Net loss per share:
Basic and diluted..... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90)
Weighted average
shares............... 2,679 3,068 3,295 3,332 3,661
Pro forma net loss per
share:
Basic and diluted..... $ (1.66) $ (0.47)
Weighted average
shares............... 9,762 14,741
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
-------------------------- ---------------
1996 1997 1998 1999
------- ------- -------- ---------------
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and short-
term investments................. $ 8,930 $ 2,055 $ 14,437 $ 9,224
Working capital................... 8,651 1,844 13,493 7,768
Total assets...................... 9,062 2,811 18,490 14,572
Long-term obligations, net of
current portion.................. 273 237
Redeemable convertible preferred
stock and warrants............... 10,042 10,081 38,973 39,979
Total stockholders' deficit....... (1,270) (7,669) (22,463) (28,359)
</TABLE>
See Note 2 of Notes to Financial Statements for information concerning the
calculation of shares used in computing net loss per share. The pro forma net
loss per share data reflects reflects our sale in April 1999 of additional
preferred stock for aggregate proceeds of $20.0 million, our issuance of
preferred stock and warrants in connection with the NBC and Hearst agreements
in April 1999, and the automatic conversion of all outstanding shares of our
redeemable convertible preferred stock into shares of our common stock.
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section contains forward-looking statements. The outcome of the events
described in these forward-looking statements is subject to factors out of our
control. You should not rely on these forward-looking statements. Our actual
results could differ materially from those discussed in the forward-looking
statements contained in this section.
Overview
We provide online communities and interactive services for businesses and
consumers. From inception through March 1999, our operating activities have
primarily been focused on:
. developing the quality environment of our services;
. expanding the audience and usage of our services;
. establishing operating relationships with partners;
. building sales momentum and developing programs and content to market the
Talk City brand name and attract users to our sites;
. developing a comprehensive computer software and hardware infrastructure;
. recruiting personnel; and
. raising capital.
To date, substantially all of our revenues have been derived from the sale of
our business services, advertising and sponsorships. Our business services
include designing customized communities, producing online events, conducting
online market research and facilitating online meetings. These services help
businesses develop and expand online relationships with customers, suppliers
and employees. Revenues derived from business services are recognized ratably
over the term of the contract period, provided that the collection of the
receivable is probable.
Advertising and sponsorship revenues are derived from two sources.
Advertising revenues generally come from short-term banner advertisement
contracts. Sponsorship revenues come from contracts under which we offer a
combination of custom programming, prominent logo placement, other onsite
promotions and additional banner ads. Our advertising and sponsorship clients
enter into short-term agreements pursuant to which they generally receive a
guaranteed number of advertising impressions on our site. Advertising and
sponsorship revenues are recognized in the period in which the advertisement is
displayed or the sponsorship event is run, provided that no significant
obligations remain, at the lesser of the ratio of impressions delivered over
total guaranteed impressions or on a straight-line basis over the term of the
contract. In some cases, where we contract with sales representative firms to
sell advertising revenues, we recognize revenues net of the commissions paid.
Operating expenses consist primarily of product development and programming,
sales and marketing, general and administrative and interest expenses. Product
development and programming expenses consist primarily of salaries, payroll
taxes and benefits and expenditures related to editorial content, community
management and support personnel, server hosting costs and software development
and operations expenses. Sales and marketing expenses consist primarily of
advertising
24
<PAGE>
and promotion costs, salaries, commissions and other related costs of internal
sales and marketing personnel and program expenses, public relations costs and
other marketing expenses. General and administrative expenses consist of
salaries, payroll taxes and benefits and related costs for general corporate
functions, including executive management, finance, facilities, legal and fees
for other professional services.
Sales and marketing expenses exclude noncash advertising and promotional
charges related to our advertising on the NBC television network and in
magazines owned by Hearst. These advertising activities are paid for through
noncash in-kind investments. This in-kind program includes $7.2 million of
television commercials and print ads valued at rates discounted from the rate
card to be incurred from 1998 through 2001. After March 31, 1999, noncash
charges of $14.3 million will be charged to operations as the related
advertising is run or promotional services are received. We expect that $8.9
million of this $14.3 million will be charged to operations during the three
months ending June 30, 1999. These amounts were determined based on the fair
value of our common stock and warrants exchanged for the services received. See
Note 3 of the notes to our financial statements.
We incurred losses of $1.3 million in 1996, $6.4 million in 1997, $15.7
million in 1998 and $6.9 million for the three months ended March 31, 1999.
These losses include noncash advertising and promotional charges of $4.3
million through March 31, 1999. At March 31, 1999, we had an accumulated
deficit of $30.3 million. We anticipate that we will incur additional operating
losses for the foreseeable future.
Results of Operations
Three Months Ended March 31, 1999 and 1998
Revenues. Total revenues increased to $980,000 for the three months ended
March 31, 1999 from $125,000 for the three months ended March 31, 1998.
Business services revenues increased to $357,000, or 36% of total revenues for
the three months ended March 31, 1999, from $60,000, or 48% of total revenues,
for the three months ended March 31, 1998. Advertising and sponsorship revenues
increased to $623,000, or 64% of total revenues, for the three months ended
March 31, 1999 from $65,000, or 52% of total revenues, for the three months
ended March 31, 1998. The increases were primarily due to increased sales from
the expansion of our sales force. These increases in personnel resulted in
increases in the number of business clients, projects, advertisers and the
amounts spent per advertiser, as well as increases in our user traffic, which
increased from 1.5 million unique visitors for the one month ended March 31,
1998 to 2.6 million unique visitors for the one month ended March 31, 1999, and
expansion of our consumer and business services offerings.
Operating Expenses:
Product Development and Programming. Product development and programming
expenses increased to $2.2 million, or 227% of total revenues, for the three
months ended March 31, 1999 from $1.2 million, or 940% of total revenues, for
the three months ended March 31, 1998. The increase was primarily attributable
to additional personnel-related costs of approximately $540,000 and an increase
in independent contractor costs of $310,000 associated with the increased
number of supervised chats we conducted and the enhancement of the
functionality of our Web sites.
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<PAGE>
Sales and Marketing. Sales and marketing expenses increased to $3.4 million,
or 349% of total revenues, for the three months ended March 31, 1999 from
$476,000, or 381% of total revenues, for the three months ended March 31, 1998.
The increase in sales and marketing expenses was primarily attributable to an
increase in sales personnel and commission-related costs of approximately
$470,000 and an increase of approximately $2.2 million in expenses associated
with the development and implementation of our branding, promotion and
marketing campaigns. We expect that sales and marketing expenses will increase
for the foreseeable future as we increase expenditures for branding, promotion
and marketing, expand our internal sales force and hire additional marketing
personnel.
General and Administrative. General and administrative expenses increased to
$974,000, or 99% of total revenues, for the three months ended March 31, 1999
from $336,000, or 269% of total revenues, for the three months ended March 31,
1998. The increase was primarily due to compensation expense of approximately
$169,000 related to the issuance of stock options and recruiting costs of
approximately $180,000. In addition, we incurred an increase in accounting and
legal fees of $130,000 and an increase in facilities expenses of $100,000 in
order to support the growth of our business. We expect general and
administrative expenses will increase in the future as we hire additional
personnel and incur additional costs related to the growth of our business and
operations as a public company. In addition, we expect to expand our facilities
and incur associated expenses to support our anticipated growth.
Noncash Advertising and Promotional Charges. We incurred charges of $1.4
million, or 143% of total revenues, for the three months ended March 31, 1999
and $1.0 million, or 831% of total revenues, for the three months ended March
31, 1998 for noncash expenses associated with advertising and operating
agreements with two of our media partners.
Interest Income (Expense), Net. Interest income (expense), net includes
income from our cash and investments and expenses related to our equipment
financing obligations. Interest income increased to $154,000, or 16% of total
revenues, for the three months ended March 31, 1999 from $10,000, or 8% of
total revenues, for the three months ended March 31, 1998. The increase was
primarily due to a higher average investment balance during the three months
ended March 31, 1999.
Periods Ended December 31, 1998, 1997 and 1996
Revenues. Total revenues were $1.5 million in 1998, $208,000 in 1997 and
$14,000 in 1996. Business services revenues were $522,000, or 36% of total
revenues, in 1998 and $25,000, or 12% of total revenues, in 1997. Advertising
and sponsorship revenues were $931,000, or 64% of total revenues, in 1998,
$183,000, or 88% of total revenues, in 1997 and $14,000, or 100% of total
revenues, in 1996. The increases were primarily due to increased sales from the
expansion of our sales force, which resulted in increases in the number of
business clients, projects, advertisers and amounts spent per advertiser, as
well as increases in our user volume and expansion of our consumer and business
services offerings.
Operating Expenses:
Product Development and Programming. Product development and programming
expenses were $5.4 million, or 370% of total revenues, in 1998, $3.5 million,
or 1,669% of total revenues, in 1997 and $771,000, or 5,507% of total revenues,
in 1996. In our first year of operations, we were
26
<PAGE>
building our infrastructure and did not begin to incur substantial expenses
until 1997. The increase in absolute dollars in product development and
programming from 1997 to 1998 was primarily attributable to an increase in
personnel and recruiting-related costs of $700,000 and an increase in chat
hosting and server-related costs of $1.1 million associated with the rapid
growth in user volume from our supervised chats and enhancements of
functionality to our Web sites. Product development expenses as a percentage of
total revenues decreased due to growth in total revenues.
Sales and Marketing. Sales and marketing expenses were $6.7 million, or 458%
of total revenues, in 1998, $2.5 million, or 1,198% of total revenues, in 1997
and $252,000, or 1,800% of total revenues, in 1996. In our first year of
operations, we did not dedicate significant resources to sales and marketing.
The increase in sales and marketing expenses from 1997 to 1998 was primarily
attributable to an increase of approximately $2.5 million in our online and
print advertising, public relations and other promotional expenditures and an
increase in personnel and recruiting-related expenses of $825,000 as a result
of implementing our sales and marketing strategy.
General and Administrative. General and administrative expenses were $1.8
million, or 124% of total revenues, in 1998, $974,000, or 468% of total
revenues, in 1997 and $335,000, or 2,393% of total revenues, in 1996. The
increase in general and administrative expenses in 1998 was primarily due to
increases in personnel and professional services, travel and facilities-related
expenses to support the growth of our operations. General and administrative
expenses decreased as a percentage of revenues in 1997 due to of the growth in
total revenues.
Noncash Advertising and Promotional Charges. In 1998, we charged $2.9
million, or 198% of total revenues, to operations, representing noncash
expenses associated with advertising and operating agreements with various
media partners and investors.
Interest Income (Expense), Net. Net interest expense was $367,000, or 25% of
total revenues, in 1998 and net interest income was $339,000, or 163% of total
revenues, in 1997 and $36,000, or 257% of total revenues, in 1996. We incurred
interest expense in 1998 as a result of our loan financing in 1998. Interest
income increased in 1997 compared to 1996 due to higher cash equivalent and
investment balances as a result of proceeds received from the sale of preferred
stock in the fourth quarter of 1996.
Income Taxes. Management has established a full valuation allowance against
its net deferred tax assets because it does not expect sufficient taxable
income to be generated during the 15-year carryforward period.
Quarterly Results of Operations
The following table presents certain statement of operations data for our
five most recent quarters ended March 31, 1999. In management's opinion, this
unaudited information has been prepared on the same basis as the audited annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the unaudited
information for the quarters presented. This information should be read in
conjunction with our
27
<PAGE>
financial statements, including the notes thereto, included elsewhere herein.
The results of operations for any quarter are not necessarily indicative of
results that may be expected for any future periods.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
Mar. June Sept. Dec. Mar.
31, 30, 30, 31, 31,
1998 1998 1998 1998 1999
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Business services.............. $ 60 $ 66 $ 167 $ 229 $ 357
Advertising and sponsorships... 65 202 231 433 623
------- ------- ------- ------- -------
Total revenues............... 125 268 398 662 980
Operating expenses:
Product development and
programming................... 1,175 1,298 1,268 1,642 2,224
Sales and marketing............ 476 697 1,983 3,512 3,425
General and administrative..... 336 338 467 663 974
Noncash advertising and
promotional charges........... 1,039 118 1,411 322 1,410
------- ------- ------- ------- -------
Total operating expenses..... 3,026 2,451 5,129 6,139 8,033
------- ------- ------- ------- -------
Loss from operations......... (2,901) (2,183) (4,731) (5,477) (7,053)
Interest income (expense), net... 10 (251) (280) 154 154
------- ------- ------- ------- -------
Net loss..................... (2,891) (2,434) (5,011) (5,323) (6,899)
Accretion of redeemable
convertible preferred stock and
warrants........................ 20 20 478 40 72
Net loss applicable to common
stockholders................ $(2,911) $(2,454) $(5,489) $(5,363) $(6,971)
======= ======= ======= ======= =======
</TABLE>
Our revenues have increased in all quarters presented as a result of
increased sales from the expansion of our sales force which resulted in
increases in the number of business clients, projects, advertisers and amounts
spent per advertiser, as well as increases in our user traffic and expansion of
our consumer and business services offerings. Seasonality may significantly
affect our revenues during the first and third quarters as advertisers and
business clients historically spend less during these periods. Because Internet
commerce, business services and advertising are emerging markets, additional
seasonal and other patterns may develop in the future as the market matures.
Any seasonality is likely to result in quarterly fluctuations in our operating
results, which could harm our business. Our operating results also may
fluctuate significantly in the future as a result of a variety of other
factors, many of which are outside of our control. For detailed information
regarding these factors, please see "Risk Factors--Fluctuations in our
quarterly operating results may harm our stock price."
Liquidity and Capital Resources
Since our inception in March 1996, we have financed our operations primarily
through the private placement of our preferred stock and, to a lesser extent,
through equipment financing. As of March 31, 1999, we had $3.5 million in cash
and cash equivalents and $5.7 million in short-term investments. Net cash
provided by financing activities was $10.1 million in 1996 and $24.2 million in
1998, and was primarily attributable to net proceeds from the issuance of
stock. In April 1999, we completed a private placement of preferred stock with
aggregate gross proceeds of $20.0 million.
28
<PAGE>
Net cash used in operating activities was $1.0 million in 1996, $6.3 million
in 1997, $11.0 million in 1998 and $4.6 million for the quarter ended March 31,
1999. Cash used in operating activities in each of these periods was primarily
the result of net operating losses and increases in accounts receivable,
partially offset by increases in accrued expenses and accounts payable.
Net cash used in investing activities was $137,000 for the inception period
in 1996, $572,000 in 1997, $6.6 million in 1998 and $535,000 for the three
months ended March 31, 1999. Cash used in investing activities in each period
was primarily related to purchases of property and equipment.
As of March 31, 1999, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments
for capital expenditures, we anticipate a substantial increase in our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel.
In May 1998, we obtained an equipment line of credit with a financial
institution in the amount of $2.0 million. This line of credit is secured by
our fixed assets and has a three-year term that expires in May 2001. As of
March 31, 1999, the amount outstanding under this line of credit was $367,000.
This amount is due in monthly installments through May 2001.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to our community network,
marketing and selling our services, our brand promotions and other factors. We
have experienced substantial increases in our expenditures since our inception
consistent with growth in our operations and staffing, and we anticipate that
our expenditures will continue to increase for the foreseeable future.
Additionally, we will continue to evaluate possible acquisitions of or
investments in complementary businesses, technologies, services or products and
plan to expand our sales and marketing programs. We currently believe that our
available cash and cash equivalents combined with the net proceeds from this
offering will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next 18 months. We may need to raise
additional funds, however, in order to fund more rapid expansion, including
significant increases in personnel and office facilities; to develop new or
enhance existing services or products; to respond to competitive pressures; or
to acquire or invest in complementary businesses, technologies, services or
products. In addition, in order to meet our long term liquidity needs, we may
need to raise additional funds, establish a credit facility or seek other
financing arrangements. Additional funding may not be available on favorable
terms or at all.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software development or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. We do not expect the adoption of this standard to
have a material effect on our capitalization policy.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments,
29
<PAGE>
including derivative instruments embedded in other contracts, collectively
referred to as derivatives, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. This statement does not apply to us as we currently do not have any
derivative instruments or hedging activities.
Disclosures About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure.
We do not have any foreign currency hedging or other derivative financial
instruments.
Year 2000 Compliance
We may be exposed to a loss of revenues and our operating expenses could
increase if the systems on which we are dependent to conduct our operations are
not year 2000 compliant. Our potential areas of exposure include products
purchased from third parties, information technology including computers and
software, and non-information technology including telephone systems and other
equipment used internally. The reasonably likely worst case scenario for year
2000 issues would be if a significant defect exists in key hardware or software
and if a solution for such a problem were not immediately available. If a
problem is detected in these subsystems during our year 2000 compliance testing
process, these components will need to be revised or replaced.
We do not currently have a contingency plan to deal with the worst-case
scenario that might occur if technologies we are dependent upon are not year
2000 compliant and fail to operate effectively after the year 2000. We intend
to develop a plan for this scenario upon the completion of our compliance
assessment plan. This contingency plan is expected to be completed by the third
quarter of 1999.
All areas that are vital to our operations are being tested and validated for
year 2000 compliance. We expect to complete our year 2000 compliance assessment
plan in the second quarter of 1999 and our compliance testing and related
documentation by the end of the third quarter. Until our assessment is
completed we will not be able to evaluate whether our systems will need to be
revised or replaced, or the cost involved. We have contacted all our major
third party vendors. Of these vendors, 94% have replied to us in writing. Of
the vendors that have replied, 70% are representing that they are year 2000
compliant, 25% are in the process of fixing any known year 2000 problems or
have already identified specific patches available that we will need to install
and verify and 5% are still assessing their year 2000 readiness. To the extent
that vendors fail to provide certification that they are year 2000 compliant,
we will seek to terminate and replace those relationships.
We do not expect to spend more than $100,000 to assess and remediate the year
2000 problem based on the size of our operations, the percentage of our vendors
that are standard to our industry and the lack of dependency on older legacy
software in our production systems.
30
<PAGE>
In the event that our production and operational facilities that support our
Web sites are not year 2000 compliant, portions of our Web sites may become
inaccessible. A prolonged disruption in our operations could cause our business
clients and partners to stop doing business with us. Our review of our systems
has shown that there is no single application that would make our Web sites
totally unavailable and we believe that we can quickly address any difficulties
that may arise. In the event that our Web-hosting facilities are not year 2000
compliant, our Web sites would be unavailable and we would not be able to
deliver services to our users.
If our present efforts to address the year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with whom we
conduct business do not successfully address such issues, our business could be
harmed.
31
<PAGE>
Business
This section contains forward-looking statements. The outcome of the events
described in these forward-looking statements is subject to factors out of our
control. You should not rely on these forward-looking statements. Our actual
results could differ materially from those discussed in the forward-looking
statements contained in this section.
Overview
We provide online communities and interactive services for businesses and
consumers. We offer businesses a wide range of services to help them develop
and expand online relationships with customers, suppliers and employees. These
services include designing fully integrated, customized communities, producing
online events, conducting online market research and facilitating online
meetings. For consumers, we operate a network of online communities located at
www.talkcity.com. Our network includes 20 topical categories, over 50 themed
communities, 50 co-branded partner communities and thousands of user generated
communities. These communities offer services such as moderated chat, home
pages, special event production, message boards and online event guides. Based
on the average minutes spent per user per day on community sites, we are one of
the leading community sites on the Internet.
We have established partnerships across multiple industries and media forms,
including partnerships with major media companies, Internet content companies
and Internet service providers. We work with our partners to produce and market
community services that leverage our partners' content, brand or customer
relationships. By integrating these co-branded services into our community
network, we enjoy exceptional distribution, content and marketing leverage.
Some of our partners include Cox Interactive Media, Hearst, NBC, WebTV Network,
@Home and AT&T WorldNet.
Our community network has achieved critical mass in terms of traffic,
registered users and the loyalty of our users. In March 1999, we had
approximately 2.6 million unique visitors according to I/PRO. These users
generated over 6.6 million hours of activity on our www.talkcity.com site
during March 1999. During our peak periods, which tend to be early evening
hours, we have as many as 18,000 users simultaneously chatting or engaging in
other interactive activities. As of March 31, 1999, we had over 2 million user
registrations and, during the quarter ended March 31, 1999, we averaged
approximately 200,000 new registrations per month. We believe the strong
loyalty of our users and engaging nature of our programming are reflected by
the significant amount of time that users spend on our site. Our users spend,
on average, approximately 2.5 hours per month on our site.
We began providing online community services in April 1996 as LiveWorld
Productions, Inc. and changed our name to TalkCity, Inc. in August 1998. Since
April 1996, our operating activities have been focused on expanding our
audience, establishing relationships with our partners, developing programs and
content and building our infrastructure.
Industry Background
The Continuing Growth and Evolution of the Internet
The Internet is an increasingly significant global communications medium,
enabling millions of people to directly interact, share information and conduct
business electronically. International Data Corporation estimates that the
number of Web users worldwide will increase from 142 million at the end of 1998
to more than 500 million by the year 2003. As Internet use becomes easier and
more
32
<PAGE>
widespread, users are shifting from an early adopter, computer-oriented
audience to a more mainstream consumer audience. Jupiter Communications
estimates that the number of Internet connected households in the United States
will grow from approximately 29 million at the end of 1998 to approximately 57
million by the end of 2002.
The Internet also provides businesses and advertisers with an attractive
means of selling and marketing products and services. According to
International Data Corporation, worldwide consumer commerce revenue on the
Internet is expected to increase from $14.9 billion at the end of 1998 to more
than $177 billion in 2003. As the Internet audience grows and the demographics
of the Web continue to evolve toward mainstream consumers, advertisers are also
expected to significantly increase Internet spending. Jupiter Communications
estimates that the amount of advertising dollars spent on the Internet will
increase from approximately $1.9 billion in 1998 to approximately $7.7 billion
by 2002, a compound annual growth rate of 42%.
The Increasing Importance of Online Communities
In addition to changing the nature of advertising and commercial
transactions, the Internet has also enabled the formation of online
communities. An online community is a group of people who interact via the
Internet with each other around common areas of interest. Online communities
facilitate this interaction by integrating published content, commerce
capabilities and communication resources, such as live events, message boards,
chat rooms, instant messaging, email and homepages.
Companies with strong brands, loyal customers and relevant content are
particularly well-positioned to organize online communities for their
customers. The more passionate a company's customers are about their common
interest, whether it be music, children, a profession or a favorite television
show, the greater the opportunity for that company to migrate its customers
into a robust online community. For example, a media company with a popular
television show can earn the gratitude of its fans by organizing an online
community in which fans can talk about the show, attend live chat events with
the stars, read about missed episodes and buy licensed merchandise at a
discount. We believe the benefits of online communities extend to businesses,
consumers and advertisers.
Online communities represent a significant opportunity for businesses to
deepen their relationship with existing customers or expand their markets by
doing the following:
. reducing customer acquisition, education and support costs;
. increasing customer satisfaction, loyalty and retention;
. capitalizing on the propensity of customers to buy their products or
services;
. enhancing businesses' ability to target customers and understand their
individual needs;
. reducing fixed capital costs;
. broadening geographic reach; and
. providing an opportunity to minimize the use of middlemen such as
retailers, wholesalers, distributors and brokers.
Online communities can also provide significant benefits to consumers, such
as:
. satisfying consumers' basic social need for communication in a convenient
manner that is not limited by the same time and geographic constraints;
33
<PAGE>
. serving as a venue for group meetings and events;
. enabling people to interact on focused topics of interest;
. allowing consumers to obtain increased product and services information
while protecting their privacy; and
. aggregating consumer buying power and helping them to obtain lower prices
from vendors.
Finally, online communities represent an increasingly attractive opportunity
for advertisers because their participants:
. can be segmented and targeted by their membership profiles and by the
discussion topics they select;
. have favorable usage patterns characterized by extended and frequent
visits to the site; and
. are loyal to their online community and associated brands, products and
services.
Shortcomings of Existing Online Communities
To date, many businesses, consumers and advertisers have been frustrated in
their attempts to capitalize on the benefits of online communities.
Despite the compelling benefits of online communities, many businesses find
it difficult to migrate their traditional customer bases into online
communities. First, businesses have difficulty initially attracting a critical
mass of users to the online community and often compete for consumers with
larger, more established Web sites. Second, many businesses lack the capability
to build a scalable technology platform to provide a range of interactive
services and support an online community and do not wish to incur the
substantial costs of developing this capability. Third, businesses often are
unable to hire and retain employees with the specialized skills required to
produce online events, host online discussions, manage user interests and
profiles and execute the many other tasks associated with providing interactive
services or effectively managing an online community.
Many mainstream consumers find existing community sites unsatisfactory.
First, many community sites lack a friendly and welcoming atmosphere. Second,
chat rooms on many existing community sites sometimes include participants who
behave in obnoxious or inappropriate ways, with no practical recourse for users
to object and stop such behavior. As a result, mainstream consumers,
particularly parents of young children, are often reluctant to participate or
allow their children to participate in the community. Third, many community
sites lack structured programming, which makes it difficult for newcomers to
find community programming that meets their needs and desires.
While advertisers have begun to promote their products on community sites,
several factors have limited their use of community sites as a marketing
vehicle. Advertisers are concerned that consumers might associate the
advertisers' brand with inappropriate behavior that may sometimes occur within
community Web sites. In addition, some Internet programming is so generic that
it is difficult for advertisers to focus on their targeted audiences.
The Talk City Solution
We have created a network of award-winning online communities and developed a
portfolio of interactive services that meet the needs of businesses, consumers,
advertisers and partners. Key elements of our solution include the following:
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Online Interactive Services for Businesses. We provide businesses with the
tools, resources and infrastructure required to provide businesses Internet
community-based marketing, sales and support solutions. Our business services
range from online events, market research and online meetings to fully
integrated, customized communities. Our business services offer several key
advantages. First, our services allow businesses to communicate, interact and
build relationships with their customers. Second, our services help businesses
learn more about their customers through focus groups, market research and
online polls. Third, our interactive services provide an easily deployed and
cost-effective solution enabling our business clients to leverage our
technology infrastructure. Fourth, our experienced moderators enable businesses
to direct the flow of interaction and our trained city standards advisors help
to manage the environment in which businesses' brands and products are
discussed. Finally, our critical mass of users provides a foundation upon which
our business clients can build their own audience.
Clean Well Lighted Environment. We have structured our community as a clean
well lighted environment that is attractive to businesses, users, partners and
advertisers. By "clean and well lighted," we mean that our site is family-
oriented, welcoming and friendly. We strive to maintain the family-oriented
nature of our service by enforcing a set of published behavior standards. These
standards are maintained by our trained city standards advisors. These city
standards advisors can be called upon at any time by our users to resolve
issues relating to standards violations. The friendly tone of our service is
further maintained by our network of approximately 2,000 community leaders and
moderators who personify the friendly culture and serve as role models for all
users.
Extensive Community Network. We have created an extensive network of
community sites which spans multiple industries and media forms and provides us
with exceptional distribution and marketing leverage. The Talk City community
consists of three types of partnerships: major media, distribution and Internet
content. Our major media partners, consisting of Cox Interactive Media, Hearst
and NBC, provide us with access to a vast majority of U.S. households through a
combination of national, local and cable broadcast television, radio,
newspapers, magazines and Internet properties. We derive substantial
distribution leverage and access to a growing audience through our distribution
partners, such as @Home and WebTV Network. Our Internet content partners, such
as NetNoir and Hispanic Online, bring audiences of shared interests or
demographic groups into our community. In addition, our Chat@TalkCity program
includes over 77,000 registered Internet sites and individuals. This extensive
community provides us with one of the largest distributed and integrated
networks of community services on the Internet.
Structured and Moderated Programming. A key element of our programming is our
network of approximately 2,000 trained community leaders and moderators who
work together to maintain and enhance our culture. These leaders and moderators
facilitate interaction in our communities by drawing users into the
conversation, encouraging them to express their ideas or to interact with
celebrity guests, and provide an experience that makes our users want to stay
longer and return more frequently to our community. To make newcomers feel
welcome, our moderators send "how to chat" messages, hold special "welcome to
Talk City" chats for new users and can be called upon at any time to answer
questions. They also direct discussions in a manner consistent with the quality
programming requirements of our business clients and partners. Our trained
community leaders and moderators manage over 75,000 supervised chats each month
and oversee the services offered within our community including chats, message
boards, home pages and user content.
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Critical Mass. Our community network has achieved critical mass in terms of
traffic, registered users and the loyalty of our users. In March 1999, we had
approximately 2.6 million unique visitors according to I/PRO. These users
generated over 6.6 million hours of activity on our www.talkcity.com site
during March 1999 according to I/PRO. During our peak periods, which tend to be
early evening hours, we have as many as 18,000 users simultaneously chatting or
engaging in other interactive activities according to I/PRO. As of March 31,
1999, we had over 2 million user registrations and, during the quarter ended
March 31, 1999, we averaged approximately 200,000 new registrations per month.
We believe the strong loyalty of our users and engaging nature of our
programming are reflected by the significant amount of time that users spend on
our site. Our users spend, on average, approximately 2.5 hours per month on our
site according to I/PRO. We believe our critical mass provides our users with a
sense of excitement, camaraderie and activity. Moreover, business clients and
partners who join our community network use our core audience as a foundation
upon which to build their own audience.
Through our community network, we believe our business services and online
community network are able to provide significant benefits to businesses,
consumers and advertisers, as summarized below:
<TABLE>
<CAPTION>
Customers Benefits
- --------- --------
<S> <C>
Businesses . Online community-based marketing, sales and support solutions
. Professional production and moderated environment
. Reduced customer acquisition and maintenance costs
Consumers . Welcoming and friendly culture
. Family-oriented environment
. Variety of interactive programming
Advertisers . Positive, effective branding venue
. Segmented, targetable and mainstream audience
. Loyal, engaged viewers
Partners . Professional production and moderated environment
. Critical mass of traffic and variety of programming
. Co-branding and customization of community services
</TABLE>
Strategy
Our objective is to be the leading Internet provider of high quality online
communities and interactive services for businesses and consumers. Key elements
of our strategy include the following:
Expand Business Services. We intend to increase the revenues we generate from
our business services by:
. aggressively increasing the number of personnel dedicated to selling and
implementing our business services, including personnel with expertise in
specific industries;
. focusing on selling long-term customized communities which integrate a
wide range of our business services;
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. creating specialized templates for targeted communities, such as
communities for employees, customers and suppliers; and
. enhancing the functionality and usability of our business services
products.
Build Brand Awareness. We intend to increase awareness of Talk City's brand
and our commitment to building high quality online communities. We intend to
achieve this goal in a cost-efficient manner by:
. leveraging the broad reach of our partners' traditional media properties.
For example, we are increasing our presence on regional radio,
television, print and online properties owned by Cox Interactive Media
and promoting our Cox co-branded local properties, such as
accessatlanta.com and bayinsider.com. Likewise, Hearst will continue to
publish full-page advertisements promoting our co-branded properties in
magazines such as Good Housekeeping and Cosmopolitan. NBC airs
advertisements on its television network promoting our co-branded
property, www.nbc.talkcity.com.
. expanding our partner ingredient branding program. In this program, we
provide our community services in exchange for featured co-branding of
the Talk City and OnNow logos and brand names. Additionally, we plan to
expand our Chat@TalkCity program, which currently includes over 77,000
registered Web sites and individuals.
Drive Sponsorship and Advertising Revenues. To increase our sponsorship and
advertising sales revenues, we intend to:
. increase the number of our sales personnel and focus their efforts on
longer term, high value sponsorship deals;
. sell more advertisements targeted to demographic groups within our
audience;
. align advertiser offerings more precisely with users' interests; and
. focus on selling integrated sponsorships.
Increase Usage of Consumer Community Services. We intend to significantly
increase the amount of time our users spend on our site and the frequency with
which they return. We plan to accomplish this goal in three ways. First, we
expect to expand professionally developed content and features which are
relevant to our particular themed communities. Second, we intend to add useful
new community tools and services which we believe will be attractive to our
users, such as calendaring which allows users to schedule event and group
activities, display the schedule on our site and notify others, via email,
instant messaging or Web page comment, of the scheduled event or activity,
group home pages and personalization. Finally, we plan to significantly expand
our trained community leader and moderator network. This will support the
growth of our consumer community services as users are more likely to stay
longer and return more frequently to our service if they are welcomed by and
interact with our moderators.
Increase Ecommerce Services. We plan to generate additional ecommerce
revenues by offering new services that capitalize on our users' interest in
social interaction and their distinct usage patterns. Examples of these types
of services include user-to-user auctions, themed shopping events, online
personals and classified ads.
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Expand Depth and Breadth of Our Partner Network. We intend to expand the
depth and breadth of our partner network by:
. adding account executives to help manage and further develop our partner
relationships;
. increasing the number of major media, distribution and Internet content
partners;
. rolling out community services for our major media partners' online
properties; and
. increasing the number of tools and services we offer our partners.
Business Services
We provide businesses with online community-based marketing, sales and
support solutions. Our business services include designing fully integrated
customized communities, producing online events, conducting online market
research and facilitating online meetings. These services help our business
clients develop and expand online relationships with their employees, customers
and suppliers.
Customized Community
Many businesses have the assets needed to build an online community, such as
strong brands, loyal customers and relevant content, but lack the skills to
operate a community effectively. We help these businesses deploy such assets to
build and organize online communities, improving their relationship marketing
and support. Customized communities are tailored to complement a client's
specific products, brands and targeted audience, and typically include
customized sets of one or more of the following:
. chats;
. message boards;
. home pages; and
. surveys and events.
For example, we created a customized community for Kemper to review and
exchange information and ideas on the latest financial products with their fund
managers.
Online Events
We utilize our professional production capabilities and our moderator network
to produce online events for business clients. Businesses use online events to
introduce new products, educate customers, make sales and marketing
presentations and communicate with and train employees. These online events
enable businesses to reach local, national and international audiences through
the Internet with real-time, two-way interaction, combining text chat and
message boards with graphics, audio and visual aids. For example, we produced
an online interactive press conference for Nokia.
Market Research
Our market research services include online focus groups, polls and
quantitative surveys. These services enable business clients to generate new
ideas, receive customer feedback and test product concepts, advertising and Web
sites on a national basis with rapid turnaround. We are able to deliver high
quality focus groups and surveys based upon our ability to deliver the
requisite demographics of participants, the skill of our trained community
leaders and moderators in eliciting meaningful comments from all participants
in the group and our expertise in developing effective survey content.
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We believe that our services produce high quality results for our business
clients on a more cost-effective basis than is generally achievable through
traditional methods. We have developed a specific set of online methodologies
and tools to provide these market research services. Examples of business
clients which use our market research services includes JWT Specialized
Communications, an affiliate of J. Walter Thompson, Kemper and Mattel.
Some of our online market research services are produced in partnership with
NFO Research, one of the leading market research companies in the United
States. NFO contributes its national panel of over 1 million U.S. consumers,
with an average of 100 data points per household, its market research
expertise, presence in the market research industry and national market
research sales force. We contribute our expertise in online focus groups and
surveys, our registered audience base and our national sales force. We jointly
produce focus groups with NFO and share the associated revenues.
Online Meetings
Online meetings allow our business clients to deliver standard presentations,
such as PowerPoint(TM), over the Internet to meetings attended by hundreds of
people. This service enables a business client to conveniently conduct a
meeting with attendees around the world without having to incur the cost of
travel and materials distribution. This service also allows the client to
maintain full real time control and two-way interaction through the use of text
chat, group polling and voting and phone conference calling.
Partner Network
Overview
As of March 31, 1999, our community included 35 corporate partners with whom
we produce co-branded versions of Talk City for their 50 Internet sites. By
building our service as a distributed and integrated community with many
partners, we have created a network model which we believe will continue to
build on its own momentum. Through our partner network, we are able to drive
additional traffic to our sites and promote our brand, utilize our partners'
content and programming expertise and access their personnel and celebrity
talent. Simultaneously, by increasing our usage, brand identity and programming
expertise, there is more incentive for additional partners to join our
community and promote our brand.
With most of our partners, we co-produce a custom link from the partner's
site into a customized view of our entire community. Each partner version of
Talk City is tailored to that particular partner, co-branded with the partner's
brand and co-marketed to promote our joint programming. Partners are given the
flexibility to tailor or promote any elements of our service they want featured
on the joint site. The partner's user base has full access to our service, and
each partner's users have access to the other partners' users. In many cases,
we have a revenue sharing agreement with the partner in which we are generally
responsible for selling advertising for the joint services and the resulting
revenue is shared with the partner, thus providing a financial incentive for
both parties to make the joint services successful. Our partner network
includes three types of partners: major media, distribution and Internet
content. For the quarter ended March 31,1999, none of our partners drove user
volume responsible for more than 1% of our revenues, except WebTV Network which
was responsible for approximately 17% of our revenues for that quarter.
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Major Media Partners
Cox Interactive Media Web sites. In August 1998, we established our
partnership with Cox Interactive Media. We provide our interactive services,
including chat, home page creation capabilities and message boards, for a
number of Cox Interactive Media destinations including the following:
AccessArizona.com GoPBI.com
AccessAtlanta.com GreatOutdoors.com
ActiveDayton.com HamptonRoads.com
Austin360.com OCNow.com
BayInsider.com RealPittsburgh.com
Fastball.com SanDiegoInsider.com
GoBig12.com SECAction.com
GoCarolinas.com The Shopping Channel
The agreement with Cox Interactive Media is for an initial term of three
years with automatic additional two-year terms, with the initial renewal term
at the discretion of Cox, unless either party notifies the other in writing of
its election to have the agreement expire at least 60 days in advance of the
end of the then-current term.
Hearst. In September 1998, we established our partnership with the Hearst New
Media and Technology division of Hearst Communications. We provide interactive
services for the following Hearst-related sites:
. William Morrow Books--We co-produce a weekly chat series called
"BookSpeak" which brings William Morrow authors online to interact with
the HomeArts' audience.
. Victoria Magazine--We provide the chat services for the editors and
readers of Victoria Magazine.
. Lifetime Television--We provide the chat services for Lifetime cable
television programs.
In addition to the above online co-branding and promotion, we receive
discounted advertising in various Hearst magazines. The community services
agreement with Hearst is for an initial three-year term with automatic
additional two-year terms unless either party notifies the other in writing of
its election to have the agreement expire at least 60 days in advance of the
end of the then-current term.
NBC and affiliates. In 1998 and 1999, we entered into various agreements with
NBC and its affiliated companies pursuant to which we provide our interactive
services, on a local and national basis, to the following Web sites operated by
NBC:
. CNBC.com--We facilitate the online interaction and discussion between
CNBC.com's users and personalities on a variety of business related
topics.
. NBC.com--We provide general and featured celebrity chats for NBC daytime
and prime time programming, such as "Just Shoot Me," "Frasier" and "Days
of Our Lives."
. TNBC--We provide our chat service for NBC's teen oriented programming,
including television shows such as "Saved by the Bell" and "Hang Time."
In addition, we co-produce TNBC's "At the Max" chat as well as the weekly
"Best Friends" chat.
. NBC Interactive Neighborhood--We provide the capability to host locally-
oriented chats to several of NBC's 200 local affiliate television
stations.
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In addition, we receive advertising on various NBC television programs. Our
agreement with NBC, which covers CNBC.com, TNBC and NBC.com, is for an initial
three-year term with an automatic extension for a two-year period unless either
party notifies the other in writing of its election to have the agreement
expire at least 60 days in advance of the end of the then-current term. Our
agreement covering NBC Interactive Neighborhood is for a two-year term. The
parties have agreed to negotiate a possible extension of an additional one or
two-year term. Either party may terminate the agreement at any time and for any
reason in its sole discretion by providing the other party with 60 days prior
written notice.
Distribution Partners
Our distribution partners are Internet service providers that direct their
users to Talk City as their primary community offering. Pursuant to the written
agreements with our distribution partners, we share the costs and revenues
associated with promoting and providing the services and attracting the users.
Our distribution partners include @Home, AT&T WorldNet, BellSouth.Net,
Concentric Networks and WebTV Network. These partners enable us to reach a
substantial number of additional users.
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Internet Content Partners
We also provide community services for online Internet content sites. Our
Internet content partners operate a Web service that typically focuses on a
particular topic or subject. They work with us to provide their users with our
community offerings. Our Internet content partners bring audiences of shared
interests or demographic groups into our community. We share the associated
costs of creating content, integrating information on our respective sites and
promoting the services. We include the following within our group of Internet
content partners:
<TABLE>
<CAPTION>
Partner Co-Branded Service
------- ------------------
<C> <S>
@Music................................ A music site for which we provide
always open chat rooms to discuss
numerous music topics
Auto OnRamp........................... An auto site for which we provide chat
on topics such as classic and muscle
cars
Donna Wick Radio Show................. A radio and Internet inspirational
radio show, hosted by Donna Wick, for
which we provide chat rooms for
listeners to chat during live
broadcasts
Hispanic Online....................... An Internet site for the Hispanic
market for which we provide chat and
special events production for featured
guests
Learfield Communications.............. We provide chat rooms for their
Gamecruiser site, the official Internet
broadcast site for 13 of the nations'
top college athletic programs, for
listeners to chat during live
broadcasts
The Lottery Channel................... An Internet site for lottery players
nationwide for which we provide chat
for lottery players to discuss
strategies and share winning stories
NetNoir............................... An Internet site for the African
American market for which we provide
chat and special events production for
featured guests
POV Magazine.......................... A magazine geared towards Gen-Xers
entering the working world for which we
provide chat and special events
production for featured guests
Religions and Spirituality............ We provide our community services for
users to explore world religions,
spiritual traditions and exchange ideas
Fresh Sounds, Inc..................... A music site for which we provide our
community services
Seismic Productions/Lost Worlds....... An Internet guide which provides
virtual tours of the Mayan ruins and
the surface of Mars through the Mars
Pathfinder for which we provide our
community services
Time Warner Books/Little Brown Books.. We provide chat and event hosting for
weekly author chats
Transformations....................... An Internet site geared towards self
help, support and recovery issues for
which we provide our community services
Women Online Worldwide................ An Internet site geared towards
celebrating the spirit of womankind for
which we provide chat on a variety of
women-related topics
Zapa Digital Arts..................... An Internet site which provides our
users with tools and accessories for
home page creation
ZineZone.............................. A personalization site that allows
users to control their view of the Web
for which we provide chat and special
events production for featured guests
</TABLE>
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Chat@TalkCity Program
Our Chat@TalkCity network program enables other Internet sites and
individuals to create a permanent chat room within our community. These chat
rooms can also be embedded directly into the participants' Internet site or
home page, whether the home page is on our service or on another service. The
Chat@TalkCity program provides its participants with the tools to build a chat
room, embed it in their Internet site or home page and make it either a public
chat room, accessible through our service, or a private room. We provide our
Chat@TalkCity participants with instructions on how to operate a chat room and
work within our guidelines, including access to our city standards advisors. As
of March 31, 1999, over 77,000 Internet sites and individuals have registered
online to participate in the Chat@TalkCity program.
Consumer Community Service
We believe that quality community services must be planned and proactively
managed. In order to accomplish this, we provide active role models through our
network of trained community leaders and moderators. In addition, we produce a
variety of programming through our live events, topical categories and themed
communities, all within the established culture, tone and standards of our
community.
Our Moderator Network
A key element of our programming is our network of approximately 2,000
trained community leaders and moderators who work together to enhance our
culture. The moderators range in age from 14 to 77 and are located all over the
United States and in multiple countries around the world. Our moderators
supervise over 75,000 chats per month, as well as our message boards, home
pages and audience content. These leaders and moderators facilitate interaction
in our communities by using proprietary tools to draw users into conversation
and encourage them to express their ideas. Our moderator network is essentially
a community in itself, with a centralized set of goals, guiding principles and
management. Community leaders and moderators become well acquainted with one
another and this camaraderie helps to form a strong foundation of goodwill and
high-spirited commitment.
City Standards Advisors. Our city standards advisors form a separate group
within the moderator network. These individuals are our response-based
standards maintenance team, handling behavior problems, such as profanity or
obscenity, and answering calls from users who believe that standards violations
are occurring in their chat rooms or in one-on-one conversations with other
users. City standards advisors have the power to remove participants from our
actual servers, as opposed to leaders or moderators who can only remove
offenders from the respective chat rooms which they are supervising or
moderating at the time. At least one city standard advisor is on duty on our
service at all times. At peak times, there are typically six city standards
advisors to ensure our clean well-lighted community is maintained.
Recruitment. Our current network of moderators serves as our primary
recruiter for new community leaders and moderators. Our community leaders and
moderators are continually seeking good conversationalists and articulate
participants on our service. They frequently post notices and, in many cases,
approach promising candidates to direct them to a Web site to learn about and
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potentially apply for a community leader or moderator position. This recruiting
provides us with a steady stream of potential new community leaders and
moderators to our training program. There are currently thousands of people on
the waiting list to join our moderator network.
Training and Quality Assurance. Our training consists of online training
sessions and an on-the-job apprenticeship within our community. Candidates
participate in a five session series of two hour classes held in chat rooms.
These training sessions focus on the principles and mechanics of moderating and
the maintaining of our behavior standards. Four teams of three trainers each
run the ongoing training program. Candidates who complete the program are
provided with an ongoing mentor to provide further guidance as necessary. A
quality assurance team systematically reviews the performance of our leaders
and moderators. In addition, most of our themed communities hold regular
meetings to discuss such issues as new chat topics requested by users,
behavioral or cultural challenges or moderator policy revisions.
Volunteers. Most people volunteer as trained community leaders or moderators
because they enjoy being moderators. They like chatting with people and often
have a personality that enjoys helping others, welcoming them and providing a
pleasant context for conversation. They may also enjoy the recognition they
receive in a community leadership position. Often they are passionately
committed to some interest or issue, such as crafts or health, and enjoy being
in a position to share their expertise or interest with others. Volunteers do
not receive any financial compensation.
Compensation. Over 270 of our approximately 2,000 trained community leaders
and moderators are compensated for their services. The remainder are
volunteers. Compensated leaders and moderators sign an independent contractor
agreement with us which includes a full nondisclosure agreement. These
agreements are terminable by either party upon 30 days' prior written notice.
Our compensated trained community leaders and moderators are either paid per
hour or receive a flat fee per month depending upon whether such leaders or
moderators oversee an entire themed community.
Programming
We provide our community with an extensive series of live events, 20 topical
categories and over 50 themed communities as described below.
Live Events. We operate one of the most extensive series of live events on
the Internet, attended by audiences ranging in size from several dozen people
to many thousands. The following are examples of events which we produced or
co-produced with our partners and clients in the first quarter of 1999:
Enrico Colantoni--"Just Shoot Me" Mackenzie Phillips (ZoogDisney)
(NBC.com) Shawn Phillips (@Music)
Golden Globe Awards (NBC.com) Premier of "The 60s" (NBC.com)
Grammy Awards Michael Stipe--REM singer
(Borders.com/Grammy.com) (ZoogDisney)
Jewel (ZoogDisney) Joe Satriani
Greg Louganis--Olympic Diver (Borders.com/Grammy.com)
(Borders.com) Jan Schlichtmann--lawyer in "Civil
Mark McGwire & Starbucks CEO, Howard Action" (ZineZone)
Schultz (Starbucks) Soap Opera Digest Awards (NBC.com)
MickeyMouse (ToonDisney) 3rd Storee (ZoogDisney)
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Topical Categories. Our 20 topical categories and over 50 themed communities
all offer moderated chats, message boards, home pages, special events
production and discussion groups. The topical categories may include
professional editorial content or graphical presentation, or they may be co-
produced with our partners. Our topical categories are organized as follows:
<TABLE>
<S> <C> <C>
Ages: 20s to Seniors Computing and Technology Movies, TV and Radio
Numerous chat rooms ComputerTalk Movie City
based on particular FolksOnline NBC.com
ages MacTalk NBC Interactive
Senior-Citizens New2Internet Neighborhoods
New2TalkCity
Art and Books New2WebTV Music
Art City @Music
Borders.com
Ethnic and Lifestyle
Mystery Place Alternative LifeStyles News and Sports
Hispanic Online News Talk
Auto Latino Chat Sailing Forum
AutoOnRamp NetNoir TCSports
Trefpunt
Business Finance Romance and Social
Business City Center Games City Pub
Fantasy Forum Courtship Corner
Cities and Travel Games Galore Talk City Personals
Canada Space Corps Town Talk
City Down Under
Cox Interactive Media Health and Wellness Spirituality
sites, such as Transformations Jesus Cafe
accessatlanta.com Wellness Forum Religions and
India Spiritualities
Local Home and Family
Travel Forum Animal Forum Teen
EduCenter The InSite
Collectibles and Hobbies FoodTalk Teen Talk
Collectibles Hearst New Media & TNBC MaxChat
Technology sites Youth Online
College Science Visions
College Connection Women
Kids Women Together
KidszKorner Women Online Worldwide
</TABLE>
In addition, our community provides programming in multiple languages,
including English, Filipino, French, German, several dialects of Hindi,
Italian, Spanish and Vietnamese. We believe the global nature of our
programming creates an around-the-clock friendly environment and a diversity of
subject matter which further increases its value and interest to the entire
audience.
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Applications and Features
We offer a wide range of applications and features through which our users
interact and our programming is created. These include:
. chat--primarily text chat;
. audio chat--the user's words are heard aloud by other users;
. avatar--graphical figures or characters on the computer screen are used
to represent the participating users;
. 3D chat--chats take place in a graphical environment in which the
graphics display a three-dimensional view of an environment such as a
room, forest or castle;
. instant messaging--private chats between users;
. buddy lists--user-created list of special friends which notifies the user
and helps the user find these friends when they come on to the service;
. auditoriums--large scale chat events that can handle thousands of users
simultaneously and provide for a more structured question and answer
format than a standard chat room;
. message boards--topical areas of the service in which a user can display
a text message on the screen for others to read;
. home pages--personalized Web sites created by users within our themed
communities;
. polls;
. email;
. search; and
. calendars--features over 3,000 events and activities on our service each
month and serves as an important programming tool for our users.
OnNow
We also operate a second destination site, www.onnow.com, which is a guide to
live events on the Internet. The OnNow service provides users with a guide to
thousands of chats, web casts and other live events on the Internet provided by
hundreds of Internet sites, including www.talkcity.com.
Our OnNow service provides users with quick, easy access to schedules of
events in 54 different categories, organized and searchable by topic, time,
audience type, media and publisher. Each event listing provides a description
of the event, an Internet link directly to the event and a link to any
specialized software that might be required to participate in the event. In
addition, users can receive email reminders for events in which they have
expressed interest.
Established Culture
Our programming and services are offered within our clean well lighted
environment which is focused on positive and respectful behavior between people
and intended to create a friendly and welcoming environment for family-oriented
audiences. As new users come to our service, they participate in the moderated
or supervised areas and see and learn the positive culture and behavior
standards from our trained community leaders and moderators. We believe that
when users have become familiar with the culture of our service, they tend to
maintain that culture even when participating in unmoderated, but supervised,
areas of our community.
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Sales And Marketing
Sales
We concentrate our sales efforts on, and derive our revenues from, our
business services and advertising and sponsorships. Our internal sales force
consisted of 15 sales personnel as of March 31, 1999.
Business Services. Sales of our business services are generated by our
internal sales force, which we began to significantly expand in the second half
of 1998. In addition, through our partnership with NFO Research we develop,
produce and sell our interactive market research services, such as our focus
groups. Our business services are generally part of the client's corporate
strategy and are often incorporated into the client's primary business plan. As
a result, we generally work with the senior management of our business clients
and their agencies who possess broad budget authority rather than media buyers
within the organization. This results in a close strategic working relationship
between us and the client and enhances the prospects for long-term account
relationships and repeat revenues.
Sponsorships and Advertising. We believe our clean well lighted community and
loyal, mainstream audience presents attractive opportunities to our sponsors
and advertisers. Our sales force works with our sponsors and advertisers to
provide them with information on our users' demographics and interests so that
the efforts of our advertising clients are aligned with the topical area or
community of their choice. Sponsorships are designed to support broad marketing
objectives, including brand promotion, awareness, product introductions and the
integration of advertising with content. Our sponsorship and advertising
clients enter into short-term agreements pursuant to which they generally
receive a guaranteed number of impressions. We also utilize a third-party
service to sell advertising on our Web sites.
Marketing
We employ a variety of methods to increase our audience and build brand
recognition and loyalty.
Traditional Marketing. Our traditional marketing programs include a mixture
of television, magazine and newspaper media, direct mail and participation in
and sponsorship of Internet trade shows and advertising associations. Our
advertisements are published in selected magazines owned by Hearst, such as
Cosmopolitan and Good Housekeeping. In addition, we receive advertising on the
NBC television network. Both Hearst and NBC provide us the flexibility to
specifically target advertisements to television shows or magazines attractive
to our users.
The Hearst and NBC advertising is currently paid for through noncash in-kind
investments. In total, this in-kind program includes $7.2 million of television
commercials and print advertisements valued at rates discounted from the rate
card to be incurred from 1998 through 2001. Please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Three months
ended March 31, 1999" and "--Operating Expenses--Noncash Advertising and
Promotional Charges."
Partner Ingredient Branding. Partner ingredient branding describes the
process by which our community network is offered on our partner Web sites in
exchange for featured co-branding of the
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Talk City brand name on the Internet and in traditional media forums, generally
in a less prominent position than our partner's brand name. For example, when
an NBC.com user clicks on "NBC Talk City," the user is instantly presented with
an NBC co-branded view of www.talkcity.com. While this co-branded site focuses
on NBC-specific programming, such as a chat about "Friends," the NBC.com user
has access to our community and programming as well.
Viral Community Growth. To date, the majority of our user base growth has
resulted from word-of-mouth recommendations within our community. We intend to
actively encourage and continue this word-of-mouth endorsement by user
communication through our expanding community leader and moderator network and
by ongoing service enhancements, contests and promotions that encourage our
users to invite others to our community.
Operating Infrastructure
Our operating infrastructure has been designed and implemented to support the
delivery of millions of page views per day. Web pages are generated and
delivered, in response to end-users requests, by any one of over 70 Web and
applications servers. Key attributes of this infrastructure include the ability
to support growth, performance and service availability.
Our servers run on the Sun Solaris and Microsoft NT operating systems and use
Netscape Enterprise, Apache and Microsoft's IIS Web server software. We also
use NetApp file servers for personal home pages and a variety of Web-based
applications software to provide our services. In addition, we contract with
CommTouch, Inc. to provide HTML-based email, One&Only Network to provide
personnels, TelePost to provide online conferencing services, and MyPoints to
provide affinity rewards programs. We have developed a variety of proprietary
software, including tools for event production and community moderating, chat
proxy servers, template systems to support dynamic pages and monitoring and
reporting systems.
We maintain all of our production servers at the Sunnyvale, California
facility of Frontier GlobalCenter. Our operations are dependent upon Frontier
GlobalCenter's ability to protect its systems against damage from fire,
earthquakes, power loss, telecommunications failure, break-ins and other
similar events.
Our data is copied to backup tapes on a nightly basis. We keep all of our
production servers behind firewalls for security purposes and do not allow
outside access, at the operating systems level, except via special secure
channels. Strict password management and physical security measures are
followed. Computer security response team alerts are read, and, where
appropriate, recommended action is taken to address security risks and
vulnerabilities.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. Components of our Web sites have in the past
suffered outages or experienced slower response times because of equipment or
software downtime.
Competition
The market for business services, users and Internet advertising is new and
rapidly evolving, and competition across all these areas is intense and is
expected to increase significantly in the future. With no substantial barriers
to entry, we expect that competition will intensify.
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We believe that the primary competitive factors in creating communities on
the Internet and business services are:
. the degree of quality and structure in the environment;
. functionality;
. brand recognition;
. user affinity and loyalty;
. demographic focus;
. variety of value-added services;
. ease-of-use;
. quality of service and of the production process; and
. reliability and critical mass.
We compete with numerous companies or sites that are primarily focused on
business services, including companies that provide:
. similar services on the Internet, such as broadcast.com for live events
production, Well Engaged for customized communities and many smaller
companies that provide online market research and event services;
. software for businesses to implement business services in-house, such as
Microsoft, IBM/Lotus, Netscape and iChat/Accuity; and
. similar solutions by non-online methods, such as market research firms,
trade show firms and event production firms.
None of these companies is currently dominant in the business services area.
In the consumer community area, we also compete with numerous companies, none
which are currently dominant. These competitors include Delphi, theglobe.com,
GeoCities, Xoom, Homestead.com, WBS.net, Angelfire, Fortune City, iVillage,
Tripod and Third Age. We expect the number of our competitors in this area to
continue to increase as the barriers to entry in the consumer community area
are low.
Other consumer community competitors include:
. community components of portals and search engine sites, Internet access
sites and general purpose online services, such as America Online, the
Microsoft Network, Yahoo!, Excite, Infoseek, Lycos and Earthlink; and
. online event guide sites and the online event guide components of search
engines such as Yahoo! and America Online.
We will likely also face competition in the future from developers of Web
directories, search engine providers, shareware archives, content sites,
commercial online services, sites maintained by Internet service providers and
other entities that establish or attempt to establish communities on the
Internet by developing their own communities or purchasing one of our
competitors.
In addition, we could face competition in the future from traditional media
companies, a number of which, including Disney, CBS, Fox and NBC, have recently
made significant acquisitions of, or investments in, Internet companies.
Further, our competitors and potential competitors may develop interactive
business services or communities that are equal or superior to ours, or that
achieve greater market acceptance than our business services and community.
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We also compete with traditional forms of media such as newspapers,
magazines, radio and television for advertisers and advertising revenues. We
believe that the principal competitive factors in attracting advertisers to our
Web sites include:
. our brand visibility;
. the high usage per user on our sites;
. the amount of traffic on our Web sites;
. the quality of the culture and environment of our Web sites;
. the demographics of our users;
. our ability to offer targeted audiences; and
. the overall cost-effectiveness of the advertising medium we offer.
We believe that the number of Internet companies relying on business
services, Web-based advertising and ecommerce revenues will increase greatly in
the future. Accordingly, we will likely face increased competition, resulting
in increased pricing pressures on our advertising rates which could in turn
harm our business.
Many of our current and potential competitors, including developers of Web
directories and search engines, have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than we do. These 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, companies, advertisers
and third-party content providers. Internet content providers and Internet
service providers, including developers of Web directories, search engines,
sites that offer professional editorial content and commercial online services,
may be perceived by advertisers as having more desirable Web sites for
placement of advertisements.
In addition, many of our current advertising customers and strategic partners
also have established collaborative relationships with certain of our
competitors or potential competitors and other high-traffic Web sites or offer
services that are or might become competitive to our services. As a result, any
of the following could occur:
. we may be unable to increase the number of our users, business clients or
advertisers at historical levels;
. we may be unable to retain our current users, business clients or
advertiser customers;
. competitors may experience greater growth in traffic or business clients
than we do as a result of these relationships which could have the effect
of making their Web sites or services more attractive to advertisers; or
. our strategic partners may sever or elect not to renew their agreements
with us.
We may be unable to compete successfully against current or future
competitors and competitive pressures may cause our business to suffer.
Intellectual Property, Proprietary Rights And Domain Names
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark and copyright law, trade secret protection
and confidentiality and license agreements with our employees, customers,
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independent contractors, partners and others to protect our proprietary rights.
We strategically pursue the registration of trademarks and service marks in the
United States, and have applied for and obtained registration in the United
States for "Talk City" and "LiveWorld." We have also applied for U.S. trademark
registration of "OnNow." Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our services
are made available online.
We have licensed in the past, and expect to license in the future, certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our brand is maintained
by these licensees, licensees may take actions that might harm the value of our
proprietary rights or reputation. The steps taken by us to protect our
proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks and similar proprietary rights. In
addition, other parties may assert claims of infringement of intellectual
property or other proprietary rights against us.
We have been subject to claims and expect to be subject to legal proceedings
and claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by us and our licensees. These claims, even if
without merit, could cause us to expend significant financial and managerial
resources. Further, if these claims are successful, we may be required to
change our trademarks, alter our content and pay financial damages, any of
which could harm our business.
We may be required to obtain licenses from others to refine, develop, market
and deliver new services. We may be unable to obtain any needed license on
commercially reasonable terms or at all and rights granted under any licenses
may not be valid and enforceable.
Employees
As of March 31, 1999, we had a total of 82 employees, all of whom were
located in the United States. Of the total, 52 were engaged in product
development and programming, 21 in sales and marketing and 9 in general and
administrative. None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our relations with our
employees to be good. See "Risk Factors--Our chief executive officer and vice
president of community are critical to our business and they may not remain
with us in the future."
Facilities
Our principal offices currently occupy approximately 14,000 square feet in
Campbell, California under a lease that expires in May 2002. In addition, we
lease approximately 3,000 square feet at an office in New York, New York under
a lease that expires in March 2004. We are currently considering relocating our
principal office facilities to accommodate anticipated future growth.
Legal Proceedings
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings in the ordinary course
of business.
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Management
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of April 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Peter H. Friedman....... 44 President, Chief Executive Officer and Chairman of the Board
Jeffrey Snetiker........ 51 Senior Vice President, Chief Financial and Administrative Officer
Jenna Woodul............ 50 Vice President of Community
Bernard G. Bernstein.... 33 Lead Engineer
Chris N. Christensen.... 38 Vice President of Engineering and Operations
Patricia Griffith....... 47 Vice President of Sales
Christopher J. Escher... 40 Vice President of Marketing
Arwyn Bryant............ 41 Vice President of Product Marketing and Business Operations
Daniel Paul............. 34 Vice President of Business Development
Kenneth A. Bronfin...... 39 Director
Joseph A.
Graziano(a)(b)......... 55 Director
Thomas P.
Hirschfeld(a)(b)....... 36 Director
John Sculley............ 60 Director
Barry M. Weinman(a)(b).. 60 Director
Martin J. Yudkovitz..... 44 Director
</TABLE>
- --------
(a) Member of the Audit Committee.
(b) Member of the Compensation Committee.
Peter H. Friedman has served as our Chairman of the Board, President and
Chief Executive Officer since he co-founded our company in March 1996. From
1984 to February 1996, Mr. Friedman worked at Apple Computer, Inc., where he
served as Vice President and General Manager of Apple's Internet/Online
business unit. In this role, Mr. Friedman oversaw the launch and growth of
eWorld, Apple's consumer online Internet-based service, managed and grew
Apple's AppleLink business services and a series of Internet-based services
such as Salon and Youth Central. Mr. Friedman also held various senior roles in
marketing at Apple. Mr. Friedman received an M.B.A. degree from the Harvard
Business School and a B.A. degree from Brown University.
Jeffrey Snetiker has served as our Senior Vice President, Chief Financial and
Administrative Officer since March 1999. From October 1996 to February 1999,
Mr. Snetiker was Principal Consultant of Executive Business Advisory, a
consulting company. From January 1995 to September 1996, Mr. Snetiker served as
Senior Vice President, Finance and Administration of United Paramount Network,
a television broadcast network. From October 1985 to November 1993, Mr.
Snetiker held various executive positions for Reeves Entertainment, a
television production and distribution company, including Executive Vice
President, Chief Financial and Administrative Officer from January 1990 to
November 1993, Senior Vice President, Finance and Administration from January
1989 to December 1989 and Vice President, Finance and Administration from
October 1985 to December 1988. From January 1983 to September 1985, Mr.
Snetiker was Vice President and Controller of Group W Productions, a subsidiary
of Westinghouse Broadcasting & Cable. Mr. Snetiker received a B.S. degree in
Accounting from C.W. Post College of Long Island University.
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Jenna Woodul has served as our Vice President of Community since she co-
founded our company in March 1996. From January 1993 to March 1996, Ms. Woodul
cultivated the online community for Apple's eWorld, where she directed the
Community Center. Ms. Woodul worked at Apple from 1984 to 1988 in the area of
Apple's business communications service, AppleLink, as a core member of the
team which developed the community-oriented AppleLink Personal Edition, which
later became America Online. Ms. Woodul received an M.A. degree from the
University of New Mexico and a B.A. degree from Vassar College.
Daniel Paul has served as our Vice President of Business Development since
August 1996. From June 1994 to July 1996, Mr. Paul served as Vice President,
New Media, Turner Home Entertainment, a division of Turner Broadcasting
Company. From June 1986 to May 1994, Mr. Paul served in various capacities at
Apple, most recently as Entertainment Industry Evangelist reporting to the
Chairman and CEO a role in which he was responsible for the development of
Apple's market presence in Hollywood. Mr. Paul attended both Boston University
and the University of Colorado.
Kenneth A. Bronfin has served as a director of our company since September
1998. Mr. Bronfin currently serves as Senior Vice President and Deputy Group
Head of Hearst New Media and Technology, the unit of The Hearst Corporation
responsible for the development and investment in Internet-related businesses.
Prior to joining Hearst in June 1996, Mr. Bronfin served as Vice President,
Business Development and General Manager of the NBC Data Network at NBC.
Mr. Bronfin received an M.B.A. degree from the Wharton School at the University
of Pennsylvania and a B.S. degree in Electrical Engineering from the University
of Virginia.
Joseph A. Graziano has served as a director of our company since its
inception in March 1996 and was the Acting Chief Financial Officer from May
1996 until March 1999. From June 1989 to December 1995, Mr. Graziano served as
the Executive Vice President and Chief Financial Officer of Apple and was a
member of its board of directors from June 1993 until October 1995. From May
1987 to June 1989, Mr. Graziano served as Chief Financial Officer of Sun
Microsystems, Inc. and from October 1981 to May 1985, as Chief Financial
Officer of Apple. Mr. Graziano also serves as a director of Pixar and Carrier
Access Corporation. Mr. Graziano received a B.S. degree in accounting from
Merrimack College and is a Certified Public Accountant.
Thomas P. Hirschfeld has served as a director of our company since October
1997. Mr. Hirschfeld has served as a Managing Director of Patricof & Co.
Ventures, Inc., a venture capital company, since April 1999 and was a Principal
from January 1995 to March 1999. From January 1994 to December 1994, he served
as Assistant to the Mayor of New York City. From August 1986 to December 1993,
Mr. Hirschfeld was with Salomon Brothers, an investment banking firm.
Mr. Hirschfeld serves as a director of a number of privately-held companies in
which the limited partnerships managed by Patricof & Co. are investors. He
received an M.A degree from Balliol College, Oxford and an A.B. degree from
Harvard College.
John Sculley has served as a director of our company since July 1996. Since
February 1994, Mr. Sculley has been a partner with his brothers in Sculley
Brothers, a family investment capital firm, that focuses on media enabling
technologies, Internet services and consumer businesses. The Sculleys are
active investors in approximately 20 companies in the Silicon Valley, New York,
Bermuda and Israel. Their Internet service investments include Intralinks, Talk
City, Zapa.com,
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GreenTree, Buy.com and Softvideo. Their consumer companies include Country
Gourmet, Select Comfort, Ranch 1, Frame King and Sirius Thinking Ltd. Mr.
Sculley serves on the board of directors of NFO Worldwide, Inc., an affiliate
of NFO Research, and a number of other private companies.
Barry M. Weinman has served as a director of our company since August 1998.
Since May 1993, he has been a Managing Director of Media Technology Equity
Partners and a General Partner of Media Technology Ventures and AVI Management
Partners, which has been making high tech venture capital investments in the
Silicon Valley since 1980. AVI and its new media fund, Media Technology
Ventures, had approximately $300 million under management as of March 31, 1999.
Mr. Weinman is also on the board of directors of Women.com, Be.Inc, InfoGear
and Quokka Sports. Mr. Weinman received an M.A. degree from London School of
Economics/University of Southern California and a B.S. degree from Clarkson
College of Technology.
Bernard G. Bernstein has served as our Lead Engineer since he co-founded our
company in March 1996. From January 1994 to February 1996, Dr. Bernstein served
as a Senior Scientist/Engineer for Apple in its Electronic Media Lab, a
research lab in the Apple Online Services division. Dr. Bernstein received a
Ph.D. degree in Computer Science from the University of Colorado at Boulder, an
M.S. degree in Computer Science from the University of Colorado at Boulder and
a B.S. degree in Computer Science from the State University of New York at
Albany.
Chris N. Christensen has served as our Vice President of Engineering and
Operations since May 1996. From May 1993 to May 1996, Mr. Christensen served as
the Engineering Manager for Apple's Online Services division. Mr. Christensen
managed the Macintosh and Windows clients for Apple's eWorld online service. He
also wrote the email application for the Newton and worked on the QuickTime
plug-in for Macintosh. Prior to his experience at Apple, Mr. Christensen worked
at Hewlett Packard for five years. Mr. Christensen received an M.E. degree and
a B.S. degree from Rensselaer Polytechnic Institute.
Patricia Griffith has served as our Vice President of Sales since January
1998. From July 1997 to January 1998, Ms. Griffith served as our Director of
Western Sales. Ms. Griffith joined our company from Women.com where she served
as Vice President of Sales from January 1996 to July 1997. At Women.com, Ms.
Griffith was responsible for developing the advertising strategies and programs
that launched a successful advertising model for Women's Wire. From October
1986 to December 1995, Ms. Griffith worked for Harte Hanks Communications, a
marketing company, where she served as Senior Accountant Executive for
Major/National Accounts. Ms. Griffith received a B.A. degree in History and a
B.A. degree in Anthropology from the University of California, Santa Barbara.
Christopher J. Escher has served as our Vice President of Marketing since
August 1997. From February 1997 to August 1997, Mr. Escher served as the
managing director of the Palo Alto, California office of Cunningham
Communication, Inc., a marketing communication firm specializing in high
technology concerns. At Cunningham, Mr. Escher led the Cisco Systems account,
among others. From October 1984 to February 1997, Mr. Escher worked at Apple in
a variety of marketing and communications roles, from Online Services Marketing
Director to Public Relations Director and Creative Director. He culminated his
career at Apple in 1997 as Vice President, Corporate Communications. Mr. Escher
received a B.A. degree in British Studies from Stanford University.
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Arwyn Bryant has served as our Vice President of Product Marketing and
Business Operations since January 1998. From July 1996 to December 1997, Mr.
Bryant served as our Senior Director of Product Marketing. From January 1994 to
June 1996, Mr. Bryant held a variety of positions in the areas of Business
Development, Content Development, International Development and Solution
Marketing in Apple's Online Services division. Mr. Bryant received a B.A.
degree in Business/Economics from Macquarie University in Sydney, Australia.
Martin J. Yudkovitz has served as a director of our company since August
1998. Since December 1995, Mr. Yudkovitz has been the President and Chief
Executive Officer of NBC Multimedia, Inc., a subsidiary of NBC. Prior to this
he served as Senior Vice President, Strategic Development for NBC. From 1992 to
1994, he served as Senior Vice President of Strategic Development at NBC. His
other positions at NBC have included Vice President of Business Affairs for
NBC's 1992 Olympics Unit, First General Counsel and Vice President for Business
Affairs at CNBC and Senior Counsel to NBC's 1988 Seoul Olympics Unit in NBC
Sports. Mr. Yudkovitz joined NBC in January 1984 in the legal department. Mr.
Yudkovitz received a J.D. degree from Columbia University and a B.A. degree
from Rutgers University.
No director has a contractual right to serve as a member of our Board of
Directors.
Classified Board
Immediately following the offering, our board of directors will consist of
seven directors divided into three classes with each class serving for a term
of three years as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- ------
<S> <C> <C>
Class I 2000 Bronfin and Hirschfeld
Class II 2001 Sculley, Yudkovitz and Weinman
Class III 2002 Friedman and Graziano
</TABLE>
At each annual meeting of stockholders, directors will be elected by the
holders of common stock to succeed those directors whose terms are expiring. In
addition, our bylaws provide that the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors. This classification
of the board of directors may have the effect of delaying or preventing changes
in control of our company.
Board Committees
The board of directors has a compensation committee and an audit committee.
The compensation committee, currently comprised of Mr. Hirschfeld, Mr. Graziano
and Mr. Weinman, administers the 1996 stock option plan, the 1999 employee
stock purchase plan and all matters concerning executive compensation and
employment agreements. The audit committee, currently comprised of Mr.
Hirschfeld, Mr. Graziano and Mr. Weinman, approves our independent auditors,
reviews the results and scope of annual audits and other accounting related
services, and evaluates our internal audit and control functions. The
compensation committee was established in November 1996 and the audit committee
was established in December 1996.
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Director Compensation
We currently do not pay compensation to directors for serving in that
capacity, nor do we currently reimburse directors for expenses incurred in
attending board meetings. In May 1996, Mr. Graziano received options to
purchase an aggregate of 350,000 shares of common stock at an exercise price
per share of $0.06. Mr. Sculley received options to purchase 75,000 shares of
common stock in July 1996 and 25,000 shares of common stock in October 1996,
each at an exercise price per share of $0.20. Please see also "Employee Benefit
Plans--Director Option Plan" for a description of options to be granted to
directors.
Compensation Committee Interlocks and Insider Participation
The compensation committee is currently comprised of Mr. Hirschfeld, Mr.
Graziano and Mr. Weinman. Neither Mr. Hirschfeld nor Mr. Weinman has at any
time been an officer or employee of our company. Mr. Graziano served as our
Acting Chief Financial Officer from May 1996 to March 1999. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except for:
. any breach of the director's duty of loyalty to a company or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or
. any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we may indemnify our directors and executive officers
to the fullest extent permitted by law. We may, in our discretion, indemnify
other officers, employees and agents as set forth in Delaware law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity,
regardless of whether the bylaws would permit indemnification.
We also have entered into agreements to indemnify our directors and officers.
These agreements indemnify our directors and officers for some expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
them in any action or proceeding, including any action by or in the right of
our company, arising out of their services as one of our directors or officers,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request. In addition, we have obtained directors' and
officers' insurance providing indemnification for some of our directors,
officers and employees for certain liabilities. We believe that these
provisions, agreements and insurance are necessary to attract and retain
qualified directors and officers.
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At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for indemnification.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during the fiscal year ended December 31, 1998 to our Chief Executive
Officer and our four other most highly compensated officers who earned more
than $100,000 during that fiscal year. All option grants were made under our
1996 stock option plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------- ----------------------
Securities Underlying
Name and Principal Position Salary ($) Bonus ($) Options (#)
--------------------------- ---------- --------- ----------------------
<S> <C> <C> <C>
Peter H. Friedman.................. $225,000 $ -- --
President and Chief Executive
Officer
Patricia Griffith.................. 140,000 21,569 55,000
Vice President of Sales
Christopher J. Escher.............. 150,000 -- --
Vice President of Marketing
Jenna Woodul....................... 125,000 -- --
Vice President of Community
Chris N. Christensen............... 115,000 -- --
Vice President of Engineering and
Operations
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our four other most highly
compensated executive officers during the fiscal year ended December 31, 1998.
We have never granted any stock appreciation rights. All option grants were
made under our 1996 stock option plan. The exercise price per share was equal
to the fair market value of the common stock on the date of grant as determined
by the board of directors. Percentage of total options is based on an aggregate
of 315,648 shares of common stock granted under the 1996 stock option plan in
the year ended December 31, 1998. The potential realizable value is calculated
based on the term of the ten-year option and assumed rates of stock
appreciation of 5% and 10%, compounded annually. These assumed rates comply
with the rules of the Securities and Exchange Commission and do not represent
our estimate of future stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our common stock.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable
Value at Assumed
Number Annual Rates of Stock
Of Securities % of Price Appreciation for
Underlying Total Options Exercise Option Term
Options Granted in Price Per Expiration -----------------------
Name Granted (#) 1998 (%) Share ($) Date 5% 10%
- ---- ------------- ------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter H. Friedman....... -- -- -- -- -- --
Patricia Griffith....... 55,000 17.4% $0.28 1/15/08 $ 25,085 $ 39,944
Christopher J. Escher... -- -- -- -- -- --
Jenna Woodul............ -- -- -- -- -- --
Chris N. Christensen.... -- -- -- -- -- --
</TABLE>
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Aggregated Option Exercises in Last Fiscal Year
The following table sets forth for our Chief Executive Officer and our four
other most highly compensated executive officers information concerning shares
acquired upon exercise of stock options in fiscal year ended December 31, 1998
and exercisable and unexercisable options held as of December 31, 1998. None of
the individuals listed below held any unexercised options at the end of fiscal
year 1998. All options were granted under our 1996 stock option plan. The value
realized is based on the assumed initial public offering price of $9.00, minus
the per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
<TABLE>
<CAPTION>
Shares
Acquired on Value Realized
Name Exercise (#)(a) ($)
---- --------------- --------------
<S> <C> <C>
Peter H. Friedman........................... -- --
Patricia Griffith........................... 75,000 654,000
Christopher J. Escher....................... 150,000 1,308,000
Jenna Woodul................................ -- --
Chris N. Christensen........................ -- --
</TABLE>
- --------
(a) The shares acquired by each of Ms. Griffith and Mr. Escher were acquired
pursuant to restricted stock purchase agreements. We have the right to
repurchase any unvested shares at their cost in the event of either
employee's termination of employment. As of April 30, 1999, approximately
48,647 shares held by Ms. Griffith and 84,375 shares held by Mr. Escher
were unvested and subject to our repurchase.
Employment Agreements
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination the employee will not solicit our employees. At the time of
commencement of employment, our employees also generally sign offer letters
specifying basic terms and conditions of employment. In general, our employees
are not subject to written employment agreements.
Employee Benefit Plans
1996 Stock Option Plan. Our 1996 stock option plan, as amended and restated,
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code and for the granting to
employees and consultants of nonstatutory stock options. As of April 30, 1999,
3,075,000 shares were authorized under the plan, 1,301,049 shares had been
issued upon the exercise of stock options granted under the plan, 456,340
shares were subject to outstanding options and 1,317,611 shares remained
available for future grant. The 1996 stock option plan provides for annual
increases on the first day of each fiscal year beginning 2000 equal to the
lesser of:
. 750,000 shares;
. 4% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 1996 stock option plan may be administered by the board of directors or a
committee of the board. The board has the power to determine the terms of the
options granted, including the exercise
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<PAGE>
price, the number of shares subject to each option, the exercisability of the
option grant and the form of consideration payable upon exercise. The board
also has the authority to amend, suspend or terminate the 1996 stock option
plan, provided that no action may affect any share of common stock previously
issued and sold or any option previously granted under the plan. The 1996 stock
option plan terminates in October 2006.
The 1996 stock option plan provides that in the event we merge with or into
another company, or we sell substantially all of our assets, each option may be
assumed or substituted by the successor company. If the outstanding options are
not assumed or substituted by the successor company, each outstanding option
will fully vest and become exercisable and the optionee will have 15 days to
exercise the option, after which time the option will terminate.
1996A Stock Option Plan. Our 1996A stock option plan provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Internal Revenue Code and for the granting to employees and
consultants of nonstatutory stock options. The terms of the 1996A stock option
plan are substantially similar to those of the 1996 stock option plan. All of
the 725,000 shares of common stock authorized for issuance pursuant to the
1996A stock option plan have been issued upon the exercise of stock options
granted under the plan. The 1996A stock option plan terminates in April 2006.
1999 Employee Stock Purchase Plan. A total of 500,000 shares of common stock
has been reserved for issuance under our 1999 employee stock purchase plan,
plus annual increases on the first day of each fiscal year beginning 2000 equal
to the lesser of:
. 500,000 shares;
. 2% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains successive 24-month offering
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first offering period,
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or before October 31,
1999. Subsequent offering periods will each have a six-month duration
commencing on the first trading day on or after May 1 and November 1 of each
year.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock; or
. any employee whose rights to purchase stock under all of our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of
stock for each calendar year.
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 10,000 shares.
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<PAGE>
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the fair market
value of the common stock at end of the offering period.
The purchase plan provides that in the event we merge with or into another
company, or we sell substantially all of our assets, each outstanding option
may be assumed or substituted by the successor company. If the successor
company refuses to assume or substitute the options, the offering period then
in progress will be shortened and a new exercise date will be set, which will
occur before the proposed merger or sale.
The purchase plan will become effective on the effective date of this
offering and will terminate in June 2009. The board has the authority to amend
or terminate the purchase plan, except that no action may adversely affect any
outstanding rights to purchase stock.
1999 Director Option Plan
Non-employee directors are entitled to participate in the 1999 director
option plan. The director option plan will become effective upon the effective
date of this offering. The 1999 director option plan has a term of ten years,
unless terminated sooner by the board. A total of 250,000 shares of common
stock have been reserved for issuance under the 1999 director option plan.
Each non-employee director automatically will receive, on the commencement of
this offering and on the date of each annual meeting of stockholders, a fully
vested and exercisable option to purchase 5,000 shares of common stock. Each
new non-employee director who joins our board after the effective date of the
offering will receive, upon joining the board, an initial, fully vested and
exercisable option to purchase 20,000 shares of common stock. The exercise
price of all options is required to be 100% of the fair market value per share
of the common stock, determined with reference to the closing price of the
common stock as reported on the Nasdaq National Market on the date of grant.
In the event we merge with, or sell substantially all of our assets to,
another company, each option may be assumed or substituted by the successor
company. In the absence of an assumption or substitution, the board must notify
each option holder that the option is exercisable for 30 days, after which
period it expires. If the successor company refuses to assume or substitute the
options, each outstanding option will terminate after 30 days. Options granted
under the 1999 director option plan must be exercised within three months of
the end of the optionee's termination of service as a director or consultant,
or within twelve months after such director's termination by death or
disability, but not later than the expiration of the option's ten-year term.
401(k) Savings Plan
We have a 401(k) savings plan covering our employees who are at least 21
years of age. The 401(k) savings plan is intended to qualify under Section
401(k) of the Internal Revenue Code. Consequently, contributions to the 401(k)
savings plan by our employees, and income earned on such contributions, are not
taxable to employees until withdrawn from the 401(k) savings plan. Subject to
restrictions imposed by the Internal Revenue Code on highly compensated
employees, employees
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<PAGE>
may generally defer up to 20% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,000 in 1999, and to have the amount of
such reduction contributed to the 401(k) savings plan. The 401(k) savings plan
permits, but does not require, additional matching contributions by us on
behalf of all participants in the 401(k) savings plan. We have not made any
matching contributions to the 401(k) savings plan in 1997, 1998 or the three
months ended March 31, 1999.
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<PAGE>
Certain Transactions
Equity Investment Transactions for Cash
In June 1996, we sold 150,000 shares of Series A preferred stock for $2.00
per share. In July 1996 we sold 350,000 shares of Series A1 preferred stock for
$2.00 per share. In November 1996, we sold 3,294,785 shares of Series B
preferred stock for $2.80 per share. In August and September of 1998, we sold
5,592,033 shares of Series D preferred stock at $4.00 per share. In April 1999,
we sold 2,499,882 shares of Series E preferred stock for $8.00 per share.
Listed below are the directors, executive officers and stockholders who
beneficially own 5% or more of our securities who participated in these
financings.
<TABLE>
<CAPTION>
Series A Series A1 Series B Series D Series E
Directors, Executive Officers Preferred Preferred Preferred Preferred Preferred Aggregate Cash
and 5% Stockholders Stock Stock Stock Stock Stock Consideration
- ----------------------------- --------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Funds managed by
Patricof & Co.
Ventures, Inc.(a)...... -- -- 714,287 1,253,405 -- $6,100,000
Cox Interactive Media,
Inc...................... -- -- -- 1,250,000 -- 5,000,000
Media Technology Equity
Partners, L.P.(b)........ -- -- -- 1,000,000 125,000 5,000,000
New York Life Insurance
Company.................. -- -- 714,286 400,000 175,000 5,000,000
Hearst Communications,
Inc.(c).................. -- -- -- 292,033 210,521 2,852,296
Starbucks Corporation..... -- -- -- -- 1,000,000 8,000,000
Joseph A. Graziano........ 150,000 50,000 18,000 -- -- 450,400
John Sculley.............. -- 150,000 -- -- -- 300,000
</TABLE>
- --------
(a) The Patricof & Co. Ventures, Inc. shares include shares purchased by APA
Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and Patricof Private
Investment Club, L.P. Mr. Hirshfeld, a Managing Director of Patricof & Co.
Ventures, Inc. and a director of our company, disclaims beneficial
ownership of the securities held by these entities except for his
proportional interest in the entities.
(b) Mr. Weinman, a director of our company, is a Managing Director of Media
Technology Equity Partners and a General Partner of Media Technology
Ventures and AVI Management Partners. Mr. Weinman disclaims beneficial
ownership of the securities held by this entity except for his proportional
interest in the entity.
(c) Mr. Bronfin, a director of our company, is Senior Vice President and Deputy
Group Head of the Hearst New Media and Technology division of Hearst
Communications, Inc. Mr. Bronfin disclaims beneficial ownership of the
securities held by this entity except for his proportional interest in the
entity.
NBC and Affiliates Agreements
NBC
We entered into a series of letter agreements with NBC in February, July and
August 1998 pursuant to which we aired advertisements on various NBC television
programs. In consideration for NBC's agreement to air the advertisements, we
issued:
. an aggregate of 384,615 shares, at a price per share of $4.68, of our
Series C preferred stock, which converts to 450,000 shares of common
stock;
. a warrant to purchase 125,000 shares, with an exercise price per share of
$6.00, of Series D preferred stock;
. an aggregate of 600,000 shares, at a price per share of $4.00, of our
Series D preferred stock; and
. a warrant to purchase a total of 266,667 shares of Series D preferred
stock.
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<PAGE>
The exercise prices of the warrant to purchase an aggregate of 266,667 shares
of Series D preferred stock are as follows:
. with respect to 41,667 shares, $6.00 per share;
. with respect to 125,000 shares, $8.00 per share; and
. with respect to 100,000 shares, $10.00 per share.
Mr. Yudkovitz, a director of our company, is President and Chief Executive
Officer of NBC Multimedia, a subsidiary of NBC.
NBC Multimedia
In February 1998, we executed a letter agreement with NBC Multimedia, Inc.
pursuant to which we include localized versions of our chat service within NBC
Interactive Neighborhood's menu of localized Web services. In consideration, we
issued a warrant to NBC Multimedia to purchase 320,513 shares of common stock
at an exercise price per share of $4.68. On August 31, 1998, we issued a new
warrant to NBC Multimedia, upon cancellation and in replacement of the original
NBC Multimedia warrant, exercisable for 375,000 shares of common stock, at an
exercise price per share of $4.00, pursuant to an anti-dilution protection
contained in the original warrant.
In August 1998, we entered into an operating agreement with NBC Multimedia
pursuant to which we provide our community services to various NBC Web sites.
In consideration for the execution of the operating agreement by NBC
Multimedia, we issued:
. 500,000 shares of our Series D preferred stock, at a purchase price per
share of $4.00; and
. a warrant to purchase a total of 130,556 shares of Series D preferred
stock.
The warrant has the following exercise prices:
. with respect to 55,555 shares, $6.00 per share;
. with respect to 41,666 shares, $8.00 per share; and
. with respect to 33,335 shares, $10.00 per share.
Mr. Yudkovitz, a director of our company, is President and Chief Executive
Officer of NBC Multimedia.
Hearst Agreement
Pursuant to an agreement, dated October 30, 1998, as amended on April 15,
1999, with the Hearst New Media and Technology division of Hearst
Communications, Inc., we issued an aggregate of 750,000 shares of our Series D
preferred stock, at a price per share of $4.00, in consideration for the
publication by Hearst, over an agreed upon time period beginning September 3,
1998, of our advertisements in various magazines owned by Hearst. Mr. Bronfin,
a director of our company, is Senior Vice President and Deputy Group Head of
the Hearst New Media and Technology division of Hearst Communications, Inc.
Loan Financing
In April and July of 1998, we engaged in a loan financing pursuant to which
we issued to the investors in the financing convertible promissory notes and
warrants to purchase shares of common stock. An aggregate principal amount of
$2,903,000 was issued pursuant to the loan financing.
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<PAGE>
The principal plus interest on the notes were convertible, at the option of
each individual investor, into Series D preferred stock upon the initial
closing of the Series D financing, which occurred on August 25, 1998, at a
conversion price per share of $4.00. Each individual warrant issued pursuant to
the financing was exercisable for a number of shares of common stock equal to
30% of the principal amount of the note held by the investor divided by $3.00
per share. The exercise price of the warrants is $3.00 per share.
Funds managed by Patricof & Co. Ventures, Inc. invested an aggregate
principal amount of $900,000 in the loan financing, which converted to an
aggregate of 228,405 shares of Series D preferred stock. These funds also
received warrants to purchase an aggregate of 90,000 shares of common stock.
The Patricof & Co. Ventures, Inc. shares and warrants include shares and
warrants held by APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and
Patricof Private Investment Club, L.P. Funds managed by Patricof & Co.
Ventures, Inc. own more than 5% of our securities. Mr. Hirschfeld, a Managing
Director of Patricof & Co. Ventures, Inc. and a director of our company,
disclaims beneficial ownership of the securities held by these entities except
for his proportional interest in the entities.
New York Life Insurance Company invested an aggregate principal amount of
$400,000 in the loan financing which converted to an aggregate of 102,183
shares of Series D preferred stock. New York Life also received warrants to
purchase an aggregate of 40,000 shares of common stock. New York Life Insurance
Company owns more than 5% of our securities.
Restricted Stock Purchase Agreement
In March 1999, Mr. Snetiker exercised an option grant to purchase an
aggregate of 125,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have a right to repurchase any of the unvested 125,000
shares upon his termination of employment. As of April 30, 1999, all 125,000
shares held by Mr. Snetiker remain unvested. Mr. Snetiker paid the $5.00
exercise price per share for such shares by delivery of a ten-year full-
recourse promissory note bearing interest at 5.23% per annum, compounded semi-
annually. The note is secured by the shares of common stock purchased by Mr.
Snetiker. As of April 30, 1999, approximately $625,000 in unpaid principal and
interest was outstanding in the aggregate under the note. In addition, Mr.
Snetiker's stock option agreement provides that, if at any time prior to March
1, 2000:
. we enter into any transaction which involves a change of control and Mr.
Snetiker's employment is terminated as a result of the change of control;
or
. Mr. Snetiker's employment is terminated other than for cause or as a
result of voluntary resignation
then, in each case, 25% of the unvested shares held by Mr. Snetiker will
automatically vest in full. Generally, a "change of control" is defined to
include mergers, asset sales or other transactions involving a transfer of at
least 50% of our securities.
Repurchase Agreements
On November 20, 1996, as a condition to closing the Series B preferred stock
financing, we entered into repurchase agreements with Mr. Friedman and Ms.
Woodul. Pursuant to the repurchase
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<PAGE>
agreements, we have the right to repurchase any or all of the unvested shares
of common stock held by Mr. Friedman and Ms. Woodul, respectively, upon their
termination for any reason. As of April 30, 1999, 200,926 and 48,611 of the
shares held by Mr. Friedman and Ms. Woodul, respectively, remain unvested.
These repurchase rights will terminate upon the closing of this offering.
The repurchase agreements also provide that in the event of termination of
such individuals' employment for any reason, with limited exceptions, each of
Mr. Friedman and Ms. Woodul will be entitled to receive 90 days, or such longer
period as the board determines, of their then current salary and benefits,
payable in one lump sum as of the date of termination.
Other Transactions
We have entered into indemnification agreements with each of our executive
officers and directors.
We have granted options to certain of our executive officers and directors.
See "Management--Option Grants in Last Fiscal Year" and "--Restricted Stock
Purchase Agreement."
Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of the preferred stock.
See "Description of Capital Stock--Registration Rights."
We believe that all related-party transactions described above were on terms
no less favorable than could have been otherwise obtained from unrelated third
parties.
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<PAGE>
Principal Stockholders
The following table sets forth information with respect to beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of common stock offered by us in this offering, for:
. each person who we know beneficially owns more than 5% of the common
stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table; and
. all of our directors and officers as a group.
Unless otherwise indicated, the principal address of each of the stockholders
below is c/o Talk City, Inc., 307 Orchard City Drive, Suite 350, Campbell,
California 95008. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock held by them. The number of shares of common
stock outstanding used in calculating the percentage for each listed person
includes shares of common stock underlying options or warrants held by such
person that are exercisable within 60 days of April 30, 1999 but excludes
shares of common stock underlying options or warrants held by any other person.
Percentage of beneficial ownership is based on 19,175,763 shares of common
stock outstanding as of April 30, 1999, after giving effect to the conversion
of all outstanding shares of preferred stock upon the closing of this offering.
The numbers shown in the table assume no exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
Percentage
Shares Owned Beneficially Owned
Prior to ------------------------------
the Offering Before Offering After Offering
------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders:
Entities affiliated with National
Broadcasting Company, Inc.(a).... 2,447,223 12.2% 10.0%
Funds Managed by Patricof & Co.
Ventures, Inc.(b)................ 2,057,692 10.7 8.7
New York Life Insurance
Company(c)....................... 1,431,469 7.5 6.0
Hearst Communications, Inc.(d).... 1,252,554 6.5 5.3
Cox Interactive Media, Inc.(e).... 1,250,000 6.5 5.3
Media Technology Equity Partners,
L.P.(f).......................... 1,125,000 5.9 4.8
Starbucks Corporation (g)......... 1,000,000 5.2 4.2
Directors and Executive Officers:
Peter H. Friedman(h).............. 1,567,936 8.2 6.6
Kenneth A. Bronfin(e)............. 1,252,554 6.5 5.3
Joseph A. Graziano(i)............. 578,761 3.0 2.4
Thomas P. Hirschfeld(b)........... 2,057,692 10.7 8.7
John Sculley(j)................... 260,762 1.4 1.1
Barry M. Weinman(f)............... 1,125,000 5.9 4.8
Martin J. Yudkovitz(a)............ 2,447,223 12.2 10.0
Patricia Griffith(k).............. 75,000 * *
Christopher J. Escher(l).......... 155,000 * *
Jenna Woodul(m)................... 757,087 3.9 3.2
Chris N. Christensen(n)........... 200,000 1.0 *
All directors and officers as a
group (15 persons)(o)............ 11,436,953 56.7 46.3
</TABLE>
- --------
* Represents less than one percent of the total.
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<PAGE>
(a) Principal address is 30 Rockefeller Plaza, New York, NY 10112. Number of
shares includes 1,050,000 shares held by NBC, 500,000 shares held by NBC
Multimedia, warrants issued to NBC Multimedia to purchase 505,556 shares
exercisable within 60 days of April 30, 1999 and warrants issued to NBC to
purchase 391,667 shares exercisable with 60 days of April 30, 1999. Mr.
Yudkovitz, a director of our company, is President and Chief Executive
Officer of NBC Multimedia. Mr. Yudkovitz disclaims beneficial ownership of
the shares held by these entities except to the extent of his proportional
interest in the entities.
(b) Principal address is 445 Park Avenue, New York, NY 10022. Number of shares
includes 1,645,776 shares held by APA Excelsior IV, L.P., 290,432 shares
held by APA Excelsior IV/Offshore, L.P., 31,484 shares held by Patricof
Private Investment Club, warrants issued to APA Excelsior IV, L.P. to
purchase 75,276 shares exercisable within 60 days of April 30, 1999,
warrants issued to APA Excelsior IV/Offshore, L.P. to purchase 13,284
shares exercisable within 60 days of April 30, 1999 and warrants issued to
Patricof Private Investment Club to purchase 1,440 shares exercisable
within 60 days of April 30, 1999. Mr. Hirschfeld, a director of our
company, is a Managing Director of Patricof & Co. Ventures, Inc. Mr.
Hirschfeld disclaims beneficial ownership of the shares held by these
entities except to the extent of his proportional interest in the entities.
(c) Principal address is 1400 Lake Hearn Drive, Atlanta, GA 30319.
(d) Principal address is 51 Madison Avenue, New York, NY 10010. Number of
shares includes 1,391,469 shares and warrants to purchase 40,000 shares
exercisable within 60 days of April 30, 1999.
(e) Principal address is 959 8th Avenue, New York, NY 10019. Mr. Bronfin, a
director of our company, is Senior Vice President and Deputy Group Head of
the Hearst New Media and Technology division of Hearst Communications, Inc.
Mr. Bronfin disclaims beneficial ownership of the shares held by such
entity except to the extent of his proportional interest in the entity.
(f) Principal address is One First Street, Los Altos, CA 94022. Mr. Weinman, a
director of our company, is a Managing Director of Media Technology Equity
Partners and a General Partner of Media Technology Ventures and AVI
Management Partners. Mr. Weinman disclaims beneficial ownership of the
shares held by such entity except to the extent of his proportional
interest in the entity.
(g) Principal address is 2401 Utah Avenue South, Seattle, WA 98134.
(h) Includes 1,470,936 shares held directly by Mr. Friedman, 200,926 shares of
which are subject to a repurchase option we hold as of April 30, 1999,
50,000 shares held by Arthur and Cynthia Friedman, 28,000 shares held by
Robert Friedman, 7,000 shares held by Joan Friedman, 7,000 shares held by
Judy and Kevin Wichter and a warrant to purchase 5,000 shares exercisable
within 60 days of April 30, 1999.
(i) Includes a warrant to purchase 3,000 shares exercisable within 60 days of
April 30, 1999.
(j) Principal address is 90 Park Avenue, New York, NY 10016. Includes 257,762
shares, 100,000 shares of which were issued upon exercise of stock options.
Of those 100,000 shares, 32,813 are subject to a repurchase option we hold
as of April 30, 1999, a warrant to purchase 3,000 shares exercisable within
60 days of April 30, 1999, 31,667 shares held by Sculley Brothers LLC,
10,000 shares held by Sculley Investment Ltd. Partnership, 2,500 shares
held by John Sculley Irrevocable Trust fbo Madeline Allnatt u/d/t 12/30/97
and 2,500 shares held by John Sculley Irrevocable Trust fbo Oliver Allnatt
u/d/t 12/30/97.
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<PAGE>
(k) Includes 75,000 shares issued upon exercise of stock options, 48,647 shares
of which are subject to a repurchase option we hold as of April 30, 1999.
(l) Includes 150,000 shares issued upon exercise of stock options, 84,375
shares of which are subject to a repurchase option we hold as of April 30,
1999 and a warrant to purchase 5,000 shares exercisable within 60 days of
April 30, 1999.
(m) Includes 380,087 shares held directly by Ms. Woodul, 48,611 shares of which
are subject to a repurchase option we hold as of April 30, 1999, 375,000
shares held by Morgan S. Wright and a warrant to purchase 2,000 shares
exercisable within 60 days of April 30, 1999.
(n) Includes 200,000 shares issued upon exercise of stock options, 54,167 of
which are subject to a repurchase option we hold as of April 30, 1999.
(o) Includes an aggregate of:
. 722,665 shares of which are subject to a repurchase option we hold as of
April 30, 1999;
. 1,700,000 shares issued upon exercise of stock options; and
. warrants to purchase 1,008,023 shares exercisable within 60 days of
April 30,1999.
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<PAGE>
Description of Capital Stock
Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value.
The following summary of the rights of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our amended and restated certificate of
incorporation and bylaws which are included as exhibits to the registration
statement of which this prospectus is a part and by the provisions of Delaware
law.
Common Stock
After giving effect to the proposed one for two reverse stock split of the
all outstanding common stock and the conversion of all previously outstanding
preferred stock into shares of common stock, as of April 30, 1999, there were
19,175,763 shares of common stock outstanding held of record by approximately
88 stockholders. There will be 23,675,763 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants, after giving effect to the sale of common
stock in the offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred
stock, the holders of common stock are entitled to receive ratably any
dividends as may be declared by the board of directors out of funds legally
available for the payment of dividends. See "Dividend Policy." In the event of
our liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets, subject to prior distribution rights
of the preferred stock, if any, then outstanding. Holders of common stock have
no preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued in the offering
will be fully paid and non-assessable.
Preferred Stock
Upon the consummation of this offering, each outstanding share of Series A,
Series A1, Series B, Series D and Series E preferred stock will automatically
convert into one share of common stock. Each outstanding share of Series C
preferred stock will automatically convert into approximately 1.17 shares of
common stock. Pursuant to our amended and restated certificate of
incorporation, the board of directors has the authority, without further action
by the stockholders, to issue up to 5,000,000 shares of preferred stock in one
or more series and to fix the designations, powers, preferences and privileges,
which may be greater than the rights of the common stock. The board, without
stockholder approval, can issue preferred stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of common stock. Preferred stock could thus be issued quickly with
terms calculated to delay or prevent a change in control of our company or make
removal of management more difficult. Additionally, the issuance of preferred
stock may have the effect of decreasing the market price of the common stock.
At present, there are no shares of preferred stock outstanding, and we have no
plans to issue any of the preferred stock.
69
<PAGE>
Common Stock Warrants
Upon completion of the offering, we will have 47 warrants outstanding to
purchase an aggregate of 1,318,246 shares of common stock, exercisable as
follows:
. 285,300 shares at an exercise price of $3.00 per share;
. 498,830 shares at an exercise price of $4.00 per share;
. 222,222 shares at an exercise price of $6.00 per share;
. 178,559 shares at an exercise price of $8.00 per share; and
. 133,335 shares at an exercise price of $10.00 per share.
These warrants expire five years from the date of execution.
Registration Rights
Upon completion of the offering, the holders of an aggregate of approximately
17,569,709 shares of common stock will be entitled to rights with respect to
the registration of such shares under the Securities Act of 1933. Under the
terms of the third amended and restated shareholders rights agreement, as
amended, if we propose to register any of our securities under the Securities
Act of 1933, either for our own account or for the account of other security
holders, these holders are entitled to notice of such registration and are
entitled to include shares of common stock in the registration. The rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering subject to the registration to limit the number of shares
included in such registration. A limited number of the holders of these rights
may also require us to file a registration statement under the Securities Act
of 1933 with respect to their shares of common stock and we are required to use
our best efforts to effect such registration, subject to conditions and
limitations. Furthermore, stockholders with registration rights may require us
to file additional registration statements on Form S-3, subject to conditions
and limitations.
Delaware Anti-Takeover Law and Our Charter and Bylaws Provisions
Delaware Anti-Takeover Statute. We are subject to Section 203 of the Delaware
General Corporation Law. In general, these provisions prohibit a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder, unless the transaction in which the person
became an interested stockholder is approved in a manner presented in Section
203 of the Delaware General Corporation Law.
Generally, a "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
In general, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years, did own, 15% or more of
a corporation's outstanding voting stock.
Amended and Restated Certificate of Incorporation. Our amended and restated
certificate of incorporation provides:
. that the board of directors may issue, without further action by the
stockholders, up to 5,000,000 shares of undesignated preferred stock;
70
<PAGE>
. that any action to be taken by our stockholders must be effected at a
duly called annual or special meeting and not by written consent; and
. for the division of the board of directors into three classes, with each
class serving for a term of three years.
Bylaws. Our bylaws provide that special meetings of our stockholders may be
called only by the chairman of the board, the president, the board or
stockholders holding a majority of our outstanding stock.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board and in the policies formulated by the
board and to discourage certain types of transactions that may involve an
actual or threatened change of control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited proposal for a takeover
that does not contemplate the acquisition of all of our outstanding shares or
an unsolicited proposal for the restructuring or sale of all or part of our
company. These provisions, however, could discourage potential acquisition
proposals and could delay or prevent a change in control of our company. They
may also have the effect of preventing changes in our management.
Transfer Agent and Registrar
The transfer agent and registrar for common stock is Firstar Bank of
Minnesota, N.A.
Listing
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "TCTY." We have not applied to list our common stock on any
other exchange or quotation system.
71
<PAGE>
Shares Eligible For Future Sale
Prior to the offering, there has been no market for the common stock. Future
sales of substantial amounts of common stock in the public market following the
offering could cause the prevailing market price of our common stock to fall
and impede our ability to raise equity capital at a time and on terms favorable
to us.
Upon completion of the offering, we will have outstanding an aggregate of
23,675,763 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after April 30, 1999. Of these outstanding shares, the 4,500,000
shares sold in the offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The remaining 19,175,763 shares of common stock outstanding upon
completion of the offering and held by existing stockholders will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933. Restricted shares 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 of 1933, which
rules are summarized below, or another exemption. Sales of the restricted
shares in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock. All officers, directors
and certain other holders of common stock have entered into contractual "lock-
up" agreements providing that they will not offer, sell, contract to sell or
grant any option to purchase or otherwise dispose of shares of common stock
owned by them or that could be purchased by them through the exercise of
options or warrants for a period of 180 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, additional shares will be
eligible for sale beginning 181 days after the effective date of the offering,
subject in some cases to certain volume limitations.
Of the remaining restricted shares:
. 722,665 shares are subject to our repurchase option in the event of
termination of employment; and
. 10,989,525 shares will not be eligible for sale pursuant to Rule 144
until the expiration of a one-year holding period.
In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates", would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 236,758 shares immediately after the offering; or
. the average weekly trading volume of the common stock as reported through
the Nasdaq National Market during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale.
72
<PAGE>
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned for at
least two years the restricted shares proposed to be sold, 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.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirements. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, including exercises after the date the issuer becomes
so subject. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 91 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
We have agreed not to sell or otherwise dispose of any shares of common stock
or any securities convertible into or exercisable or exchangeable for common
stock, or enter into any swap or similar agreement that transfers, in whole or
in part, the economic risk of ownership of the common stock, for a period of
180 days after the date of this prospectus, without the prior written consent
of Lehman Brothers Inc., subject to limited exceptions.
We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 1996A stock option plan, 1996 stock option plan, 1999
employee stock purchase plan and the 1999 director option plan. This
registration statement is expected to be filed simultaneously with the
effectiveness of the registration statement covering the shares of common stock
offered in this offering and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates and the expiration of a
180-day lockup period, be available for sale in the open market, except to the
extent that such shares are subject to our vesting restrictions or the
contractual restrictions described above.
73
<PAGE>
Underwriting
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Volpe Brown Whelan & Company, LLC and
U.S. Bancorp Piper Jaffray Inc. are acting as representatives, have each agreed
to purchase from us the respective number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
Lehman Brothers Inc...................................................
Volpe Brown Whelan & Company, LLC.....................................
U.S. Bancorp Piper Jaffray Inc........................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement, must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 675,000 additional shares.
<TABLE>
<CAPTION>
No Full
Paid by Talk City Exercise Exercise
----------------- -------- --------
<S> <C> <C>
Per Share..................................................... $ $
Total......................................................... $ $
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at the public offering price less a selling concession not in
excess of $ share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ share to brokers and dealers. After the
offering, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
74
<PAGE>
We have agreed that, without the prior consent of Lehman Brothers Inc. we
will not directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities which may be converted into or exchanged for
any such shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors and certain other
stockholders, including all of the holders of the preferred stock and warrants,
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities which may be
converted into or exchanged for any such shares for the period ending 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and
capital structure, estimates of our business potential and earning prospects,
an overall assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "TCTY."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that if the representatives purchase shares of common
stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the
75
<PAGE>
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
A prospectus in electronic format is being made available on an Internet Web
site maintained by E*TRADE Securities, Inc. Internet purchases of the common
stock offered by this prospectus will be available only to registered customers
of E*TRADE Securities, Inc. on an equal priority basis.
At our request, the underwriters have reserved up to 5% shares of the common
stock offered by this prospectus for sale to our officers, directors, employees
and their family members and to our business associates at the initial public
offering price set forth on the cover page of this prospectus. These persons
must commit to purchase no later than the close of business on the day
following the date of this prospectus. The number of shares available for sale
to the general public will be reduced to the extent these persons purchase the
reserved shares. In addition, E*TRADE Securities, Inc. has reserved up to
100,000 shares for sale to our trained community leaders and moderators on the
same terms and conditions. The number of shares available for sale to customers
of E*TRADE Securities, Inc. will be reduced to the extent these persons
purchase their reserved shares.
In connection with our private placement of Series D preferred stock and our
private placement of Series E Preferred Stock, we paid to Volpe Brown Whelan &
Company, LLC an aggregate of $1,148,208 in cash, warrants to purchase 120,080
shares of our Series D preferred stock, at an aggregate exercise price of
$480,320, and warrants to purchase 11,893 shares of our Series E Preferred
Stock, at an aggregate exercise price of $95,144, as payment for acting as our
financial advisor.
76
<PAGE>
Legal Matters
The validity of the shares of common stock offered by this prospectus will be
passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Legal matters in connection with this
offering will be passed upon for the underwriters by Cooley Godward LLP, San
Francisco, California. WS Investment Company, an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as an
individual attorney of this firm, beneficially own an aggregate of 15,000
shares of our common stock.
Experts
The financial statements of Talk City, Inc. as of December 31, 1997 and 1998
and for the period from March 29, 1996 (inception) through December 31, 1996
and the years ended December 31, 1997 and 1998 included in this prospectus have
been included in reliance on the report of KPMG LLP, independent auditors,
appearing elsewhere in this prospectus, and upon the authority of such firm as
experts in accounting and auditing.
Available Information
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act of 1933, a registration statement on Form S-1
relating 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 our company and
the shares we are offering by this prospectus you should refer to the
registration statement, including the exhibits and schedules thereto. You may
inspect a copy of the registration statement without charge at the Public
Reference Room of the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Securities and Exchange
Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an
Internet site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The Securities and Exchange Commission's World Wide
Web address is http://www.sec.gov.
We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as we may determine or as
may be required by law.
77
<PAGE>
Talk City, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Form of Independent Auditors' Report..................................... F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
When the reverse preferred and common stock split and reincorporation in
Delaware, referred to in Note 11 of the Notes to Financial Statements have been
consummated, we will be in a position to render the following report.
/s/ KPMG LLP
Form of Independent Auditors' Report
The Board of Directors and Stockholders
Talk City, Inc.:
We have audited the accompanying balance sheets of Talk City, Inc. (the
Company), as of December 31, 1997 and 1998, and the related statements of
operations, redeemable convertible preferred stock and stockholders' deficit,
and cash flows for the period from March 29, 1996 (inception) to December 31,
1996 and for each of the years in the two-year period ended December 31, 1998.
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 Talk City, Inc. as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from March 29, 1996 (inception) to December 31, 1996 and for each of the
years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Mountain View, California
April 23, 1999, except as to
Note 11 which is as of ,
1999
F-2
<PAGE>
Talk City, Inc.
Balance Sheets
(in thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 2,055 $ 8,697 $ 3,484
Short term investments........................ -- 5,740 5,740
Accounts receivable, net...................... 121 763 1,212
Prepaid expenses and other current assets..... 67 -- 47
------- -------- --------
Total current assets........................ 2,243 15,200 10,483
------- -------- --------
Property and equipment, net..................... 548 999 1,384
Other assets, net............................... 20 2,291 2,705
------- -------- --------
Total assets................................ $ 2,811 $ 18,490 $ 14,572
======= ======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................. $ 391 $ 1,205 $ 2,221
Accrued liabilities........................... 8 375 364
Notes payable, current portion................ -- 127 130
------- -------- --------
Total current liabilities................... 399 1,707 2,715
------- -------- --------
Notes payable, less current portion............. -- 273 237
------- -------- --------
Total liabilities........................... 399 1,980 2,952
------- -------- --------
Commitments
Series A, A1, B, C, and D redeemable convertible
preferred stock:
Authorized--3,900,000 in 1997 and 19,000,000
in 1998 and 1999
Issued and outstanding--3,794,785, in 1997,
10,929,909 in 1998, and 11,101,212 in 1999...
Liquidation preference--$10,225 in 1997,
$39,027 in 1998, and $39,713 in 1999......... 10,081 38,973 39,979
Stockholders' deficit:
Common stock, $0.001 par value:
Authorized--30,000,000 in 1997 and 60,000,000
in 1998 and 1999.............................
Issued and outstanding--3,687,200 in 1997,
4,191,666 in 1998, and 4,314,904 in 1999..... 4 4 4
Additional paid-in capital.................... 260 1,792 3,959
Deferred compensation......................... (59) (598) (1,144)
Notes receivable from stockholders............ (175) (303) (921)
Accumulated deficit........................... (7,699) (23,358) (30,257)
------- -------- --------
Total stockholders' deficit................. (7,669) (22,463) (28,359)
------- -------- --------
Total liabilities and stockholders'
deficit.................................... $ 2,811 $ 18,490 $ 14,572
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Talk City, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months ended
(Inception) to December 31, March 31,
December 31, ----------------- --------------------
1996 1997 1998 1998 1999
-------------- ------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Business services..... $ -- $ 25 $ 522 $ 60 $ 357
Advertising and
sponsorships......... 14 183 931 65 623
------- ------- -------- --------- ---------
Total revenues...... 14 208 1,453 125 980
------- ------- -------- --------- ---------
Operating expenses:
Product development
and programming...... 771 3,472 5,383 1,175 2,224
Sales and marketing... 252 2,492 6,668 476 3,425
General and
administrative....... 335 974 1,804 336 974
Noncash advertising
and promotional
charges.............. -- -- 2,890 1,039 1,410
------- ------- -------- --------- ---------
Total operating
expenses........... 1,358 6,938 16,745 3,026 8,033
------- ------- -------- --------- ---------
Loss from
operations......... (1,344) (6,730) (15,292) (2,901) (7,053)
Interest income
(expense), net......... 36 339 (367) 10 154
------- ------- -------- --------- ---------
Net loss............ (1,308) (6,391) (15,659) (2,891) (6,899)
Accretion of redeemable
convertible preferred
stock and warrants..... 8 38 558 20 72
------- ------- -------- --------- ---------
Net loss applicable
to common
stockholders....... $(1,316) $(6,429) $(16,217) $ (2,911) $ (6,971)
======= ======= ======== ========= =========
Net loss per share:
Basic and diluted..... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90)
======= ======= ======== ========= =========
Weighted average
shares............... 2,679 3,068 3,295 3,332 3,661
======= ======= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Talk City, Inc.
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible Notes
Preferred stock Common stock Additional receivable
------------------ ----------------- paid-in Deferred from
Shares Amount Shares Amount capital compensation stockholders
---------- ------- --------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders April
1, 1996......... -- $ -- 2,300,000 $ 2 $ 44 $ -- $ --
Issuance of
preferred stock,
net of issuance
costs........... 3,794,785 10,035 -- -- -- -- --
Issuance of
common stock
upon exercise of
stock options... -- -- 1,537,200 2 292 (89) (205)
Accretion
attributable to
redeemable
preferred
stock........... -- 8 -- -- (8) -- --
Net loss........ -- -- -- -- -- -- --
---------- ------- --------- --- ------ ------- -----
Balances,
December 31,
1996............ 3,794,785 10,043 3,837,200 4 328 (89) (205)
Repurchase of
common stock.... -- -- (150,000) -- (30) -- 30
Accretion
attributable to
redeemable
preferred
stock........... -- 38 -- -- (38) -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- 30 --
Net loss........ -- -- -- -- -- -- --
---------- ------- --------- --- ------ ------- -----
Balances,
December 31,
1997............ 3,794,785 10,081 3,687,200 4 260 (59) (175)
Noncash issuance
of preferred
stock and
preferred and
common stock
warrants
pursuant to the
NBC agreements.. 884,615 4,565 -- -- 575 -- --
Issuance of
preferred stock,
net of $1,233
issuance costs.. 6,250,509 23,769 -- -- -- -- --
Issuance of
preferred stock
warrants for
services
rendered in
connection with
the preferred
stock offering.. -- 438 -- -- (438) -- --
Issuance of
common stock
warrants
pursuant to the
loan agreement.. -- -- -- -- 490 -- --
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 504,466 -- 133 -- (128)
Deferred
compensation
related to
option grants... -- -- -- -- 892 (892) --
Amortization of
stock-based
compensation.... -- -- -- -- -- 353 --
Accretion
attributable to
redeemable
preferred
stock........... -- 120 -- -- (120) -- --
Net loss........ -- -- -- -- -- -- --
---------- ------- --------- --- ------ ------- -----
Balances,
December 31,
1998............ 10,929,909 38,973 4,191,666 4 1,792 (598) (303)
Issuance of
common stock
upon exercise of
stock options
and warrants,
net of
repurchases..... -- -- 123,238 -- 638 -- (618)
Noncash issuance
of preferred
stock pursuant
to the Hearst
agreement....... 171,303 904 -- -- -- -- --
Revaluation of
warrants related
to the NBC
operating
agreements...... -- 30 -- -- 886 -- --
Deferred
compensation
related to
option grants... -- -- -- -- 715 (715) --
Amortization of
stock-based
compensation.... -- -- -- -- -- 169 --
Accretion
attributable to
redeemable
preferred
stock........... -- 72 -- -- (72) -- --
Net loss........ -- -- -- -- -- -- --
---------- ------- --------- --- ------ ------- -----
Balances, March
31, 1999
(unaudited)..... 11,101,212 $39,979 4,314,904 $ 4 $3,959 $(1,144) $(921)
- --------------------------------------------------
========== ======= ========= === ====== ======= =====
<CAPTION>
Total
Accumulated stockholders'
deficit deficit
----------- ------------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders April
1, 1996......... $ -- $ 46
Issuance of
preferred stock,
net of issuance
costs........... -- --
Issuance of
common stock
upon exercise of
stock options... -- --
Accretion
attributable to
redeemable
preferred
stock........... -- (8)
Net loss........ (1,308) (1,308)
----------- -------------
Balances,
December 31,
1996............ (1,308) (1,270)
Repurchase of
common stock.... -- --
Accretion
attributable to
redeemable
preferred
stock........... -- (38)
Amortization of
stock-based
compensation.... -- 30
Net loss........ (6,391) (6,391)
----------- -------------
Balances,
December 31,
1997............ (7,699) (7,669)
Noncash issuance
of preferred
stock and
preferred and
common stock
warrants
pursuant to the
NBC agreements.. -- 575
Issuance of
preferred stock,
net of $1,233
issuance costs.. -- --
Issuance of
preferred stock
warrants for
services
rendered in
connection with
the preferred
stock offering.. -- (438)
Issuance of
common stock
warrants
pursuant to the
loan agreement.. -- 490
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- 5
Deferred
compensation
related to
option grants... -- --
Amortization of
stock-based
compensation.... -- 353
Accretion
attributable to
redeemable
preferred
stock........... -- (120)
Net loss........ (15,659) (15,659)
----------- -------------
Balances,
December 31,
1998............ (23,358) (22,463)
Issuance of
common stock
upon exercise of
stock options
and warrants,
net of
repurchases..... -- 20
Noncash issuance
of preferred
stock pursuant
to the Hearst
agreement....... -- --
Revaluation of
warrants related
to the NBC
operating
agreements...... -- 886
Deferred
compensation
related to
option grants... -- --
Amortization of
stock-based
compensation.... -- 169
Accretion
attributable to
redeemable
preferred
stock........... -- (72)
Net loss........ (6,899) (6,899)
----------- -------------
Balances, March
31, 1999
(unaudited)..... $(30,257) $(28,359)
- --------------------------------------------------
=========== =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Talk City, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months ended
(Inception) to December 31, March 31,
December 31, ------------------- --------------------
1996 1997 1998 1998 1999
-------------- -------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (1,308) $ (6,391) $ (15,659) $ (2,891) $ (6,899)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation........... 15 125 347 70 162
Stock compensation
expense............... -- 30 353 46 169
Common stock warrants
issued pursuant to the
loan financing........ -- -- 490 -- --
Noncash advertising and
promotional charges... -- -- 2,890 1,039 1,410
Provision for accounts
receivable allowance.. -- -- 100 -- --
Changes in operating
assets and
liabilities:
Accounts receivable... (10) (111) (742) (45) (449)
Prepaid expenses and
other current
assets............... (1) (66) 67 13 (47)
Accounts payable and
accrued liabilities.. 290 110 1,181 54 1,005
-------- -------- --------- --------- ---------
Net cash used in
operating activities.. (1,014) (6,303) (10,973) (1,714) (4,649)
-------- -------- --------- --------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment........ (137) (550) (797) (218) (531)
Purchases of short-
term investments..... -- -- (5,740) -- --
Other assets.......... -- (22) (22) -- (4)
-------- -------- --------- --------- ---------
Net cash used in
investing activities... (137) (572) (6,559) (218) (535)
Cash flows from
financing activities:
Proceeds from sale of
redeemable preferred
stock, net of
issuance costs....... 10,035 -- 21,197 -- --
Proceeds from issuance
of common stock...... 46 -- 5 -- --
Proceeds from loan
financing, net of
issuance costs....... -- -- 2,903 -- --
Repayment of loan
financing............ -- -- (331) -- --
Proceeds from notes
payable.............. -- -- 491 -- --
Repayment of notes
payable.............. -- -- (91) -- (29)
-------- -------- --------- --------- ---------
Net cash provided by
financing activities... 10,081 -- 24,174 -- (29)
-------- -------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ 8,930 (6,875) 6,642 (1,932) (5,213)
Cash and cash
equivalents at
beginning of period.... -- 8,930 2,055 2,055 8,697
-------- -------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 8,930 $ 2,055 $ 8,697 $ 123 $ 3,484
======== ======== ========= ========= =========
Cash paid during the
period for interest.... $ -- $ -- $ 113 $ -- $ 16
======== ======== ========= ========= =========
Supplemental disclosure
of noncash financing
activities:
Accretion of redeemable
convertible preferred
stock and warrants.... $ 8 $ 38 $ 558 $ 20 $ 72
======== ======== ========= ========= =========
Common stock issued for
notes receivable...... $ 205 $ -- $ 128 $ 128 $ 618
======== ======== ========= ========= =========
Issuance of stock and
warrants for
advertising and
promotional services.. $ -- $ -- $ 5,140 $ 1,577 $ 904
======== ======== ========= ========= =========
Issuance of preferred
stock for conversion
of loan financing..... $ -- $ -- $ 2,572 $ -- $ --
======== ======== ========= ========= =========
Deferred compensation
related to option
grants................ $ 89 $ -- $ 892 $ 223 $ 715
======== ======== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Talk City, Inc.
Notes to Financial Statements
(information with respect to March 31, 1998 and 1999 is unaudited)
(1) Description of Business and Nature of Operations
Talk City, Inc. (the Company), incorporated in March 1996, is a provider of
online communities and interactive services for businesses and consumers. The
Company offers businesses a wide range of services to help them develop and
expand online relationships with customers, suppliers, and employees. These
services include designing fully integrated, customized communities, producing
online events, conducting online market research and facilitating online
meetings. For consumers, the Company operates a network of online communities
located at www.talkcity.com. This network includes 20 topical categories, over
50 themed communities, 50 co-branded partner communities and thousands of user
generated communities. These communities offer services such as moderated chat,
home pages, special event production, message boards and online event guides.
The Company generates revenues by selling business services and advertising and
sponsorships on its Web sites to corporations of various sizes within several
industries.
(2) Summary of Significant Accounting Policies
(a) Interim Financial Statements
The interim financial statements of the Company for the three months
ended March 31, 1998 and 1999, 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 note
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 March 31, 1999, and the results of its operations and its
cash flows for the three months ended March 31, 1998 and 1999. Results for
the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire year.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Cash Equivalents and Short-Term Investments
Cash equivalents consist of instruments with maturities of three months
or less at the time of purchase.
F-7
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The Company has classified its cash equivalents and short-term
investments as "available for sale." Such investments are carried at fair
value, based on the quoted market prices, and unrealized gains and losses,
if material, are reported as a separate component of accumulated other
comprehensive income (loss) in stockholders' deficit. The cost of
securities sold is based on the specific identification method. Realized
and unrealized gains and losses were not material during all periods
presented.
(d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment, generally three to five years.
(e) Long Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. Recoverability of assets held and used is measured
by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such amounts are considered
to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(f) Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, short-term
investments, accounts receivable, accounts payable and notes payable
approximate their carrying values due to the short maturity or variable
rate structure of those instruments.
(g) 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 one domestic financial institution. From time to
time, the Company's cash balances with its financial institution may exceed
Federal Deposit Insurance Corporation insurance limits.
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. As of December 31, 1998 and March 31, 1999, the allowance for
bad debts was $100,000.
F-8
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
(h) Revenue Recognition
To date, the Company's revenues have been derived primarily from the sale
of business services and sponsorship and advertising contracts.
Business services revenues are derived principally from contracts
relating to one or more events and contracts relating to a period of time
up to two years in which the Company designs customized communities,
produces online events, conducts market research, and facilitates online
meetings for customers. Business services revenues are recognized as the
events are run or ratably over the term of the contract period which
coincides with when the services are performed, provided that collection of
the receivable is probable.
Sponsorship contracts integrate traditional advertising with content
designed to support broad marketing objectives, including brand promotion,
awareness, and product introductions. Advertising revenues are derived
principally from short-term advertising contracts in which the Company
delivers banner advertisements on its online properties over a specified
period of time for a fixed fee. The Company's contracts typically are
short-term agreements that guarantee a minimum number of impressions or
pages to be delivered to users over a specified period of time. Revenues
from these contracts are recognized in the period in which the
advertisement is displayed or the event is run, provided that no
significant Company obligations remain. The amount of revenue recognized
each period is based on the lesser of the ratio of impressions delivered
over total guaranteed impressions or the ratable amortization over the term
of the contract.
In certain instances where the Company contracts with third party sales
agents for the sale of advertising, the Company recognizes the revenues
from such transactions net of the related commission paid to the agent.
(i) Product Development and Programming
Product development and programming expenses consist primarily of
salaries, payroll taxes and benefits and expenditures related to editorial
content, community management and support personnel, server hosting costs
and software development and operations expenses. Costs related to the
development of new products and enhancements to existing products are
charged to operations as incurred. Software development costs are required
to be capitalized when a product's technological feasibility has been
established by completion of a working model of the product. To date,
completion of a working model of the Company's products and general release
have substantially coincided. As a result, the Company has not capitalized
any software development costs because such costs have not been
significant.
(j) Advertising Expense
The cost of advertising is expensed as incurred. Such costs totaled
approximately $122,000, $1,245,000, $7,410,000, $1,154,000 and $4,162,000
for the period from inception to December 31, 1996, the years ended
December 31, 1997 and 1998, and the three months ended March 31, 1998 and
1999, respectively. For the year ended December 31, 1998 and the three
F-9
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
months ended March 31, 1998 and 1999, these costs included $2,890,000,
$1,039,000, and $1,410,000, respectively, of noncash advertising and
promotional charges pursuant to the NBC and Hearst advertising and
operating agreements. See Note 3--Advertising and Operating Agreements.
(k) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
(l) Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method pursuant to Accounting
Principles Board (APB) Opinion No. 25. As such, compensation expense is
recorded on the date of grant when the fair value of the underlying common
stock exceeds the exercise price for stock options or the purchase price
for the issuance or sales of common stock. Pursuant to Statement of
Financial Accounting Standards (SFAS) No. 123, the Company discloses the
pro forma effects of using the fair value method of accounting for stock-
based compensation arrangements. See Note 6--Capitalization.
The Company accounts for stock-based compensation arrangements with
nonemployees in accordance with the Emerging Issues Task Force Abstract
(EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services. Accordingly, unvested options held by nonemployees are subject
to revaluation at each balance sheet date based on the then current fair
market value.
Unearned deferred compensation resulting from employee and nonemployee
option grants is amortized on an accelerated basis over the vesting period
of the individual options, generally four years in accordance with
Financial Accounting Standards Board Interpretation No. 28.
(m) Comprehensive Loss
The Company has no significant components of other comprehensive loss,
and accordingly, the comprehensive loss is the same as the net loss for all
periods.
(n) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock. Diluted net loss per shares is computed
using the weighted-average number of shares of common stock outstanding
and, when dilutive, potential common shares from options and warrants to
purchase common stock using the treasury stock method and from convertible
securities using the if-converted basis. All potential common shares have
been
F-10
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares (in thousands):
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months
(Inception) to December 31, ended March 31,
December 31, ------------- ----------------
1996 1997 1998 1998 1999
-------------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Stock options................ 133 675 343 233 395
Unvested common stock subject
to repurchase............... 937 647 752 1,038 817
Preferred and common stock
warrants.................... -- -- 1,311 375 1,306
Redeemable convertible
preferred stock (as if
converted).................. 679 3,795 6,467 4,005 11,081
----- ------ ------ ------- --------
1,749 5,117 8,873 5,651 13,599
===== ====== ====== ======= ========
</TABLE>
(o) Segment Reporting
During 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS
131 establishes annual and interim reporting standards for operating
segments of a company. The statement requires disclosures of selected
segment-related financial information about products, major customers, and
geographic areas. The Company has one operating segment because it is not
organized by multiple segments for purposes of making operating decisions
or assessing performance. The chief operating decision maker evaluates
performance, makes operating decisions, and allocates resources based on
financial data consistent with the presentation in the accompanying
financial statements.
The Company's revenues have all been earned from customers in the United
States. In addition, all operations and assets are based in the United
States. Revenues from one major customer was $229,000 in 1998. Total
receivables from this customer were $171,000 at December 31, 1998.
(p) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use. SOP 98-1
is effective for financial statements for years beginning after December
15, 1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company does
not expect the adoption of this standard to have a material effect on the
Company's capitalization policy.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative
F-11
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
instruments, including derivative instruments embedded in other contracts,
and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This statement does
not apply to the Company as the Company currently does not have any
derivative instruments or hedging activities.
(3) Advertising and Operating Agreements
Advertising Agreements
The Company entered into three separate agreements with the National
Broadcasting Company (NBC) whereby NBC provides the Company with advertising
time and promotes the Company's services on television, primarily during prime
time programs, in exchange for preferred stock and warrants described as
follows:
(i) On April 22, 1998, the Company issued 213,675 shares of Series C
Redeemable Convertible Preferred Stock (Series C Stock) at a price of
$4.68 per share, which converts into 250,000 shares of common stock,
in exchange for advertising spots provided by NBC.
(ii) On August 31, 1998, the Company issued 170,940 shares of Series C
Stock at a price of $4.68 per share, which converts into 200,000
shares of common stock, and warrants to purchase 125,000 shares of
Series D Redeemable Convertible Preferred Stock (Series D Stock) with
an exercise price of $6.00 per share in exchange for advertising
spots provided by NBC. The warrant is exercisable at any time prior
to August 31, 2003 and is valued at approximately $425,000 using the
Black Scholes option pricing model.
(iii) On August 21, 1998, the Company entered into a letter agreement
whereby NBC will provide the Company with the use of advertising
spots having an aggregate discounted rate card value of $2,400,000 in
exchange for 600,000 shares of Series D Stock valued at $4.00 per
share and warrants to purchase 266,667 shares of Series D Stock with
a weighted average exercise price of $8.44 per share (the Contingent
Shares). For each $800,000 of advertising spots provided, the Company
will issue 200,000 shares of Series D Stock and warrants to purchase
41,667, 125,000, and 100,000 shares of Series D Stock in the first,
second, and third tranches, respectively. As of March 31, 1999, NBC
had not provided any advertising spots pursuant to this agreement.
On October 30, 1998, the Company entered into an agreement with the New Media
and Technology division of Hearst Communications, Inc. (Hearst) whereby Hearst
will provide advertising space to the Company in selected national
publications. The advertising has an aggregate discounted rate card value of
$3,000,000 and will be provided in exchange for 750,000 shares of Series D
Stock (the Contingent Shares). For every $4.00 of print advertising provided by
Hearst, the Company will issue one share of Series D Stock. For the three
months ended March 31, 1999, 171,303 shares were issuable to Hearst based on
the value of the print advertising provided in the period. These shares are
considered to be issued and outstanding for purposes of presentation in the
accompanying balance sheet.
F-12
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The Company charged approximately $2,228,000, $1,000,000, and $695,000 for
the year ended December 31, 1998 and for the three months ended March 31, 1998
and 1999, respectively, to noncash advertising and promotional charges in the
statement of operations pursuant to the above arrangements. The value of the
advertising spots was determined based on the fair value of the equity
instruments on the date the advertising was provided. In accordance with EITF
No. 96-18, the Contingent Shares and related advertising expense will be
determined based on the fair value of the common stock and warrants exchanged
for the services received. The estimated value of the advertising incurred in
each period based on rates discounted from the respective rate card was
approximately $1,800,000, $1,000,000 and $580,000 for the year ended December
31, 1998 and the three months ended March 31, 1998 and 1999, respectively.
In April 1999, the Company amended the NBC and Hearst advertising agreements.
See Note 11--Subsequent Events.
Operating Agreements
During 1998, the Company entered into two operating agreements with NBC and
NBC Multimedia whereby the Company and NBC jointly produce, market, and promote
the Company's online properties and involves the integration of the Company's
and NBC's Web sites over a period of two to three years. In connection with
these agreements, the Company issued preferred stock and warrants to NBC and
NBC Multimedia as follows:
(i) The Company executed an operating agreement whereby the Company issued
a warrant to purchase 375,000 shares of common stock with an exercise
price of $4.00 per share. The warrant is exercisable at any time prior
to its expiration in February 2003. Of the shares issuable upon
exercise of the warrants, 50% and 25% are subject to cancellation, if
not previously exercised, in the event that NBC cancels the agreement
for convenience prior to February 25, 1999 and February 25, 2000,
respectively (the Variable Warrants). The warrant was initially valued
at approximately $630,000 using the Black-Scholes option pricing
model.
(ii) The Company executed an operating agreement whereby the Company issued
500,000 shares of Series D Stock valued at $4.00 per share and a
warrant to purchase 130,556 shares of Series D Stock with a weighted
average exercise price of $7.66 per share. The warrant is exercisable
at any time prior to their expiration in August 2003. Of the shares
issuable upon exercise of the warrant, 25% are subject to
cancellation, if not previously exercised, in the event that NBC
cancels the agreement for convenience prior to August 21, 2001 (the
Variable Warrants). The warrant was initially valued at approximately
$439,000 using the Black-Scholes option pricing model.
The total value attributed to the operating agreements is being amortized
ratably over the term of the respective agreements, which coincides with when
the services are received. For the year ended December 31, 1998 and for the
three months ended March 31, 1998 and 1999, amortization expense related to
these agreements of approximately $663,000,
F-13
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
$39,000 and $715,000, respectively, was recorded to noncash advertising and
promotional charges in the statement of operations. In accordance with EITF No.
96-18, the Variable Warrants are subject to revaluation at each balance sheet
date based on the then current fair value through the date the related
cancellation or repurchase rights lapse. As of December 31, 1998 and March 31,
1999, the unamortized value attributable to the noncancelable preferred stock
and warrants of $2,253,000 and $2,454,000, respectively, has been recorded in
other assets.
In April 1999, the Company amended the NBC operating agreements. See Note
11--Subsequent Events.
(4) Financial Statement Components
(a) Cash Equivalents and Short-Term Investments
The following is a summary of cash equivalents and short-term investments as
of December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Cash equivalents:
Money markets funds........................................ $ -- $ 21
Commercial paper........................................... 1,807 4,445
Auction rate securities.................................... -- 1,300
Corporate notes............................................ -- 2,347
------ -------
1,807 8,113
------ -------
Short-term investments:
Commercial paper........................................... -- 980
Corporate notes............................................ -- 4,760
------ -------
-- 5,740
------ -------
$1,807 $13,853
====== =======
</TABLE>
As of December 31, 1997 and 1998, the contractual maturities of all debt
securities in the Company's portfolio, except auction-rate securities, were
less than one year. The contractual maturities for the auction-rate securities
exceed 10 years. However, the Company has the option of adjusting the interest
rates or liquidating these investments on their respective reset dates, which
occur every 90 days or less.
F-14
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
(b) Property and Equipment
Property and equipment consisted of the following as of December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
-------------
<S> <C> <C>
Computer equipment............................................ $ 664 $1,435
Furniture and fixtures........................................ 23 50
----- -------
687 1,485
Less accumulated depreciation................................. 139 486
----- -------
$ 548 $ 999
===== =======
</TABLE>
(c) Interest Income (Expense), Net
Interest income (expense), net consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 29, 1996 Years ended
(Inception) to December 31,
December 31, ------------
1996 1997 1998
-------------- ------------
<S> <C> <C> <C>
Interest income................................ $36 $ 339 $ 241
Interest and other expense..................... -- -- (608)
--- ----- ------
$36 $ 339 $ (367)
=== ===== ======
</TABLE>
Included in interest expense in 1998 is the value associated with the common
stock warrants issued to the holders of the notes totaling $490,000. See Note
6--Capitalization.
(5) Notes Payable
The Company has an equipment line of credit with a financial institution that
provides up to $2,000,000 in borrowings, bears interest at a rate determined on
the draw date, and currently expires in April 2002. The line of credit is
secured by the Company's fixed assets. As of December 31, 1998, $400,000 was
outstanding under this agreement with the principal amount due in 48 monthly
installments beginning in May 1998. These amounts bear interest at a fixed rate
of approximately 20%.
The aggregate principal payments due under the line of credit subsequent to
December 31, 1998 are as follows: 1999, $127,000; 2000, $152,000; 2001,
$93,000; and 2002, $28,000.
F-15
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
(6) Capitalization
(a) Redeemable Convertible Preferred Stock
A summary of redeemable convertible preferred stock as of December 31, 1998
follows:
<TABLE>
<CAPTION>
Noncumulative Liquidation Redemption
Shares dividend preference price
outstanding per share per share per share
----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Series A.................... 150,000 $0.16 $2.00 $2.00
Series A1................... 350,000 0.16 2.00 2.00
Series B.................... 3,294,785 0.22 2.80 2.80
Series C.................... 384,615 0.38 4.68 4.68
Series D.................... 6,750,509 0.32 4.00 4.00
----------
10,929,909
==========
</TABLE>
At any time after November 30, 2001, following the written request of the
holders of a majority of the then outstanding shares of preferred stock, the
Company must redeem all or any part of the then outstanding shares of preferred
stock for cash at the greater of the redemption price or the then current fair
market value.
Each share of the Series A, A1, B, and D redeemable preferred stock is
convertible into common stock at a rate of 1.00 shares of common stock for one
share of preferred stock and is subject to certain adjustments for
antidilution. Pursuant to antidilution adjustments, the Series C Stock is
convertible at a rate of 1.17 shares of common stock for 1 share of Series C
Stock. The redeemable preferred stock automatically converts to common stock
upon completion of a public offering of the Company's common stock or at such
time as the Company receives the consent of the majority of the holders of each
series of the preferred stock. The holders of the redeemable preferred stock
are entitled to the number of votes equal to the number of shares of common
stock on an "as if converted" basis.
No dividends have been declared or paid on either the preferred stock or
common stock since inception of the Company.
The Company borrowed approximately $2,900,000 under a convertible loan
arrangement from April 1998 through August 1998. Advances were at an interest
rate of 9% per annum. In connection with the issuance of the Series D Stock in
September 1998, notes of $2,634,000, including accrued interest, were converted
into 658,476 shares of Series D Stock and the remaining notes were repaid in
full.
(b) Common Stock
As of December 31, 1998, the Company has reserved 10,994,812 shares of common
stock for the future conversion of the Series A through D Preferred Stock.
F-16
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The Company has issued to the Company's founders 2,300,000 shares of common
stock, which are subject to repurchase on termination of employment. As of
December 31, 1998, 468,520 shares were subject to repurchase. Such repurchase
rights terminate upon the completion of a public offering of the Company's
common stock.
Option holders have exercised options to purchase shares of restricted common
stock in exchange for stockholder promissory notes. The notes are secured by
the underlying shares of common stock and were issued with full recourse
rights. The notes bear interest at 6% and expire on various dates ranging from
November 2006 to March 2009. The Company has the right to repurchase all
unvested shares purchased by the notes at the original exercise price in the
event of employee termination. The number of shares subject to this repurchase
right decreases as the shares vest under the original option terms, generally
over four years. As of December 31, 1998 and March 31, 1999, there were 732,979
and 855,684 shares, respectively, subject to repurchase. These options were
exercised at prices ranging from $0.02 to $0.60 with a weighted average
exercise price of $0.26 per share. The options exercised to date have a
weighted average fair value of $0.28 per share.
(c) Stock Option Plan
The Company's 1996 Stock Option Plan (the 1996 Plan) provides for stock
options to be granted to employees, independent contractors, officers, and
directors. Options are generally granted at an exercise price which
approximates 100% of the estimated fair market value per share at the date of
grant, as determined by the Company's Board of Directors. All options are
granted at the discretion of the Company's Board of Directors and have a term
not greater than 10 years from the date of grant. Options issued generally vest
ratably over 4 years, 25% one year after the grant date and the remainder at a
rate of 1/36 per month thereafter.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
Options exercise Options exercise Options exercise
outstanding price outstanding price outstanding price
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $-- 207,750 $0.20 674,801 $0.26
Options granted......... 1,823,200 0.24 520,551 0.28 315,623 0.92
Options exercised....... (1,612,200) 0.32 -- -- (534,519) 0.26
Options canceled........ (3,250) 0.20 (53,500) 0.28 (112,907) 0.38
---------- ------- --------
Outstanding at end of
year................... 207,750 0.20 674,801 0.26 342,998 0.82
========== ======= ========
Shares available for
future grant........... 805,050 488,000 315,336
========== ======= ========
</TABLE>
In connection with its grants of options, the Company has recognized unearned
deferred compensation expense of $892,000 for the year ended December 31, 1998.
Of this amount, $618,000
F-17
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
related to 301,623 options granted to employees with exercise prices below the
deemed fair market value of the common stock. The weighted average exercise
price and weighted average fair value for these options were $0.78 and $2.82,
respectively. The remaining $274,000 relates to the value of option grants to
non-employees determined using the Black-Scholes option pricing model.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options Vested
--------------------------------- ---------------------
Weighted-
average
Range remaining Weighted- Weighted-
of contractual average average
exercise Number life exercise Number exercise
prices outstanding (years) price outstanding price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.20-0.40 265,374 8.99 $0.30 149,110 $0.28
2.00 40,500 9.81 2.00 -- --
3.00-4.00 37,124 9.91 3.32 -- --
------- -------
342,998 9.18 0.82 149,110 0.28
======= =======
</TABLE>
The Company uses the intrinsic-value method in accounting for its stock-based
compensation plans. Accordingly, no compensation cost 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 compensation costs been
determined in accordance with SFAS No. 123 for all of the Company's stock based
compensation plans, net loss and basic and diluted net loss per share would not
have been materially impacted.
The weighted-average fair value of employee stock options granted during
1996, 1997, and 1998 was $0.06, $0.08 and $2.02, respectively. The fair value
of employee options granted was estimated on the date of grant using the
minimum value method. The following weighted-average assumptions were used in
the employee and nonemployee calculations for 1996, 1997, and 1998:
(i) dividend yield of 0%; (ii) expected volatility of 0% for employees and 45%
in 1996 and 1997 and 135% in 1998 for nonemployees; (iii) weighted average
risk-free interest rate of approximately 6% in 1996 and 1997 and 5% in 1998;
and (iv) expected life of three years for employees and ten years for
nonemployees.
(d) Preferred Stock Subscribed and Warrants
In August and October 1998, the Company agreed to issue 600,000 and 750,000
shares of the Series D Stock in exchange for television and print advertising,
respectively. In addition, the Company agreed to issue warrants to purchase
266,667 shares of Series D stock associated with the August 1998 advertising
agreement. As the associated advertising services have not yet been provided,
these shares and warrants were not issued as of December 31, 1998. As of March
31, 1999, 171,303 shares were issuable pursuant to these agreements based on
advertising provided to date. Although these shares were not delivered until
April 15, 1999, they are considered issued and
F-18
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
outstanding at March 31, 1999 for purposes of presentation in the accompanying
balance sheet. See Note 3--Advertising and Operating Agreements.
In connection with the Series D Stock issuance, the Company issued warrants
to two investment banking firms to purchase 123,830 shares of Series D Stock
with an exercise price of $4.00 per share. The warrants are exercisable any
time prior to September 4, 2003 and are valued at approximately $438,000 using
the Black-Scholes option pricing model. The fair value of the warrants was
deemed to be a direct financing cost associated with the Series D Stock
issuance and was accreted to Redeemable Convertible Preferred Stock in 1998 and
has been presented as an increase in the net loss applicable to common
stockholders in the 1998 statement of operations.
In connection with the NBC operating and advertising agreements, the Company
issued warrants to purchase 375,000 shares of common stock and 255,556 shares
of the Series D Stock. See Note 3--Advertising and Operating Agreements.
In connection with the convertible loan financing, the Company issued
warrants to purchase 290,300 shares of common stock with an exercise price of
$3.00 per share. The warrants may be exercised at any time prior to the fifth
anniversary of the issuance of the warrants, ranging from April 2003 through
July 2003. The warrants are valued at approximately $490,000 using the Black-
Scholes option pricing model. The fair value of the warrants was deemed to be
additional interest expense and charged to Interest Income (Expense), Net in
1998.
The following weighted-average assumptions were used in estimating the fair
value of the warrants issued in 1998: (i) dividend yield of 0%; (ii) expected
volatility of 135%; (iii) weighted average risk-free interest rate of
approximately 5%; and (iv) expected life of five years.
(7) Income Taxes
Income tax expense of $800, $800, and $8,000 in 1996, 1997 and 1998,
respectively, consisted of minimum state income taxes.
The reconciliation between the amount computed by applying the U. S. federal
statutory tax rate of 34% to the net loss and the actual provision for income
taxes for the periods ending December 31, 1996, 1997 and 1998, follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ------- -------
<S> <C> <C> <C>
Income tax benefit at statutory rate............... $(445) $(2,173) $(5,270)
State income tax, net of federal benefit........... 1 1 8
Current year net operating loss and temporary
differences for which no benefit has been
recognized........................................ 439 2,153 4,969
Other.............................................. 6 20 301
----- ------- -------
Total.......................................... $ 1 $ 1 $ 8
===== ======= =======
</TABLE>
F-19
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $3,068 $8,812
Preferred and common stock warrants........................ -- 582
Property and equipment..................................... 202 179
Research credit carryforwards.............................. 97 233
Other...................................................... -- 117
------ ------
Total gross deferred tax assets.......................... 3,367 9,923
Valuation allowance.......................................... (3,367) (9,923)
------ ------
Total net deferred tax assets............................ $ -- $ --
====== ======
</TABLE>
Management has established a full valuation allowance against its net
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the 15-year carryforward period. The net
increase in total valuation allowance for the years ended December 31, 1997 and
1998 was approximately $2,826,000 and $6,556,000, respectively.
The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $20,762,000 and $19,842,000, respectively,
available to reduce future taxable income subject to income taxes. The net
operating loss carryforwards for federal and California income tax purposes
expire beginning in 2011 and 2004, respectively.
The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses and credits in the event of an "ownership change." The
issuances of preferred stock have resulted in multiple ownership changes since
inception of the Company. Approximately $16,800,000 of the federal net
operating loss carryforward will be subject to an annual limitation in the
amount of $1,700,000. Any unused annual limitation can be carried over and
added to the succeeding year's annual limitation within the allowable
carryforward period. Future changes in ownership may result in additional
limitations.
The Company also has research credit carryforwards for federal and California
income tax return purposes of approximately $151,000 and $82,000, respectively,
available to reduce future income taxes. The federal research credit
carryforward expires in years 2011, 2012, and 2018. The California research
credit carryforward can be utilized indefinitely.
(9) Commitments
Operating Leases
The Company leases its facilities under noncancelable operating leases
expiring at various dates through 2004. Rent expense was approximately $63,000,
and $211,000 for the years ended December 31, 1997 and 1998.
F-20
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................. $ 402
2000................................................................. 414
2001................................................................. 427
2002................................................................. 437
2003 and thereafter.................................................. 102
------
Total minimum lease payments..................................... $1,782
======
</TABLE>
(10) Retirement Plan
Effective January 1997, the Company established a qualified 401(k) Plan (the
Plan) available to all employees who meet the Plan's eligibility requirements.
Participants may elect to contribute a percentage of their compensation to this
Plan up to a statutory maximum amount. The Company may make matching
contributions to the Plan on a discretionary basis. The Company has not made
any contributions to the Plan in 1997, 1998 or the three months ended 1999.
(11) Subsequent Events
Amendment of NBC and Hearst Agreements
On April 15, 1999, the Board of Directors amended the advertising and
operating agreements with NBC and Hearst to effect the immediate issuances of
the warrants and shares of preferred stock as follows:
. 600,000 shares of Series D Stock and warrants to purchase 266,667 shares
of Series D Stock pursuant to the NBC advertising agreement dated August
21, 1998;
. 750,000 shares of Series D Stock pursuant to the Hearst advertising
agreement;
. A warrant to purchase 375,000 shares of common stock in exchange for and
upon cancellation of the previous warrant issued to NBC pursuant to the
operating agreement dated February 27, 1998; and,
. Warrants to purchase 130,556 shares of Series D Stock in exchange for
and upon cancellation of the previous warrants issued to NBC pursuant to
the operating agreement dated August 21, 1998.
All the warrants and preferred stock issued pursuant to the above are
noncancelable and nonforfeitable. Accordingly, the fair market value of these
instruments will be measured and fixed on the date of issuance. The fair value
of the preferred stock and warrants of $11.5 million issued in connection with
the advertising agreements will be recorded to Other Assets and charged to
operations as the advertisements are run. The fair value of the common stock
warrants of $349,000 (valued as of March 31, 1999) will be recorded in Other
Assets and amortized over the remaining
F-21
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
term of the respective operating agreements. Subsequent to March 31, 1999,
noncash charges of approximately $14,300,000 (of which $11,500,000 is
attributable to the advertising agreements and $2,800,000 is attributable to
the operating agreements) will be charged to operations as the related
advertising is run or promotional services are received, of which the Company
expects to incur $14,300,000 million in the year ending December 31, 1999.
These amounts were determined based on the fair value of the Series E
Redeemable Convertible Preferred Stock issued on the same date.
Series E Redeemable Convertible Preferred Stock
On April 15, 1999, the Company issued 2,499,882 shares of Series E Redeemable
Convertible Preferred Stock (Series E) at a purchase price of $8.00 per share
for total proceeds of approximately $20.0 million. Holders of Series E
preferred stock are entitled to receive annual noncumulative dividends at the
rate of $0.32 per share. Each outstanding share is convertible on a one for one
basis. Upon liquidation, the holders of Series E preferred stock are entitled
to receive $8.00 per share. Holders of Series E are subject to all other rights
and preferences of the previously issued preferred stock.
The following unaudited pro forma financial information presents the
financial position of the Company as if the amendments to the NBC and Hearst
Agreements and the issuance of the Series E Redeemable Convertible Preferred
Stock occurred on March 31, 1999:
<TABLE>
<CAPTION>
Pro
Actual Forma
-------- --------
<S> <C> <C>
Cash, cash equivalents and short-term investments......... $9,224 $ 29,223
Working capital........................................... 7,768 39,250
Total assets.............................................. 14,572 46,403
Long-term obligations, net of current portion............. 237 237
Redeemable convertible preferred stock and warrants....... 39,979 71,461
Total stockholders' deficit............................... (28,359) (28,010)
</TABLE>
Initial Public Offering
On April 23, 1999, the Board of Directors authorized the filing of a
registration statement with the 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 Redeemable Convertible Preferred Stock will
automatically convert into shares of common stock based on the respective
conversion ratios.
Reverse Stock Split and Reincorporation
On April 23, 1999, the Board of Directors authorized a one for two reverse
stock split of the Company's common stock and preferred stock and a
reincorporation of the Company into the state of Delaware. As part of the
reincorporation the common stock par value will be adjusted to equal
F-22
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
$0.001 per share and to the number of common shares authorized will be
increased to 100,000,000, effective prior to the closing of the Company's
anticipated IPO. The share information in the accompanying financial statements
has been retroactively restated to reflect the effect of this reverse stock
split for all periods presented.
Stock Plans
The Board of Directors approved, on April 23, 1999, the 1999 Employee Stock
Purchase Plan. The common stock available for sale under the plan shall be
500,000 plus an annual increase to be added on the first day of the Company's
fiscal year beginning in 2000 equal to the lesser of (i) 500,000 shares, (ii)
2% of the outstanding shares on such date, or (iii) a lesser amount determined
by the Board.
The Board of Directors also approved a 1999 Director Option Plan reserving
250,000 shares of common stock for issuance thereunder and an amendment and
restatement to the 1996 Plan increasing the shares of common stock reserved for
issuance thereunder by 750,000. The amendment and restatement of the 1996 Plan
also provides for the automatic annual increase in the number of shares
reserved for issuance under the 1996 Plan by the lesser of 750,000 shares, 4%
of the then outstanding shares of common stock or a lesser an amount determined
by the Board of Directors.
F-23
<PAGE>
[INSIDE BACK COVER]
Text: 2,000 trained community leaders and moderators make the difference.
Text: Talk City's trained community leaders and moderators keep the
service family-oriented, welcoming and friendly. Here are a few
faces behind the nicknames.
[This page will contain photos and personal profiles of five community leaders
and moderators.]
Text: www.talkcity.com
<PAGE>
4,500,000 Shares
[TALK CITY LOGO]
Common Stock
---------------------
PROSPECTUS
, 1999
---------------------
Lehman Brothers
Volpe Brown Whelan & Company
U.S. Bancorp Piper Jaffray
Internet distribution by
E*TRADE Securities
<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 by the registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
----------
<S> <C>
Registration Fee................................................. $ 14,387
NASD Fee......................................................... 5,675
Nasdaq Listing Fee............................................... 90,000
Legal Fees and Expenses.......................................... 500,000
Accounting Fees and Expenses..................................... 275,000
Printing and Engraving Expenses.................................. 125,000
Blue Sky Fees and Expenses....................................... 5,000
Transfer Agent Fees.............................................. 10,000
Miscellaneous.................................................... 74,938
----------
Total.......................................................... $1,100,000
==========
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, the
registrant's amended and restated certificate of incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the bylaws of
the registrant provide that: (1) the registrant is required to indemnify its
directors and executive officers and persons serving in such capacities in
other business enterprises at the registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (2) the registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (3) the registrant is required to
advance expenses, as incurred, to its directors and executive officers in
connection with defending a proceeding, except that it is not required to
advance expenses to a person against whom the registrant brings a claim for
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct, knowing violation of law or deriving an improper personal benefit;
(4) the rights conferred in the bylaws are not exclusive, and the registrant is
authorized to enter into indemnification agreements with its directors,
executive officers and employees; and (5) the registrant may not retroactively
amend the bylaw provisions in a way that it adverse to such directors,
executive officers and employees in these matters.
The registrant's policy is to enter into indemnification agreements with each
of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the bylaws, as well as additional
II-1
<PAGE>
procedural protections. In addition, such indemnification agreements provide
that the registrant's directors and executive officers will be indemnified to
the fullest possible extent not prohibited by law against all expenses,
including attorney's fees, and settlement amounts paid or incurred by them in
any action or proceeding, including any derivative action by or in the right of
the registrant, on account of their services as directors or executive officers
of the registrant or as directors or officers of any other company or
enterprise when they are serving in such capacities at the request of the
registrant. The registrant will not be obligated pursuant to the
indemnification agreements to indemnify or advance expenses to an indemnified
party with respect to proceedings or claims initiated by the indemnified party
and not by way of defense, except with respect to proceedings specifically
authorized by the registrant's board of directors or brought to enforce a right
to indemnification under the indemnification agreement, the registrant's bylaws
or any statute or law. Under the agreements, the registrant is not obligated to
indemnify the indemnified party (1) for any expenses incurred by the
indemnified party with respect to any proceeding instituted by the indemnified
party to enforce or interpret the agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous; (2) for any amounts paid in settlement of a proceeding unless the
registrant consents to such settlement; (3) with respect to any proceeding
brought by the registrant against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith
or was frivolous; (4) on account of any suit in which judgment is rendered
against the indemnified party for an accounting of profits made from the
purchase or sale by the indemnified party of securities of the registrant
pursuant to the provisions of (S)16(b) of the Securities Exchange Act of 1934,
and related laws; (5) on account of the indemnified party's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct or a knowing violation of the law; (6) on
account of any conduct from which the indemnified party derived an improper
personal benefit; (7) on account of conduct the indemnified party believed to
be contrary to the best interests of the registrant or its stockholders; (8) on
account of conduct that constituted a breach of the indemnified party's duty of
loyalty to the registrant or its stockholders; or (9) if a final decision by a
court having jurisdiction in the matter shall determine that such
indemnification is not lawful.
The indemnification provision in the bylaws and the indemnification
agreements entered into between the registrant and its directors and executive
officers may be sufficiently broad to permit indemnification of the
registrant's officers and directors for liabilities arising under the
Securities Act of 1933.
Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement..................................... 1.1
Amended and Restated Certificate of Incorporation of the
registrant........................................................ 3.1
Form of Second Amended and Restated Certificate of Incorporation of
the registrant to be filed upon closing of the offering........... 3.2
Bylaws of registrant............................................... 3.3
Form of Indemnification Agreement entered into by the registrant
with each of its directors and executive officers................. 10.1
</TABLE>
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since March 29, 1996, the registrant has issued and sold the securities
described below.
(a) From March 29, 1996, to April 30, 1999, the registrant issued and sold an
aggregate of 2,035,302 shares of unregistered common stock to 30 directors,
officers, employees, former employees and consultants at prices ranging from
$0.02 to $5.00 per share, for aggregate cash consideration of approximately
$958,938, of which approximately $916,400 is subject to outstanding promissory
notes payable to the registrant. These shares were sold pursuant to the
exercise of options granted by the board. As to each director, officer,
employee, former employee and consultant of the registrant who was issued such
securities, the registrant relied upon Rule 701 of the Securities Act of 1933.
Each such person purchased securities of the registrant pursuant to a written
contract between such person and the registrant. In addition, the registrant
met the conditions imposed under Rule 701(b).
(b) On April 1, 1996, the registrant sold in the aggregate 2,300,000 of
unregistered common stock at a price per share of $0.02, which such amounts
reflect a ten-for-one stock split approved by the board and stockholders in
April and May of 1996, respectively, to Peter H. Friedman and Jenna Woodul, for
aggregate cash consideration of $46,000. These shares were sold pursuant to
repurchase agreements between the registrant and each such individual. As to
each person issued such securities, the registrant relied upon Section 4(2) of
the Securities Act of 1933.
(c) On June 4, 1996, the registrant sold in the aggregate 150,000 shares of
unregistered Series A preferred stock at a price per share of $2.00 to Joseph
A. Graziano for aggregate cash consideration of $300,000. The registrant relied
upon Section 4(2) of the Securities Act of 1933 in connection with the sale of
these shares.
(d) On July 15, 1996, the registrant issued and sold in the aggregate 350,001
shares of unregistered Series A1 preferred stock at a price per share of $2.00
to certain investors for aggregate cash consideration of $700,000. These shares
were sold pursuant to a Series A1 preferred stock purchase agreement between
the registrant and such investors. The issuance was made in reliance upon
Section 4(2) of the Securities Act of 1933.
(e) On November 20, 1996, the registrant sold in the aggregate 3,294,790
shares of unregistered Series B preferred stock at a price per share of $2.80
to certain investors for aggregate cash consideration of $9,225,400. The shares
were sold pursuant to a Series B preferred stock purchase agreement between the
registrant and such investors. The registrant relied upon Section 4(2) of the
Securities Act of 1933 and Regulation D, Rule 506, in connection with the sale
of these shares. The sale of Series B preferred stock was made in compliance
with all of the terms of Rules 501 and 502 of Regulation D, there were no more
than 35 investors, as calculated pursuant to Rule 501(e) of Regulation D, and
each investor who was not an accredited investor represented to the registrant
that it had such knowledge and experience in financial and business matters
that it was capable of evaluating the merits and risks of the investment.
(f) In April and July 1998, the registrant issued and sold (1) 40
unregistered convertible promissory notes in the aggregate principal amount of
$2,903,000, (2) 40 unregistered warrants exercisable for an aggregate of
290,300 shares of unregistered common stock, at an exercise price
II-3
<PAGE>
per share of $3.00, and (3) in the aggregate 2,890 shares of unregistered
senior preferred stock, pursuant to a bridge loan financing. The bridge notes,
bridge warrants and senior preferred stock were issued to a limited number of
investors pursuant to a note and warrant purchase agreement. Pursuant to their
terms, the principal amount of the bridge notes, plus the accrued interest
thereon, were convertible, at the option of the holders, into shares of the
registrant's capital stock issued in the registrant's next equity financing
simultaneously with the initial closing of such financing. The bridge warrants
may be exercised in whole or in part at any time prior to five years from their
respective date of issuance and may be exercised for cash or pursuant to a net
exercise provision contained therein. The senior preferred stock entitled its
holders to rights upon narrowly-defined acquisitions of the registrant. The
senior preferred stock had no other rights and all outstanding shares of the
senior preferred stock were automatically canceled and null and void as of the
initial closing of the Series D preferred stock financing of the registrant.
The registrant relied upon Section 4(2) of the Securities Act of 1933 and
Regulation D, Rule 506, in connection with the sale of these securities. The
sale of the bridge notes, bridge warrants and senior preferred stock were made
in compliance with all of the terms of Rules 501 and 502 of Regulation D, there
were no more than 35 investors, as calculated pursuant to Rule 501(e) of
Regulation D, and each investor who was not an accredited investor represented
to the registrant that it had such knowledge and experience in financial and
business matters that it was capable of evaluating the merits and risks of the
investment.
(g) On April 22, 1998, the registrant issued and sold in the aggregate
213,675 shares of Series C preferred stock, or 250,000 shares of unregistered
common stock issuable upon conversion of the Series C preferred stock, at a
price per share of $4.68, to National Broadcasting Company, Inc. in
consideration for the broadcast by NBC television network of advertising spots
prepared by the registrant over a time period mutually agreed upon by the
registrant and NBC. The agreed upon aggregate consideration to the registrant
was $1,000,000. The shares were sold pursuant to a Series C preferred stock
purchase agreement. The registrant relied upon Section 4(2) of the Securities
Act of 1933 and Regulation D, Rule 506, in connection with the sale of these
shares. The sale of Series C preferred stock was made in compliance with all of
the terms of Rules 501 and 502 of Regulation D, there were no more than 35
investors, as calculated pursuant to Rule 501(e) of Regulation D, and each
investor who was not an accredited investor represented to the registrant that
it had such knowledge and experience in financial and business matters that it
was capable of evaluating the merits and risks of the investment.
(h) On April 22, 1998, the registrant issued and sold an unregistered warrant
to purchase 320,513 shares of unregistered common stock, with an exercise price
per share of $4.68, to NBC Multimedia, Inc. in consideration for NBC
Multimedia's agreement to include localized versions of the registrant's chat
service among the list of primary services offered as part of NBC Interactive
Neighborhood's menu of localized world wide web services. This warrant is
referred to elsewhere in this registration statement as the Original Multimedia
Warrant. The agreed upon aggregate consideration to the registrant was
$1,500,000. The Original Multimedia Warrant was issued pursuant to a warrant
purchase agreement. The Original Multimedia Warrant may be exercised in whole
or in part at any time prior to April 22, 2003, and may be exercised for cash
or pursuant to a net exercise provision contained therein. The registrant
relied upon Section 4(2) of the Securities Act of 1933 and Regulation D, Rule
506, in connection with the sale of the Original Multimedia Warrant. The sale
of the Original Multimedia Warrant was made in compliance with all of the terms
II-4
<PAGE>
of Rules 501 and 502 of Regulation D, there were no more than 35 investors, as
calculated pursuant to Rule 501(e) of Regulation D, and each investor who was
not an accredited investor represented to the registrant that it had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment.
(i) In August and September 1998, the registrant sold in the aggregate
5,592,035 shares of unregistered Series D preferred stock at a price per share
of $4.00 to a limited number of investors for aggregate cash consideration of
$22,368,132. The shares were sold pursuant to a Series D preferred stock
purchase agreement. The registrant relied upon Section 4(2) of the Securities
Act of 1933 and Regulation D, Rule 506, in connection with the sale of these
shares. The sale of the Series D preferred stock was made in compliance with
all of the terms of Rules 501 and 502 of Regulation D, there were no more than
35 investors, as calculated pursuant to Rule 501(e) of Regulation D, and each
investor who was not an accredited investor represented to the registrant that
it had such knowledge and experience in financial and business matters that it
was capable of evaluating the merits and risks of the investment.
(j) On August 25, 1998, simultaneously with the initial closing of the Series
D preferred stock financing, the registrant issued in the aggregate 658,000
shares of unregistered Series D preferred stock, at a conversion price per
share of $4.00, to the holders of the bridge notes in consideration for the
cancellation of the principal and accrued interest on such notes as of August
24, 1998. In addition, all 1,445 outstanding shares of senior preferred stock
were canceled and declared null and void as of such date. The registrant relied
upon Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in
connection with the sale of these shares. The sale of the Series D preferred
stock was made in compliance with all of the terms of Rules 501 and 502 of
Regulation D, there were no more than 35 investors, as calculated pursuant to
Rule 501(e) of Regulation D, and each investor who was not an accredited
investor represented to the registrant that it had such knowledge and
experience in financial and business matters that it was capable of evaluating
the merits and risks of the investment.
(k) On August 31, 1998, the registrant issued and sold (1) in the aggregate
170,940 shares of unregistered Series C preferred stock, or 200,000 shares of
common stock issuable upon conversion of such Series C preferred stock, at a
price per share of $4.68, and (2) an unregistered warrant to purchase 125,000
shares of unregistered Series D preferred stock, with an exercise price per
share of $1.50, to NBC in consideration for the broadcast by the NBC television
network of advertising spots prepared by the registrant over a time period
mutually agreed upon by the registrant and NBC. The agreed upon aggregate
consideration to the registrant was $1,550,000. The shares and the warrant were
issued pursuant to a Series C preferred stock, Series D preferred stock and
warrant purchase agreement. The warrant may be exercised in whole or in part at
any time prior to August 31, 2003 and may be exercised for cash or pursuant to
a net exercise provision contained therein. The registrant relied upon Section
4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in connection
with the sale of these securities. The sale of the Series C preferred stock and
warrant were made in compliance with all of the terms of Rules 501 and 502 of
Regulation D, there were no more than 35 investors, as calculated pursuant to
Rule 501(e) of Regulation D, and each investor who was not an accredited
investor represented to the registrant that it had such knowledge and
II-5
<PAGE>
experience in financial and business matters and that it was capable of
evaluating the merits and risks of the investment.
(l) On August 31, 1998, the registrant issued and sold (1) in the aggregate
500,000 shares of unregistered Series D preferred stock at a price per share of
$4.00, and (2) an unregistered warrant to purchase 130,555 shares of
unregistered Series D preferred stock, to NBC Multimedia in consideration for
the execution and delivery of the operating agreement by and between the
registrant and NBC Multimedia. The warrant has the following exercise prices
per share: with respect to 55,555 of the shares, $6.00; with respect to 41,667
of the shares, $8.00; and with respect to 33,333 of the shares, $10.00. The
agreed upon aggregate consideration to the registrant was $3,000,000. The
shares and the warrant were issued pursuant to a Series C preferred stock,
Series D preferred stock and warrant purchase agreement. The warrant may be
exercised in whole or in part at any time prior to August 31, 2003 and may be
exercised for cash or pursuant to a net exercise provision contained therein.
The registrant relied upon Section 4(2) of the Securities Act of 1933 and
Regulation D, Rule 506, in connection with the sale of these securities. The
sale of the Series D preferred stock and warrant was made in compliance with
all of the terms of Rules 501 and 502 of Regulation D, there were no more than
35 investors, as calculated pursuant to Rule 501(e) of Regulation D, and each
investor who was not an accredited investor represented to the registrant that
it had such knowledge and experience in financial and business matters that it
was capable of evaluating the merits and risks of the investment.
(m) On August 31, 1998, the registrant issued a new unregistered warrant to
Multimedia, to replace the Original Multimedia Warrant, exercisable for 325,000
shares of unregistered common stock with a new exercise price per share of
$4.00. This new warrant is referred to elsewhere in this registration statement
as the New Multimedia Warrant. The New Multimedia Warrant was issued to
Multimedia due to the anti-dilution provisions of the Original Multimedia
Warrant. The New Multimedia Warrant may be exercised in whole or in part at any
time prior to April 22, 2003, and may be exercised for cash or pursuant to a
net exercise provision contained therein. The registrant relied upon Section
4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in connection
with the sale of the New Multimedia Warrant. The sale of the New Multimedia
Warrant was made in compliance with all of the terms of Rules 501 and 502 of
Regulation D, there were no more than 35 investors, as calculated pursuant to
Rule 501(e) of Regulation D, and each investor who was not an accredited
investor represented to the registrant that it had such knowledge and
experience in financial and business matters that it was capable of evaluating
the merits and risks of the investment.
(n) On September 14, 1998, the registrant issued and sold three unregistered
warrants exercisable for an aggregate of 123,830 shares of unregistered Series
D preferred stock, at an exercise price per share of $4.00. The warrants were
issued to Refco Securities, Inc. and Volpe Brown Whelan & Company. Each of the
warrants may be exercised in whole or in part at any time prior to September
14, 2003 and may be exercised for cash only. The registrant relied on Section
4(2) of the Securities Act of 1933 and Regulation D, Rule 506 in connection
with the sale of the securities. The sale of the warrants was made in
compliance with all of the terms of Rule 501 and 502 of Regulation D, there
were no more than 35 investors, as calculated pursuant to Rule 501(e) of
Regulation D, and each investor who was not an accredited investor represented
to the registrant that
II-6
<PAGE>
it had knowledge and experience in financial and business matters and that it
was capable of evaluating the merits and risks of the investment.
(o) On April 15, 1999, the registrant issued and sold in the aggregate
750,000 shares of unregistered Series D preferred stock at a price per share of
$4.00 to Hearst Communications, Inc. in consideration for the promotion of the
registrant by Hearst through publication of advertisements in various Hearst
magazines. The agreed upon consideration to the registrant was $3,000,000. The
shares were sold pursuant to a Series D preferred stock purchase agreement, as
amended. The registrant relied upon Section 4(2) of the Securities Act of 1933
and Regulation D, Rule 506, in connection with the sale of these shares. The
sale of the Series D preferred stock was made in compliance with all the terms
of Rule 501 and 502 of Regulation D, there were no more than 35 investors, as
calculated pursuant to Rule 501(e) of Regulation D, and each investor who was
not an accredited investor represented to the registrant that it had such
knowledge and expertise in financial and business matter that it was capable of
evaluating the merits and risks of the investment.
(p) On April 19, 1999, the registrant issued and sold (1) in the aggregate
600,000 shares of unregistered Series D preferred stock, at a price per share
of $4.00, and (2) an unregistered warrant to purchase 266,667 shares of
unregistered Series D preferred stock, to NBC in consideration for the
broadcast by the NBC television network of advertising spots prepared by the
registrant over a time period mutually agreed upon by the registrant and NBC.
The warrant has the following exercise prices per share: with respect to 41,667
of the shares, $6.00; with respect to 125,000 of the shares, $8.00; and with
respect to 100,000 of the shares, $10.00. The agreed upon aggregate
consideration to the registrant was $4,650,000. The shares and warrant were
issued pursuant to a Series C preferred stock, Series D preferred stock and
warrant purchase agreement, as amended. The warrant may be exercised in whole
or in part at any time prior to April 19, 2004 and may be exercised for cash or
pursuant to a net exercise provision contained therein. The registrant relied
upon Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in
connection with the sale of these securities. The sale of the Series D
preferred stock and warrant was made in compliance with all of the terms of
Rules 501 and 502 of Regulation D, there were no more than 35 investors, as
calculated pursuant to Rule 501(e) of Regulation D, and each investor who was
not an accredited investor represented to the registrant that it had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment.
(q) On April 23, 1999, the registrant issued and sold in the aggregate
2,499,884 shares of unregistered Series E preferred stock at price per share of
$8.00 to a limted number of investors for aggregate cash consideration of
$19,999,056. The shares were sold pursuant to a Series E preferred stock
purchase agreement. The sale of the Series E preferred stock was made in
compliance with all of the terms of Rules 501 and 502 of Regulation D, there
were no more than 35 investors, as calculated pursuant to Rule 501(e) of
Regulation D, and each investor who was not an accredited investor represented
to the registrant that it had such knowledge and experience in financial and
business matters that it was capable of evaluating the merits and risks of the
investment.
(r) On April 23, 1999, the registrant issued and sold an unregistered warrant
exercisable for an aggregate of 11,893 shares of unregistered Series E
preferred stock, at an exercise price per share of $8.00. The warrant was
issued to Volpe Brown Whelan & Company. The warrant may be
II-7
<PAGE>
exercised in whole or in part at any time prior to April 23, 2004 and may be
exercised for cash only. The registrant relied on Section 4(2) of the
Securities Act of 1933 and Regulation D, Rule 506 in connection with the sale
of the warrant. The sale of the warrant was made in compliance with all of the
terms of Rule 501 and 502 of Regulation D, there were no more than 35
investors, as calculated pursuant to Rule 501(e) of Regulation D, and each
investor who was not an accredited investor represented to the registrant that
it had knowledge and experience in financial and business matters and that it
was capable of evaluating the merits and risks of the investment.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through their
relationships with the registrant, to information about the registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement (draft dated June , 1999).**
3.1 Amended and Restated Certificate of Incorporation of registrant.
3.2 Form of Second Amended and Restated Certificate of Incorporation of
registrant to be filed upon the closing of the offering made under the
registration statement.
3.3 Bylaws of registrant.
4.1 Form of registrant's common stock certificate.**
4.2 Third Amended and Restated Shareholders Rights Agreement, dated April
23, 1999, between the registrant and the parties named therein, as
amended on May 26, 1999.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement entered into by registrant with each
of its directors and executive officers.
10.2 1996A Stock Option Plan and related agreements.*
10.3 Amended and Restated 1996 Stock Option Plan and related agreements.
10.4 1999 Employee Stock Purchase Plan.*
10.5 1999 Director Option Plan.*
10.6 Office Lease Agreement, dated May 21, 1997, by and between the
registrant and The Manufacturers Life Insurance Company (U.S.A.).*
10.7 Office Lease Agreement, dated February 28, 1999, by and between the
registrant and SLG Graybar LLC.*
10.8 Repurchase Agreement, dated November 20, 1996, as amended, by and
between the registrant and Peter H. Friedman.*
10.9 Repurchase Agreement, dated November 20, 1996, as amended, by and
between the registrant and Jenna Woodul.*
10.10 Stock Option Agreement, dated March 1, 1999, by and between the
registrant and Jeffrey Snetiker.*
10.11 Master Service Agreement, dated April 19, 1999, by and between the
registrant and Frontier GlobalCenter.*
10.12 Network Affiliation Agreement, dated March 1, 1998 by and between the
registrant and 24/7 Media Inc.*+
10.13 Content and Services Agreement, effective July 19, 1998, by and
between the registrant and WebTV Networks, Inc.*+
</TABLE>
II-8
<PAGE>
<TABLE>
<C> <S>
10.14 Contract, dated May 13, 1997, by and between the registrant and NFO
Research.*+
10.15 Operating Agreement, dated August 24, 1998, by and between the
registrant and Cox Interactive Media, Inc.*+
10.16 Hearst-Talk City Operating Agreement, dated April 20, 1999, by and
between the registrant and Hearst New Media and Technology division, a
division of Hearst Communications, Inc.*+
10.17 Series D Preferred Stock Purchase Agreement, dated October 30, 1998,
by and between the registrant and Hearst Communications, Inc., Hearst
New Media & Technology division, as amended on April 15, 1999.*+
10.18 NBC-Talk City Chat Services Agreement, dated August 21, 1998, by and
between the registrant and NBC Multimedia, Inc., as amended on April
19, 1999.*+
10.19 Letter Agreement, dated February 25, 1998, by and between the
registrant and NBC Multimedia, Inc., as amended on July 27, 1998 and
April 19, 1999.*+
10.20 Internet Profiles Corporation Custom Reporting Services Agreement,
dated April 5, 1999, by and between the registrant and Internet
Profiles Corporation.
21.1 Subsidiaries of the registrant.*
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of KPMG LLP, Independent Auditors.
24.1 Power of Attorney.*
27. Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be supplied by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) Financial Statement Schedules
Schedules not listed above 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 undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 14 of this
registration statement or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-9
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 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-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Campbell, State of California, on this 4th day of June 1999.
Talk City, Inc.
/s/ Peter H. Friedman
By: _________________________________
Peter H. Friedman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Peter H. Friedman President and Chief Executive June 4, 1999
_____________________________________ Officer (Principal Executive
Peter H. Friedman Officer)
/s/ Jeffrey Snetiker Senior Vice President, Chief June 4, 1999
_____________________________________ Financial and Administrative
Jeffrey Snetiker Officer (Principal Financial
and Accounting Officer)
* Director June 4, 1999
_____________________________________
Kenneth A. Bronfin
* Director June 4, 1999
_____________________________________
Joseph A. Graziano
* Director June 4, 1999
_____________________________________
Thomas P. Hirschfeld
* Director June 4, 1999
_____________________________________
John Sculley
* Director June 4, 1999
_____________________________________
Barry M. Weinman
* Director June 4, 1999
_____________________________________
Martin J. Yudkovitz
/s/ Peter H. Friedman Director June 4, 1999
*By: ________________________________
Peter H. Friedman
Attorney-in-fact
</TABLE>
II-11
<PAGE>
Exhibit Index
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement (draft dated June , 1999).**
3.1 Amended and Restated Certificate of Incorporation of registrant.
3.2 Form of Second Amended and Restated Certificate of Incorporation of
registrant to be filed upon the closing of the offering made under the
registration statement.
3.3 Bylaws of registrant.
4.1 Form of registrant's common stock certificate.**
4.2 Third Amended and Restated Shareholders Rights Agreement, dated April
23, 1999, between the registrant and the parties named therein, as
amended on May 26, 1999.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement entered into by registrant with each
of its directors and executive officers.
10.2 1996A Stock Option Plan and related agreements.*
10.3 Amended and Restated 1996 Stock Option Plan and related agreements.
10.4 1999 Employee Stock Purchase Plan.*
10.5 1999 Director Option Plan.*
10.6 Office Lease Agreement, dated May 21, 1997, by and between the
registrant and The Manufacturers Life Insurance Company (U.S.A.).*
10.7 Office Lease Agreement, dated February 28, 1999, by and between the
registrant and SLG Graybar LLC.*
10.8 Repurchase Agreement, dated November 20, 1996, as amended, by and
between the registrant and Peter H. Friedman.*
10.9 Repurchase Agreement, dated November 20, 1996, as amended, by and
between the registrant and Jenna Woodul.*
10.10 Stock Option Agreement, dated March 1, 1999, by and between the
registrant and Jeffrey Snetiker.*
10.11 Master Service Agreement, dated April 19, 1999, by and between the
registrant and Frontier GlobalCenter.*
10.12 Network Affiliation Agreement, dated March 1, 1998 by and between the
registrant and 24/7 Media Inc.*+
10.13 Content and Services Agreement, effective July 19, 1998, by and between
the registrant and WebTV Networks, Inc.*+
10.14 Contract, dated May 13, 1997, by and between the registrant and NFO
Research.*+
10.15 Operating Agreement, dated August 24, 1998, by and between the
registrant and Cox Interactive Media, Inc.*+
10.16 Hearst-Talk City Operating Agreement, dated April 20, 1999, by and
between the registrant and Hearst New Media and Technology division, a
division of Hearst Communications, Inc.*+
10.17 Series D Preferred Stock Purchase Agreement, dated October 30, 1998, by
and between the registrant and Hearst Communications, Inc., Hearst New
Media & Technology Division, as amended on April 15, 1999.*+
10.18 NBC-Talk City Chat Services Agreement, dated August 21, 1998, by and
between the registrant and NBC Multimedia, Inc., as amended on April 19,
1999.*+
10.19 Letter Agreement, dated February 25, 1998, by and between the registrant
and NBC Multimedia, Inc., as amended on July 27, 1998 and April 19,
1999.*+
10.20 Internet Profiles Corporation Custom Reporting Services Agreement, dated
April 5, 1999, by and between registrant and Internet Profiles
Corporation.
21.1 Subsidiaries of the registrant.*
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of KPMG LLP, Independent Auditors.
24.1 Power of Attorney.*
27. Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be supplied by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TALK CITY, INC.
Talk City, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), certifies that:
A. The name of the Corporation is Talk City, Inc. The original
Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on May 11, 1999.
B. This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of
the Delaware General Corporation Law by the Board of Directors of the
Corporation.
C. This Amended and Restated Certificate of Incorporation was approved by
written consent of the stockholders pursuant to Section 228 of the
Delaware General Corporation Law.
D. The Certificate of Incorporation of the Corporation is hereby amended
and restated in its entirety as follows:
Article I
---------
The name of this Corporation is Talk City, Inc. (the "Corporation").
Article II
----------
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
Article III
-----------
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the General Corporation
Law of Delaware.
Article IV
----------
The Corporation is authorized to issue two classes of stock, designated
Common Stock, par value $0.001 per share ("Common Stock") and Preferred Stock,
par value $0.001 per share ("Preferred Stock"). The total number of shares of
Common Stock the Corporation has authority to
<PAGE>
issue is 100,000,000, and the total number of shares of Preferred Stock the
Corporation has authority to issue is 45,823,549. 300,000 shares of the
Preferred Stock are designated Series A Preferred Stock ("Series A Preferred"),
700,000 shares of the Preferred Stock are designated Series A1 Preferred Stock
("Series A1 Preferred"), 6,800,000 shares of the Preferred Stock are designated
Series B Preferred Stock ("Series B Preferred"), 3,000,000 shares of the
Preferred Stock are designated Series C Preferred Stock ("Series C Preferred"),
25,000,000 shares of the Preferred Stock are designated Series D Preferred Stock
("Series D Preferred") and 5,023,549 shares of Series E Preferred Stock ("Series
E Preferred"). The rights, preferences, privileges and restrictions granted to
or imposed on the Series A1 Preferred shall be identical to those granted to the
Series A Preferred, and each reference to Series A Preferred shall be deemed a
reference to Series A1 Preferred.
The undesignated 5,000,000 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the number of shares of any such series and the designation thereof.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges and restrictions to be imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase (but not above the total number
of authorized shares of the class) or decrease (but not below the number of
shares of such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series.
Upon the filing of this Amended and Restated Certificate of Incorporation,
there shall be a one for two stock split (the "Stock Split") pursuant to which
(i) each two outstanding shares of Common Stock shall be split up and converted
into one share of Common Stock, and (ii) each two outstanding shares of
Preferred Stock shall be split up and converted into one share of Preferred
Stock. No fractional share of Common Stock or Preferred Stock shall be issued
in connection with such conversion, and in lieu of any fractional share to which
a holder of Common Stock or Preferred Stock would otherwise be entitled, the
Corporation shall pay to such holder cash equal to the product of such fraction
multiplied by the fair market value of one share of Common Stock or such
Preferred Stock (as the case may be) on the date of conversion, as determined in
good faith by the Board of Directors of the Corporation.
The Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at any
time the number of shares of Common Stock remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Preferred Stock.
The relative rights, preferences, privileges and restrictions granted to or
imposed on the respective classes of the shares of capital stock or the holders
thereof are as follows:
SECTION 1. Dividends. The holders of the Preferred Stock shall be
---------
entitled to receive, when and as declared by the Board of Directors, out of
funds legally available therefor, dividends at the rate of (i) $0.16 per share,
per annum, on each outstanding share of Series A Preferred, (ii) $0.22 per
share, per annum, on each outstanding share of Series B Preferred, (iii) $0.38
per share, per annum, on each outstanding share of Series C Preferred, (iv)
$0.32 per share, per annum, on each outstanding share of Series D Preferred, and
(v) $0.64 per share, per annum, on each
-2-
<PAGE>
outstanding share of Series E Preferred, payable in preference and priority to
any payment of any dividend on Common Stock of the Corporation for such year.
The right to such dividends on the Preferred Stock shall not be cumulative. No
dividend shall be paid on the Common Stock in any year, other than dividends
payable solely in Common Stock, until all dividends for such year have been
declared and paid on the Preferred Stock. In the event that the Board of
Directors shall have declared and paid, or set apart for payment, all dividends
on the Preferred Stock at the rates specified in this section in any one fiscal
year, and shall elect to declare additional dividends in that fiscal year out of
funds legally available therefor, such additional dividends shall be declared
and paid on each share of Preferred Stock at the same time as any dividends are
declared and paid on the Common Stock, in an amount equal to the dividends paid
on such number of shares of Common Stock into which such shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred, on the record date for such dividend payments, are convertible.
SECTION 2. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of the Corporation, either voluntary or involuntary (a
"Liquidating Event"), distributions to the shareholders of the Corporation shall
be made in the following manner:
(a) The holders of the Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock by reason of
their ownership of such stock, the amount of (i) $2.00 per share for each share
of Series A Preferred then held by them, (ii) $2.80 per share for each share of
Series B Preferred then held by them, (iii) $4.68 per share for each share of
Series C Preferred then held by them, (iv) $4.00 per share for each share of
Series D Preferred then held by them and (v) $8.00 per share for each share of
Series E Preferred then held by them, and, in addition, an amount equal to all
declared but unpaid dividends (if any) on the Preferred Stock held by them. If
the assets and funds thus distributed among the holders of the Preferred Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Preferred Stock in proportion to the aggregate
preferential amount of all shares of Preferred Stock then held by them bears to
the aggregate preferential amount of all shares of Preferred Stock outstanding
as of the date of the distribution upon the occurrence of such event.
(b) After payment has been made to the holders of the Preferred
Stock of the full amounts to which they shall be entitled as aforesaid, the
entire remaining assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Common Stock
in proportion to which the aggregate amount of all shares of Common Stock then
held by them bears to the aggregate amount of all shares of Common Stock
outstanding.
(c) For purposes of this Section 2, the sale of all or
substantially all of the assets of the Corporation, a merger or consolidation of
the Corporation with or into any other corporation or corporations, or the
merger of any other corporation or corporations into the Corporation, or any
other corporate reorganization, in which sale of assets, consolidation,
reorganization or merger the shareholders of the Corporation receive
distributions in cash or securities of another corporation or corporations as a
result of such sale of assets, consolidation, reorganization or merger shall be
deemed a Liquidating Event, unless the shareholders of the Corporation hold as a
result of their stock holdings in the Corporation more than fifty percent (50%)
of the voting equity securities of the
-3-
<PAGE>
successor or surviving corporation immediately following such merger, sale of
assets, reorganization or consolidation, in which case such merger, sale of
assets, reorganization or consolidation shall not be treated as a Liquidating
Event.
(d) Noncash Distributions. If any of the assets of the Corporation
---------------------
are to be distributed other than in cash under this Section 2 or for any
purpose, then the Board of Directors of the Corporation shall promptly engage
independent competent appraisers to determine the value of the assets to be
distributed to the holders of Preferred Stock or Common Stock. The Corporation
shall, upon receipt of such appraiser's valuation, give prompt written notice to
each holder of shares of Preferred Stock or Common Stock of the appraiser's
valuation.
(e) Consent for Certain Repurchase. Each holder of an outstanding
------------------------------
share of Preferred Stock shall be deemed to have consented, for purposes of
Section 502, 503 and 506 of the California General Corporation Law, to
distributions made by the Corporation in connection with the repurchase of
shares of Common Stock issued to or held by employees, officers, directors or
consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of such
repurchase between the Corporation and such persons.
SECTION 3. Voting Rights.
-------------
(a) General. Except as otherwise required by law, the holder of
-------
each share of Common Stock issued and outstanding shall have one vote and the
holder of each share of Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Preferred
Stock could be converted at the record date for determination of the
shareholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited, such votes to be counted together with all other
shares of stock of the Corporation having general voting power and not
separately as a class. Holders of Common Stock and Preferred Stock shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the Corporation. Fractional votes by the holders of Preferred Stock shall not,
however, be permitted and any fractional voting rights shall (after aggregating
all shares into which shares of Preferred Stock held by each holder could be
converted) be rounded to the nearest whole number.
(b) Voting for Election of Directors.
--------------------------------
(i) For so long as the holders of the Series B Preferred hold
at least twenty percent (20%) of the outstanding capital stock of the
Corporation on a fully diluted basis (including stock issuable through the
exercise of any option, warrant or right and stock reserved for employees and
consultants pursuant to any stock option plan, stock purchase plan or other
stock agreement or arrangement approved by the Board of Directors) (the "Series
B Threshold Amount"), the holders of the Series B Preferred shall be entitled,
voting separately as a class, to elect two members of the Corporation's Board of
Directors (the "Series B Designees") and to remove from office such directors
and to fill any vacancies caused by the resignation, death or removal of such
directors.
-4-
<PAGE>
(ii) For so long as the holders of the Series C Preferred,
Series D Preferred and Series E Preferred hold at least twenty percent (20%) of
the outstanding capital stock of the Corporation on a fully diluted basis
(including stock issuable through the exercise of any option, warrant or right
and stock reserved for employees and consultants pursuant to any stock option
plan, stock purchase plan or other stock agreement or arrangement approved by
the Board of Directors) (the "Series C/D/E Threshold Amount"), the holders of
the Series C Preferred, Series D Preferred and Series E Preferred shall be
entitled, voting together as a separate class, to elect three members of the
Corporation's Board of Directors (the "Series C/D/E Designees") and to remove
from office such directors and to fill any vacancies caused by the resignation,
death or removal of such directors.
(iii) Four of the remaining members of the Board of Directors
will be elected by the holders of the Common Stock and the Series A Preferred,
voting together as a class. Any other members of the Board of Directors (in
excess of nine members) will be elected by the holders of Common Stock and
Preferred Stock, voting together as a class. In the event that the holders of
the Series B Preferred no longer hold the Series B Threshold Amount or the
holders of the Series C Preferred, the Series D Preferred and the Series E
Preferred no longer hold the Series C/D/E Threshold Amount, then at such time
the positions on the Board previously held by the Series B Designees or the
Series C/D/E Designees (as applicable) will be subject to nomination and
election by the holders of Common Stock and Preferred Stock, voting together as
a class.
SECTION 4. Conversion. The holders of the Preferred Stock have
----------
conversion rights as described below (the "Conversion Rights"). The term
"Preferred Stock" as used in this Section 4 of Article IV includes the then
outstanding Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred.
(a) Right to Convert. Each share of Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for the Preferred Stock, into such number of fully paid and nonassessable shares
of Common Stock as is determined (i) in the case of the Series A Preferred by
dividing $2.00 by the Series A Conversion Price, (ii) in the case of the Series
B Preferred by dividing $2.80 by the Series B Conversion Price, (iii) in the
case of the Series C Preferred by dividing $4.68 by the Series C Conversion
Price, (iv) in the case of Series D Preferred by dividing $4.00 by the Series D
Conversion Price and (v) in the case of Series E Preferred by dividing $8.00 by
the Series E Conversion Price, determined as provided below, in effect at the
time of the conversion. The price at which shares of Common Stock shall be
deliverable upon conversion shall initially be $2.00 with respect to shares of
Series A Preferred (the "Series A Conversion Price"), $2.80 with respect to
shares of Series B Preferred (the "Series B Conversion Price"), $4.00 with
respect to shares of Series C Preferred (the "Series C Conversion Price"), $4.00
with respect to shares of Series D Preferred (the "Series D Conversion Price")
and $8.00 with respect to shares of Series E Preferred (the "Series E Conversion
Price"). The term "Conversion Price" as used herein shall refer to the Series A
Conversion Price, the Series B Conversion Price, the Series C Conversion Price,
the Series D Conversion Price and the Series E Conversion Price. The initial
Conversion Price shall be subject to adjustment as provided below.
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price (i) upon the closing
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<PAGE>
of a Qualified IPO (as defined below), or (ii) (A) with respect to the shares of
Series A Preferred only, upon the election of holders of at least a majority of
the outstanding shares of Series A Preferred voting together as a single class,
(B) with respect to the shares of Series B Preferred only, upon the election of
holders of at least a majority of the outstanding shares of Series B Preferred
voting together as a single class, (C) with respect to the shares of Series C
Preferred only, upon the election of holders of at least a majority of the
outstanding shares of Series C Preferred voting together as a single class, (D)
with respect to the shares of Series D Preferred only, upon the election of
holders of at least a majority of the outstanding shares of Series D Preferred
voting together as a single class and (E) with respect to the shares of Series E
Preferred only, upon the election of holders of at least a majority of the
outstanding shares of Series E Preferred voting together as a single class. In
the event of the automatic conversion of the Preferred Stock upon a public
offering as set forth above, the person(s) entitled to receive the Common Stock
issuable upon such conversion of Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities. The term "Qualified IPO" means a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the Corporation to the public. Notwithstanding
the foregoing, if a Qualified Public Offering does not close in calendar 1999,
then the term "Qualified Public Offering" shall be qualified to require an
offering at a price per share (prior to underwriter commissions and offering
expenses) of not less than $10.00 (appropriately adjusted for any
recapitalizations, stock splits, stock combinations, stock dividends and the
like occurring after the date of the Stock Split (the "Stock Split Date") and an
aggregate offering price to the public of not less than $20,000,000.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective Conversion
Price. Before any holder of Preferred Stock shall be entitled to convert the
same into full shares of Common Stock and to receive certificates therefor, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for the Preferred
Stock, and shall give written notice to the Corporation at such office that such
holder elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to Section 4(b), the outstanding shares of
Preferred Stock shall be converted automatically without any further action by
the holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent, and provided
further that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Preferred Stock are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as practicable
after such delivery, or such agreement and indemnification in the case of a lost
certificate, issue and deliver at such office to such holder of Preferred Stock,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid and a check payable to the holder in
the amount of any cash amounts payable as the result of a conversion into
fractional shares of Common Stock. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of
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<PAGE>
Preferred Stock to be converted, or in the case of automatic conversion on the
date of closing of the offering, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date.
(d) (1) Adjustments to Preferred Stock Conversion Price for
---------------------------------------------------
Diluting Issues. The Conversion Price shall be subject to adjustment from time
- ---------------
to time as follows:
(i) Adjustments for Subdivisions, Common Stock Dividends,
-----------------------------------------------------
Combinations or Consolidations of Common Stock. In the event the outstanding
- ----------------------------------------------
shares of Common Stock shall be subdivided or increased (by stock split, stock
dividend or otherwise) into a greater number of shares of Common Stock at any
time after the Stock Split Date, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision or payment of such stock
dividend, be proportionately decreased. In the event the outstanding shares of
Common shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock at any time after the Stock Split
Date, the Conversion Price then in effect shall, concurrently with the
effectiveness of such combination or consolidation, be proportionately
increased.
(ii) Adjustments for Stock Dividends and Other Distributions. In
-------------------------------------------------------
the event the Corporation at any time or from time to time makes, or fixes a
record date for the determination of holders of Common Stock entitled to receive
any distribution (excluding any repurchases of securities by the Corporation not
made on a pro-rata basis from all holders of any class of the Corporation's
securities) payable in property or in securities of the Corporation other than
shares of Common Stock, and other than as otherwise adjusted in this Section 4
or as provided in Section 1, then and in each such event the holders of
Preferred Stock shall receive at the time of such distribution, the amount of
property or the number of securities of the Corporation that they would have
received had their Preferred Stock been converted into Common Stock on the date
of such event and had they thereafter, during the period from the date of such
event to and including the date of conversion, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 4 with respect to
the rights of the holders of the Preferred Stock.
(iii) Adjustments for Reclassification, Exchange and
----------------------------------------------
Substitution. Except as otherwise provided in Section 2 upon a Liquidating
- ------------
Event, if the Common Stock issuable upon conversion of the Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for above)
at any time after the Stock Split Date, the Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Preferred Stock immediately before that change.
-7-
<PAGE>
(d) (2) Adjustments to Series B Conversion Price, Series D
--------------------------------------------------
Conversion Price and Series E Conversion Price for Diluting Issues. In addition
- ------------------------------------------------------------------
to the adjustment of the Series B Conversion Price, Series D Conversion Price
and Series E Conversion Price provided in Section 4(d)(1) above, the Series B
Conversion Price, Series D Conversion Price and Series E Conversion Price shall
be subject to further adjustment pursuant to the provisions of Section
4(d)(2)(i)-(v) below:
(i) Special Definitions. For purposes of this Section 4(d)(2),
-------------------
the following definitions shall apply:
(1) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Original Issue Date" shall mean the date on which
-------------------
the first share of Series B Preferred, Series D Preferred or Series E Preferred
(as the case may be) was first issued.
(3) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.
(4) "Additional Shares of Common" shall mean all shares
---------------------------
of Common Stock issued (or, pursuant to Section 4(d)(2)(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than shares of
Common Stock issued or issuable (or, pursuant to Section 4(d)(2)(iii), deemed to
be issued) at any time ("Excluded Stock"):
(A) upon conversion of shares of the Series A
Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred or the Series E Preferred;
(B) to officers, directors and employees of, or
consultants to, the Corporation pursuant to a stock grant, stock option plan or
stock purchase plan or other stock agreement or arrangement approved by the
Board of Directors;
(C) as a dividend or other distribution on the Series
A Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred or the Series E Preferred;
(D) shares of capital stock issued by the Corporation
as to which the holders of a majority of the outstanding Preferred Stock
expressly consent prior to such issuance that such shares are Excluded Stock
under this Section 4(d)(2)(i)(4);
(E) pursuant to any event for which adjustment is
made pursuant to Section 4(d)(1);
(F) to research or development collaborators or
issued to banks or other institutional lenders or lessors in connection with
capital asset leases or borrowings for the acquisition of capital assets,
pursuant to any arrangement approved by the Board of Directors of the
Corporation (including securities issued upon exercise or conversion of any of
such securities)
-8-
<PAGE>
(up to a maximum of 100,000 shares (as adjusted for stock splits and the like
occurring after the Stock Split Date));
(G) pursuant to a warrant dated August 31, 1998,
issued to NBC Multimedia, Inc. ("NBC") to purchase 750,000 shares (subject to
adjustment as provided in the warrant, including without limitation as a result
of the Stock Split) of Common Stock of the Company (the "NBC Warrant") and the
shares of Common Stock underlying the NBC Warrant;
(H) pursuant to warrants issued pursuant to that
certain Note and Warrant Purchase Agreement, dated April 6, 1998, by and between
the Company and the parties thereto (the "Note Purchase Agreement") to purchase
a certain number of shares (subject to adjustment as provided in the warrants
including without limitation as a result of the Stock Split) of Common Stock of
the Corporation (the "Bridge Warrants") and the shares of Common Stock
underlying the Bridge Warrants; or
(I) pursuant to warrants dated September 14, 1998,
issued to Volpe Brown Whelan & Company, LLC ("VBW&C") to purchase 232,659 shares
and 7,500 shares (subject to adjustment as provided in the warrants, including
without limitation as a result of the Stock Split) of Series D Preferred Stock
of the Company (the "Volpe Warrants"), the shares of Series D Preferred Stock
underlying the Volpe Warrants, and the shares of Common Stock issuable upon
conversion of such shares of Series D Preferred Stock (the "Volpe Warrant
Shares") (the term Volpe Warrants and Volpe Warrant Shares include any
additional warrants and shares that may be issued to VBW&C pursuant to the terms
of the Corporation's engagement letter with VBW&C);
(J) pursuant to a warrant dated September 14, 1998,
issued to Refco Securities, Inc. to purchase 7,500 shares (subject to adjustment
as provided in the warrant, including without limitation as a result of the
Stock Split) of Series D Preferred Stock of the Corporation (the "Refco
Securities Warrant"), the shares of Series D Preferred Stock underlying the
Refco Securities Warrant, and the Common Stock issuable upon conversion of such
shares of Series D Preferred Stock; and
(K) pursuant to a warrant dated April 20, 1998 and a
warrant dated July 22, 1998, issued to Refco Capital Markets LTD to purchase
100,000 shares and 50,000 shares, respectively (subject to adjustment as
provided in each warrant, including without limitation as a result of the Stock
Split), of Common Stock of the Corporation (the "Refco Capital Warrants") and
the shares of Common Stock underlying the Refco Capital Warrants.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a particular share of Series B Preferred, Series D Preferred
or Series E Preferred (as the case may be) shall be made in respect of the
issuance of Additional Shares of Common unless the consideration per share for
an Additional Share of Common issued or deemed to be issued by the Corporation
is less than the Conversion Price in effect on the date of, and immediately
prior to such issue, for such share of Series B Preferred, Series D Preferred or
Series E Preferred (as the case may be).
-9-
<PAGE>
(iii) Deemed Issue of Additional Shares of Common.
-------------------------------------------
Options and Convertible Securities. Except as otherwise
----------------------------------
provided in Section 4(d)(2)(i)(4)(A)-(K) and 4(d)(2)(iii), in the event the
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common issued as of the
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to Section 4(d)(2)(v) hereof) of such Additional
Shares of Common would be less than the Conversion Price in effect on the date
of and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any change in the
amount of consideration payable to the Corporation, or change in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such change becoming effective, be
recomputed to reflect an appropriate increase or decrease reflecting such change
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities, but only if as a result of such adjustment the
Conversion Price then in effect is thereby reduced;
(3) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or Options
for Common Stock, the only Additional Shares of Common issued were shares of
Common Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
-10-
<PAGE>
(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of Common deemed to have
been then issued was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Corporation upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to clause (2) or (3) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (i) the Conversion Price on the original adjustment date,
or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common between the original adjustment date and such
readjustment date; and
(5) in the case of any Options which expire by their terms
not more than thirty (30) days after the date of issue thereof, no adjustment of
the Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (3) above.
(iv) Adjustment of Series B Conversion Price, Series D Conversion
------------------------------------------------------------
Price or Series E Conversion Price Upon Issuance of Additional Shares of Common.
- -------------------------------------------------------------------------------
In the event that the Corporation shall issue Additional Shares of Common
(including Additional Shares of Common deemed to be issued pursuant to Section
4(d)(2)(iii)) without consideration or for a consideration per share less than
the Series B Conversion Price, Series D Conversion Price or Series E Conversion
Price (as applicable), in effect on the date of, and immediately prior to such
issue, then and in such event, such Series B Conversion Price, Series D
Conversion Price or Series E Conversion Price (as applicable) shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Series B Conversion Price, Series D Conversion
Price or Series E Conversion Price (as applicable) by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Series B
Conversion Price, Series D Conversion Price or Series E Conversion Price (as
applicable); and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued; and provided further that, for the
purposes of this Section 4(d)(2)(iv), all shares of Common Stock issuable upon
exercise of outstanding Options or conversion of outstanding Convertible
Securities and shares of Common Stock reserved for future issuance pursuant to
stock option plans and stock purchase plans of the Company are deemed to be
outstanding and immediately after any Additional Shares of Common Stock are
deemed issued pursuant to Section 4(d)(2)(iii), such Additional Shares of Common
Stock are deemed to be outstanding.
(v) Determination of Consideration. For purposes of this Section
------------------------------
4(d)(2), the consideration received by the Corporation for the issue of any
Additional Shares of Common shall be computed as follows:
-11-
<PAGE>
(1) Cash and Property: Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation (before commissions or
expenses) excluding amounts paid or payable for accrued interest or accrued
dividends and prior to any commissions or expenses paid by the Corporation;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board; and
(C) in the event Additional Shares of Common are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Common deemed to
have been issued pursuant to Section 4(d)(2)(iii) shall be determined by
dividing
(x) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(e) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence, at any time
-----------------------------
after the Stock Split Date, of each adjustment or readjustment of the Conversion
Price pursuant to this Section 4, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Preferred Stock a certificate setting
-12-
<PAGE>
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (1) such
adjustments and readjustments, (2) the Conversion Price at the time in effect,
and (3) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Preferred
Stock.
(g) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock (other than the
Stock Split); or
(iv) to merge or consolidate with or into any other corporation,
or sell, lease or convey all or substantially all its property or business, or
to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation:
(1) shall send to the holders of the Series A Preferred,
Series B Preferred, Series D Preferred and Series E Preferred Stock at least 10
days' (and in the case of the holders of the Series C Preferred, at least 15
days') prior written notice of the date on which a record shall be taken for
such dividend, distribution or subscription rights (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for determining
rights to vote in respect of the matters referred to in (i) and (ii) above; and
(2) in the case of the matters referred to in (iii) and
(iv) above, shall send to the holders of the Series A Preferred, Series B
Preferred, Series D Preferred and Series E Preferred Stock at least 10 days'
(and in the case of the holders of the Series C Preferred, at least 15 days')
prior written notice of the date when the same shall take place (and specifying
the date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon the
occurrence of such event).
Each such written notice shall be delivered personally or
given by first class mail, postage prepaid, addressed to the holders of the
Preferred Stock at the address for each such holder as shown on the books of the
Corporation. Notwithstanding the above, (i) the 10 days' notice requirement may
be waived by a written waiver signed by the holders of a majority of the
outstanding Preferred Stock (excluding Series C Preferred), and (ii) the 15
days' notice requirement applicable to the holders of Series C Preferred may be
waived by a written waiver signed by the holders of a majority of the
outstanding Series C Preferred.
-13-
<PAGE>
SECTION 5. Status of Converted Stock. In case any shares of any series of
-------------------------
Preferred Stock shall be converted or repurchased pursuant to Section 4 and
Section 6 hereof, the shares so converted or repurchased shall be canceled and
shall not be issued by the Corporation and this Certificate of Incorporation
shall be appropriately amended to effect the corresponding reduction in the
Corporation's authorized Preferred Stock.
SECTION 6. Redemption.
----------
(a) At any time after November 30, 2001, provided that no Liquidating
Event and no Qualified IPO has occurred, following the written request (the
"Redemption Request") of the holders of a majority of the then outstanding
Preferred Stock, the Corporation shall, except where prohibited by California or
other applicable law, redeem all or any part (at the option of such holders) of
the then outstanding shares of Preferred Stock from any source of funds legally
available therefor at the Redemption Price (as defined below). The "Redemption
Price" refers to, (A) with respect to each share of Series A Preferred, the
greater of (i) $2.00 plus accrued dividends (if any) thereon or (ii) the Fair
Market Value (as defined below) of a share of Series A Preferred (determined by
a majority of the Independent Appraisers (as defined below)), (B) with respect
to each share of Series B Preferred the greater of (i) $2.80 plus accrued
dividends (if any) thereon or (ii) the Fair Market Value of the Series B
Preferred (determined by a majority of the Independent Appraisers), (C) with
respect to each share of Series C Preferred the greater of (i) $4.68 plus
accrued dividends (if any) thereon or (ii) the Fair Market Value of the Series C
Preferred (determined by a majority of the Independent Appraisers), (D) with
respect to each share of Series D Preferred the greater of (i) $4.00 plus
accrued dividends (if any) thereon or (ii) the Fair Market Value of the Series D
Preferred (determined by a majority of the Independent Appraisers) and (E) with
respect to each share of Series E Preferred the greater of (i) $8.00 plus
accrued dividends (if any) thereon or (ii) the Fair Market Value of the Series E
Preferred (determined by a majority of the Independent Appraisers).
Notwithstanding the above, in the event that the Redemption Price is determined
to be the fair market value pursuant to (A)(ii), (B)(ii), (C)(ii), (D)(ii) or
(E)(ii) above, then the Redemption Price shall be reduced by an amount equal to
the Expense Deduction (defined below). The Independent Appraisers shall be
chosen as follows: following receipt of the Redemption Request, the Board of
Directors shall provide written notice to all shareholders of the Company, and
within ten (10) days after receipt of such notice, the holders of a majority of
the then outstanding Preferred Stock and the holders of a majority of the then
outstanding Common Stock shall each separately have notified the Company of
their chosen independent appraisers, and such two independent appraisers shall
together select a third (the "Independent Appraisers"). The holders of at least
a majority of the Preferred Stock may waive the obligation to select any
Independent Appraisers, in which case the Redemption Price referred to in
(A)(ii), (B)(ii), (C)(ii), (D)(ii) or (E) (ii) shall not apply. The costs and
expenses of the Independent Appraisers shall be deducted on a pro rata basis
from the Redemption Price due to the holders of the Preferred Stock to be
redeemed (the "Expense Deduction"). The term "Fair Market Value" shall refer to
the value of a share of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred on an as-if converted to
Common Stock basis, determined by a majority of the Independent Appraisers by
determining value of the Company as a whole and dividing such value by all
outstanding securities on an as-if converted to Common Stock basis (without
applying to any discount as a result of the shares to be redeemed being only a
minority and not a majority of the Company's securities and without applying any
premium as a result of such shares being a controlling portion of the Company's
securities).
-14-
<PAGE>
(b) Within thirty (30) days (or such later time as is reasonably
necessary to have determined the fair market value by an Independent Appraiser
as described above) following receipt by the Corporation of such written
request, a written notice (the "Redemption Notice") shall be mailed, postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of Preferred Stock to be
redeemed, at the address last shown on the records of the Corporation for such
holder or given by the holder to the Corporation for the purpose of notice. The
Redemption Notice shall specify the date (the "Redemption Date") on which such
redemption of Preferred Stock is to be effected (which such date shall be on or
before the sixtieth (60th) day after the date on which the Redemption Notice is
mailed or, if such sixtieth (60th) day is not a business day, the first business
day thereafter), the applicable Redemption Prices, the place at which payment
may be obtained, and the manner in which, and the place at which, certificates
may be surrendered, and thereupon the Redemption Price of such shares shall be
payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof and each surrendered certificate shall be
canceled.
(c) In the event of any redemption of only a part of the Preferred
Stock requested to be redeemed, the Corporation shall effect such redemption pro
---
rata according to the number of shares held by each holder which elects to be
- ----
redeemed and notifies the Company of such election within fifteen (15) days of
its receipt of the Redemption Notice; provided, however, that any redemption
-------- -------
shall further be among the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred pro rata based on their
--- ----
respective liquidation preferences of all of the shares of Preferred Stock
outstanding.
(d) From and after the Redemption Date, unless there shall have been
a default in payment of the Redemption Price, all rights relating to such shares
(except the right to receive the Redemption Price without interest subsequent to
the Redemption Date upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. Subject to the rights of any series of preferred stock
which may from time to time come into existence, if the funds of the Corporation
legally available for redemption of the Preferred Stock on any Redemption Date
are insufficient to redeem the total number of shares of Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders of
such shares to be redeemed. The shares of Preferred Stock not redeemed shall
remain outstanding and entitled to all the rights, preferences and privileges
provided herein. Subject to the rights of any series of preferred stock which
may from time to time come into existence, at any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Preferred Stock, such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obligated to redeem on
any Redemption Date but which it has not redeemed.
SECTION 7. Protective Provisions.
---------------------
(a) In addition to any vote required by law, the Corporation shall
not, without first obtaining the affirmative vote or written consent of the
holders of not less than a majority of each of (i) the outstanding shares of
Common Stock and (ii) the outstanding shares of Preferred Stock voting as a
separate class:
-15-
<PAGE>
(1) effect (i) any sale of all or substantially all of the
assets of the Corporation, (ii) any merger or other reorganization of the
Corporation with or into another corporation such that the shareholders of the
Corporation prior to the transaction own less than 50% of the outstanding voting
equity securities of the surviving corporation after such transaction, or (iii)
any transaction or series of transactions which would cause the occurrence of
the events referred to in clauses (i) and (ii) above;
(2) amend, repeal or waive any material provision of, or
add any material provision to, the Corporation's Certificate of Incorporation if
such action would alter or change the rights, preferences, privileges or
restrictions provided for the benefit of, any series of Preferred Stock;
(3) authorize or issue shares of any class or series of
stock, or any debt instrument, having any preference or priority as to dividends
or assets superior to or on a parity with any such preference or priority of any
series of Preferred Stock;
(4) increase the authorized number of shares of Preferred
Stock; or
(5) issue any additional shares of Series A, Series A1,
Series B or Series C Preferred Stock, or issue any additional shares of Series E
Preferred in excess of the amount authorized.
(b) The Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than a majority
of a particular series of Preferred Stock, amend the Corporation's Certificate
of Incorporation if such action would adversely affect such series in a
different manner than other shares of the Preferred Stock.
(c) The Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than a majority
of the Series C Preferred, amend the Corporation's Certificate of Incorporation
(i) to increase the authorized number of shares of Series C Preferred to a
number greater than 3,000,000, or (ii) to change or alter this Section 7(c) in a
manner adverse to the shares of Series C Preferred.
(d) The Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than a majority
of the Series D Preferred, amend the Corporation's Certificate of Incorporation
to increase the authorized number of shares of Series D Preferred to a number
greater than 25,000,000
(e) The Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than a majority
of the Series E Preferred, amend the Corporation's Certificate of Incorporation
to increase the authorized number of shares of Series E Preferred to a number
greater than 5,023,549.
-16-
<PAGE>
Article V
---------
SECTION 1. Limitation of Director's Liability.
----------------------------------
The liability of the directors of this Corporation for monetary damages
shall be eliminated to the fullest extent permissible under Delaware law.
SECTION 2. Indemnification of Corporate Agents.
-----------------------------------
This Corporation is authorized to provide indemnification of agents through
Bylaw provisions, agreements with agents, vote of stockholders or disinterested
directors, or otherwise, to the fullest extent permissible under Delaware law.
SECTION 3. Repeal or Modification.
----------------------
Any amendment, repeal or modification of the foregoing provisions of this
Article V shall not adversely affect any right of indemnification or limitation
of liability of an agent of this Corporation relating to acts or omissions
occurring prior to such amendment, repeal or modification.
Article VI
----------
Effective upon the closing of a Qualified IPO, no action that is required
or permitted to be taken by the stockholders of the Corporation at any annual or
special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
Article VII
-----------
Effective upon the closing of a Qualified IPO, no stockholder will be
permitted to cumulate votes at any election of directors.
Article VIII
------------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make, alter
or repeal the Bylaws of the Corporation.
Article IX
----------
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
Article X
---------
The Corporation is to have perpetual existence.
Article XI
----------
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
-17-
<PAGE>
Article XII
-----------
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
Article XIII
------------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the laws of the State of Delaware)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the Corporation.
-18-
<PAGE>
IN WITNESS WHEREOF, Talk City, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed by Peter H. Friedman, its President
and Chief Executive Officer, as of the date below.
Dated: June __, 1999
/s/ Peter H. Friedman
------------------------------
Peter H. Friedman
-19-
<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TALK CITY, INC.
Talk City, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), certifies that:
A. The name of the Corporation is Talk City, Inc. The original
Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on May 11, 1999.
B. This Second Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of
the Delaware General Corporation Law by the Board of Directors of the
Corporation.
C. This Second Amended and Restated Certificate of Incorporation was
approved by written consent of the stockholders pursuant to Section
228 of the Delaware General Corporation Law.
D. The Certificate of Incorporation of the Corporation is hereby amended
and restated in its entirety as follows:
Article I
---------
The name of this Corporation is Talk City, Inc. (the "Corporation").
Article II
----------
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
Article III
-----------
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the General Corporation
Law of Delaware.
<PAGE>
Article IV
----------
The Corporation is authorized to issue two classes of stock, designated
Common Stock, par value $0.001 per share ("Common Stock") and Preferred Stock,
par value $0.001 per share ("Preferred Stock"). The total number of shares of
Common Stock the Corporation has authority to issue is 100,000,000, and the
total number of shares of Preferred Stock the Corporation has authority to issue
is 5,000,000.
The undesignated 5,000,000 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the number of shares of any such series and the designation thereof.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges and restrictions to be imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase (but not above the total number
of authorized shares of the class) or decrease (but not below the number of
shares of such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series.
The Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at any
time the number of shares of Common Stock remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Preferred Stock.
Article V
---------
SECTION 1. Limitation of Director's Liability.
----------------------------------
The liability of the directors of this Corporation for monetary damages
shall be eliminated to the fullest extent permissible under Delaware law.
SECTION 2. Indemnification of Corporate Agents.
-----------------------------------
This Corporation is authorized to provide indemnification of agents through
Bylaw provisions, agreements with agents, vote of stockholders or disinterested
directors, or otherwise, to the fullest extent permissible under Delaware law.
SECTION 3. Repeal or Modification.
----------------------
Any amendment, repeal or modification of the foregoing provisions of this
Article V shall not adversely affect any right of indemnification or limitation
of liability of an agent of this Corporation relating to acts or omissions
occurring prior to such amendment, repeal or modification.
-2-
<PAGE>
Article VI
----------
Effective upon the closing of a Qualified IPO, no action that is required
or permitted to be taken by the stockholders of the Corporation at any annual or
special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
Article VII
-----------
Effective upon the closing of a Qualified IPO, no stockholder will be
permitted to cumulate votes at any election of directors.
Article VIII
------------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make, alter
or repeal the Bylaws of the Corporation.
Article IX
----------
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
Article X
---------
The Corporation is to have perpetual existence.
Article XI
----------
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
Article XII
-----------
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
Article XIII
------------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the
-3-
<PAGE>
laws of the State of Delaware) outside of the State of Delaware at such place or
places as may be designated from time to time by the Board of Directors or in
the Bylaws of the Corporation.
-4-
<PAGE>
IN WITNESS WHEREOF, Talk City, Inc. has caused this Second Amended and
Restated Certificate of Incorporation to be signed by Peter H. Friedman, its
President and Chief Executive Officer, as of the date below.
Dated: June __, 1999
______________________________
Peter H. Friedman
-5-
<PAGE>
Exhibit 3.3
BYLAWS
OF
TALK CITY, INC.
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - CORPORATE OFFICES.............................. 1
1.1 REGISTERED OFFICE............................. 1
1.2 OTHER OFFICES................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS...................... 1
2.1 PLACE OF MEETINGS............................. 1
2.2 ANNUAL MEETING................................ 1
2.3 SPECIAL MEETING............................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............. 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS.......................... 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.. 4
2.7 QUORUM........................................ 4
2.8 ADJOURNED MEETING; NOTICE..................... 5
2.9 VOTING........................................ 5
2.10 WAIVER OF NOTICE.............................. 5
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT
A MEETING..................................... 6
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.... 6
2.13 PROXIES....................................... 7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE......... 7
ARTICLE III - DIRECTORS.................................... 7
3.1 POWERS........................................ 7
3.2 NUMBER OF DIRECTORS........................... 8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS...... 8
3.4 RESIGNATION AND VACANCIES..................... 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...... 9
3.6 REGULAR MEETINGS.............................. 9
3.7 SPECIAL MEETINGS; NOTICE...................... 9
3.8 QUORUM........................................ 9
3.9 WAIVER OF NOTICE.............................. 10
3.10 ADJOURNMENT................................... 10
3.11 NOTICE OF ADJOURNMENT......................... 10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A
MEETING....................................... 10
3.13 FEES AND COMPENSATION OF DIRECTORS............ 10
3.14 APPROVAL OF LOANS TO OFFICERS................. 10
ARTICLE IV - COMMITTEES.................................... 11
4.1 COMMITTEES OF DIRECTORS....................... 11
-i-
<PAGE>
4.2 MEETINGS AND ACTION OF COMMITTEES............. 12
4.3 COMMITTEE MINUTES............................. 12
ARTICLE V - OFFICERS....................................... 12
5.1 OFFICERS...................................... 12
5.2 ELECTION OF OFFICERS.......................... 12
5.3 SUBORDINATE OFFICERS.......................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS........... 13
5.5 VACANCIES IN OFFICES.......................... 13
5.6 CHAIRMAN OF THE BOARD......................... 13
5.7 PRESIDENT..................................... 13
5.8 VICE PRESIDENTS............................... 14
5.9 SECRETARY..................................... 14
5.10 CHIEF FINANCIAL OFFICER....................... 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS........................... 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..... 15
6.2 INDEMNIFICATION OF OTHERS..................... 15
6.3 INSURANCE..................................... 15
ARTICLE VII - RECORDS AND REPORTS.......................... 16
7.1 MAINTENANCE AND INSPECTION OF RECORDS......... 16
7.2 INSPECTION BY DIRECTORS....................... 16
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.............. 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS 16
7.5 CERTIFICATION AND INSPECTION OF BYLAWS........ 17
ARTICLE VIII - GENERAL MATTERS............................. 17
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE
AND VOTING.................................... 17
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..... 17
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW
EXECUTED...................................... 17
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID
SHARES........................................ 18
8.5 SPECIAL DESIGNATION ON CERTIFICATES........... 18
8.6 LOST CERTIFICATES............................. 19
8.7 CONSTRUCTION; DEFINITIONS..................... 19
ARTICLE IX - AMENDMENTS.................................... 19
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS...... 19
-ii-
<PAGE>
BYLAWS
------
OF
--
TALK CITY, INC.
---------------
(a Delaware Corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected, and any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, by the president, or by one
or more stockholders holding shares in the aggregate entitled to cast not less
than ten percent (10%) of the votes at that meeting.
<PAGE>
Notwithstanding the foregoing, effective upon the closing of a firm commitment
underwritten public offering of Common Stock of the corporation, a special
meeting of the stockholders may be called at any time by the board of directors,
or by the chairman of the board, by the president, or by one or more
stockholders holding shares in the aggregate entitled to cast not less than a
majority of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event less
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<PAGE>
than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person, if any, whom the stockholder proposes to nominate
for election or re-election as a director: (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors, and (v) such person's
written consent to being named as a nominee and to serving as a director if
elected; and (b) as to the stockholder giving the notice: (i) the name and
address, as they appear on the corporation's books, of such stockholder, and
(ii) the class and number of shares of the corporation which are beneficially
owned by such stockholder, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) relating to the nomination. At the
request of the Board of Directors any person nominated by the Board for election
as a director shall furnish to the Secretary of the corporation that information
required to be set forth in the stockholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a director
of the corporation unless nominated in accordance with the procedures set forth
in this Section. The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if the chairman
should so determine, the chairman shall so declare at the meeting and the
defective nomination shall be disregarded.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. Business to be brought
before an annual meeting by a stockholder shall not be considered properly
brought if the stockholder has not given timely notice thereof in writing to the
Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than twenty (20) nor more than sixty (60) days prior to the
meeting; provided, however, that in the event that less than thirty (30) days
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business, and
(v) any other
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<PAGE>
information that is required by law to be provided by the stockholder in his
capacity as a proponent of a stockholder proposal. Notwithstanding anything in
these bylaws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section. The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section, and, if the chairman
should so determine, the chairman shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
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<PAGE>
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
At a stockholders' meeting at which directors are to be elected, a
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the stockholder has given notice prior
to commencement of the voting of the stockholders' intention to cumulate votes.
If any stockholder has given such a notice, then every stockholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that stockholder's shares are
normally entitled or (ii) by distributing the stockholder's votes on the same
principle among any or all of the candidates, as the stockholder thinks fit.
The candidates receiving the highest number of affirmative votes, up to the
number of directors to be elected, shall be elected; votes against any candidate
and votes withheld shall have no legal effect.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation, no
stockholder will be permitted to cumulate votes at any election of directors.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such
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<PAGE>
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation, no
action that is required or permitted to be taken by the stockholders at any
annual or special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
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<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.13 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
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<PAGE>
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall be seven until changed by amendment of this
Section 3.2 duly approved by a majority of the directors then in office. No
reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the Corporation, the
board of directors shall be divided into three classes, the members of each
class to serve for a term of three years; provided that the directors shall be
elected as follows: at the first annual meeting of the stockholders held
following the closing of a firm commitment underwritten public offering of
Common Stock of the Corporation, the directors in the first class shall be
elected for a term of three years, at the second annual meeting following such
date, the directors in the second class shall be elected for a term of three
years, and at the third annual meeting following such date, the directors in the
third class shall be elected for a term of three years. The board of directors
by resolution shall nominate the directors to be elected for each class. At
subsequent annual meetings of shareholders, a number of directors shall be
elected equal to the number of directors with terms expiring at that annual
meeting. Directors elected at each such subsequent annual meeting shall be
elected for a term expiring with the annual meeting of shareholders three years
thereafter.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
All vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; provided, that whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
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<PAGE>
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation, or by facsimile or electronic
mail. If the notice is mailed, it shall be deposited in the United States mail
at least four (4) days before the time of the holding of the meeting. If the
notice is delivered personally or by telephone or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and other applicable law.
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<PAGE>
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
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3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have and may exercise all
the powers and authority of the board, but no such committee shall have the
power of authority to:
(a) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation);
(b) adopt an agreement of merger or consolidation under Sections 251
or 252 of the General Corporation Law of Delaware;
(c) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets;
(d) recommend to the stockholders a dissolution of the corporation or
a revocation of a dissolution; or
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<PAGE>
(e) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
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<PAGE>
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to the
chairman of the board by the board of directors or as may be prescribed by these
bylaws. If there is no president, then the chairman of the board shall also be
the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. The
president shall preside at all meetings of the stockholders and, in the absence
or nonexistence of a chairman of the board, at all meetings of the board of
directors. The president shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and duties as may be prescribed by the board of directors or these
bylaws.
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<PAGE>
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. The chief financial officer shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all of such person's transactions as chief financial officer and of the
financial condition of the corporation,
-14-
<PAGE>
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against such person and incurred
by
-15-
<PAGE>
such person in any such capacity, or arising out of such person's status as
such, whether or not the corporation would have the power to indemnify such
person against such liability under the provisions of the General Corporation
Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein
-16-
<PAGE>
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the General Corporation Law of Delaware.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
-17-
<PAGE>
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
-18-
<PAGE>
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS
----------------------------------------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
-19-
<PAGE>
Certificate of Adoption of Bylaws
of
Talk City, Inc.
A Delaware Corporation
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Talk City, Inc. hereby adopts the foregoing bylaws,
comprising nineteen (19) pages, as the Bylaws of the corporation.
Executed this 11th day of May, 1999.
_______________________________________________
Page Mailliard, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that she is the duly elected, qualified,
and acting Assistant Secretary of Talk City, Inc. and that the foregoing Bylaws,
comprising nineteen (19) pages, were adopted as the Bylaws of the corporation on
May 11, 1999 by the person appointed in the Certificate of Incorporation to act
as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and affixed
the corporate seal this 11th day of May, 1999.
_______________________________________________
Page Mailliard, Assistant Secretary
<PAGE>
EXHIBIT 4.2
================================================================================
TALK CITY, INC.
307 ORCHARD CITY DRIVE
SUITE 304
CAMPBELL, CA 95008
THIRD AMENDED AND RESTATED SHAREHOLDERS RIGHTS AGREEMENT
APRIL 23, 1999
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SECTION 1 - Purchaser Right of First Refusal; Operating Agreement Extensions............................. 2
1.1 Purchaser Right of First Refusal............................................................ 2
1.2 [Deleted Pursuant to Amendment dated as of August 26, 1998]................................. 4
1.3 Operating Agreement Extensions.............................................................. 4
1.4 Termination................................................................................. 5
SECTION 2 - Company Right of First Refusal............................................................... 5
2.1 Company Right of First Refusal.............................................................. 5
2.2 Termination of Existing Rights. ........................................................... 8
SECTION 3 - Registration Rights.......................................................................... 8
3.1 Restrictions on Transferability............................................................. 8
3.2 Certain Definitions......................................................................... 8
3.3 Restrictive Legends......................................................................... 10
3.4 Restrictions on Transfer; Notice of Proposed Transfers...................................... 11
3.5 Requested Registration..................................................................... 11
3.6 Company Registration....................................................................... 13
3.7 Registration on Form S-3................................................................... 15
3.8 Limitations on Subsequent Registration Rights.............................................. 15
3.9 Expenses of Registration................................................................... 16
3.10 Registration Procedures.................................................................... 16
3.11 Indemnification............................................................................ 16
3.12 Information by Holder...................................................................... 18
3.13 Rule 144 Reporting......................................................................... 18
3.14 Transfer of Registration Rights............................................................ 18
3.15 Standoff Agreement......................................................................... 18
3.16 Termination of Registration Rights......................................................... 19
SECTION 4 - Financial Information and Certain Other Covenants........................................... 19
4.1 Financial Information...................................................................... 19
4.2 Assignment of Rights to Financial Information.............................................. 20
4.3 Board of Directors Expenses................................................................ 20
4.4 Section 1202(c) Compliance................................................................. 20
4.5 Board Composition; Board Attendance........................................................ 20
4.6 Additional Information..................................................................... 22
4.7 Inspection Rights.......................................................................... 22
4.8 Compensation Committee..................................................................... 22
4.9 Approval of Expansion of Option Pool; Option Vesting....................................... 22
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)
Page
----
<S> <C>
4.10 Termination of Certain Covenants........................................................... 22
4.11 Regulated Financial Institutions Compliance Obligations.................................... 23
SECTION 5 - Preferred Stock Default..................................................................... 23
5.1 Preferred Stock Default Definition......................................................... 23
5.2 Cure Periods............................................................................... 24
5.3 Remedies................................................................................... 24
5.4 Further Assurances......................................................................... 24
5.5 Termination of Covenants................................................................... 24
SECTION 6 - Voting Agreement; Board of Directors ...................................................... 25
6.1 Voting Agreement........................................................................... 25
6.2 Board of Directors......................................................................... 25
SECTION 7 - Miscellaneous.............................................................................. 25
7.1 Governing Law............................................................................. 25
7.2 Confidentiality and Non-Disclosure........................................................ 25
7.3 Survival.................................................................................. 27
7.4 Successors and Assigns.................................................................... 27
7.5 Entire Agreement; Amendment............................................................... 27
7.6 Notices................................................................................... 28
7.7 Delays or Omissions....................................................................... 28
7.8 Counterparts.............................................................................. 28
7.9 Severability.............................................................................. 28
7.10 Titles and Subtitles...................................................................... 28
7.11 Waiver of Rights.......................................................................... 29
</TABLE>
-ii-
<PAGE>
TALK CITY, INC.
THIRD AMENDED AND RESTATED
SHAREHOLDERS RIGHTS AGREEMENT
THIS THIRD AMENDED AND RESTATED SHAREHOLDERS RIGHTS AGREEMENT (the
"Agreement") is made as of April 23, 1999 among (i) Talk City, Inc., a
---------
California corporation (the "Company"), (ii) the sole purchaser of the Company's
-------
Series C Preferred Stock (the "Series C Purchaser") listed on the signature
------------------
pages hereto, (iii) the holder of a warrant (the "NBC Warrant") to purchase
-----------
Common Stock of the Company (the "NBC Warrantholder") listed on the signature
-----------------
pages hereto, (iv) the holders of warrants to purchase Common Stock of the
Company (the "Bridge Warrantholders") listed on the signature pages hereto, (v)
---------------------
the purchasers of the Company's Series B Preferred Stock (the "Series B
--------
Purchasers") pursuant to the Series B Preferred Stock Purchase Agreement dated
- ----------
November 20, 1996 (the "Series B Agreement"), (vi) the sole purchaser of the
------------------
Company's Series A Preferred Stock (the "Series A Purchaser") pursuant to the
------------------
Series A Preferred Stock Purchase Agreement dated June 1996 (the "Series A
--------
Agreement"), (vii) those purchasers of the Company's Series A1 Preferred Stock
- ---------
(the "Series A1 Purchasers") pursuant to the Series A1 Preferred Stock Purchase
--------------------
Agreements dated July 1996 (the "Series A1 Agreements"), (viii) certain holders
--------------------
of Common Stock of the Company (the "Common Shareholders"), (ix) the purchasers
-------------------
(excluding the Bridge Series D Holders (as defined below)) of the Company's
Series D Preferred Stock (the "Series D Purchasers") pursuant to (a) the Series
-------------------
D Preferred Stock Purchase Agreement dated August 25, 1998 (the "Series D
--------
Financing Agreement") and (b) the Series D Preferred Stock Purchase Agreement
- -------------------
with Hearst Communications, Inc., Hearst New Media & Technology Division
("Hearst") dated October 30, 1998 (the "Hearst Series D Agreement", and together
- -------- -------------------------
with the Series D Financing Agreement, the "Series D Agreement"), (x) the
------------------
holders (the "Bridge Series D Holders") of Series D Preferred Stock issued upon
-----------------------
conversion of the bridge notes (the "Bridge Notes") issued pursuant to the
------------
bridge financing (the "Bridge Financing") of the Company, (xi) Volpe Brown
----------------
Whelan & Company ("VBW&C"), as a holder of warrants (the "VBW&C Warrants") to
--------------
purchase Series D Preferred Stock of the Company, (xii) Refco Securities, Inc.
("Refco") as a holder of a warrant (the "Refco Warrant") to purchase Series D
----- -------------
Preferred Stock of the Company and (xiii) the purchasers of the Company's Series
E Preferred Stock (the "Series E Purchasers") pursuant to the Series E Preferred
-------------------
Stock Purchase Agreement dated April 22, 1999 (the "Series E Agreement").
------------------
The Series A Purchaser and the Series A1 Purchasers are collectively
referred to as the "Series A Purchasers"; the Series A Preferred Stock, the
-------------------
Series A1 Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock, the Series E Preferred Stock and the shares
of the Series D Preferred Stock subject to the VBW&C Warrants issued to VBW&C
and the Refco Warrant issued to Refco are collectively referred to as the
"Preferred"; and (A) the Series A Purchaser, (B) the Series A1 Purchasers, (C)
- ----------
the Series B Purchasers, (D) the Series D Purchasers, (E) the Series E
Purchasers, (F) with respect to Sections 1, 2, 3, 4.1, 4.2, 4.5, 4.6, 4.9, 6 and
7 only, the Series C Purchaser, (G) with respect to Sections 2, 3, 4.1, 4.2,
4.6, 4.9, 6 and 7 only, the NBC Warrantholder, (H) with respect to Sections 2,
3, 6 and 7 only, the Bridge Warrantholders and the Series D Bridge Holders and
(J) VBW&C and Refco, as holders of the VBW&C Warrants and the Refco Warrant,
respectively, are collectively referred to as the "Purchasers."
----------
<PAGE>
The Purchasers agree to be bound by all of the terms and conditions of this
Agreement. The Common Shareholders are parties to this Agreement for purposes
of Sections 3.2, 3.6, 3.9 through 3.16, 4.8, 5, 6 and 7 only. The Series C
Purchaser is party to this Agreement for purposes of Sections 1, 2, 3, 4.1, 4.2,
4.5, 4.6, 4.9, 6 and 7 only. The NBC Warrantholder is party to this Agreement
for purposes of Sections 2, 3, 4.1, 4.2, 4.6, 4.9, 6 and 7 only. The Bridge
Warrantholders and the Bridge Series D Holders are party to this Agreement for
purposes of Sections 2, 3, 6 and 7 only.
RECITALS
--------
A. Concurrent with the execution of this Agreement, the Company and the
Series E Purchasers are entering into the Series E Agreement.
B. The Company, the NBC Warrantholder, the Bridge Warrantholders, the
Series D Purchasers, the Series C Purchaser, the Series B Purchasers, the Series
A Purchasers and the Common Shareholders desire to amend and restate the Second
Amended and Restated Shareholders Rights Agreement, dated August 25, 1998, by
and among such parties (the "Rights Agreement"), as amended by an Amendment to
----------------
the Rights Agreement, dated August 26, 1998 and as further amended by an
Amendment to the Rights Agreement dated April 2, 1999 (The Rights Agreement and
both of the amendments thereto are collectively referred to as the "Prior
-----
Agreement").
- ---------
C. The Company has requested, and the parties to the Prior Agreement have
agreed, that the Prior Agreement shall be of no further force and effect, that
the Series D Purchasers, the Series C Purchaser, Series B Purchasers and Series
A Purchasers waive their right of first refusal set forth in Section 1 of the
Prior Agreement with respect to the purchase of the Series E Preferred Stock
(and the shares of Common Stock underlying the Series E Preferred Stock) being
issued pursuant to the Series E Agreement and that the rights granted to the
Purchasers herein supersede the rights granted in the Prior Agreement.
NOW, THEREFORE, in consideration of the promises of the parties set forth
herein, the parties agree as follows:
SECTION 1
PURCHASER RIGHT OF FIRST REFUSAL; OPERATING AGREEMENT EXTENSIONS
----------------------------------------------------------------
1.1 PURCHASER RIGHT OF FIRST REFUSAL.
--------------------------------
(a) Certain Definitions. For purposes of this Section 1.1 the
-------------------
following terms shall have the following respective meanings:
-2-
<PAGE>
A Purchaser's "Pro Rata Share" means the ratio obtained by dividing
--------------
(i) the number of shares of Common Stock held by such Purchaser (including any
shares of Common Stock issuable upon conversion of the Preferred) by (ii) the
total number of shares of Common Stock outstanding immediately prior to the
issuance of the New Securities (including any shares of Common Stock into which
outstanding shares of Preferred are convertible) which are held by the
Purchasers.
"New Securities" means any shares of capital stock of the Company
--------------
including Common Stock and Preferred Stock, whether now authorized or not, and
rights, options or warrants to purchase such shares of Common Stock or Preferred
Stock, and securities of any type whatsoever that are, or may become,
convertible into such shares of Common Stock or Preferred Stock. Notwithstanding
the foregoing, "New Securities" does not include (i) the Series B Preferred
Stock or the Common Stock issuable upon conversion of the Series B Preferred
Stock or the Series A Preferred Stock, (ii) securities issuable upon exercise or
conversion of currently outstanding securities, (iii) securities offered to the
public generally pursuant to a Qualified Public Offering (as defined below),
(iv) 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 shareholders own more than fifty
percent (50%) of the voting power of the surviving or successor corporation, (v)
securities issued to employees, officers and directors of, and consultants to,
the Company approved by the Board of Directors of the Company (the "Board")
-----
(consistent with the provisions regarding the Compensation Committee set forth
in Section 4.7 below), (vi) securities issued to research or development
collaborators or issued to banks or other institutional lenders or lessors in
connection with capital asset leases or borrowings for the acquisition of
capital assets, pursuant to any arrangement approved by the Board (which Board
approval shall include the approval of at least one director selected by the
holders of the Series B Preferred Stock and at least one director selected by
the holders of the Series C Preferred Stock and Series D Preferred Stock (voting
together as a single class)) of the Company (including securities issued upon
exercise or conversion of any of such securities), (vii) stock issued in
connection with any stock split, stock dividend or recapitalization by the
Company (a "Recapitalization"), (viii) the Series C Preferred Stock, the Common
----------------
Stock issuable upon conversion of the Series C Preferred Stock, the NBC Warrant,
the Common Stock issuable upon exercise of the NBC Warrant, the Bridge Notes,
the equity securities issuable upon conversion of the Bridge Notes, the bridge
warrants (the "Bridge Warrants") issued pursuant to the Bridge Financing, the
---------------
Common Stock issuable upon exercise of the Bridge Warrants, (ix) the Series D
Preferred and the Common Stock issuable upon conversion of the Series D
Preferred, (x) securities to be issued upon exercise of warrants to be granted
to Volpe Brown Whelan & Company LLC pursuant to a letter agreement dated
December 3, 1997 (as the same may be amended) and warrants to be granted to
Refco Securities, Inc. pursuant to a letter agreement dated March 23, 1998 (as
the same may be amended) or (xi) the Series E Preferred Stock and the Common
Stock issuable upon conversion of the Series E Preferred Stock. The term
"Qualified Public Offering" means the offering of the Company's securities to
-------------------------
the public generally pursuant to a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), provided however that if a
-------- -------
Qualified Public Offering does not close in calendar 1999, then the term
"Qualified Public Offering" shall be qualified to require at least $20 million
of gross proceeds to the Company and an offering price per share of at least
$5.00 (as adjusted for any Recapitalization).
-3-
<PAGE>
(b) Right of First Refusal Upon Issuances of New Securities by the
--------------------------------------------------------------
Company. The Company hereby grants to each Purchaser the right of first refusal
- -------
to purchase up to its Pro Rata Share of New Securities which the Company may,
from time to time, propose to sell and issue after the date of this Agreement.
(i) In the event the Company proposes to undertake an issuance
of New Securities, it shall give each Purchaser written notice of its intention,
describing the type of New Securities, the price and the general terms upon
which the Company proposes to issue the same. Each Purchaser shall have fifteen
(15) days from the date of receipt of any such notice (which fifteen (15) day
period shall be specified in the notice) to agree to purchase the Purchaser's
Pro Rata Share of such New Securities for the price and upon the general terms
specified in the notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased.
(ii) In the event the Purchaser fails to exercise the right of
first refusal within such fifteen (15) day period or affirmatively indicates
that no such exercise will occur, then the Company shall have ninety (90) days
thereafter to close the sale of the New Securities respecting which the
Purchaser's option was not exercised, at a price and upon general terms no more
favorable to the purchasers thereof than specified in the Company's notice. In
the event the Company has not sold the New Securities within such ninety (90)
day period, the Company shall not thereafter issue or sell any New Securities,
without first offering such securities to the Purchasers in the manner provided
above.
(iii) The right of first refusal hereunder is not assignable
except (A) by each of such Purchasers to any affiliated partnership or
corporation or to a partner or retired partner of such Purchaser or affiliated
partnership or corporation or (B) to a transferee who acquires 100,000 or more
shares of Common Stock acquired upon conversion of the Preferred (appropriately
adjusted for Recapitalizations). Notwithstanding the foregoing, National
Broadcasting Company, Inc. ("NBC") shall be entitled to transfer its right of
---
first refusal to no more than four (4) affiliates (as such term is defined
pursuant to Rule 405 under the Securities Act) of NBC, each of whom is an
accredited investor within the meaning of Regulation D, Rule 501(a), promulgated
by the Securities and Exchange Commission, provided each such assignee agrees in
writing to be subject to the terms of this Agreement as if it were the Series C
Purchaser hereunder.
1.2 [DELETED PURSUANT TO AMENDMENT DATED AS OF AUGUST 26, 1998].
1.3 OPERATING AGREEMENT EXTENSIONS. In the event that the Company
------------------------------
receives a bona fide offer to acquire the Company (whether by merger, stock
exchange, sale of substantially all of the assets or other business combination)
pursuant to which the shareholders of the Company would hold less than 50% of
the voting equity securities of the successor or acquiring corporation following
such acquisition (an "Acquisition Offer"), then each operating agreement then in
-----------------
effect between the Company and each of NBC, Cox Interactive Media, Inc. and
Hearst Communications, Inc. (a "Corporate Partner") may, at the option of such
-----------------
Corporate Partner, be extended for a period ending on a date that is five (5)
years from the date of the closing of such Acquisition Offer (or such shorter
period as may be determined by such Corporate Partner, in its sole discretion),
with the other terms of
-4-
<PAGE>
such operating agreement to remain in full force and effect during such period.
The rights and obligations under this Section 1.3 are not assignable by any
Corporate Partner.
1.4 TERMINATION. The rights and obligations granted under Section 1.1
-----------
shall expire upon the earliest to occur of the events described in clause (i),
(ii) or (iii) below. The rights and obligations under Section 1.3 shall expire
upon the first anniversary of the initial closing of the Series D Financing
Agreement (the "First Series D Anniversary"). The events referred to above are:
--------------------------
(i) the closing of a Qualified Public Offering, (ii) as to a Purchaser if such
Purchaser or affiliated partnership or corporation no longer holds any shares of
Preferred and/or Common Stock issued upon conversion of the Preferred
(appropriately adjusted for any Recapitalizations) and (iii) a sale of
substantially all of the assets of the Company or a merger or consolidation of
the Company with or into another corporation or entity pursuant to which the
shareholders immediately prior to such merger or consolidation hold less than
fifty percent (50%) of the voting equity securities of the surviving or
acquiring entity immediately following such merger or consolidation.
SECTION 2
COMPANY RIGHT OF FIRST REFUSAL
------------------------------
2.1 COMPANY RIGHT OF FIRST REFUSAL. Unless otherwise agreed in writing by
------------------------------
the Company, each Purchaser shall not sell, transfer, pledge, hypothecate or
otherwise dispose of any of such Purchaser's Registrable Securities (as defined
in Section 3.2, which shall include, for purposes of this Section 2 only, the
Preferred, the NBC Warrant, the Bridge Warrants and the Common Stock issuable
upon the conversion of the Preferred Stock issuable upon exercise of each of the
Refco Warrant and the VBW&C Warrants) (a "Transfer"), except in compliance with
--------
Section 3.1 below, and any such Transfer shall be subject to the following:
(a) Before any Registrable Securities registered in the name of a
Purchaser may be sold or transferred, such Registrable Securities shall first be
offered to the Company. The Purchaser shall deliver a written notice (the
"Notice") to the Company stating (A) the Purchaser's bona fide intention to sell
------
or transfer such Registrable Securities (the "Proposed Transfer"), (B) the
-----------------
number of shares of such Registrable Securities to be sold or transferred (C)
the price for which the Purchaser proposes to sell or transfer such Registrable
Securities and (D) the name of the proposed purchaser or transferee.
(b) Within (5) business days after receipt of the Notice, the Company
or its assignees (as set forth in clause (c) below) shall have the right to
elect to purchase all (but not less than all) of the shares of Registrable
Securities to which the Notice refers, at the price per share specified in the
Notice.
(c) The Company may not assign its rights hereunder to any person or
entity without first offering to assign its rights hereunder to each of the
holders of the Registrable Securities
-5-
<PAGE>
then outstanding (excluding any Purchaser then proposing to sell or transfer
Registrable Securities, as applicable (the "Transferring Holder")) and any
-------------------
shares of Registrable Securities held by the Transferring Holder shall not be
counted in determining the pro rata amount of the other holders of Registrable
Securities (the "Nontransferring Holders")). In the event the Company desires to
-----------------------
assign its rights hereunder, it shall deliver a written notice (the "Transfer
--------
Notice") to the Nontransferring Holders stating (A) its intention to assign its
- ------
rights hereunder, (B) the number of shares of Registrable Securities to be sold
or transferred by the Transferring Holder, and (C) the price for which the
Transferring Holder proposes to sell or transfer such Registrable Securities.
Within seven (7) days after receipt of the Transfer Notice, each Nontransferring
Holder shall have the right to elect to purchase up to its pro rata share of the
Registrable Securities proposed to be sold or transferred by the Transferring
Holder. If any Nontransferring Holder does not exercise such right in whole, the
Company shall advise the other Nontransferring Holders by providing them with
written notice within three (3) days after the expiration of the seven (7) day
period specified above. Each such Nontransferring Holder shall thereupon be
entitled, for a period of three (3) days from the date of such notice, to
purchase some or all of the shares of Registrable Securities not otherwise
purchased pursuant to this subsection (c); provided, however, that to the extent
-------- -------
that more than one such Nontransferring Holder desires to purchase shares of
Registrable Securities exceeding that proportion as such Nontransferring
Holder's aggregate holding of Registrable Securities then bears to the aggregate
holding of Registrable Securities then held by all Nontransferring Holders who
exercised their rights under this subsection (c) ("Excess Registrable
-------------------
Securities"), the amount of such Excess Registrable Securities which each such
- ----------
Nontransferring Holder shall be entitled to purchase shall be reduced pro rata
--- ----
in accordance with that proportion as the number of shares of Registrable
Securities of which such Nontransferring Holder is then the holder bears to the
total number of shares of Registrable Securities then held by all such
Nontransferring Holders desiring to purchase Excess Registrable Securities
pursuant to this subsection (c). The right to purchase any remaining shares not
so elected to be purchased may be assigned thereafter by the Company to any
person or entity.
(d) In the event the Company and/or its assignee(s) (as set forth in
clause (c) above) elect to acquire the Registrable Securities of a Transferring
Holder as specified in the Notice, the Secretary of the Company shall so notify
the Transferring Holder and settlement thereof shall be made in cash within five
(5) business days after the Company receives the Notice; provided that if the
terms of payment set forth in the Notice were other than cash against delivery,
the Company and/or its assignee(s) (as set forth in clause (c) above) shall pay
the fair market value of such Registrable Securities as determined by the Board,
which determination shall be subject to approval by the Company and a majority
of the holders of the Registrable Securities, and if such determination cannot
be agreed upon, then the parties shall submit the matter to final, binding
arbitration.
(e) If all of the Registrable Securities to which the Notice refers
are not elected to be purchased as provided in Section 2.1(b), then the
Transferring Holder may sell the Registrable Securities to any person named in
the Notice (or any other person) at the price specified in the Notice or at a
higher price, provided that such sale or transfer is consummated within ninety
(90) days after the date of the Notice to the Company, and provided further,
that any such sale is in accordance with all terms and conditions hereof. All
Registrable Securities so sold shall continue to be subject to the provisions of
this Section 2.1 in the same manner as before the transfer, and any transferee
of such
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<PAGE>
Registrable Securities shall execute such written agreement evidencing the same
as the Company shall reasonably request.
(f) The provisions of this Section 2.1 shall terminate upon (and
shall not be applicable to such transactions effective as of) the earlier of (A)
the effective date of a reorganization, merger or consolidation which results in
the Company's shareholders immediately prior to such transaction not holding (by
virtue of shares or securities issued solely with respect thereto) at least 50%
of the voting power of the surviving or continuing entity or its immediate
parent, (B) the effective date of a sale of all or substantially all of the
assets of the Company (except a sale to an affiliate of the Company) (which
transaction has been approved by a majority of the Board) or (C) the closing of
a Qualified Public Offering.
(g) The provisions of Section 2.1(a) through (c) (including the lead-
in set forth in Section 2.1) shall not apply to (1) a transfer of any
Registrable Securities by a Purchaser (i) to any affiliated partnership, limited
liability company, or corporation, (ii) to such Purchaser's ancestors,
descendants or spouse, or any custodian or trustee for the account of the
Purchaser or the Purchaser's ancestors, descendants or spouse, (iii) a transfer
not involving a change in beneficial ownership, (2) distributions without
consideration of Restricted Securities (as such term is defined in Section 3.2)
by the Purchaser to any of its partners, or retired partners, or to the estate
of any of its partners or retired partners, (3) any transfer by any Holder (as
such term is defined in Section 3.2) to (A) any individual or entity controlled
by, controlling, or under common control with, such Holder or (B) any individual
or entity with respect to which such Holder (or any person controlled by,
controlling, or under common control with, such Holder) has the power to direct
investment decisions, or (4) in transactions in compliance with Rule 144 under
the Securities Act, so long as the Company is furnished with reasonably
satisfactory evidence of compliance with such Rule; (5) a transfer by NBC to any
affiliate of NBC (as such term is defined pursuant to Rule 405 under the
Securities Act); (6) a transfer by the NBC Warrantholder to any affiliate of the
NBC Warrantholder (as such term is defined pursuant to Rule 405 under the
Securities Act); (7) a transfer by Cox to any affiliate of Cox (as such term is
defined pursuant to Rule 405 under the Securities Act); or (8) any pledge of
Common Stock made by a Transferring Holder which creates a mere security
interest, provided the pledgee shall furnish the Company and the Purchasers with
a written agreement to be bound by and comply with all provisions of this
Agreement applicable to the Transferring Holder; provided, in each such case
--------
(other than clause (4) above) any such transferee shall receive and hold such
Registrable Securities subject to the provisions of this Section 2.1 and Section
3.15 (as though such transferee were a Holder) and shall execute such written
agreement evidencing the same as the Company shall reasonably request, and there
shall be no further transfer of such Registrable Securities unless in accordance
herewith.
(h) The provisions of this Section 2.1 may be waived by the Company
with respect to any transfer, upon duly authorized action of its Board.
2.2 TERMINATION OF EXISTING RIGHTS. In consideration of the rights
------------------------------
granted herein, Section 2 and Section 4 of each the Series A Agreement and the
Series A1 Agreements are hereby terminated and of no further force and effect.
-7-
<PAGE>
SECTION 3
REGISTRATION RIGHTS
-------------------
3.1 RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock (as defined
-------------------------------
below), the Conversion Stock (as defined below), the NBC Warrant, the Bridge
Warrants, the Refco Warrant and the VBW&C Warrants (and the Common Stock
underlying the NBC Warrant, the Bridge Warrants, the Refco Warrant and the VBW&C
Warrants), shall not be sold, assigned, transferred, pledged or hypothecated (i)
prior to a Qualified Public Offering to a competitor of the Company, which shall
include without limitation GeoCities, the globe.com, Xoom, America OnLine, or
other sites the primary focus of which is community centric services, including
but not limited to services such as chat and home pages, or other competitors as
reasonably determined by a majority of the Board members appointed by the
Preferred, which determination shall be final, and (ii) otherwise, except in
compliance with the conditions specified in this Section 3 and subject to the
Company's right of first refusal set forth in Section 2 above. The Purchasers
will cause any proposed purchaser, assignee, transferee, or pledgee of any such
shares held by the Purchasers to agree to take and hold such securities subject
to the provisions and upon the conditions specified in this Section 3. The
Company shall not be required (i) to transfer on its books any shares of
Preferred Stock, the Conversion Stock, the NBC Warrant, the Bridge Warrants, the
Refco Warrant and the VBW&C Warrants (and the Common Stock underlying the NBC
Warrants, the Bridge Warrants, the Refco Warrant and the VBW&C Warrants) which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement or (ii) to treat as owner of such Preferred Stock,
Conversion Stock, NBC Warrant, Bridge Warrants, Refco Warrant and VBW&C Warrants
(and the Common Stock underlying the NBC Warrant, the Bridge Warrants, the Refco
Warrant and the VBW&C Warrants) or to accord the right to vote as such owner or
to pay dividends to any transferee to whom such Preferred Stock, Conversion
Stock, NBC Warrant, Bridge Warrants, Refco Warrant and VBW&C Warrants (and the
Common Stock underlying the NBC Warrant, the Bridge Warrants, the Refco Warrant
and the VBW&C Warrants) shall have been so transferred.
3.2 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Closing Date" shall mean the date of this Agreement.
------------
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Stock" means the Common Stock issued or issuable pursuant
----------------
to conversion of the Preferred Stock.
"Holder" shall mean (i) any Purchaser (excluding the Series C
------
Purchaser, the NBC Warrantholder, the Bridge Warrantholders and the Bridge
Series D Holders) holding Registrable Securities (including Preferred Stock),
(ii) any person holding Registrable Securities to whom the
-8-
<PAGE>
rights under this Section 3 have been transferred in accordance with Section
3.14, (iii) with respect to Sections 3.6 and 3.9 through 3.16 only, the Common
Shareholders holding Registrable Securities, (iv) with respect to Sections 1, 2,
3, 4.1, 4.2, 4.5, 4.6, 4.9, 6 and 7 only, the Series C Purchaser, (v) with
respect to Sections 2, 3, 4.1, 4.2, 4.6, 4.9, 6 and 7 only, the NBC
Warrantholder, and (vi) with respect to Sections 2, 3, 6 and 7 only, the Bridge
Warrantholders and the Bridge Series D Holders.
"Initiating Holders" shall mean any Holders of the Registrable
------------------
Securities.
"Preferred Stock" shall mean (i) the Series A Preferred Stock issued
---------------
pursuant to the Series A Agreement, (ii) the Series A1 Preferred Stock issued
pursuant to the Series A1 Agreements, (iii) the Series B Preferred Stock issued
pursuant to the Series B Agreement, (iv) the Series C Preferred Stock issued
pursuant to the Series C Agreement, (v) the Series D Preferred Stock issued
pursuant to the Series D Agreement and upon conversion of the Bridge Notes, (vi)
the Additional Series D Preferred issued or issuable pursuant to the NBC
Purchase Agreement, the Hearst Series D Agreement and upon exercise of the VBW&C
Warrants and the Refco Warrant and (vii) the Series E Preferred Stock issued
pursuant to the Series E Agreement.
"Registrable Securities" means (i) the Conversion Stock and any Common
----------------------
Stock of the Company issued or issuable in respect of the Conversion Stock upon
any Recapitalization, or any Common Stock otherwise issuable with respect to the
Conversion Stock, (ii) with respect to Sections 3.6 and 3.9 through 3.16 only,
the Common Stock held by the Common Shareholders and their permitted transferees
under Section 3.14, (iii) the Common Stock issuable upon conversion of the NBC
Warrant, and (iv) the Common Stock issuable upon conversion of the Bridge
Warrants; provided, however, that shares of Common Stock or other securities
shall only be treated as Registrable Securities if and so long as they have not
been (A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold or are, in the
reasonable opinion of counsel for the Company, available for sale in a single
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.
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.
"Registration Expenses" shall mean all expenses, except as otherwise
---------------------
stated below, incurred by the Company in complying with Sections 3.5, 3.6 and
3.7 below, including without limitation all registration, qualification and
filing fees, printing expenses, 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.
-9-
<PAGE>
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legends set forth in Section 3.3.
"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.
"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 any Holder.
3.3 RESTRICTIVE LEGENDS. Each certificate representing (i) the Preferred
-------------------
Stock, (ii) the Conversion Stock, (iii) the NBC Warrant, (iv) the Bridge
Warrants, (v) the Common Stock issuable upon conversion of the NBC Warrant, (vi)
the Common Stock issuable upon conversion of the Bridge Warrants, (vii) the
Refco Warrant, (viii) the VBW&C Warrants and (ix) any other securities issued in
respect of the Preferred Stock, the Conversion Stock or the Common Stock
issuable upon conversion of the NBC Warrant or Bridge Warrants upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event,
shall (unless otherwise permitted by the provisions of Section 3.4 below) be
stamped or otherwise imprinted with legends in the following form (in addition
to any legend required under any other agreement between the Purchaser and the
Company or under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS
OF SUCH ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AND MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN
THE COMPANY AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE COMPANY.
Each Purchaser and Holder consents to the Company making a notation on
its records and giving instructions to any transfer agent of the Preferred
Stock, the Common Stock, the NBC Warrant, the Bridge Warrants, the Refco
Warrants or the VBW&C Warrants in order to implement the restrictions on
transfer established in this Section 3.
-10-
<PAGE>
3.4 RESTRICTIONS ON TRANSFER; NOTICE OF PROPOSED TRANSFERS. The holder of
------------------------------------------------------
each certificate representing Restricted Securities by acceptance thereof agrees
to comply in all respects with the provisions of this Section 3.4. Prior to any
proposed sale, assignment, transfer or pledge of any Restricted Securities
(other than (i) a transfer not involving a change in beneficial ownership, (ii)
in transactions involving the distribution without consideration of Restricted
Securities by the Purchaser to any of its partners, or retired partners, or to
the estate of any of its partners or retired partners, (iii) any transfer by any
Holder to (A) any individual or entity controlled by, controlling, or under
common control with, such Holder or (B) any individual or entity with respect to
which such Holder (or any person controlled by, controlling, or under common
control with, such Holder) has the power to direct investment decisions, or (iv)
in transactions in compliance with Rule 144, so long as the Company is furnished
with satisfactory evidence of compliance with such Rule), and unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied, at such holder's expense by either (i) a written opinion of regular
or regularly employed legal counsel of such holder or other legal counsel who
shall be, and whose legal opinion shall be, reasonably satisfactory to the
Company (provided that in-house counsel of the holder shall be deemed reasonable
counsel) addressed to the Company, to the effect that the proposed transfer of
the Restricted Securities may be effected without registration under the
Securities Act, or (ii) a "no action" letter from the Commission to the effect
that the transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. Each certificate evidencing the
Restricted Securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the appropriate restrictive legend set
forth in Section 3.3 above, except that such certificate shall not bear such
restrictive legend if in the opinion of counsel for such holder and the Company
such legend is not required in order to establish compliance with any provision
of the Securities Act. Notwithstanding the foregoing, SOFTBANK Ventures, Inc.
("SOFTBANK") shall be entitled to transfer Restricted Securities hereunder to
--------
one or more partnerships or corporations that it is affiliated with, provided
such assignee agrees in writing to be subject to the terms of this Agreement as
if it were a party hereunder.
3.5 REQUESTED REGISTRATION.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any registration,
qualification or compliance with respect to (1) at least twenty five percent
(25%) of the issued and outstanding Registrable Securities or (2) not less than
that number of shares of Registrable Securities which would result in an
anticipated aggregate offering price, net of underwriting discounts and
commissions, greater than five million dollars ($5,000,000), then, subject to
the paragraph below, Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
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<PAGE>
(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.
Notwithstanding the above, the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 3.5:
(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) Prior to the earlier of (i) December 1, 1999 or (ii) six
months after the effective date of the Company's first public offering;
(C) During the period starting with the date sixty (60) days
prior to the Company's estimated date of filing of, and ending on the date six
(6) months immediately following the effective date of, any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is 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 3.5(a), and such registrations have been declared or
ordered effective;
(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 it would be seriously detrimental to the Company or its
shareholders 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 3.5 shall be deferred for a period not to exceed one hundred
twenty (120) days from the date of receipt of written request from the
Initiating Holders; provided that the Company may not exercise this deferral
-------- ----
right more than once per twelve (12) month period.
Subject to the foregoing clauses (A) through (E), 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, and in any case no later than 120 days.
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<PAGE>
(b) Underwriting. In the event that a registration pursuant to
------------
Section 3.5 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 3.5(a)(i). In such event, the right of any Holder to registration
pursuant to Section 3.5 shall be conditioned upon such Holder's participation in
the underwriting arrangements required by this Section 3.5, 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 3.5, 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
holders of Registrable Securities and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders 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 any Holder of Registrable Securities disapproves of the terms
of the underwriting, such person may elect to withdraw therefrom by written
notice to the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of such registration, or such other shorter period of
time as the underwriters may require.
3.6 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 relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, 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.
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<PAGE>
(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 3.6(a)(i). In such event the right of any Holder to
registration pursuant to Section 3.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the 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.
Notwithstanding any other provision of this Section 3.6, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter and the Company may
reduce the Registrable Securities to be included in such registration to the
extent the underwriters deem necessary. The Company shall so advise all Holders
and other holders distributing their securities through such underwriting and
the number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all the Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holder at the time of filing the Registration Statement;
provided, however, that the Registrable Securities to be included by the
- -------- -------
participating Holders in the aggregate shall not be reduced to less than twenty-
five percent (25%) of the total number of shares to be registered in such
registration; provided further, however, that the foregoing provision regarding
---------------- -------
the twenty-five percent (25%) limitation shall not apply in the event of the
Company's initial public offering. 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 one hundred eighty (180) days after the effective date of
the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 3.6
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
3.7 REGISTRATION ON FORM S-3.
------------------------
(a) If any Holder or Holders 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 $1,000,000, 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 such
Holder or Holders may reasonably request; provided, however, that the Company
shall not be required to effect more than one registration pursuant to this
Section 3.7 in any twelve (12) month period. The Company shall
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<PAGE>
inform other Holders of the proposed registration and offer them the opportunity
to participate. The substantive provisions of Section 3.5(b) shall be applicable
to each registration initiated under this Section 3.7.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 3.7 (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) prior to the Company's
first registered public offering of its stock; (iii) 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 ninety (90) days of receipt of such request (other than
with respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities); (iv) during the period starting
with the date sixty (60) days prior to the Company's estimated date of filing
of, and ending on the date six (6) months immediately following, the effective
date of any registration statement pertaining to securities of the Company
(other than a registration of securities in a Rule 145 transaction or with
respect to an employee benefit plan), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or (v) 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 it would be seriously detrimental to the
Company or its shareholders 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 one hundred
and twenty (120) days from the receipt of the request to file such registration
by such Holder; provided that the Company may not exercise this deferral right
-------- ----
more than once per twelve (12) month period.
3.8 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
---------------------------------------------
Closing Date, the Company shall not enter into any agreement granting any holder
or prospective holder of any securities of the Company registration rights with
respect to such securities unless (i) such new registration rights, including
standoff obligations set forth in Section 3.15 below, are on a pari passu basis
---- -----
with those rights of the Holders hereunder, or (ii) such new registration
rights, including standoff obligations set forth in Section 3.15 below, are
subordinate to the registration rights granted Holders hereunder.
3.9 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
------------------------
connection with (i) two (2) registrations pursuant to Section 3.5, (ii) all
registrations pursuant to Section 3.6, and (iii) all registrations pursuant to
Section 3.7 shall be borne by the Company. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders and all
other Registration Expenses shall be borne by the Holders of such securities pro
rata on the basis of the number of shares so registered.
3.10 REGISTRATION PROCEDURES. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 3,
the Company will keep each Holder advised in
-15-
<PAGE>
writing as to the initiation of each registration, qualification and compliance
and as to the completion thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
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; and
(b) Furnish to all Holders 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 (the "Registration Documents"). Copies of the Registration
----------------------
Documents shall also be delivered to Holders not participating in such
registration.
3.11 INDEMNIFICATION.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder 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 3, 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 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, 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 (which such qualification the Company acknowledges shall
not apply to any registration statement, or any amendment or supplement thereto,
pursuant to Section 11 of the Securities Act), not misleading, or any violation
by the Company of the Securities Act, the Exchange Act, state securities law or
any rule or regulation promulgated under such laws applicable to the Company in
connection with any such registration, qualification or compliance, and within a
reasonable period the Company will reimburse each such Holder, each of its
officers and directors, 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 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.
(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
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<PAGE>
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 or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
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, in light of the
circumstances in which they were made, not misleading, and within a reasonable
period 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 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.
Notwithstanding the foregoing, the liability of each Holder under this
subsection (b) shall be limited in an amount equal to the gross proceeds before
expenses and commissions to each Holder received for the shares sold by such
Holder, unless such liability arises out of or is based on willful misconduct by
such Holder.
(c) Each party entitled to indemnification under this Section 3.11
(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 3.11 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 of a release from all liability in respect to such claim or
litigation.
3.12 INFORMATION BY HOLDER. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 3.
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<PAGE>
3.13 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 Restricted 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, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act;
(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); and
(c) So long as the Holder owns any Restricted Securities to furnish
to the Holder 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 the Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing the Holder to sell
any such securities without registration.
3.14 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to
-------------------------------
register securities granted Holders under Sections 3.5, 3.6 and 3.7 may be
assigned to a transferee or assignee which acquires at least 100,000 shares of
Registrable Securities in connection with any transfer or assignment of
Registrable Securities by the Purchasers or the Common Shareholders (as the case
may be).
3.15 STANDOFF AGREEMENT. In connection with any public offering of the
------------------
Company's securities, the Holder agrees, 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 (not to exceed one
hundred eighty (180) days in the case of the Company's initial public offering,
and ninety (90) days in the case of other public offerings of the Company) from
the effective date of such registration as may be requested by the underwriters;
provided that the officers and directors of the Company who own stock of the
- -------- ----
Company and holders of five percent (5%) or more of the Company's outstanding
voting securities also agree to such restrictions.
3.16 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted
----------------------------------
pursuant to Section 3 shall terminate as to each Holder at such time as a public
market for the Company's
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<PAGE>
Common Stock exists and all Registrable Securities held by such Holder have been
sold pursuant to Rule 144.
SECTION 4
FINANCIAL INFORMATION AND CERTAIN OTHER COVENANTS
-------------------------------------------------
4.1 FINANCIAL INFORMATION. The Company will furnish the following reports
---------------------
to each Holder for so long as such Holder continues to hold 50,000 shares of
Preferred or Common Stock (as adjusted for Recapitalizations):
(a) As soon as practicable after the end of each fiscal year, and in
any event within ninety (90) days thereafter, each Purchaser shall receive
audited consolidated balance sheets, consolidated statements of income,
shareholders' equity and cash flow of the Company and its subsidiaries, if any,
as of the end of such fiscal year, all prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in each
case comparative figures for the previous fiscal year, certified by independent
public accountants of recognized national standing selected by the Company.
Together with each delivery of annual financial statements of the Company
pursuant to this subsection (a), the Company will deliver a certificate of its
Chief Financial Officer stating that no violation of the Company's covenants
under this Agreement exists, or if such a violation exists, then specifying the
nature thereof, the period of existence thereof, and what action the Company
proposes to take with respect thereto.
(b) As soon as available, and in any event within forty-five (45)
days after the end of the first, second and third quarterly accounting periods
in each fiscal year of the Company, each Purchaser shall receive a financial
summary of such quarter, in a form provided by the Series B Purchasers,
certified by the Chief Financial Officer of the Company.
(c) As soon as available, and in any event within twenty (20) days
after the end of each month, the Company shall furnish each Purchaser with
unaudited consolidated monthly financial statements, including a consolidated
balance sheet of the Company as of the end of such month, together with related
consolidated statements of operations, changes in shareholders' equity and cash
flows for such month and year-to-date, prepared in accordance with generally
accepted accounting principles consistently applied (with the exception of full
footnote disclosures, schedules and precise period cutoffs) and certified by the
Chief Financial Officer of the Company, subject to usual year-end audit
adjustments, together with a written comparison of the results as reported on
such financial statements with the projections thereof contained in the
applicable Annual Budget (as defined below).
(d) As soon as available, and in any event within twenty (20) days
prior to the end of each fiscal year (except with respect to fiscal 1997, which
shall be by January 30, 1997), the Company shall furnish each Purchaser with an
annual budget and strategic plan (the "Annual Budget") of the Company for the
-------------
next following fiscal year consisting of (i) projected consolidated statements
of operations, changes in shareholders' equity and cash flows, each on a monthly
basis, for each of the calendar months of such fiscal year; (ii) a projected
consolidated balance sheet as of the
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<PAGE>
close of each calendar month; (iii) projected capital expenditures for each
month; and (iv) promptly upon making thereof, any revision or updating which may
be made of any such Annual Budget. Each such Annual Budget and any revisions
thereof shall be submitted for the approval of the Board and be subject to
revision or updating by the Board.
(e) Promptly upon receipt thereof, a copy of each report or
management letter, if any, submitted to the Company by independent public
accountants in connection with each annual audit (and any other audit which may
be performed) of the books of the Company made by such accountants.
4.2 ASSIGNMENT OF RIGHTS TO FINANCIAL INFORMATION. The rights granted
---------------------------------------------
pursuant to Section 4 may be assigned or otherwise conveyed by the Purchaser (or
by any permitted transferee of any such rights) only in connection with the
transfer to a single permitted transferee of not less than 100,000 shares of
Preferred Stock (or Common Stock issuable upon conversion of the Preferred Stock
or the NBC Warrant, or a combination of both) (including, for such purposes
transfers by affiliates of a transferor) (appropriately adjusted for
Recapitalizations) or upon the written consent of the Company, provided that
prior written notice of such assignment or conveyance is given to the Company.
4.3 BOARD OF DIRECTORS EXPENSES. The representatives of the Series B
---------------------------
Purchasers and the Series C/D/E Purchasers elected to the Board shall be
entitled to reimbursement for their reasonable out-of-pocket expenses incurred
in connection with attending Board meetings.
4.4 SECTION 1202(C) COMPLIANCE. The Company shall use reasonable efforts
--------------------------
to comply with Section 1202(c) of the Internal Revenue Code of 1986, as amended
(the "Code"), and shall use reasonable efforts to make all filings required
----
under Section 1202(D)(1)(c) of the Code and any related Treasury regulations.
4.5 BOARD COMPOSITION; BOARD ATTENDANCE.
-----------------------------------
(a) At each election of directors, and for so long as (i) Cox, or any
of its affiliates, holds at least 1,250,000 shares of Series D Preferred Stock
(appropriately adjusted for any Recapitalizations), (ii) NBC, or any of its
affiliates, holds, or has the right to be issued, as of July 14, 1998, at least
769,230 shares of Series C Preferred Stock (approximately adjusted for any
Recapitalizations), and (iii) Hearst Communications, Inc., Hearst New Media &
Technology division ("Hearst"), or any of its affiliates, holds at least
1,000,000 shares of Series D Preferred Stock (appropriately adjusted for any
Recapitalizations), the Series C Purchaser and each of the Series D Purchasers
and Series E Purchasers hereby agree to vote all shares of voting capital stock
of the Company (including, without limitation, all shares of Common Stock issued
upon conversion of the Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock) registered in their respective names or beneficially
owned by them as of the date thereof, including any and all other securities of
the Company legally or beneficially acquired by each of such Purchasers after
the date of this Agreement, for one representative to the Board as designated by
Cox, for one representative to the Board as designated by NBC, and for one
representative to the Board designated by Hearst;
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<PAGE>
provided, however, that if any of Cox, NBC or Hearst falls below their
respective threshold stock holdings as described above, such party's loss of
their right to a representative to the Board shall not affect any other party's
right hereunder. Any vote taken to remove any director elected pursuant to this
Section 4.5(a), or to fill any vacancy created by the resignation of such
director elected pursuant to this Section 4.5(a), shall also be subject to the
provisions of this Section 4.5(a).
(b) (i) The Company shall permit a representative of each of
Patricof, SOFTBANK, New York Life, Soros, Cox, NBC, CSK Venture Capital, Hearst
New Media & Technology, Media Technology Equity Partners, L.P., Intel
Corporation ("Intel") and Starbucks Corporation (each a "Major Investor"), Aaron
--------------
Hsu and Alec Hsu to attend (each a "Board Visitor"), but not vote at, meetings
-------------
of the Board (whether in person, telephonic or other), and all committees
thereof, and to receive notices of such meetings and information circulated to
members of the Board at or prior to any such meetings; provided, however that if
a representative of a Major Investor serves on the Board, such Major Investor
shall not be entitled to designate a Board Visitor. Each Board Visitor shall, at
the request of the Board, except himself or herself from all discussions and
deliberations of the Board (or any committee constituted by the Board) which may
involve conflicts of interest on the part of the Board Visitor or relationships
between the Company and the Major Investor represented by the Board Visitor.
Each Board Visitor and/or Major Investor agrees to maintain the confidentiality
of information received at or in connection with any Board meeting and to abide
by conflict of interest guidelines that may be adopted by the Board.
(ii) The Company acknowledges that Intel will likely have, from
time to time, information that may be of interest to the Company ("Information")
-----------
regarding a wide variety of matters including, by way of example only, (1)
Intel's technologies, plans and services, and plans and strategies relating
thereto, (2) current and future investments Intel has made, may make, may
consider or may become aware of with respect to other companies and other
technologies, products and services, including, without limitation,
technologies, products and services that may be competitive with the Company's
services, and plans and strategies relating thereto, of other companies,
including, without limitation, companies that may be competitive with the
Company. The Company recognizes that a portion of such Information may be of
interest to the Company. Such information may or may not be known by the Intel
Board Visitor.
The Company, as a material part of the consideration for this
Agreement, agrees that Intel and its Board Visitor shall have no duty to
disclose any Information to the Company or permit the Company to participate in
any projects or investments based on any Information, or to otherwise take
advantage of any opportunity that may be of interest to the Company if it were
aware of such Information, and hereby waives, to the extent permitted by law,
any claim based on the corporate opportunity doctrine or otherwise that could
limit Intel's ability to pursue based on such Information or that would require
Intel or its Board Visitor to disclose any such Information to the Company or
offer any opportunity relating thereto to the Company.
4.6 ADDITIONAL INFORMATION. Upon receipt by the Company of written or
----------------------
other formal notice of (a) any investigation by any federal or state
governmental or regulatory agency in connection with which the Company is
identified as an object of such investigation; (b) any complaint or
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<PAGE>
proceeding instituted against the Company by any federal or state governmental
or regulatory agency; and (c) any other action at law or suit in equity
involving a claim or claims against the Company which, if concluded adversely to
the Company, could give rise to damages in excess of $125,000 in the aggregate
or could otherwise materially adversely affect the business or assets of the
Company, the Company shall promptly provide a copy of such notice to the
Purchasers.
4.7 INSPECTION RIGHTS. Holders of at least 50,000 shares of Preferred or
-----------------
Common (as adjusted for Recapitalizations) shall have the right upon prior
written notice for a purpose reasonably related to their position as
shareholders to inspect the Company's facilities at reasonable times during
normal business hours.
4.8 COMPENSATION COMMITTEE. The Company will maintain a compensation
----------------------
committee of the Board (a "Compensation Committee") which will be composed of
----------------------
three (3) outside directors, one of whom shall be Joseph Graziano for so long as
he continues to serve on the Board and, thereafter, a designee of the Series A
Purchasers and the Common Shareholders, voting together as a single class, and
the other two (2) of whom shall be selected by the holders of a majority of the
Preferred held by the Purchasers. The Compensation Committee will review the
overall compensation structure of the Company and specifically all annual
salaries greater than $100,000, all employee stock option programs and grants
and employee agreements. In addition, the Compensation Committee will
specifically review the overall compensation structure and details relative to
business and market conditions every six (6) months and make recommendations
regarding such conditions to the Board.
4.9 APPROVAL OF EXPANSION OF OPTION POOL; OPTION VESTING. Except with the
----------------------------------------------------
written approval of the holders of a majority of the then outstanding shares of
Preferred held by the Purchasers, the Company shall not increase the number of
shares available for issuance to employees and consultants beyond the shares
currently reserved under the 1996A Stock Option Plan and 1996 Stock Option Plan.
Equity or option grants to all officers or employees from and after the date of
this Agreement shall be subject to a minimum of four (4) year vesting with a
minimum of twelve (12) month cliff vesting upon initial hiring, except as
otherwise approved by the Compensation Committee or the Board.
4.10 TERMINATION OF CERTAIN COVENANTS. The covenants set forth in Sections
--------------------------------
4.1, 4.2, 4.4, 4.5, 4.6, 4.7 and 4.8 and 4.9 above shall terminate and be of no
further force or effect upon the earlier of (i) the closing of a Qualified
Public Offering or (ii) with respect to any individual Purchaser, at such time
as the Purchaser no longer holds any shares of capital stock of the Company.
4.11 REGULATED FINANCIAL INSTITUTIONS COMPLIANCE OBLIGATIONS. Nothing in
--------------------------------------------------------
this Agreement shall diminish the continuing obligations of any financial
institution to comply with applicable requirements of law that it maintain
responsibility for the disposition of, and control over its admitted assets,
investments and property, including (without limiting the generality of the
foregoing) the provisions of Section 1411(b) of the New York Insurance Law, as
amended, and as hereinafter from time to time in effect.
-22-
<PAGE>
SECTION 5
PREFERRED STOCK DEFAULT
-----------------------
5.1 PREFERRED STOCK DEFAULT DEFINITION. A Preferred Stock default (a
----------------------------------
"Preferred Stock Default") shall occur if:
- ------------------------
(a) the Company shall become insolvent, make an assignment for the
benefit of its creditors or suspend business; a case under any provision of
Title 11 of the United States Code, 11 U.S.C. (S)101 et seq. (the "Bankruptcy
-- --- ----------
Code"), or any comparable law of any jurisdiction, including provisions for
- ----
receivership or reorganization shall be commenced by or against the Company
which, in the case of any action being commenced against the Company under the
Bankruptcy Code, shall retain unstayed or undismissed for a period of sixty (60)
days;
(b) the Company fails to complete, within five (5) years from
November 20, 1996, either: (i) a Qualified Public Offering, (ii) a sale,
liquidation or dissolution of the Company, or (iii) a sale, transfer or
disposition of all or substantially all of the assets of the Company;
(c) the Company incurs indebtedness in excess of $250,000 or pledges
any of its assets (other than in the ordinary course of business) in each case
without the consent of (i) the holders of a majority of each Series of the
Preferred or (ii) one of two representatives of the Series B Preferred then on
the Board;
(d) the Company violates any provision of Article IV, Section 7 of
the Company's Third Amended and Restated Articles of Incorporation (the
"Restated Articles");
-----------------
(e) the Company shall default on any outstanding debt in an amount
equal to or greater than $250,000 or on any contract giving rise to a right in
any third party to any material claim against the Company or on its assets (and
such claim shall have been finally adjudicated adverse to the Company or
resolved by a settlement agreement adverse to the Company); or
(f) if at any time prior to the third anniversary of November 20,
1996 any of the representations and warranties of the Company contained in
Section 3 of the Series B Agreement shall have been breached or inaccurate in
any material respect as of November 20, 1996.
5.2 CURE PERIODS. Upon the occurrence and continuation of a Preferred
------------
Stock Default, the Purchasers shall give the Company written notice (the
"Default Notice") of such Preferred Stock Default, and the Company shall have
- ---------------
the opportunity to cure such default for the time periods set forth below:
(a) for an initial period of ten (10) days following receipt of the
Default (the "Initial Cure Period"); and
-------------------
-23-
<PAGE>
(b) in the event that at the termination of the Initial Cure Period
(i) the Preferred Stock Default remains uncured, (ii) the Preferred Stock
Default remains capable of cure by the Company and (iii) the Company is, in good
faith, pursuing a course of action to cure such Preferred Stock Default, an
additional twenty (20) days (the "Second Cure Period").
------------------
Notwithstanding the above, if during any of the time periods set forth in
clauses (a) and (b) above, the Preferred Stock Default becomes incapable of
cure, or in the case of a Preferred Stock Default existing under Section 5.1(e),
there is an acceleration of the indebtedness to which the Preferred Stock
Default relates or the obligor otherwise commences enforcement of its rights
upon default, then the Purchasers will be entitled to pursue the remedies set
forth under Section 5.3 immediately upon such occurrence.
5.3 REMEDIES. In the event of the occurrence and continuation of a
--------
Preferred Stock Default which has not been cured within the time periods
specified in Section 5.2 above, the holders of a majority of the outstanding
Preferred (excluding the Series C Preferred), voting as a separate class, may
demand, and be entitled to, in accordance with the provisions of Article IV,
Section 6 of the Restated Articles, an immediate (i) redemption of all of the
Preferred (which shall include the Series C Preferred) (or a portion of such
shares pro rata), and (ii) payment of all accrued but unpaid dividends (if any).
5.4 FURTHER ASSURANCES. The Company, the Purchasers and the Common
------------------
Shareholders hereby agree to enter into such voting or other agreements as are
necessary to implement the provisions of this Section 5, and further agree to
consent to approve any amendment to the Company's Restated Articles as may be
necessary to implement the provisions of this Section 5. In the event that a
sale of the Company or its liquidation is required in order to satisfy the
remedies set forth in Section 5.3, the Company, the Purchasers and the Common
Shareholders shall approve (i) in the case of a sale of the Company, the highest
offer received within six (6) months following the demand referred to in Section
5.3 and (ii) if no sale of the Company is contemplated, then a liquidation of
the Company within six (6) months following the demand referred to in Section
5.3.
5.5 TERMINATION OF COVENANTS. The covenants set forth in this Section 5
------------------------
shall terminate and be of no further force and effect upon the earlier to occur
of (i) a Qualified Public Offering, (ii) a sale, liquidation or dissolution of
the Company or a merger or consolidation of the Company or other transaction
with or into any other corporation, where the shareholders of the Company hold
as a result of their stockholdings in the Company less than fifty percent (50%)
of the voting equity securities of the successor or surviving corporation
immediately following such merger, consolidation or other transaction, or (iii)
a sale, transfer or disposition of all or substantially all of the assets of the
Company.
-24-
<PAGE>
SECTION 6
VOTING AGREEMENT; BOARD OF DIRECTORS
------------------------------------
6.1 VOTING AGREEMENT. For so long as Peter Friedman shall continue to
----------------
hold five percent (5%) of the outstanding capital stock of the Company, on a
fully diluted basis (including stock issuable through the exercise of any
option, warrant or right and stock reserved for employees and consultants
pursuant to any stock option plan, stock purchase plan or other stock agreement
or arrangement approved by the Board), the Purchasers agree to vote all of their
shares of Preferred, or all of their shares of Common Stock issuable upon
exercise of the NBC Warrant, the Bridge Warrants or the Preferred, for the
election of Peter Friedman to the Board of Directors of the Company, and further
agree to take any necessary action to effect such election including without
limitation the execution of any proxies.
6.2 BOARD OF DIRECTORS. Any increase in the authorized number of
------------------
directors of the Company beyond nine (9) members, as well as the appointment of
any such members, shall be subject to the approval of the Board.
SECTION 7
MISCELLANEOUS
-------------
7.1 GOVERNING LAW. This Agreement shall be governed in all respects by
-------------
the internal laws of the State of California.
7.2 CONFIDENTIALITY AND NON-DISCLOSURE.
----------------------------------
(a) Confidential Business Information. Subject to Section 7.2(f), the
---------------------------------
Purchasers covenant and agree that they shall maintain the confidentiality of
all non-public information related to the business of the Company made available
to them and/or any of their representatives by the Company and so marked as
confidential ("Confidential Business Information"). The Purchasers further
---------------------------------
covenant and agree that they shall not disclose any Confidential Business
Information to any person or entity, other than their partners, officers,
directors, employees, attorneys, accountants and other agents with a legitimate
need for such information (which individuals and entities will in turn agree to
be bound by this Section 7.2(a), except as required by law or any regulatory
body, without the prior written consent of the Company. The Purchasers agree
that violation of this Section 7.2(a) would cause immediate and irreparable
damage to the business of the Company, and consent to the entry of immediate and
permanent injunctive relief for any violation hereof.
(b) Disclosure of Terms. The terms and conditions of this Agreement
-------------------
and the Series D Agreement (including all Exhibits thereto) (collectively, the
"Financing Terms"), including their existence, shall be considered confidential
---------------
information and shall not be disclosed by any party hereto to any third party
except in accordance with the provisions set forth below.
-25-
<PAGE>
(c) Press Releases, Etc. With sixty (60) days of the initial closing
-------------------
of the Series D Agreement, the Company may issue a press release, in a form
provided by Intel, or as otherwise approved by Intel, disclosing that Intel has
invested in the Company; provided, however, that the release does not disclose
-------- -------
any of the Financing Terms and the final form of the press release is approved
in advance in writing by Intel. No other announcement regarding Intel, whether
by the Company or any other party hereto, in a press release, conference,
advertisement, announcement, professional or trade publication, mass marketing
materials or otherwise to the general public may be made without Intel's prior
written consent. The parties hereto acknowledge and agree that this Section
7.2(c) shall not restrict the Company from issuing a press release, or from
making any other announcement regarding any other Series D Purchaser (other than
and excluding Intel, its investment in the Company or the Financing Terms),
whether by press release, conference, advertisement, professional or trade
publication, mass marketing materials or otherwise, to the general public.
(d) Permitted Disclosures. Notwithstanding the foregoing, (i) any
---------------------
party may disclose any of the Financing Terms to its current or bona fide
prospective investors, employees, investment bankers, lenders, accountants and
attorneys, in each case only where such persons or entities are under
appropriate nondisclosure obligations; and (ii) any party may disclose (other
than in a press release or other public announcement described in subsection
(c)) solely the fact that the Series D Purchasers and Series E Purchasers are
investors in the Company and the amount of such party's investment to any third
parties without the requirement for the consent of any other party or
nondisclosure obligations.
(e) Legally Compelled Disclosure. In the event that any party is
----------------------------
requested or becomes legally compelled (including without limitation, pursuant
to federal or state securities laws and regulations) to disclose the existence
of this Agreement or the Series D Agreement or any of the Financing Terms hereof
in contravention of the provisions of this Section 7.2, such party (the
"Disclosing Party") shall provide the other parties (the "Non-Disclosing
---------------- --------------
Parties") with prompt written notice of that fact so that the appropriate party
may seek (with the cooperation and reasonable efforts of the other parties) a
protective order, confidential treatment or other appropriate remedy. In such
event, the Disclosing Party shall furnish only that portion of the information
which is legally required and shall exercise reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded such information
to the extent reasonably requested by any Non-Disclosing Party.
(f) Other Information. The provisions of this Section 7.2 and Section
-----------------
4.5(b)(i) above shall be in addition to, and not in substitution for, the
provisions of any separate nondisclosure agreement executed by any of the
parties hereto with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, the disclosure and exchange of confidential
information between the Company and Intel (including without limitation, any
exchanges of information with any Intel Board Visitor) shall be governed solely
by the terms of the Corporate Non-Disclosure Agreement No. 110478, dated July
16, 1998, executed by the Company and Intel, and any Confidential Information
Transmittal Records (as defined therein) provided in connection therewith.
(g) All notices required under this section shall be made pursuant to
Section 7.6 of this Agreement.
-26-
<PAGE>
7.3 SURVIVAL. The covenants and agreements made herein shall survive the
--------
Closing (as defined in the Series B Agreement, the Series C Agreement, the
Bridge Agreement, the Series D Agreement and the Series E Agreement).
7.4 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.
7.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Series B Agreement,
---------------------------
the Series C Agreement, the Series D Agreement, the Series E Agreement, the NBC
Warrant Agreement, the Bridge Agreement, the VBW&C Letter Agreement, the Refco
Letter Agreement and the other documents delivered pursuant hereto as of the
respective Closings under each agreement constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, 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 or therein. Neither this Agreement nor any term
hereof may be amended, waived, discharged or terminated other than by a written
instrument signed by the Company and (i) with respect to Sections 2, 3, 6 and 7,
the holders of a majority of the Common Stock issued or issuable upon conversion
of the then outstanding Preferred plus the shares of Common Stock issuable upon
exercise of the NBC Warrant plus the shares of Common Stock issuable upon
exercise of the Bridge Warrants plus the Series D Preferred Stock issued or
issuable upon exercise of the Refco Warrant and the VBW&C Warrants, (ii) with
respect to Sections 1, 4.1, 4.2, 4.5, 4.6 and 4.9, the holders of a majority of
the Common Stock issued or issuable upon conversion of the then outstanding
Preferred, plus the Series D Preferred Stock issued or issuable upon exercise of
the Refco Warrant and the VBW&C Warrants, plus (except for Section 4.5) the
shares of Common Stock issuable upon exercise of the NBC Warrant, (iii) with
respect to Sections 4.3, 4.4, 4.7, 4.8 and 5, the holders of a majority of the
Common Stock issued or issuable upon conversion of the then outstanding
Preferred (excluding the Series C Preferred, the Additional Series D Preferred
held by each of the Series C Purchaser and the NBC Warrantholder and the Series
D Preferred block issued or issuable upon exercise of the Refco Warrant and the
VBW&C Warrants) and (iv) with respect to Section 1.3, the Company and the
holders of a majority of the then outstanding Series D Preferred (excluding the
Series D Preferred Stock issued or issuable upon exercise of the Refco Warrant
and the VBW&C Warrants). Any such duly executed amendment, waiver, modification
or termination shall be effective as to all Purchasers. Notwithstanding any of
the foregoing, (i) Section 6.1 may not be amended without the consent of Peter
Friedman; (ii) Section 4.5(a) may not be amended without the consent of Cox,
Hearst and NBC; and (iii) Sections 3.2, 3.6, 3.9 through 3.16, 4.8, 5, 6 and 7
may not be amended in a manner adverse to the Common Shareholders without the
consent of the holders of a majority of the shares of Common Stock of the
Company held by the Common Shareholders.
7.6 NOTICES. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be mailed by first class mail, postage
prepaid, or otherwise delivered by hand or by messenger, or by a reputable
overnight courier service or telecopier (with telephonic confirmation of
receipt) addressed (a) if to a Purchaser, at such Purchaser's address, as shown
on the stock records of the Company, or at such other address as such Purchaser
shall have furnished to the
-27-
<PAGE>
Company in writing, or (b) if to any other holder of any Preferred, the NBC
Warrant, any Bridge Warrant, the Refco Warrant or the VBW&C Warrants, at such
address as such holder shall have furnished the Company in writing, or, until
any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Preferred, the NBC Warrant, such Bridge
Warrant, the Refco Warrant or the VBW&C Warrants, who has so furnished an
address to the Company, or (c) if to the Company, one copy should be sent to its
address set forth on the cover page of this Agreement and addressed to the Chief
Executive Officer, or at such other address as the Company shall have furnished
to the Purchasers.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or
seven (7) business days after the same has been deposited in a regularly
maintained receptacle for the deposit of the United States mail, addressed and
mailed as aforesaid, or the next business day if sent by overnight courier
service, or upon telephonic confirmation of receipt if sent by telecopier.
7.7 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or
-------------------
omission to exercise any right, power or remedy accruing to any party to this
Agreement upon any breach or default of any other party under this Agreement,
shall impair any such right, power or remedy of such nondefaulting party 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
party 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 party to this Agreement, shall be cumulative and not
alternative.
7.8 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.9 SEVERABILITY. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
-------- ----
it materially changes the economic benefit of this Agreement to any party.
7.10 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.
-28-
<PAGE>
7.11 WAIVER OF RIGHTS. In consideration of the rights granted herein, (i)
----------------
all rights granted to, and any obligations of, the parties to the Prior
Agreement are amended and restated in full to read as set forth in this
Agreement; and (ii) the Purchasers waive, on behalf of all of the Purchasers,
the right of first refusal as with respect to the issuance of the Series E
Preferred Stock.
-29-
<PAGE>
The foregoing Agreement is hereby executed as of the date first above
written.
"COMPANY"
TALK CITY, INC.,
a California corporation
By: _________________________________
Name: Peter Friedman
Title: Chief Executive Officer
"SERIES E PURCHASERS"
By: _________________________________
Name:
Title:
"SERIES D PURCHASERS"
VOLPE BROWN WHELAN & COMPANY
By: _________________________________
Name:
Title:
REFCO SECURITIES, INC.
By: _________________________________
Name:
Title:
HEARST COMMUNICATIONS, INC., HEARST NEW
MEDIA & TECHNOLOGY DIVISION
By: _________________________________
Name:
Title:
COX INTERACTIVE MEDIA, INC.
By: _________________________________
Name:
Title:
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
NEW YORK LIFE INSURANCE
By: _________________________________
Name:
Title:
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By: _________________________________
Name: Patricia M. Cloherty
Title: President
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS & CO. (CAYMAN) LTD., as Custodian for
APA EXCELSIOR IV / OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
(Its Investment Advisor)
By: _________________________________
Name: Patricia M. Cloherty
Title: Co-Chairman
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By: _________________________________
Name: Patricia M. Cloherty
Title: President
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
QUANTUM INDUSTRIAL PARTNERS LDC
By: _________________________________
Name:
Title:
MEDIA TECHNOLOGY EQUITY PARTNERS, L.P.
By: _________________________________
Name:
Title:
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-1(A) Investment Fund
By: _________________________________
Name:
Title:
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-1(B) Investment Fund
By: _________________________________
Name:
Title:
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-2 Investment Fund
By: _________________________________
Name:
Title:
______________________________________
John Hsu
INTEL CORPORATION
By: _________________________________
Name:
Title:
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
"BRIDGE SERIES D HOLDERS"
______________________________________
Tarek AbuZayyad
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By: _________________________________
Name: Patricia M. Cloherty
Title: President
______________________________________
Bernard Bernstein
______________________________________
Steve Campbell
______________________________________
Michael Chasalow
______________________________________
Jeffrey Cheng
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS & CO (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV / OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
(Its Investment Advisor)
By: _________________________________
Name: Patricia M. Cloherty
Title: Co-Chairman
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
______________________________________
Barry Davis
______________________________________
Peter H. Friedman
______________________________________
Joseph Graziano
______________________________________
Raymond Ho
______________________________________
Aaron Hsu
______________________________________
Alec Hsu
NEW YORK LIFE INSURANCE
By: _________________________________
Name:
Title:
______________________________________
Don O'Brien
______________________________________
The O'Brien Living Trust, J.J. O'Brien
as Co-Trustee
______________________________________
David J. Padzensky
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By: ____________________________________________
Name: Patricia M. Cloherty
Title: President
_________________________________________________
Daniel Paul
REFCO CAPITAL MARKETS, LTD.
By: ____________________________________________
Name:
Title:
_________________________________________________
John Sculley
_________________________________________________
Robert Tabke
_________________________________________________
Jonathan Traxler
_________________________________________________
Wijntje Van Der Zouw
_________________________________________________
Traxler Family Trust u/a 6/2/89, Joseph Traxler
& Joyce Traxler, Trustees
_________________________________________________
Kenneth R. Wirt
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
_________________________________________________
Jenna Woodul
"SERIES C PURCHASER"
NATIONAL BROADCASTING COMPANY, INC.
By: ____________________________________________
Name:
Title:
"NBC WARRANTHOLDER"
NBC MULTIMEDIA, INC.
By: ____________________________________________
Name:
Title:
"BRIDGE WARRANTHOLDERS"
_________________________________________________
Tarek AbuZayyad
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By: ____________________________________________
Name: Patricia M. Cloherty
Title: President
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
AXON TECHNOLOGIES
By: ____________________________________________
Name: Bruce Dembecki
Title:
_________________________________________________
Bernard Bernstein
_________________________________________________
Steve Campbell
_________________________________________________
Michael Chasalow
_________________________________________________
Jeffrey Cheng
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS & CO. (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV / OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
(Its Investment Advisor)
By: ____________________________________________
Name: Patricia M. Cloherty
Title: Co-Chairman
_________________________________________________
Barry Davis
_________________________________________________
Christopher Escher
_________________________________________________
David Fox
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
_________________________________________________
Peter H. Friedman
_________________________________________________
Joseph Graziano
_________________________________________________
Raymond Ho
_________________________________________________
Aaron Hsu
_________________________________________________
Alec Hsu
NEW YORK LIFE INSURANCE
By: ____________________________________________
Name:
Title:
_________________________________________________
Don O'Brien
_________________________________________________
The O'Brien Living Trust, J.J. O'Brien
as Co-Trustee
_________________________________________________
David J. Padzensky
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Iys General Partner)
By: ____________________________________________
Name: Patricia M. Cloherty
Title: President
_________________________________________________
Daniel Paul
_________________________________________________
Luis Piedrahita
REFCO CAPITAL MARKETS, LTD.
By: ____________________________________________
Name:
Title:
_________________________________________________
John Sculley
SOFTBANK VENTURES, INC.
By: ____________________________________________
Name:
Title:
_________________________________________________
Robert Tabke
_________________________________________________
Jonathan Traxler
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
____________________________________________________
Traxler Family Trust u/a 6/2/89, Joseph Traxler
& Joyce Traxler, Trustees
____________________________________________________
Kenneth R. Wirt
____________________________________________________
Jenna Woodul
"SERIES B PURCHASERS"
____________________________________________________
Joseph Graziano
____________________________________________________
Aaron Hsu
____________________________________________________
Alec Hsu
____________________________________________________
William Lipner
NEW YORK LIFE INSURANCE
By: _______________________________________________
Name:
Title:
QUANTUM INDUSTRIAL PARTNERS LDC
By: _______________________________________________
Name: Michael C. Neus
Title: Attorney-in-Fact
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
SOFTBANK VENTURES, INC.
By: _______________________________________________
Name:
Title:
____________________________________________________
Ken Wirt
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By: _______________________________________________
Name: Patricia M. Cloherty
Title: President
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS & CO. (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV / OFFSHORE, L.P.
By: PATRICOF & CO., VENTURES, INC.
(Its Investment Advisor)
By: _______________________________________________
Name: Patricia M. Cloherty
Title Co-Chairman
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Manager)
By: _______________________________________________
Name: Patricia M. Cloherty
Title: President
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
"SERIES A PURCHASER"
____________________________________________________
Joseph Graziano
"SERIES A1 PURCHASERS"
____________________________________________________
Steve Campbell
____________________________________________________
Joseph Graziano
____________________________________________________
Aaron Hsu
____________________________________________________
John Scully
____________________________________________________
Sculley Brothers, LLC
____________________________________________________
Sculley Investment Limited Partnership
____________________________________________________
John Sculley Irrevocable Trust FBO Oliver Allnatt
u/d/t 12/30/97, Geraldine Coleman, Trustee
____________________________________________________
John Sculley Irrevocable Trust FBO Madeline
Allnatt u/d/t 12/30/97, Geraldine Coleman, Trustee
____________________________________________________
Robert Tabke
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
"COMMON SHAREHOLDERS"
____________________________________________________
Peter Friedman
____________________________________________________
Joseph Graziano
____________________________________________________
John Sculley
____________________________________________________
Jenna Woodul
____________________________________________________
Arthur and Cynthia Friedman
____________________________________________________
Joan Friedman
____________________________________________________
Robert Friedman
____________________________________________________
Judy and Ken Wichter
____________________________________________________
Morgan S. Wright
[SIGNATURE PAGE TO SHAREHOLDERS RIGHTS AGREEMENT]
<PAGE>
AMENDMENT AGREEMENT
-------------------
This Amendment Agreement ("Agreement") is entered into as of May 26, 1999
---------
among (i) Talk City, Inc., a California corporation (the "Company"), (ii) the
-------
sole purchaser of the Company's Series C Preferred Stock (the "Series C
--------
Purchaser") listed on the signature pages hereto, (iii) the holder of a warrant
- ---------
(the "NBC Warrant") to purchase Common Stock of the Company (the "NBC
----------- ---
Warrantholder") listed on the signature pages hereto, (iv) the holders of
- -------------
warrants to purchase Common Stock of the Company (the "Bridge Warrantholders")
---------------------
listed on the signature pages hereto, (v) the purchasers of the Company's Series
B Preferred Stock (the "Series B Purchasers") pursuant to the Series B Preferred
-------------------
Stock Purchase Agreement dated November 20, 1996 (the "Series B Agreement"),
------------------
(vi) the sole purchaser of the Company's Series A Preferred Stock (the "Series A
--------
Purchaser") pursuant to the Series A Preferred Stock Purchase Agreement dated
- ---------
June 1996 (the "Series A Agreement"), (vii) those purchasers of the Company's
------------------
Series A1 Preferred Stock (the "Series A1 Purchasers") pursuant to the Series A1
--------------------
Preferred Stock Purchase Agreements dated July 1996 (the "Series A1
---------
Agreements"), (viii) certain holders of Common Stock of the Company (the "Common
- ----------
Shareholders"), (ix) the purchasers (excluding the Bridge Series D Holders (as
- ------------
defined below) of the Company's Series D Preferred Stock (the "Series D
--------
Purchasers") pursuant to (a) the Series D Preferred Stock Purchase Agreement
- ----------
dated August 25, 1998 (the "Series D Financing Agreement"), and (b) the Series D
----------------------------
Preferred Stock Purchase Agreement with Hearst Communications, Inc., Hearst New
Media & Technology division ("Hearst") dated October 30, 1998, as amended on
------
April 15, 1999 (the "Hearst Series D Agreement" and together with the Series D
-------------------------
Financing Agreement, the "Series D Agreement"), (x) the holders (the "Bridge
------------------ ------
Series D Holders") of Series D Preferred Stock issued upon conversion of the
- ----------------
bridge notes (the "Bridge Notes") issued pursuant to the bridge financing (the
------------
"Bridge Financing") of the Company, (xi) Volpe Brown Whelan & Company ("VBW&C"),
- ----------------- -----
as a holder of warrants (the "VBW&C Warrants") to purchase Series D Preferred
--------------
Stock and Series E Preferred Stock of the Company, (xii) Refco Securities, Inc.
("Refco") as a holder of a warrant (the "Refco Warrant") to purchase Series D
----- -------------
Preferred Stock of the Company and (xiii) the purchasers of the Company's Series
E Preferred Stock (the "Series E Purchasers") pursuant to the Series E Preferred
-------------------
Stock Purchase Agreement dated April 23, 1999 (the "Series E Agreement").
------------------
RECITAL
The Company desires to amend the Third Amended and Restated Shareholders
Rights Agreement dated April 23, 1999 ("Rights Agreement") to provide that the
----------------
registration rights in the Rights Agreement apply to the shares of Common Stock
underlying a warrant (the "New VBW&C Warrant") to purchase 23,785 shares of
-----------------
Series E Preferred Stock of the Company issued to VBW&C upon the closing (as
defined in the Series E Agreement) of the Series E Preferred Stock financing of
the Company and pursuant to a letter agreement, dated December 3, 1997, by and
between the Company and VBW&C (the "VBW&C Letter Agreement").
----------------------
<PAGE>
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Amendments.
----------
a. The definition of "VBW&C Warrants" as set forth in the first
--------------
paragraph of page 1 of the Rights Agreement is amended to include the New VBW&C
Warrant issued to VBW&C pursuant to the Closing (as defined in the Series E
Agreement) and the VBW&C Letter Agreement.
b. The definition of "Preferred" as set forth in the second
---------
paragraph of page 1 of the Rights Agreement is amended to include the 23,785
shares of the Company's Series E Preferred Stock subject to the New VBW&C
Warrant (such Preferred is referred to as the "VBW&C Series E Preferred").
------------------------
c. The definition of "Preferred Stock" in Section 3.2 of the Rights
---------------
Agreement shall be amended to include the VBW&C Series E Preferred issuable upon
exercise of the VBW&C Warrants.
d. (i) Clause (i) of the second sentence of Section 7.5 of the
Rights Agreement is amended to include the VBW&C Series E Preferred issued or
issuable upon exercise of the VBW&C Warrants.
(ii) Clause (ii) of the second sentence of Section 7.5 of the
Rights Agreement is amended to include the VBW&C Series E Preferred issued or
issuable upon exercise of the VBW&C Warrants.
(iii) Clause (iii) of the second sentence of Section 7.5 of
the Rights Agreement is amended to include the VBW&C Series E Preferred issued
or issuable upon exercise of the VBW&C Warrants.
(iv) Clause (iv) of the second sentence of Section 7.5 of the
Rights Agreement is amended by amending the parenthetical after "Series D
Preferred" to state "(excluding the Series D Preferred Stock and Series E
Preferred Stock issued or issuable upon exercise of the Refco Warrant and the
VBW&C Warrants)."
2. Miscellaneous.
-------------
a. Governing Law. This Agreement shall be governed in all respects
-------------
by the internal laws of the Sate of California.
-2-
<PAGE>
b. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one instrument.
c. 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.
-3-
<PAGE>
The foregoing Agreement is hereby executed as of the date first above
written.
"COMPANY"
TALK CITY, INC.
a California corporation
__________________________________________________
Peter H. Friedman
Chief Executive Officer and President
"SERIES E PURCHASERS"
__________________________________________________
Tarek AbuZayyad
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-1(A) Investment Fund
By:_________________________________________
Name:
Title:
FREEDOM COMMUNICATIONS
By:_________________________________________
Name:
Title:
<PAGE>
HEARST COMMUNICATIONS, INC.
By:_________________________________________
Name:
Title:
__________________________________________________
John Hsu
__________________________________________________
Aaron Hsu
__________________________________________________
Alec J. Hsu
MEDIA TECHNOLOGY EQUITY PARTNERS, L.P.
By:_________________________________________
Name:
Title:
MULTI-ACCOUNTS, LLC
By:_________________________________________
Name:
Title:
NEW YORK LIFE INSURANCE COMPANY
By:_________________________________________
Name:
Title:
__________________________________________________
Gordon Radley
<PAGE>
SOFTBANK VENTURES, INC.
By:_________________________________________
Name:
Title:
SONY MUSIC
By:_________________________________________
Name:
Title:
STARBUCKS CORPORATION
By:_________________________________________
Name:
Title:
"SERIES D PURCHASERS"
VOLPE BROWN WHELAN & COMPANY
By:_________________________________________
Name:
Title:
REFCO SECURITIES, INC.
By:_________________________________________
Name:
Title:
<PAGE>
HEARST COMMUNICATIONS, INC., HEARST NEW MEDIA AND
TECHNOLOGY DIVISION
By:_________________________________________
Name:
Title:
COX INTERACTIVE MEDIA, INC.
By:_________________________________________
Name:
Title:
NEW YORK LIFE INSURANCE COMPANY
By:_________________________________________
Name:
Title:
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS,L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV/OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
(Its Investor Advisor)
By:_________________________________________
Name: Patricia M. Cloherty
Title: Co-Chairman
<PAGE>
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
QUANTUM INDUSTRIAL PARTNERS LDC
By:_________________________________________
Name:
Title:
MEDIA TECHNOLOGY EQUITY PARTNERS, L.P.
By:_________________________________________
Name:
Title:
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-1(A) Investment Fund
By:_________________________________________
Name:
Title:
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-1(B) Investment Fund
By:_________________________________________
Name:
Title:
<PAGE>
CSK VENTURE CAPITAL CO., LTD. as Investment
Manager for CSK-2 Investment Fund
By:_________________________________________
Name:
Title:
INTEL CORPORATION
By:_________________________________________
Name:
Title:
__________________________________________________
John Hsu
"BRIDGE SERIES D HOLDERS"
__________________________________________________
Tarek AbuZayyad
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS,L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
__________________________________________________
Bernard Bernstein
__________________________________________________
Steve Campbell
__________________________________________________
Michael Chasalow
<PAGE>
__________________________________________________
Jeffrey Cheng
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV/OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
(Its Investor Advisor)
By:_________________________________________
Name: Patricia M. Cloherty
Title: Co-Chairman
__________________________________________________
Barry Davis
__________________________________________________
Peter H. Friedman
__________________________________________________
Joseph Graziano
__________________________________________________
Raymond Ho
__________________________________________________
Aaron Hsu
__________________________________________________
Alec Hsu
NEW YORK LIFE INSURANCE
By:_________________________________________
Name:
Title:
__________________________________________________
Don O'Brien
<PAGE>
__________________________________________________
The O'Brien Living Trust, J.J. O'Brien as
Co-Trustee
__________________________________________________
David J. Padzensky
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
__________________________________________________
Daniel Paul
REFCO SECURITIES, INC.
By:_________________________________________
Name:
Title:
__________________________________________________
John Sculley
__________________________________________________
Robert Tabke
__________________________________________________
Jonathan Traxler
__________________________________________________
Wijntje Van Der Zouw
<PAGE>
___________________________________________
Traxler Family Trust u/a 6/2/89, Joseph
Traxler & Joyce Traxler, Trustees
___________________________________________
Kenneth R. Wirt
___________________________________________
Jenna Woodul
"SERIES C PURCHASER"
NATIONAL BROADCASTING COMPANY, INC.
By:_____________________________________
Name:
Title:
"NBC WARRANTHOLDER"
NBC MULTIMEDIA, INC.
By:_____________________________________
Name:
Title:
"BRIDGE WARRANTHOLDERS"
___________________________________________
Tarek Abu Zayyad
<PAGE>
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS,L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
AXON TECHNOLOGIES
By:_________________________________________
Name: Bruce Dembecki
Title:
__________________________________________________
Bernard Bernstein
__________________________________________________
Steve Campbell
__________________________________________________
Michael Chasalow
__________________________________________________
Jeffrey Cheng
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV/OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
(Its Investor Advisor)
By:_________________________________________
Name: Patricia M. Cloherty
Title: Co-Chairman
<PAGE>
_________________________________________________
Barry Davis
_________________________________________________
Christopher Escher
_________________________________________________
David Fox
_________________________________________________
Peter H. Friedman
_________________________________________________
Joseph Graziano
_________________________________________________
Raymond Ho
_________________________________________________
Aaron Hsu
_________________________________________________
Alec Hsu
NEW YORK LIFE INSURANCE
By:_________________________________________
Name:
Title:
_________________________________________________
Don O'Brien
_________________________________________________
The O'Brien Living Trust, J.J. O'Brien as
Co-Trustee
_________________________________________________
David J. Padzensky
<PAGE>
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
__________________________________________________
Daniel Paul
__________________________________________________
Luis Piedrahita
REFCO SECURITIES, INC.
By:_________________________________________
Name:
Title:
__________________________________________________
John Sculley
SOFTBANK VENTURES, INC.
By:_________________________________________
Name:
Title:
__________________________________________________
Robert Tabke
__________________________________________________
Jonathan Traxler
<PAGE>
__________________________________________________
Traxler Family Trust u/a 6/2/89, Joseph
Traxler & Joyce Traxler, Trustees
__________________________________________________
Kenneth R. Wirt
__________________________________________________
Jenna Woodul
"SERIES B PURCHASERS"
__________________________________________________
Joseph Graziano
__________________________________________________
Aaron Hsu
__________________________________________________
Alec Hsu
__________________________________________________
William Lipner
NEW YORK LIFE INSURANCE COMPANY
By:_______________________________________________
Name:
Title:
QUANTUM INDUSTRIAL PARTNERS LDC
By:_______________________________________________
Name: Michael C. Neus
Title: Attorney-in-Fact
<PAGE>
SOFTBANK VENTURES, INC.
By:_______________________________________________
Name:
Title:
__________________________________________________
Ken Wirt
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Partner)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
APA EXCELSIOR IV/OFFSHORE, L.P.
By: COUTTS (CAYMAN) LTD., As Custodian for
APA EXCELSIOR IV/OFFSHORE, L.P.
By: PATRICOF & CO., VENTURES, INC.
(Its Investment Advisor)
By:_________________________________________
Name: Patricia M. Cloherty
Title Co-Chairman
<PAGE>
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.
(Its General Partner)
By: PATRICOF & CO. MANAGERS, INC.
(Its General Manager)
By:_________________________________________
Name: Patricia M. Cloherty
Title: President
"SERIES A PURCHASER"
__________________________________________________
Joseph Graziano
"SERIES A1 PURCHASERS"
__________________________________________________
Campbell 1984 Revocable Trust U/A 10/21/92
__________________________________________________
Joseph Graziano
__________________________________________________
Aaron Hsu
__________________________________________________
John Scully
__________________________________________________
Sculley Brothers, LLC
__________________________________________________
Sculley Investment Limited Partnership
<PAGE>
__________________________________________________
John Sculley Irrevocable Trust FBO Oliver
Allnatt u/d/t 12/30/97, Geraldine Coleman,
Trustee
__________________________________________________
John Sculley Irrevocable Trust FBO Madeline
Allnatt u/d/t 12/30/97, Geraldine Coleman,
Trustee
__________________________________________________
Robert Tabke
"COMMON SHAREHOLDERS"
__________________________________________________
Peter Friedman
__________________________________________________
Joseph Graziano
__________________________________________________
John Sculley
__________________________________________________
Jenna Woodul
__________________________________________________
Arthur and Cynthia Friedman
__________________________________________________
Joan Friedman
__________________________________________________
Robert Friedman
__________________________________________________
Judy and Kevin Wichter
__________________________________________________
Morgan S. Wright
<PAGE>
__________________________________________________
Kevin Wichter and
__________________________________________________
Judy Wichter, Trustees of the Amy Francis
Friedman 1999 Trust U/T/A dated May 10, 1999
__________________________________________________
Kevin Wichter and
__________________________________________________
Judy Wichter, Trustees of the Jonathan
Lawrence Friedman 1999 Trust U/T/A dated
May 10, 1999
<PAGE>
EXHIBIT 5.1
-----------
[WILSON SONSINI LETTERHEAD]
May __, 1999
Talk City, Inc.
307 Orchard City Drive, Suite 350
Campbell, CA 95008
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1, as amended, filed
by Talk City, Inc., a Delaware corporation (the "Company"), with the Securities
and Exchange Commission in connection with the registration under the Securities
Act of 1933, as amended, of up to ______________ shares of the Company's Common
Stock (including an over-allotment of up to ______________ shares of the
Company's Common Stock granted to the underwriters) (the "Shares"). The Shares
are to be sold to the underwriters for resale to the public as described in the
Registration Statement and pursuant to the Underwriting Agreement filed as an
exhibit thereto. As legal counsel to the Company, we have examined the
proceedings proposed to be taken in connection with the sale and issuance of the
Shares.
Based upon the foregoing, we are of the opinion that the Shares, when
issued in the manner described in the Registration Statement, will be duly
authorized, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 10.1
TALK CITY, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of ____________ by
and between Talk City, Inc., a Delaware corporation (which, together with the
California corporation which was its predecessor, is known herein as the
"Company"), and _____________________________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the coverage of liability
insurance has been limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee 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, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by Indemnitee in
connection with such action or proceeding if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company,
<PAGE>
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe Indemnitee's conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
- ---------------
that (i) Indemnitee did not act in good faith, (ii) Indemnitee did not act in a
manner which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or (iii) with respect to any criminal action or
proceeding, Indemnitee had no reasonable cause to believe that Indemnitee's
conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee 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, against expenses
(including attorneys' fees) and, to the fullest extent permitted by law, amounts
paid in settlement, in each case to the extent actually and reasonably incurred
by Indemnitee in connection with the defense or settlement of such action or
proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and its stockholders, except that no indemnification shall be made in respect of
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its stockholders unless and only to the extent that the court in which such
action or suit is or was pending shall determine upon application that, in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses and then only to the extent that the
court shall determine.
2. Agreement to Serve. In consideration of the protection afforded by
------------------
this Agreement, if Indemnitee is a director of the Company, he agrees to serve
at least for the balance of the current term as a director and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. If Indemnitee is an officer of the Company not serving
under an employment contract, he agrees to serve in such capacity at least for
the balance of the current fiscal year of the Company and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. Following the applicable period set forth above, Indemnitee
agrees to continue to serve in such capacity at the will of the Company (or
under separate agreement, if such agreement exists) so long as he is duly
appointed or elected and qualified in accordance with the applicable provisions
of the Bylaws of the Company or any subsidiary of the Company or until such time
as he tenders his resignation in writing. Nothing contained in this Agreement
is intended to or shall create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
<PAGE>
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section
1(a) or (b) hereof (but not amounts actually paid in settlement of any such
action or proceeding). Indemnitee hereby undertakes to repay such expenses
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the date
postmarked if sent by domestic certified or registered mail, properly addressed;
otherwise notice shall be deemed received when such notice shall actually be
received by the Company. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
<PAGE>
(c) Procedure. Any indemnification provided for in Section 1 shall be
---------
made no later than forty-five (45) days after receipt of the written request of
Indemnitee. If a claim under this Agreement, under any statute, or under any
provision of the Company's Certificate of Incorporation or Bylaws providing for
indemnification, is not paid in full by the Company within forty-five (45) days
after a written request for payment thereof has first been received by the
Company, Indemnitee may, but need not, at any time thereafter submit his claim
to arbitration as described in Section 14 to recover the unpaid amount of the
claim and, subject to Section 15 of this Agreement, Indemnitee shall also be
entitled to be paid for the expenses (including attorneys' fees) of bringing
such claim. It shall be a defense to any such action (other than a claim
brought for expenses incurred in connection with any action or proceeding in
advance of its final disposition) that Indemnitee has not met the standards of
conduct which make it permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company, and Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Subsection 3(a) unless and until such
defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists or an arbitration panel as described in Section
14. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court or arbitration panel to decide, and neither the failure
of the Company (including its Board of Directors, any committee or subgroup of
the Board of Directors, independent legal counsel, or its stockholders) to have
made a determination that indemnification of Indemnitee is proper in the
circumstances because Indemnitee has met the applicable standard of conduct
required by applicable law, nor an actual determination by the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its stockholders) that Indemnitee has
not met such applicable standard of conduct, shall create a presumption that
Indemnitee has or has not met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his own counsel in
any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct
<PAGE>
of any such defense or (C) the Company shall not, in fact, have employed counsel
to assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of Indemnitee's rights and Company's obligations under this Agreement.
In the event of any change in any applicable law, statute or rule which narrows
the right of a Delaware corporation to indemnify a member of its Board of
Directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested directors, the General Corporation Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office.
The indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though he may have ceased to serve in such capacity at the time of
any action or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines, penalties or amounts paid in
settlement actually or reasonably incurred by him in the investigation, defense,
appeal or settlement of any civil or criminal action or proceeding, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such expenses, judgments, fines or penalties to
which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Directors' and Officers' Liability Insurance. The Company shall, from
--------------------------------------------
time to time, make a good faith determination whether or not it is practicable
for the Company to obtain and maintain
<PAGE>
a policy or policies of insurance with reputable insurance companies providing
the officers and directors of the Company with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of directors' and officers' liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
-----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
-------------
or transactions from which a director may not be indemnified under the Delaware
General Corporation Law; or
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such claim; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction or the arbitration panel determines that each of the
<PAGE>
material assertions made by the Indemnitee in such proceeding was not made in
good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Effectiveness of Agreement. To the extent that the indemnification
--------------------------
permitted under the terms of certain provisions of this Agreement exceeds the
scope of the indemnification provided for in the Delaware General Corporation
Law, such provisions shall not be effective unless and until the Company's
Certificate of Incorporation authorizes such additional rights of
indemnification. In all other respects, the balance of this Agreement shall be
effective as of the date set forth on the first page and may apply to acts or
omissions of Indemnitee which occurred prior to such date if Indemnitee was an
officer, director, employee or other agent of the Company, 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, at the time
such act or omission occurred.
11. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries.
<PAGE>
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
13. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
14. Arbitration. It is understood and agreed that the Company and
-----------
Indemnitee shall carry out this Agreement in the spirit of mutual cooperation
and good faith and that any differences, disputes or controversies shall be
resolved and settled amicably among the parties hereto. In the event that the
dispute, controversy or difference is not so settled in the above manner within
forty-five (45) days, then the matter shall be exclusively submitted to
arbitration in Santa Clara County, California before three independent
technically qualified arbitrators in accordance with the Commercial Arbitration
Rules of the American Arbitration Association and under the laws of Delaware,
without reference to conflict of laws principles. Subject to Sections 1(b) and
6, arbitration shall be the exclusive forum and the decision and award by the
arbitrator(s) shall be final and binding upon the parties concerned and may be
entered in any state court of California having jurisdiction.
15. Attorneys' Fees. In the event that any action is instituted or claim
---------------
is submitted to arbitration by Indemnitee under this Agreement to enforce or
interpret any of the terms hereof, Indemnitee shall be entitled to be paid all
court costs and expenses, including reasonable attorneys' fees, incurred by
Indemnitee with respect to such action or arbitration, unless as a part of such
action, a court of competent jurisdiction or the arbitrator(s) determines that
each of the material assertions made by Indemnitee as a basis for such claim
were not made in good faith or were frivolous. In the event of an action
instituted or a claim submitted to arbitration by or in the name of the Company
under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action or
claim (including with respect to Indemnitee's counterclaims and cross-claims
made in such action or arbitration), unless as a part of such action the court
or the arbitrator(s) determines that each of Indemnitee's material defenses to
such action or claim were made in bad faith or were frivolous.
16. Notice. All notices, requests, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
17. Consent to Jurisdiction. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any proceeding which arises out of or
relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California
in Santa Clara County and that any arbitration proceeding which arises out of or
relates to this Agreement shall be held in Santa Clara County, California.
<PAGE>
18. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and performed entirely within
Delaware.
19. Subrogation. In the event of 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 documents required and shall do
all acts that may be necessary to secure such rights and to enable the
corporation effectively to bring suit to enforce such rights.
20. Continuation of Indemnification. All agreements and obligations of
-------------------------------
the Company contained herein shall continue during the period that Indemnitee is
a director, officer or agent of the Company and shall continue thereafter so
long as Indemnitee shall be subject to any possible claim or threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
arbitrational, administrative or investigative, by reason of the fact that
Indemnitee was serving in the capacity referred to herein.
21. Amendment and Termination. Subject to Section 20, no amendment,
-------------------------
modification, termination or cancellation of this Agreement shall be effective
unless in writing signed by both parties hereto.
22. Integration and Entire Agreement. This Agreement (a) sets forth the
--------------------------------
entire understanding between the parties, (b) supersedes all previous written or
oral negotiations, commitments, understandings and agreements relating to the
subject matter hereof and (c) merges all prior and contemporaneous discussions
between the parties.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
TALK CITY, INC.
By:______________________________
Title:___________________________
Address: 307 Orchard City Drive
Suite 350
Campbell, California 95008
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
Signature
______________________________
Print Name
______________________________
______________________________
Address
<PAGE>
Exhibit 10.3
TALK CITY, INC.
(Formerly LiveWorld Productions, Inc.)
1996 STOCK PLAN
(as amended and restated April 23, 1999)
1. Purposes of the Plan. The purposes of this 1996 Stock Plan, as amended
--------------------
and restated, are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Talk City, Inc., a California corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
<PAGE>
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the 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 Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, 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 exchange or system 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 regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day 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 shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1996 Stock Plan, as amended and restated.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant to
----------------
a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
----------
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 6,150,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year beginning in 2000 equal to the lesser of
(i) 1,500,000 shares, (ii) 4% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered
------------------------------
by different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
-4-
<PAGE>
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
-5-
<PAGE>
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. 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. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
-6-
<PAGE>
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 500,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
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 per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
-7-
<PAGE>
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
-8-
<PAGE>
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter 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) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
-9-
<PAGE>
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason
-10-
<PAGE>
(including death or Disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
-11-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For
the purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the
-12-
<PAGE>
determination shall be provided to each Optionee within a reasonable time after
the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. 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 to 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 been obtained.
18. 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.
-13-
<PAGE>
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-14-
<PAGE>
Exhibit 10.20
INTERNET PROFILES CORPORATION
CUSTOM REPORTING SERVICES AGREEMENT
This Agreement ("Agreement") sets forth the terms and conditions upon which
Internet Profiles Corporation, a California corporation ("I/PRO"), will provide
custom research services to Talk City, Inc.("Customer") beginning April 5, 1999,
-------------
until this Agreement is terminated in accordance with the terms of this
contract.
Custom Reporting Services. I/PRO will provide website and chat server
data measurement, analysis and audit services ("the Work") retroactively for the
period January 1, 1999 to March 31, 1999.
Confidentiality and Ownership. I/PRO acknowledges that in the course of
the transactions contemplated by this Agreement, I/PRO may be provided with
confidential information about Customer (including log information and
information relating to Customer's planned or existing computer systems and
systems architecture) and confidential information of third parties with which
Customer conducts business (such information being referred to collectively as
"Confidential Information"). In recognition of the foregoing, and subject to the
"Publicity; Data" section below, the parties agree that without written consent
from the other party to treat all Confidential Information of the other and
third parties as confidential, maintaining such information in strict
confidence, using at least reasonable care to avoid unauthorized use or
disclosure of such information.
Reporting Services. Customer will provide I/PRO with log data files
relating to the use of Customer's World Wide Web Site and internet Chat server
("Log Data"). Following receipt of such information, I/PRO will perform the
Custom Reporting Services as specified herein.
Publicity; Data. Customer agrees to permit I/PRO to disclose to
potential new clients that it has performed various services for Talk City,
Inc., however, the specifics and results of such services must be kept
confidential by I/PRO. Further, disclosure of Talk City's name or reference to
the services that were contracted for by Talk City in connection with any form
of public advertising or marketing by I/PRO is strictly prohibited. I/PRO agrees
that the results of its work or any document prepared by I/PRO in connection
with the services it has provided for Talk City may be referred to or included
as part of any public document produced by Talk City.
Limitations of Liability. I/PRO will have no responsibility for any
errors or omissions in the Log Data, or any errors in reports resulting
therefrom. Customer will indemnify and hold harmless I/PRO and I/PRO's employees
and agents against any lawsuit, claim, expense or other loss (including
reasonable attorneys' fees and costs) incurred by them as a result of any
inaccuracy or omission in the Log Data. In no event will I/PRO be liable to
Customer on any basis (i) for indirect damages, lost profits or other
consequential damages of any kind, or (ii) other than for damages resulting
directly from errors and omissions resulting from I/PRO's gross negligence or
willful misconduct. Reports will be subject to the limitations and disclaimers
set forth in such reports.
Payment. The total cost of the Work is a flat fixed amount of
$22,500.00. At the completion of the Work, a summary report will be provided to
the Customer by I/PRO, after which the total amount will be payable within 30
days. Late payments under this Agreement shall bear interest from the due date
at a rate of 1.5% per month or, if less, the maximum interest rate permitted by
law. I/PRO may, at its discretion, bill on an ongoing basis for work completed.
Miscellaneous. This Agreement is in force until the completion of the
Work, or upon the written agreement of both parties. This Agreement is governed
by California law, and contains the complete expression of the agreement between
the parties, superseding all written or oral agreements. This Agreement may only
be amended or modified only in writing.
INTERNET PROFILES CORPORATION (I/PRO): CUSTOMER:
Date: April 8/99 Date: 4-8-99
-------------------------------- ------------------------------
Signature: /s/ JOHN JENSEN Signature: /s/ JEFFREY SNETIKER
--------------------------- -------------------------
Signatory's Name: JOHN JENSEN Signatory's Name: JEFFREY SNETIKER
-------------------- ------------------
Title: RESEARCH MGR Title: SR VP, CFO & CAO
------------------------------- -----------------------------
<PAGE>
Exhibit 23.2
The Board of Directors and Stockholders
Talk City, Inc.:
We consent to the use of our "Form of Independent Auditors' Report" included
herein and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG LLP
Mountain View, California
June 3, 1999
