<PAGE>
As filed with the Securities and Exchange Commission on June 23, 1999
Registration No. 333-77455
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 2
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. [_]
---------------
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 23, 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.
The shares have been approved for listing 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 9.
<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 AND GATEFOLD]
Center Caption: The Talk City Network Participants
[NAMES OF NETWORK PARTICIPANTS]
Text: Talk City provides community services for 35 network
participants. These network participants, 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 network
participants' online community offerings and share the
resulting revenue. Our agreements with our network
participants range in duration from six months to three years.
No individual network participant 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.
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........................ 9
Use of Proceeds..................... 24
Dividend Policy..................... 24
Capitalization...................... 25
Dilution............................ 26
Selected Financial Data............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................ 36
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management....................... 57
Certain Transactions............. 67
Principal Stockholders........... 71
Description of Capital Stock..... 74
Shares Eligible for Future Sale.. 77
Underwriting..................... 79
Legal Matters.................... 82
Experts.......................... 82
Available Information............ 82
Index to Financial Statements.... F-1
</TABLE>
----------------
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.
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>
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 prior
to the closing of this offering and also 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. The
information contained in this prospectus also assumes no exercise of the
underwriters' over allotment option and reflects our reincorporation in
Delaware prior to the closing of this offering. References in this prospectus
to "we," "our" and "us" refer to Talk City, Inc., unless the context otherwise
requires.
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, consisting of approximately 270 paid
and 1,800 volunteer individuals, who facilitate this interaction, maintain our
standards of conduct and supervise our online community services, such as
online events, chats, home pages and message boards. According to Media Metrix,
in April 1999 we ranked sixteenth out of the top 500 sites on the Internet
based on average minutes spent per usage day for home users. In addition, based
on our review of the Media Metrix report, we ranked second out of the top
15 Internet sites whose primary focus is providing online community services.
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 6.0 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
over 2.0 hours per user in the month of March. We believe that these statistics
demonstrate the attractiveness of our community services.
4
<PAGE>
We provide online community services for over 50 Internet sites managed by 35
companies whom we refer to as our network participants. We provide our network
participants 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 network participant and Talk City
receive equal treatment in use or placement of logos. Our network participants
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 network participants. Our network participants include three
Fortune 500 major media companies, multiple Internet service providers and
numerous Internet content companies. Our network participants are as follows:
Talk City Network Participants
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<TABLE>
<S> <C>
Major Media Companies Internet Content Companies
------------------------------------------------------------
Cox Interactive Media, Inc. @Music
Hearst Communicastions, Auto OnRamp
Inc. CheckOut.com
National Broadcasting Donna Wick Radio Show
Company, Inc. Girl Geeks?
GreenTree
----------------------------- Hispanic Online
Internet Service Providers Learfield Communications
----------------------------- Lifetime Television
The Lottery Channel
Excite@Home LucasFilm Ltd.
AT&T WorldNet Service NetNoir
BellSouth.Net POV Magazine
Cable & Wireless USA Religions and Spirituality
Internet, LLC Riffage.com
Concentric Network Sony Music
MindSpring Enterprises Transformations
WebTV Network, a wholly- UKMax.com
owned subsidiary of Virtual Communities
Microsoft Corporation Women Online Worldwide
Zapa Digital Arts
ZineZone
</TABLE>
5
<PAGE>
For the quarter ended March 31, 1999, none of our network participants
individually 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 network
participants, as summarized below:
<TABLE>
<CAPTION>
Customers Benefits
- ----------------------------------------------------------------------------
<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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Network Participants .Professional production and moderated environment
.Critical mass of traffic and variety of programming
.Co-branding and customization of community services
</TABLE>
Risks of Investment
An investment in our common stock involves a high degree of risk. Since our
inception in March 1996, we have incurred significant losses, and as of March
31, 1999, we had an accumulated deficit of $30.3 million. We expect our
operating losses and negative cash flow to continue for the foreseeable future.
In addition, we encounter a number of risks, including our unpredictable
quarterly operating results, new and unproven revenue model and dependence on
our business services revenues, advertising revenues, the maintainance of our
brand identity and our network participants, particularly WebTV Network. You
should carefully consider these risks and uncertainties as well as the other
risks and uncertainties described in the section of this prospectus entitled
"Risk Factors" before deciding whether to invest in shares of our common stock.
Corporate Information
We were incorporated in California in March 1996 and expect to reincorporate
in Delaware in June 1999. 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.
6
<PAGE>
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
moderator network
Approved Nasdaq National Market Symbol.... TCTY
</TABLE>
7
<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>
8
<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 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 and be affected by many factors, the more important of
which include:
. our dependence on increased business services and advertising and
sponsorship revenues;
. expansion of our sales force;
. the length of our sales cycle, particularly our business services sales
cycle;
. our ability to increase our audience of loyal, engaged users;
. management of growth; and
. potential technical difficulties or system down time affecting the
Internet generally or us specifically.
9
<PAGE>
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 contribute to our not
achieving profitability and may cause our accumulated deficit to increase.
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 revenues may not meet our expectations or may decline and we will
need to revise our revenue model to reflect this. 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. 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. We have only recently
begun to hire business services sales personnel.
Our growth will depend upon the acceptance of the Internet as an attractive
medium for our business services clients
Our current and potential 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 will not grow or will decrease
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 will not grow or will decrease 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
10
<PAGE>
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 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.
If we do not provide our advertisers with the guaranteed number of impressions
required by our contracts with them, our reputation would be harmed and our
advertising inventory would be decreased
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 for our other current and potential
advertisers. Continued inability to deliver the guaranteed number of
impressions to our advertisers would hurt our reputation and could cause our
current as well as potential advertisers to not advertise on our sites. If
minimum guaranteed impressions are not met, we defer recognition of the
corresponding revenues until guaranteed impression levels are achieved.
We rely on our network participants for user volume and increased revenues
Our network participants 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 network participant if the user comes to our sites via the participant's
site. If we were to terminate or otherwise lose the benefit of all of our
network participant contracts, we would risk losing as much as 52% of our
volume. Our network participant contracts typically have terms of six months to
three years each.
In addition, we sell advertisements based on the volume of our sites, a
portion of which volume is provided by our network participants. 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 network
participants. If we were to terminate or otherwise lose the benefit of all of
our network participant 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 network participants 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.
We rely on WebTV Network for a substantial amount of our volume and revenues,
and if our contract with WebTV Network were not renewed or terminated, we would
need to replace this volume and revenues through other sources
We have a two-year contract with WebTV Network which runs through July 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 network participants, through the growth of our sites or with volume
generated through other means, such as increased marketing, any
11
<PAGE>
of which would result in an unexpected diversion of management efforts or
increased operating expenses. If we were unable to replace this volume, we
would also be unable to replace the 17% of our revenues lost from WebTV Network
as well. For the year ended 1998, none of our network participants individually
drove more than 2% of our volume, except WebTV Network which was responsible
for approximately 24% of our volume. For the quarter ended March 31, 1999, none
of our network participants individually drove more than 3% of our volume,
except for WebTV Network which was responsible for approximately 47% of our
volume. In addition, WebTV Network was responsible for approximately 13% and
17% of our revenues for the year ended 1998 and the quarter ended March 31,
1999, respectively.
Our uncertain sales cycle may cause us to incur substantial expenses and expend
management time without generating the corresponding revenues which would slow
our cash flow
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. 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;
. the success and continued internal support of advertisers', business
services clients' and network participants' own development efforts; and
. the possibility of cancellation or delay of projects by advertisers,
business services clients or network participants.
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, we would need to increase our expenditures for these activities
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 service as a
result of the increased focus on commercialization of our services due to their
continued exposure to advertising or ecommerce activities on our sites or the
use of their information for commercial purposes. Our users may also become
dissatisfied with our service if we do not maintain our structured environment,
if we experience system failures or we do not continually upgrade our software
12
<PAGE>
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 over 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,
would cause us to implement new programs to engage our users and maintain our
structured environment. The implementation of these new programs would cause us
to expend unexpected management time and resources which would increase our
operating expenses.
Maintaining and promoting our brand identity is a critical aspect of
maintaining and expanding our user base, business clients and the number of our
network participants
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 contribute
to our not achieving profitability. We spent approximately $7.4 million in 1998
and $4.2 million in the quarter ended March 31, 1999 on these activities. We
expect to spend over $10 million in the next 12 months, consisting of a
combination of cash and noncash in-kind advertising. The amounts include co-
branding, ingredient branding, where the Talk City brand receives a less
prominent position than the brand, usually as an ingredient of the overall
service offered, such as "chat powered by Talk City," and other marketing
activities with our network. These other marketing activities will consist of
activities in which we work with our network participants 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, network participants
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
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management as well as on our administrative, operational and financial systems
and controls. If we are unable to do this effectively, we would have to divert
resources away from the continued growth of our business and implementation of
our business strategy, such as management time and our limited revenues. 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 cause us to incur increased
operating expenses and divert other senior management time in searching for
their replacements. The loss of their services could also harm our reputation
as our business clients, advertisers and network participants could become
concerned about our future operations. 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.
We may be unable to consummate potential acquisitions or investments or
successfully integrate them with our business which would slow our growth
strategy
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.
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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.
Additional financing may not be available on favorable terms or at all. 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;
. increase the number of our network participants;
. develop our brand;
. expand our moderator base;
. grow our traffic;
. increase our revenues; or
. respond to competitive pressures.
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.
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, network
participants and advertisers
System failures could harm our reputation and reduce our attractiveness to
businesses, users, network participants and advertisers. Our ability to attract
potential business clients, users, network participants and advertisers to
promote our brand will depend significantly on the performance of our network
infrastructure. In addition, a key element of our strategy is to generate a
high level 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 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
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<PAGE>
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.
Our communications and other computer hardware operations are subject to
disruptions which are out of our control and for which we may not have adequate
insurance
Fire, floods, earthquakes, power loss, telecommunications failures, break-ins
and similar events could damage our communications hardware and other computer
hardware operations. These operations are located separate from our principal
offices at Frontier Global Centers facilities in Sunnyvale, California. In
addition, computer viruses, electronic break-ins or other similar interruptions
also could disrupt 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. The usage of our Web sites, which
drives our volume and in turn our revenues, may not grow if Internet usage in
general 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.
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.
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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 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,
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<PAGE>
portions of our Web site may become inaccessible. A prolonged disruption in our
operations could cause our business clients and network participants 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 and increase
our operating expenses. 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.
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.
If Internet service providers become regulated in a manner similar to long
distance telephone carriers, Internet growth may grow at a slower pace which
would cause our revenues to decrease
If Internet growth slows due to proposals to regulate Internet service
providers similar to long distance telephone carriers, our user volume and the
demand for our business services would decline which would cause our revenues
to decrease. Increased use of the Internet has burdened the existing
telecommunications infrastructure and led to interruptions in phone service in
areas with high
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Internet use. Several telecommunications companies and local telephone
carriers, such as Pacific Bell, have petitioned the Federal Communications
Commission to regulate Internet service providers and online 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.
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 decrease our revenues,
contribute to our not achieving profitability and hurt our reputation.
According to Media Metrix, in April 1999 we ranked sixteenth out of the top 500
sites on the Internet based on average minutes spent per usage day for home
users. In addition, based on our review of the Media Matrix report, we ranked
second out of the top 15 Internet sites whose primary focus is providing online
community services. However, 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. 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@Home, 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. See "Business--Competition."
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We depend on third-party software to measure user demographics and for other
related services and if this software does not function properly, we would need
to purchase new software or write the software ourselves, each of which could
cause a temporary disruption in our business
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
from other third party providers. Even though the third-party software we
currently use is easily replaced through multiple other third party providers,
or by our writing the necessary software programs ourselves, each of these
alternatives would require an unplanned increase in operating expenses and
could cause a one to two month disruption in our business.
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 NetGravity, 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.
We are dependent on the trademarks "Talk City" and "OnNow" and if we could not
use these marks we would need to reimplement our Web sites and re-build our
brand identity
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, network participants and advertisers. Our operating expenses would
substantially increase if we had to re-build our brand identity or reimplement
our Web sites.
Possible infringement of our intellectual property rights by third parties
could substantially increase our operating expenses
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
substantially increase our operating expenses. 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.
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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."
Our stock price is likely to be extremely volatile as the market for Internet
companies' stock has recently experienced extreme price and volume fluctuations
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. As a result, investors in
these companies often buy the stock at very high prices only to see the price
drop substantially a short time later, resulting in an extreme drop in value in
the stock holdings of these investors. 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.
Our stock price is likely to be extremely volatile due to broad market and
industry factors beyond our control
We expect our stock price to be subject to wide fluctuations in response to a
variety of factors, including factors beyond our control. These broad market
and industry factors could harm the market price of our common stock,
regardless of our performance. These factors include:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new programming by us or
our competitors;
. 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.
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
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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."
If we raise additional capital through the issuance of new securities, you will
incur additional dilution
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.
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
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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."
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<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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Capitalization
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis after giving effect to the one for two reverse
stock split of the common stock and preferred stock;
. on a pro forma basis to reflect the sale of 2,499,884 shares of
preferred stock for aggregate proceeds of $20.0 million and the
issuance of 1,350,000 shares of preferred stock, with an assigned
value of $8.00 per share for reporting purposes, 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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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.
26
<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.
27
<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 our network participants;
. 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
28
<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 volume, 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 major media network participants.
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
30
<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
major media network participants 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
31
<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 volume 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 cause our stock price to decline."
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.
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
32
<PAGE>
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 personnel, 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, 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
33
<PAGE>
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, 95% have replied to us in writing. Of
the vendors that have replied, 72% are representing that they are year 2000
compliant, 23% 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.
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
34
<PAGE>
operations could cause our business clients and network participants 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
significantly disrupted.
35
<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 network participant 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. According to Media Metrix, in April 1999 we ranked sixteenth out of the
top 500 sites on the Internet based on average minutes spent per usage day for
home users. In addition, based on our review of the Media Metrix report, we
ranked second out of the top 15 Internet sites whose primary focus is providing
online community services.
We have established relationships across multiple industries and media forms,
including relationships with major media companies, Internet service providers
and Internet content companies. We refer to these companies as our network
participants. We work with our network participants to produce and market
community services that leverage our network participants' content, brand or
customer relationships. By integrating these co-branded services into our
community network, we enjoy exceptional distribution, content and marketing
leverage.
For the quarter ended March 31, 1999, WebTV Network was responsible for
approximately 47% of our volume and approximately 17% of our revenues. We have
a two-year contract with WebTV Network which runs through July 2000. If this
contract was terminated or not renewed, we could lose as much as 47% of our
volume and, if we do not replace this volume with volume from our other network
participants or the growth of our sites, we could lose as much as 17% of our
revenues.
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
36
<PAGE>
have been focused on expanding our audience, establishing relationships with
our network participants, 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 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;
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. 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;
. 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
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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 network participants. Key elements of our solution include the
following:
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, network
participants 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 over 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 network participants: major media companies,
Internet service providers and Internet content companies. Our major media
participants 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 Internet
service provider participants. Our Internet content participants bring
audiences of shared interests or demographic groups into our community. In
addition, our Chat@TalkCity program includes over
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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 over 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 network participants. 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.
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
network participants who join our community network use our core audience as a
foundation upon which to build their own audience.
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Through our community network, we believe our business services and online
community network are able to provide significant benefits to businesses,
consumers, advertisers and network participants, 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
Network Participants . 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;
. 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 clean well lighted online communities. We intend
to achieve this goal in a cost-efficient manner by:
. leveraging the broad reach of our major media participants' 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.
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. expanding our co-branding and ingredient branding program. In this
program, we provide our community services in exchange for featured co-
branding or ingredient 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.
Increase Involvement and Number of Our Network Participants. We intend to
increase the involvement and number of our network participants by:
. adding account executives to help manage and further develop our
relationships with our network participants;
. increasing the number of major media companies, Internet service
providers and Internet content companies;
. rolling out community services for our major media participants, online
properties; and
. increasing the number of tools and services we offer our network
participants.
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.
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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 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.
We believe that our services produce the desired 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 and Mattel.
Some of our online market research services are jointly produced 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.
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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.
Network Participants
Overview
As of March 31, 1999, our community included 35 network participants 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
network participants, we have created a network model which we believe will
continue to build on its own momentum. Through our network participants, we are
able to drive additional traffic to our sites and promote our brand, utilize
our network participants' 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
network participants to join our community and promote our brand.
With most of our network participants, we co-produce a custom link from the
participant's site into a customized view of our entire community. Each
participant version of Talk City is tailored to that particular participant,
co-branded with the participant's brand and co-marketed to promote our joint
programming. Network participants are given the flexibility to tailor or
promote any elements of our service they want featured on the joint site. The
network participant's user base has full access to our service, and each
network participant's users have access to the other participants' users. In
many cases, we have a revenue sharing agreement with the network participant in
which we are generally responsible for selling advertising for the joint
services and the resulting revenue is shared with the participant, thus
providing a financial incentive for both parties to make the joint services
successful. Our network participants consist of three types of companies: major
media, Internet service providers and Internet content.
For the year ended 1998, approximately 15% of our revenue was based on volume
driven by our network participants. The volume is considered to be "driven"by a
network participant if the user comes to our sites via the participant's site.
For this period, none of our network participants drove user volume responsible
for more than 1% of our revenues, except WebTV Network which was responsible
for approximately 13% of our revenues for that year. For the quarter ended
March 31, 1999, none of our network participants 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.
Major Media Companies
Cox Interactive Media Web sites. In August 1998, we established our
relationship with Cox Interactive Media. We provide our interactive services,
including chat, home page creation
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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
BayInsider.com Insidecentralflorida.com
OCNow.com
Fastball.com RealPittsburgh.com
GoBig12.com SanDiegoInsider.com
GoCarolinas.com SECAction.com
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. Pursuant to our agreement with Cox, we share the
expenses and revenues arising under the agreement according to mutually agreed
upon percentages.
Hearst. In September 1998, we established our relationship 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.
. CosmoGirl--We provide the chat services for the CosmoGirl Web site.
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. Pursuant to our agreement with Hearst, we share
the expenses and revenues arising under the agreement according to mutually
agreed upon percentages.
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. Pursuant to our agreements with NBC, we share the expenses and
resulting revenues arising under the agreements according to mutually agreed
upon percentages.
Internet Service Providers
Our Internet service provider participants direct their users to Talk City as
their primary community offering. Pursuant to our written agreements with these
participants, we share the costs and revenues associated with promoting and
providing the services and attracting the users. Our Internet service provider
participants include Excite@Home, AT&T WorldNet, BellSouth.Net, Concentric
Network, WebTV Network, Cable & Wireless USA Internet and MindSpring. These
participants enable us to reach a substantial number of additional users.
Internet Content Companies
We also provide community services for online Internet content sites. Our
Internet content participants 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 participants bring audiences of
shared interests or demographic groups into our community. Pursuant to the
agreements with each of our Internet content participants, we share the
expenses and revenues arising under the agreement with the respective
participant. Specifically, 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 participants:
<TABLE>
<CAPTION>
Internet Content
Participant 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
CheckOut.com........... A music, video and game site for which we provide our
community services
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
Girl Geeks?............ We provide the community services for this site which
is devoted to exploring women and technology issues
GreenTree.............. A vitamin and nutritional products ecommerce site for
which we provide our chat and message board services
Hispanic Online........ An Internet site for the Hispanic market for which we
provide chat and special events production for
featured guests
</TABLE>
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<TABLE>
<CAPTION>
Internet Content Participant Co-Branded Service
---------------------------- ------------------
<C> <S>
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
Lifetime Television......... An Internet site complementing Lifetime
Television Networks for which we provide our
community services for various shows and special
events
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
LucasFilm................... We are the official and exclusive LucasFilm
Internet chat provider for Star Wars motion
pictures through August 1999
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
Riffage.com................. A music site for which we provide our community
services
Sony Music.................. A music site for which we provide our community
services
Transformations............. An Internet site geared towards self help,
support and recovery issues for which we provide
our community services
UKMax.com................... An Internet site focused on the United Kingdom
for which we provide our community services
Virtual Communities......... A geographically-oriented Web site, currently
focused on Ireland and Jerusalem, 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>
Chat@TalkCity Program
Our Chat@TalkCity 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
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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 over 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 users
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
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
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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 compensation or incentives, financial or otherwise.
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 network participants 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 network participants. 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.
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;
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. 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.
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.
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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 agreement 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."
Network Participant Co-Branding and Ingredient Branding. "Branding" describes
the process by which our community services are offered on our network
participants' Web sites in exchange for featured co-branding or ingredient
branding of the Talk City brand name on the Internet and in traditional media
forums. 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.
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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.
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;
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. 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. According to Media Metrix, in April 1999 we ranked
sixteenth out of the top 500 sites on the Internet based on average minutes
spent per usage day for home users. In addition, based on our review of the
Media Metrix report, we ranked second out of the top 15 Internet sites whose
primary focus is providing online community services. However, we expect the
number of our competitors in the consumer community area to continue to
increase as the barriers to entry in this 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@Home, 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 network
participants 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 network participants 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,
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trade secret protection and confidentiality and license agreements with our
employees, clients, independent contractors, network participants 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 23,000 square feet in
Campbell, California under leases that expire in July 2000 and 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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<PAGE>
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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<PAGE>
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 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. Except as required
under Delaware law or the rules of the Nasdaq National Market, the rights of
stockholders may not be modified otherwise than by a vote of a majority or more
of the shares outstanding. 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. Please 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.
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<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;
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<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
Our common stock has been approved for listing 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.
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<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.
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
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<PAGE>
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.
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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, U.S.
Bancorp Piper Jaffray Inc. and E*TRADE Securities, 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........................................
E*TRADE Securities, 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.
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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. Please 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.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.1 million.
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
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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. who possess sufficient net worth and investment
experience. All eligible accounts may submit an indication of interest to
E*TRADE Securities, Inc. to purchase shares. If demand exceeds availability,
E*TRADE Securities, Inc. will randomly allocate shares to applicants in 100
share lots in a round-robin fashion, meaning that no applicant will receive a
second lot until all applicants have received one lot and so forth, until all
shares available to E*TRADE Securities, Inc. have been distributed.
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.
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<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.
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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>
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 network participant 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
Multimedia whereby the Company and NBC Multimedia jointly produce, market, and
promote the Company's online properties and involves the integration of the
Company's and NBC Multimedia'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 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 April 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 Multimedia 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 its 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
Multimedia 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 Multimedia 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 14, 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, excluding the 171,303 shares related to the Hearst
agreement accounted for as of March 31, 1999 (see Note 3), will be recorded to
Other Assets and charged to operations as the advertisements are run. The fair
value of the common stock warrants of
F-21
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
$349,000 (valued as of March 31, 1999) will be recorded in Other Assets in
April 1999 and amortized over the remaining term of the respective operating
agreements. Subsequent to March 31, 1999, noncash charges of approximately
$14,300,000 will be charged to operations as the related advertising is run or
promotional services are received, of which the Company expects to incur
$12,900,000 million in the year ending December 31, 1999. Of the $14,300,000 in
total noncash charges, $11,500,000 is attributable to the advertising
agreements and $2,800,000 is attributable to the operating agreements. At March
31, 1999 approximately $2,450,000 relating to the operating agreements was
recorded in Other Assets. 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. The following are paid moderators of
Talk City.
[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
Internet distribution by
E*TRADE Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
----------
<S> <C>
Registration Fee................................................. $ 14,387
NASD Fee......................................................... 5,675
Nasdaq Listing Fee............................................... 95,000
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.................................................... 69,938
----------
Total.......................................................... $1,100,000
==========
</TABLE>
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>
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<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 2,019,954 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
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<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 $6.00, 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 130,556 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 41,666
of the shares, $8.00; and with respect to 33,335 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 limited 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.*
10.21 Lease Agreement, dated May 5, 1999, by and between the registrant and
Pruneyard Associates, LLC.
10.22 Consent of Media Metrix.
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.
+ 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.
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<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.
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<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 23rd 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 23, 1999
_____________________________________ Officer (Principal Executive
Peter H. Friedman Officer)
/s/ Jeffrey Snetiker Senior Vice President, Chief June 23, 1999
_____________________________________ Financial and Administrative
Jeffrey Snetiker Officer (Principal Financial
and Accounting Officer)
* Director June 23, 1999
_____________________________________
Kenneth A. Bronfin
* Director June 23, 1999
_____________________________________
Joseph A. Graziano
* Director June 23, 1999
_____________________________________
Thomas P. Hirschfeld
* Director June 23, 1999
_____________________________________
John Sculley
* Director June 23, 1999
_____________________________________
Barry M. Weinman
* Director June 23, 1999
_____________________________________
Martin J. Yudkovitz
/s/ Peter H. Friedman Director June 23, 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.*
10.21 Lease Agreement, dated May 5, 1999, by and between the registrant and
Pruneyard Associates, LLC.
10.22 Consent of Media Metrix.
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.
+ 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>
Talk City, Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June ___, 1999
Lehman Brothers Inc.
Volpe Brown Whelan & Company
U.S. Bancorp Piper Jaffray Inc.
E*TRADE Securities, Inc.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Talk City, Inc., a Delaware corporation (the "Company"), proposes to sell
4,500,000 shares (the "Firm Stock") of the Company's Common Stock, par value
$0.001 per share. In addition, the Company proposes to grant to the
Underwriters named in Schedule 1 hereto (the "Underwriters") an option to
purchase up to an additional 675,000 shares of the Common Stock on the terms and
for the purposes set forth in Section 3 (the "Option Stock"). The Firm Stock
and the Option Stock, if purchased, are hereinafter collectively called the
"Stock." This is to confirm the agreement concerning the purchase of Stock from
the Company by the Underwriters.
1. Representations, Warranties and Agreements of the Company. The Company
represents, warrants and agrees that:
(a) A registration statement on Form S-1 and amendments thereto, with
respect to the Stock has (i) been prepared by the Company in conformity
with the requirements of the United States Securities Act of 1933 (the
"Securities Act") and the rules and regulations (the "Rule and
Regulations") of the United States Securities and Exchange Commission (the
"Commission") thereunder, (ii) been filed with the Commission under the
Securities Act and (iii) become effective under the Securities Act. Copies
of such registration statement and the amendments thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this Agreement,
"Effective Time" means the date and the time as of which such registration
statement, or the most recent post-effective amendment thereto, if any, was
declared effective by the Commission; "Effective Date" means the date of
the Effective Time; "Preliminary Prospectus" means each prospectus included
in such registration statement, or amendments thereto, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Representatives pursuant
to Rule 424(a) of the Rules and Regulations; "Registration Statement" means
such registration statement, as amended at the Effective Time, including
all information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 6(a) hereof and deemed to be a part of the registration statement
as of the Effective Time pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations; and
<PAGE>
"Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and
Regulations. The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the requirements
of the Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which its ownership or lease
of property or the conduct of its business requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the business, financial condition or results of
operations of the Company, and has all power and authority necessary to own
or hold its properties and to conduct the business in which it is engaged;
and the Company has no subsidiaries.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein
will be duly and validly issued, fully paid and non-assessable; and the
Stock will conform to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which the Company is
2.
<PAGE>
bound or to which any of the property or assets of the Company is subject,
nor will such actions result in any violation of the provisions of the
certificate of incorporation or bylaws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its properties or assets;
and except for the registration of the Stock under the Securities Act and
such consents, approvals, authorizations, registrations or qualifications
as may be required under the Exchange Act and applicable state securities
laws in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby.
(h) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right (other than rights that have been waived or
satisfied) to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month period preceding
the date of the Prospectus, including any sales pursuant to Rule 144A
under, or Regulations D or S of, the Securities Act, other than shares
issued pursuant to employee benefit plans, qualified stock options plans or
other employee compensation plans or pursuant to outstanding options,
rights or warrants.
(j) The Company has not sustained, since the date of the latest
audited financial statements included in the Prospectus, any material loss
or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since such date, there has not been
any change in the capital stock or long-term debt of the Company or any
material adverse change, or any development involving a prospective
material adverse change in, or affecting the general affairs, management,
financial position, stockholders' equity or results of, operations of the
Company, otherwise than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at the
dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved.
3.
<PAGE>
(l) KPMG LLP, who have certified certain financial statements of the
Company, whose report appears in the Prospectus and who have delivered the
initial letter referred to in Section 7(g) hereof, are independent public
accountants as required by the Securities Act and the Rules and
Regulations.
(m) The Company does not own any real property. The Company has good
and marketable title to all personal property owned by it, in each case
free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value
of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and all real property
and buildings held under lease by the Company are held by it under valid,
subsisting and enforceable leases, with such exceptions as are not material
and do not interfere with the use made and proposed to be made of such
property and buildings by the Company as described in the Prospectus.
(n) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and
the value of its properties and as is customary for companies engaged in
similar businesses in similar industries.
(o) Except as described in the Prospectus, the Company owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights and licenses necessary for the conduct of
its business and has no reason to believe that the conduct of its business
will conflict with, and has not received any notice of any claim of
conflict with, any such rights of others.
(p) There are no legal or governmental proceedings pending to which
the Company is a party or of which any property or assets of the Company is
the subject which, if determined adversely to the Company, might have a
material adverse effect on the financial position, stockholders' equity,
results of operations or business of the Company; and to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(q) There are no contracts or other documents that are required to be
described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations that have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, that is required
to be described in the Prospectus that is not so described.
4.
<PAGE>
(s) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent that might be expected to have
a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company which has had (nor does the Company have any
knowledge of any tax deficiency which, if determined adversely to the
Company, might have) a material adverse effect on the financial position,
stockholders' equity, results of operations, business or prospects of the
Company.
(v) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities (other
than option grants under its existing option plans or stock issued upon the
exercise or conversion of outstanding options, warrants or other
securities), (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations that were incurred in
the ordinary course of business, (iii) entered into any transaction not in
the ordinary course of business or (iv) declared or paid any dividend on
its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls that provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(x) The Company (i) is not in violation of its certificate of
incorporation or bylaws, (ii) is not in default in any material respect,
and no event has occurred which,
5.
<PAGE>
with notice or lapse of time or both, would constitute such a default, in
the due performance or observance of any term, covenant or condition
contained in any material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties or assets is subject
and (iii) is not in violation in any material respect of any law,
ordinance, governmental rule, regulation or court decree to which it or its
property or assets may be subject or has failed to obtain any material
license, permit, certificate, franchise or other governmental authorization
or permit necessary to the ownership of its property or to the conduct of
its business.
(y) There are no issues related to the Company's preparedness for the
Year 2000 that (i) are of a character required to be described or referred
to in the Prospectus by the Securities Act that have not been accurately
described in the Prospectus or (ii) might reasonably be expected to have a
material adverse effect on the financial position, stockholders' equity,
results of operations, business or prospects of the Company or that might
materially affect its properties, assets or rights.
(z) Neither the Company, nor any director, officer, agent, employee
or other person associated with or acting on behalf of the Company, has
used any corporate funds for any unlawful contribution, gift, entertainment
or other unlawful expense relating to political activity; made any direct
or indirect unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977; or made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment.
(aa) To the Company's knowledge, there has been no storage, disposal,
generation, manufacture, refinement, transportation, handling or treatment
of toxic wastes, medical wastes, hazardous wastes or hazardous substances
by the Company (or any of its predecessors in interest) at, upon or from
any of the property now or previously leased by the Company in violation of
any applicable law, ordinance, rule, regulation, order, judgment, decree or
permit or which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for
any violation or remedial action that would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company. The terms "hazardous wastes", "toxic wastes",
"hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(bb) The Company is not an "investment company" within the meaning of
such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the
6.
<PAGE>
Company agrees to sell the Firm Stock to the several Underwriters and each of
the Underwriters, severally and not jointly, agrees to purchase the number of
shares of the Firm Stock set opposite that Underwriter's name in Schedule 1
hereto. The respective purchase obligations of the Underwriters with respect to
the Firm Stock shall be rounded among the Underwriters to avoid fractional
shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to purchase
up to 675,000 shares of Option Stock. Such option is granted solely for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set forth opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
3. Offering of Stock by the Underwriters. Upon authorization by the
Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
It is understood that _______ shares of the Firm Stock will initially be
reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to employees
and persons having business relationships with the Company who have heretofore
delivered to the Representatives offers or indications of interest to purchase
shares of Firm Stock in form satisfactory to the Representatives, and that any
allocation of such Firm Stock among such persons will be made in accordance with
timely directions received by the Representatives from the Company; provided,
that under no circumstances will the Representatives or any Underwriter be
liable to the Company or to any such person for any action taken or omitted in
good faith in connection with such offering to employees and persons having
business relationships with the Company. It is further understood that any
shares of such Firm Stock that are not purchased by such persons will be offered
by the Underwriters to the public upon the terms and conditions set forth in the
Prospectus.
4. Delivery of and Payment for the Stock. Delivery of and payment for the
Firm Stock shall be made at the offices of Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California, at 10:00 A.M., New York City time, on the
fourth full business day following the date of this Agreement or at such other
date or place as shall be determined by agreement between the Representatives
and the Company. This date and time are sometimes referred to as the "First
Delivery Date." On the First Delivery Date, the Company shall deliver or cause
to be delivered certificates representing the Firm Stock to the Representatives
for the account of each Underwriter against payment to or upon the order of the
Company of the
7.
<PAGE>
purchase price by certified or official bank check or checks payable in
immediately available funds; provided, that the amount of such payment shall be
reduced by one days' interest on the amount of gross proceeds at the
Underwriters' cost of borrowing such funds plus any other expenses associated
with such payment of immediately available funds. Time shall be of the essence,
and delivery at the time and place specified pursuant to this Agreement is a
further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement, the option granted in Section 2 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date").
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 4 (or at
such other place as shall be determined by agreement between the Representatives
and the Company) at 10:00 A.M., New York City time, on the Second Delivery Date.
On the Second Delivery Date, the Company shall deliver or cause to be delivered
the certificates representing the Option Stock to the Representatives for the
account of each Underwriter against payment to or upon the order of the Company
of the purchase price by certified or official bank check or checks payable in
immediately available funds; provided, that the amount of such payment shall be
reduced by one days' interest on the amount of gross proceeds at the
Underwriters' cost of borrowing such funds plus any other expenses associated
with such payment of immediately available funds. Time shall be of the essence,
and delivery at the time and place specified pursuant to this Agreement is a
further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Representatives shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the Second Delivery Date.
8.
<PAGE>
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under
the Securities Act not later than Commission's close of business on the
second business day following the execution and delivery of this Agreement
or, if applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Securities Act; to make no further amendment or any supplement to
the Registration Statement or to the Prospectus except as permitted herein;
to advise the Representatives, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with copies
thereof; to advise the Representatives, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with
the Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits
other than this Agreement and the computation of per share earnings) and
(ii) each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus; and, if the delivery of a prospectus is required
at any time after the Effective Time in connection with the offering or
sale of the Stock or any other securities relating thereto and if at such
time any events shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if for any
other reason it shall be necessary to amend or supplement the Prospectus in
order to comply with the Securities Act, to notify the Representatives and,
upon their request, to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or
effect such compliance;
9.
<PAGE>
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the Representatives,
be required by the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Representatives and counsel for the Underwriters and obtain
the consent of the Representatives to the filing;
(f) As soon as practicable after the Effective Date (but in no event
later than 15 months after the Effective Date), to make generally available
to the Company's security holders and to deliver to the Representatives an
earnings statement of the Company (which need not be audited) complying
with Section 11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the
Company to its stockholders and all public reports and all reports and
financial statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant to
requirements of or agreements with such exchange or to the Commission
pursuant to the Exchange Act or any rule or regulation of the Commission
thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, offer for sale, sell or otherwise dispose of (or
enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than (A) the Stock and shares
issued pursuant to employee benefit plans, qualified stock option plans or
other employee compensation plans existing on the date hereof, (B) pursuant
to currently outstanding options, warrants or rights, or (C) as
consideration in the acquisition of businesses whether by merger,
consolidation, purchase or otherwise; provided that any such shares
transferred as consideration will be subject to the same restrictions on
transfer as set forth in this Section 5(i) for the remainder of the 180 day
lock-up period, unless waived in writing by Lehman Brothers Inc., which
waiver shall not be unreasonably withheld), or sell or grant options,
rights or warrants with respect to any shares of Common Stock (other than
the grant of options pursuant to option plans existing on the date hereof),
without the prior written consent of Lehman Brothers Inc.; and to cause
each officer, director and stockholder of the Company to furnish to the
10.
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Representatives, prior to the First Delivery Date, a letter or letters, in
form and substance satisfactory to counsel for the Underwriters, pursuant
to which each such person shall agree not to, directly or indirectly, offer
for sale, sell or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any shares of
Common Stock for a period of 180 days from the date of the Prospectus,
without the prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of the
Stock on the Nasdaq National Market System and to use its best efforts to
complete that application for inclusion, subject only to official notice of
issuance, prior to the First Delivery Date;
(k) To file with the Commission all reports containing such
information as may be required under Rule 463 of the Securities Act;
(l) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus; and
(m) To take such steps as shall be necessary to ensure that the
Company shall not become an "investment company" within the meaning of such
term under the Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the stock; (e) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
sale of the Stock; (f) any applicable listing or other fees; (g) the fees and
expenses (not in excess, in the aggregate, of $5,000) of qualifying the Stock
under the securities laws of the several jurisdictions as provided in Section
5(h) and of preparing, printing and distributing a Blue Sky Memorandum
(including related fees and expenses of counsel to the Underwriters); (h) all
travel and lodging expenses of the Company's personnel in connection with the
road show as part of the offering of the Stock; and (i) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement; provided that, except as provided in this Section 6 and in
Section 11, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters.
7. Conditions of Underwriters' Obligations. The respective obligations of
the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of
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the representations and warranties of the Company of its obligations hereunder,
and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 5(a); no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued
and no proceeding for that purpose shall have been initiated or threatened
by the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the Company
on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue
statement of a fact which, in the opinion of Cooley Godward llp, counsel
for the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Stock, the
Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby shall
be reasonably satisfactory in all material respects to counsel for the
Underwriters, and the Company shall have furnished to such counsel all
documents and information that they may reasonably request to enable them
to pass upon such matters.
(d) Wilson Sonsini Goodrich & Rosati shall have furnished to the
Representatives its written opinion, as counsel to the Company, addressed
to the Underwriters and dated such Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the business,
financial condition or results of operations of the Company, and has
all power and authority necessary to own or hold its properties and to
conduct the business in which it is engaged; and the Company has no
subsidiaries;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the shares of Stock being delivered on such
Delivery Date) have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus;
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(iii) Except as described in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any shares of the Stock
pursuant to the Company's certificate of incorporation or bylaws or
any agreement or other instrument known to such counsel;
(iv) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
to which the Company is a party or of which any property or assets of
the Company is the subject which, if determined adversely to the
Company, might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations,
business or prospects of the Company; and, to such counsel's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(v) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such opinion,
the Prospectus was filed with the Commission pursuant to the
subparagraph of Rule 424(b) of the Rules and Regulations specified in
such opinion on the date specified therein and no stop order
suspending the effectiveness of the Registration Statement has been
issued and, to such counsel's knowledge, no proceeding for that
purpose is pending or threatened by the Commission;
(vi) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to
such Delivery Date (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Securities Act and the Rules and Regulations;
(vii) To such counsel's knowledge, after due inquiry, there are
no contracts or other documents which are required to be described in
the Prospectus or filed as exhibits to the Registration Statement by
the Securities Act or by the Rules and Regulations which have not been
described or filed as exhibits to the Registration Statement or
incorporated therein by reference as permitted by the Rules and
Regulations;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company;
(ix) The issue and sale of the shares of Stock being delivered
on such Delivery Date by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of
the transactions contemplated hereby will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known
13.
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to such counsel to which the Company is a party or by which the
Company is bound or to which any of the property or assets of the
Company is subject, nor will such actions result in any violation of
the provisions of the certificate of incorporation or bylaws of the
Company or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or assets; and,
except for the registration of the Stock under the Securities Act and
such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby; and
(X) Except as described in the Prospectus, to such counsel's
knowledge, after due inquiry, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right (other than rights which have been waived or satisfied) to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the federal laws of the United States of
America, the laws of the State of California and the General Corporation
Law of the State of Delaware and that such counsel is not admitted in the
State of Delaware. Such counsel also shall have furnished to the
Representatives a written statement, addressed to the Underwriters and
dated such Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that (x) such counsel has acted as counsel
to the Company on a regular basis, has acted as counsel to the Company in
connection with previous financing transactions and has acted as counsel to
the Company in connection with the preparation of the Registration
Statement, and (y) based on the foregoing, no facts have come to the
attention of such counsel which lead it to believe that the Registration
Statement (other than the financial statements, financial data and related
schedules therein, as to which such counsel need express no opinion), as of
the Effective Date, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading, or that the
Prospectus contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not assume
any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
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except for the statements made in the Prospectus under the captions
"Description of Capital Stock", insofar as such statements relate to the
Stock and concern legal matters.
(e) The Representatives shall have received from Cooley Godward llp,
counsel for the Underwriters, such opinion or opinions, dated such Delivery
Date, with respect to the issuance and sale of the Stock, the Registration
Statement, the Prospectus and other related matters as the Representatives
may reasonably require, and the Company shall have furnished to such
counsel such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(f) At the time of execution of this Agreement, the Representatives
shall have received from KPMG LLP a letter, in form and substance
satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date hereof (or, with respect to matters involving
changes or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not more
than five days prior to the date hereof), the conclusions and findings of
such firm with respect to the financial information and other matters
ordinarily covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(g) With respect to the letter of KPMG LLP referred to in the
preceding paragraph and delivered to the Representatives concurrently with
the execution of this Agreement (the "initial letter"), the Company shall
have furnished to the Representatives a letter (the "bring-down letter") of
such accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01
of Regulation S-X of the Commission, (ii) stating, as of the date of the
bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five
days prior to the date of the bring-down letter), the conclusions and
findings of such firm with respect to the financial information and other
matters covered by the initial letter and (iii) confirming in all material
respects the conclusions and findings set forth in the initial letter.
(h) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 7(a) and 7(k) have been
fulfilled; and
15.
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(ii) They have carefully examined the Registration Statement and
the Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus.
(i) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the Company
or any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, otherwise
than as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in clause (i) or (ii), is, in the reasonable
judgment of the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Stock being delivered on such Delivery Date on the terms
and in the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
in the over-the-counter market, or trading in any securities of the Company
on any exchange or in the over-the-counter market, shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction, (ii) a
banking moratorium shall have been declared by federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(k) The Nasdaq National Market System shall have approved the Stock
for inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
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All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or in any
blue sky application or other document prepared or executed by the Company (or
based upon any written information furnished by the Company) specifically for
the purpose of qualifying any or all of the Stock under the securities laws of
any state or other jurisdiction (any such application, document or information
being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading or (iii) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or relating
in any manner to, the Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i) or (ii) above
(provided that the Company shall not be liable under this clause (iii) to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful misconduct), and
shall reimburse each Underwriter and each such officer, employee or controlling
person promptly upon demand for any legal or other expenses reasonably incurred
by that Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, or in any Blue Sky
Application, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein. The
foregoing indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
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(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information concerning
such Underwriter furnished to the Company through the Representatives by or on
behalf of that Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or controlling person for
any legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly
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represented by separate counsel, and in that event the fees and expenses of such
separate counsel shall be paid by the Company. No indemnifying party shall (i)
without the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company, on the one hand, and the Underwriters, on the other,
from the offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, on the one hand, and the Underwriters,
on the other, with respect to the statements or omissions that resulted in such
loss, claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, with respect to
such offering shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Stock purchased under this Agreement (before
deducting expenses) received by the Company, on the one hand, and the total
underwriting discounts and commissions received by the Underwriters with respect
to the shares of the Stock purchased under this Agreement, on the other hand,
bear to the total gross proceeds from the offering of the shares of the Stock
under this Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this Section 8(d) were to be
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section 8(d)
shall be deemed to include, for purposes of this Section 8(d), any legal or
other expenses reasonably incurred by such
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indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Stock underwritten by it and distributed to the public
was offered to the public exceeds the amount of any damages which such
Underwriter has otherwise paid or become liable to pay by reason of any untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 8(d) are several in proportion to their
respective underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning over-
allotments on the inside front cover page of and the concession and reallowance
figures appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company, except that the Company
will continue to be liable for the payment of expenses to the extent set forth
in Sections 6 and 11. As used in this Agreement, the term "Underwriter"
includes, for all purposes of this Agreement unless the context
20.
<PAGE>
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 9, purchases Firm Stock which a defaulting Underwriter agreed but
failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
prior to delivery of and payment for the Firm Stock if, prior to that time, any
of the events described in Sections 7(i) or 7(j), shall have occurred or if the
Underwriters shall decline to purchase the Stock for any reason permitted under
this Agreement.
11. Reimbursement of Underwriters' Expenses. If the Company shall fail to
tender the Stock for delivery to the Underwriters by reason of any failure,
refusal or inability on the part of the Company to perform any agreement on its
part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by the Company is not fulfilled,
the Company will reimburse the Underwriters for all reasonable out-of-pocket
expenses (including fees and disbursements of counsel) incurred by the
Underwriters in connection with this Agreement and the proposed purchase of the
Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 9 by
reason of the default of one or more Underwriters, the Company shall not be
obligated to reimburse any defaulting Underwriter on account of those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World Financial
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Chief Executive Officer (Fax: (408) 871-
5300);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take
21.
<PAGE>
effect at the time of receipt thereof. The Company shall be entitled to act and
rely upon any request, consent, notice or agreement given or made on behalf of
the Underwriters by Lehman Brothers Inc. on behalf of the Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of and be binding upon the Underwriters, the Company and their
respective successors. This Agreement and the terms and provisions hereof are
for the sole benefit of only those persons, except that (A) the representations,
warranties, indemnities and agreements of the Company contained in this
Agreement shall also be deemed to be for the benefit of the person or persons,
if any, who control any Underwriter within the meaning of Section 15 of the
Securities Act and (B) the indemnity agreement of the Underwriters contained in
Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations, warranties and
agreements of the Company and the Underwriters contained in this Agreement or
made by or on behalf on them, respectively, pursuant to this Agreement, shall
survive the delivery of and payment for the Stock and shall remain in full force
and effect, regardless of any investigation made by or on behalf of any of them
or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For purposes
of this Agreement, (a) "business day" means any day on which the New York Stock
Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set
forth in Rule 405 of the Rules and Regulations.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
22.
<PAGE>
If the foregoing correctly sets forth the agreement between the Company and
the Underwriters, please indicate your acceptance in the space provided for that
purpose below.
Very truly yours,
Talk City, Inc.
By__________________________________________
Peter H. Friedman
President and Chief Executive Officer
Accepted:
Lehman Brothers Inc.
Volpe Brown Whelan & Company
U.S. Bancorp Piper Jaffray Inc.
E*TRADE Securities, Inc.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By_________________________________
Authorized Representative
23.
<PAGE>
SCHEDULE 1
Number of
Underwriters Shares
Lehman Brothers Inc....................
Volpe Brown Whelan & Company...........
U.S. Bancorp Piper Jaffray Inc.........
E*TRADE Securities, Inc.
-----------
Total 4,500,000
===========
24.
<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
-5-
<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
-6-
<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.
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<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 for
breach of fiduciary duty as a director 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.
----------------------
Neither any amendment, repeal or modification of the foregoing provisions of
this Article V, nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article V, shall adversely affect any right
of indemnification or limitation of liability of a director or 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.
-17-
<PAGE>
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
-----------
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 for
breach of fiduciary duty as a director 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.
----------------------
Neither any amendment, repeal or modification of the foregoing provisions
of this Article V, nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article V, shall adversely affect any right
of indemnification or limitation of liability of a director or 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
-----------
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.
-3-
<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
-4-
<PAGE>
EXHIBIT 4.1
NUMBER TALK CITY, INC. SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
_____________________
CUSIP 874263
_____________________
THIS CERTIFIES THAT
Is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE OF $0.001 PER SHARE, OF
----------- -----------
--------------------- TALK CITY, INC. ---------------------
----------- -----------
(hereinafter called the "Company"), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized
attorney, but only upon surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are
issued and shall be subject to all the provisions of the Certificate
of Incorporation of the Company, and all amendments thereof, to all of
which the holder by acceptance hereof assents. This certificate is not
valid unless countersigned by the transfer Agent and Registrar,
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Peter H. Friedman /s/ [signature illegible]
PRESIDENT & CEO CHIEF FINANCIAL OFFICER
[TALK CITY, INC. DELAWARE CORPORATE SEAL]
Countersigned and Registered:
Firstar Bank of Minnesota, N.A.
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
TALK CITY, INC.
A statement of the rights, preferences, privileges and restrictions granted to
or imposed upon the respective classes or series of shares and upon the holders
thereof as established, from time to time, by the Certificate of Incorporation
of the Corporation and by any certificate of determination, and the number of
shares constituting each class and series and the designations thereof, may be
obtained by the holder hereof upon written request and without charge from the
Secretary of the Corporation at its corporate headquarters.
________________________________________________________________________________
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by entireties
JT TEN - as joint tenants with right of survivorship
and not as tenants in common
UGMA - ________ Custodian
________
(Cust)
(Minor)
under Uniform Gifts to Minors
Act _____________________
(State)
Additional abbreviations may also be used though not in the above list.
________________________________________________________________________________
For value received hereby sell, assign and transfer unto
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL
ZIP CODE OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
Shares
________________________________________________________________________________
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Dated
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED
_________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
<PAGE>
EXHIBIT 10.21
LEASE AGREEMENT
between
PRUNEYARD ASSOCIATES, LLC
as "Landlord"
and
TALK CITY, INC.
as "Tenant"
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. PREMISES.................................................... 3
2. TERM; POSSESSION............................................ 3
3. RENT........................................................ 3
4. SECURITY DEPOSIT............................................ 7
5. USE AND COMPLIANCE WITH LAWS................................ 7
6. TENANT IMPROVEMENTS & ALTERATIONS........................... 9
7. MAINTENANCE AND REPAIRS..................................... 11
8. TENANT'S TAXES.............................................. 12
9. UTILITIES AND SERVICES...................................... 12
10. EXCULPATION AND INDEMNIFICATION............................. 13
11. INSURANCE................................................... 14
12. DAMAGE OR DESTRUCTION....................................... 16
13. CONDEMNATION................................................ 17
14. ASSIGNMENT AND SUBLETTING................................... 19
15. DEFAULT AND REMEDIES........................................ 21
16. LATE CHARGE AND INTEREST.................................... 23
17. WAIVER...................................................... 23
18. ENTRY, INSPECTION AND CLOSURE............................... 23
19. SURRENDER AND HOLDING OVER.................................. 24
20. ENCUMBRANCES................................................ 25
21. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS.............. 25
22. NOTICES..................................................... 26
23. ATTORNEYS' FEES............................................. 26
24. QUIET POSSESSION............................................ 27
25. SECURITY MEASURES........................................... 27
26. FORCE MAJEURE............................................... 27
27. RULES AND REGULATIONS....................................... 27
28. LANDLORD'S LIABILITY........................................ 28
29. CONSENTS AND APPROVALS...................................... 28
30. WAIVER OF RIGHT TO JURY TRIAL............................... 28
31. BROKERS..................................................... 29
32. RELOCATION OF PREMISES...................................... 29
33. ENTIRE AGREEMENT............................................ 29
34. MISCELLANEOUS............................................... 29
35. AUTHORITY................................................... 30
</TABLE>
-i-
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
Additional Rent.................................... 5 Service Failure............................... 13
Alterations........................................ 10 Substantially Completed....................... 3
Award.............................................. 18 Taxes......................................... 5
Base Operating Costs............................... 4 Tenant........................................ 3
Base Taxes......................................... 4 Tenant's Share................................ 5
Broker............................................. 29 Tenant's Taxes................................ 12
Building........................................... 3 Tenant Delay.................................. 3
Building Rules..................................... 28 Tenant Improvements........................... 10
Building Systems................................... 8 Term.......................................... 3
Business Days...................................... 12 Trade Fixtures................................ 11
Business Hours..................................... 12 Transfer...................................... 19
Claims............................................. 13 Transferee.................................... 20
Commencement Date.................................. 3 Visitors...................................... 8
Condemnation....................................... 18
Condemnor.......................................... 18
Construction Rider................................. 3
Controls........................................... 12
Date of Condemnation............................... 18
Encumbrance........................................ 25
Environmental Losses............................... 8
Environmental Requirements......................... 8
Event of Default................................... 21
Expiration Date.................................... 3
Handled by Tenant.................................. 8
Handling by Tenant................................. 8
Hazardous Materials................................ 8
HVAC............................................... 7
Interest Rate...................................... 23
Landlord........................................... 3
Laws............................................... 4
Mortgagee.......................................... 26
Operating Costs.................................... 4
Parking Facility................................... 3
Permitted Hazardous Materials...................... 8
Premises........................................... 3
Project............................................ 3
Property........................................... 3
Property Manager................................... 15
Proposed Transferee................................ 19
Rent............................................... 7
Rental Tax......................................... 12
Representatives.................................... 8
Scheduled Commencement Date........................ 3
Security Deposit................................... 7
</TABLE>
-ii-
<PAGE>
BASIC LEASE INFORMATION
Lease Date: For identification purposes only, the date of this
Lease is May 5, 1999
Landlord: Pruneyard Associates, LLC, a California limited
liability company
Tenant: Talk City, Inc., a Delaware corporation
Project: The Pruneyard Office Towers
Building Address: Pruneyard Office Tower I
1901 South Bascom Avenue
Campbell, California 95008
Rentable Area of
Building: Approximately 116,743 rentable square feet
Premises: Floor: Fifth Floor
Suite Number: 500
Rentable Area: Approximately 9,259 rentable
square feet
Term: 12 full calendar months
Commencement Date: JUNE 1/ST/ 1999
Expiration Date: JUNE 30/TH/ 2000
Base Rent: 06/01/99 - 06/30/00: $3.10 per rentable square foot
per month
Base Year: The calendar year 1999
Tenant's Share: 7.9%
Security Deposit: $28,702.90
Landlord's Address PRUNEYARD ASSOCIATES, LLC
for Payment of Rent: File No. 72847
P.O. Box 61000
San Francisco, California 94161-2847
Business Hours: 7:00 a.m. to 6:00 p.m., Monday - Friday (except
holidays); and 9:00 a.m. to 3:00 p.m., Saturday
(except holidays)
-1-
<PAGE>
Landlord's Address Pruneyard Associates, LLC
for Notices: 1999 South Bascom Avenue, Suite 200
Campbell, California 95008
Attn: Property Manager
with a copy to:
Pruneyard Associates, LLC
2929 Campus Drive, Suite 450
San Mateo, CA 94403
Attention: General Counsel
Tenant's Address Pruneyard Office Tower I
for Notices: 1901 South Bascom Avenue, Suite 500
Campbell, California 95008
with a copy to:
Talk City, Inc.
307 Orchard City Drive, Suite 350
Campbell, CA 95008
Access Card Deposit: None
Broker(s): Cornish & Carey
Guarantor(s): None
Property Manager: Cornerstone Properties Limited Partnership dba Wilson-
Cornerstone Properties Limited Partnership
Additional Provisions: None
Exhibits:
- --------
Exhibit A: The Premises
Exhibit B: Construction Rider
Exhibit C: Building Rules
Exhibit D: Additional Provisions
Exhibit E: Asbestos Notification
The Basic Lease Information set forth above is part of the Lease. In the
event of any conflict between any provision in the Basic Lease Information and
the Lease, the Lease shall control.
-2-
<PAGE>
THIS LEASE is made as of the Lease Date set forth in the Basic Lease
Information, by and between the Landlord identified in the Basic Lease
Information ("Landlord"), and the Tenant identified in the Basic Lease
Information ("Tenant"). Landlord and Tenant hereby agree as follows:
1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, upon the terms and subject to the conditions of this Lease, the office
space identified in the Basic Lease Information as the Premises (the
"Premises"), in the Building located at the address specified in the Basic Lease
Information (the "Building"). The approximate configuration and location of the
Premises is shown on Exhibit A. Landlord and Tenant agree that the rentable area
---------
of the Premises for all purposes under this Lease shall be the Rentable Area
specified in the Basic Lease Information. The Building, together with the
parking facilities serving the Building (the "Parking Facility"), and the
parcel(s) of land on which the Building and the Parking Facility are situated
(collectively, the "Property"), is part of the Project identified in the Basic
Lease Information (the "Project").
2. TERM; POSSESSION. The term of this Lease (the "Term") shall commence on the
Commencement Date as described below and, unless sooner terminated, shall expire
on the Expiration Date set forth in the Basic Lease Information (the "Expiration
Date"). The "Commencement Date" shall be JUNE 1/st/ 1999.
3. RENT.
3.1 Base Rent. Tenant agrees to pay to Landlord the Base Rent set forth in
---------
the Basic Lease Information, without prior notice or demand, on the first day of
each and every calendar month during the Term, except that Base Rent for the
first full calendar month in which Base Rent is payable shall be paid upon
Tenant's execution of this Lease and Base Rent for any partial month at the
beginning of the Term shall be paid on the Commencement Date. Base Rent for any
partial month at the beginning or end of the Term shall be prorated based on the
actual number of days in the month.
If the Basic Lease Information provides for any change in Base Rent by
reference to years or months (without specifying particular dates), the change
will take effect on the applicable annual or monthly anniversary of the
Commencement Date (which won't necessarily be the first day of a calendar
month).
3.2 Additional Rent: Increases in Operating Costs and Taxes.
-------------------------------------------------------
(a) Definitions.
-----------
(1) "Base Operating Costs" means Operating Costs for the
calendar year specified as the Base Year in the Basic Lease Information
(excluding therefrom, however, any Operating Costs of a nature that would not
ordinarily be incurred on an annual, recurring basis).
-3-
<PAGE>
(2) "Base Taxes" means Taxes for the calendar year specified as the
Base Year in the Basic Lease Information.
(3) "Operating Costs" means all costs of managing, operating,
maintaining and repairing the Property, including all costs, expenditures, fees
and charges for: (A) operation, maintenance and repair of the Property
(including maintenance, repair and replacement of glass, the roof covering or
membrane, and landscaping); (B) utilities and services (including
telecommunications facilities and equipment, recycling programs and trash
removal), and associated supplies and materials; (C) compensation (including
employment taxes and fringe benefits) for persons who perform duties in
connection with the operation, management, maintenance and repair of the
Building, such compensation to be appropriately allocated for persons who also
perform duties unrelated to the Building; (D) property (including coverage for
earthquake and flood if carried by Landlord), liability, rental income and other
insurance relating to the Property, and expenditures for deductible amounts paid
under such insurance; (E) licenses, permits and inspections; (F) complying with
the requirements of any law, statute, ordinance or governmental rule or
regulation or any orders pursuant thereto (collectively "Laws"); (G)
amortization of capital improvements required to comply with Laws, or which are
intended to reduce Operating Costs or improve the utility, efficiency or
capacity of any Building System, with interest on the unamortized balance at the
rate paid by Landlord on funds borrowed to finance such capital improvements
(or, if Landlord finances such improvements out of Landlord's funds without
borrowing, the rate that Landlord would have paid to borrow such funds, as
reasonably determined by Landlord), over such useful life as Landlord shall
reasonably determine; (H) an office in the Project for the management of the
Property, including expenses of furnishing and equipping such office and the
rental value of any space occupied for such purposes; (I) property management
fees; (J) accounting, legal and other professional services incurred in
connection with the operation of the Property and the calculation of Operating
Costs and Taxes; (K) a reasonable allowance for depreciation on machinery and
equipment used to maintain the Property and on other personal property owned by
Landlord in the Property (including window coverings and carpeting in common
areas); (L) contesting the validity or applicability of any Laws that may affect
the Property; (M) the Building's share of any shared or common area maintenance
fees and expenses (including costs and expenses of operating, managing, owning
and maintaining the Parking Facility and the common areas of the Project and any
fitness center or conference center in the Project); and (N) any other cost,
expenditure, fee or charge, whether or not hereinbefore described, which in
accordance with generally accepted property management practices would be
considered an expense of managing, operating, maintaining and repairing the
Property. Operating Costs for any calendar year during which average occupancy
of the Building is less than one hundred percent (100%) shall be calculated
based upon the Operating Costs that would have been incurred if the Building had
an average occupancy of one hundred percent (100%) during the entire calendar
year.
Operating Costs shall not include (i) capital improvements (except as otherwise
provided above); (ii) costs of special services rendered to individual tenants
(including Tenant) for which a special charge is made; (iii) interest and
principal payments on loans or indebtedness secured by the Building; (iv) costs
of improvements for Tenant or other tenants of the Building; (v) costs of
services or other benefits of a type which are not available to Tenant but which
are available to other tenants or occupants, and costs for which Landlord is
reimbursed by other tenants of the Building other than through payment of
tenants' shares of increases in Operating Costs and Taxes;
-4-
<PAGE>
(vi) leasing commissions, attorneys' fees and other expenses incurred in
connection with leasing space in the Building or enforcing such leases; (vii)
depreciation or amortization, other than as specifically enumerated in the
definition of Operating Costs above; and (viii) costs, fines or penalties
incurred due to Landlord's violation of any Law.
(4) "Taxes" means: all real property taxes and general, special
or district assessments or other governmental impositions, of whatever kind,
nature or origin, imposed on or by reason of the ownership or use of the
Property; governmental charges, fees or assessments for transit or traffic
mitigation (including area-wide traffic improvement assessments and
transportation system management fees), housing, police, fire or other
governmental service or purported benefits to the Property; personal property
taxes assessed on the personal property of Landlord used in the operation of the
Property; service payments in lieu of taxes and taxes and assessments of every
kind and nature whatsoever levied or assessed in addition to, in lieu of or in
substitution for existing or additional real or personal property taxes on the
Property or the personal property described above; any increases in the
foregoing caused by changes in assessed valuation, tax rate or other factors or
circumstances; and the reasonable cost of contesting by appropriate proceedings
the amount or validity of any taxes, assessments or charges described above. To
the extent paid by Tenant or other tenants as "Tenant's Taxes" (as defined in
Section 8 - Tenant's Taxes), "Tenant's Taxes" shall be excluded from Taxes.
(5) "Tenant's Share" means the Rentable Area of the Premises
divided by the total Rentable Area of the Building, as set forth in the Basic
Lease Information. If the Rentable Area of the Building is changed or the
Rentable Area of the Premises is changed by Tenant's leasing of additional space
hereunder or for any other reason, Tenant's Share shall be adjusted accordingly.
(b) Additional Rent.
---------------
(1) Tenant shall pay Landlord as "Additional Rent" for each
calendar year or portion thereof during the Term Tenant's Share of the sum of
(x) the amount (if any) by which Operating Costs for such period exceed Base
Operating Costs, and (y) the amount (if any) by which Taxes for such period
exceed Base Taxes.
(2) Prior to the end of the Base Year and each calendar year
thereafter, Landlord shall notify Tenant of Landlord's estimate of Operating
Costs, Taxes and Tenant's Additional Rent for the following calendar year.
Commencing on the first day of January of each calendar year and continuing on
the first day of every month thereafter in such year, Tenant shall pay to
Landlord one-twelfth (1/12th) of the estimated Additional Rent. If Landlord
thereafter estimates that Operating Costs or Taxes for such year will vary from
Landlord's prior estimate, Landlord may, by notice to Tenant, revise the
estimate for such year (and Additional Rent shall thereafter be payable based on
the revised estimate).
(3) As soon as reasonably practicable after the end of the Base
Year and each calendar year thereafter, Landlord shall furnish Tenant a
statement with respect to such year, showing Operating Costs, Taxes and
Additional Rent for the year, and the total payments made by Tenant with respect
thereto. Unless Tenant raises any objections to Landlord's statement within
-5-
<PAGE>
ninety (90) days after receipt of the same, such statement shall conclusively be
deemed correct and Tenant shall have no right thereafter to dispute such
statement or any item therein or the computation of Additional Rent based
thereon. If Tenant does object to such statement, then Landlord shall provide
Tenant with reasonable verification of the figures shown on the statement and
the parties shall negotiate in good faith to resolve any disputes. Any objection
of Tenant to Landlord's statement and resolution of any dispute shall not
postpone the time for payment of any amounts due Tenant or Landlord based on
Landlord's statement, nor shall any failure of Landlord to deliver Landlord's
statement in a timely manner relieve Tenant of Tenant's obligation to pay any
amounts due Landlord based on Landlord's statement.
(4) If Tenant's Additional Rent as finally determined for any
calendar year exceeds the total payments made by Tenant on account thereof,
Tenant shall pay Landlord the deficiency within ten (10) days of Tenant's
receipt of Landlord's statement. If the total payments made by Tenant on account
thereof exceed Tenant's Additional Rent as finally determined for such year,
Tenant's excess payment shall be credited toward the rent next due from Tenant
under this Lease. For any partial calendar year at the beginning or end of the
Term, Additional Rent shall be prorated on the basis of a 365-day year by
computing Tenant's Share of the increases in Operating Costs and Taxes for the
entire year and then prorating such amount for the number of days during such
year included in the Term. Notwithstanding the termination of this Lease,
Landlord shall pay to Tenant or Tenant shall pay to Landlord, as the case may
be, within ten (10) days after Tenant's receipt of Landlord's final statement
for the calendar year in which this Lease terminates, the difference between
Tenant's Additional Rent for that year, as finally determined by Landlord, and
the total amount previously paid by Tenant on account thereof.
If for any reason Base Taxes or Taxes for any year during the Term are reduced,
refunded or otherwise changed, Tenant's Additional Rent shall be adjusted
accordingly. If Taxes are temporarily reduced as a result of space in the
Building being leased to a tenant that is entitled to an exemption from property
taxes or other taxes, then for purposes of determining Additional Rent for each
year in which Taxes are reduced by any such exemption, Taxes for such year shall
be calculated on the basis of the amount the Taxes for the year would have been
in the absence of the exemption. The obligations of Landlord to refund any
overpayment of Additional Rent and of Tenant to pay any Additional Rent not
previously paid shall survive the expiration of the Term. Notwithstanding
anything to the contrary in this Lease, if there is at any time a decrease in
Taxes below the amount of the Taxes for the Base Year, then for purposes of
calculating Additional Rent for the year in which such decrease occurs and all
subsequent periods, Base Taxes shall be reduced to equal the Taxes for the year
in which the decrease occurs.
3.3 Payment of Rent. All amounts payable or reimbursable by Tenant under
---------------
this Lease, including late charges and interest (collectively, "Rent"), shall
constitute rent and shall be payable and recoverable as rent in the manner
provided in this Lease. All sums payable to Landlord on demand under the terms
of this Lease shall be payable within ten (10) days after notice from Landlord
of the amounts due. All rent shall be paid without offset, recoupment or
deduction in lawful money of the United States of America to Landlord at
Landlord's Address for Payment of Rent as set forth in the Basic Lease
Information, or to such other person or at such other place as Landlord may from
time to time designate.
-6-
<PAGE>
4. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with
Landlord the amount specified in the Basic Lease Information as the Security
Deposit, if any (the "Security Deposit"), as security for the performance of
Tenant's obligations under this Lease. Landlord may (but shall have no
obligation to) use the Security Deposit or any portion thereof to cure any Event
of Default under this Lease or to compensate Landlord for any damage Landlord
incurs as a result of Tenant's failure to perform any of Tenant's obligations
hereunder. In such event Tenant shall pay to Landlord on demand an amount
sufficient to replenish the Security Deposit. If Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return to Tenant the
Security Deposit or the balance thereof then held by Landlord and not applied as
provided above. Landlord may commingle the Security Deposit with Landlord's
general and other funds. Landlord shall not be required to pay interest on the
Security Deposit to Tenant.
5. USE AND COMPLIANCE WITH LAWS.
5.1 Use. The Premises shall be used and occupied for general business
---
office purposes and for no other use or purpose. Tenant shall comply with all
present and future Laws relating to Tenant's use or occupancy of the Premises
(and make any repairs, alterations or improvements as required to comply with
all such Laws), and shall observe the "Building Rules" (as defined in Section
27 - Rules and Regulations). Tenant shall not do, bring, keep or sell anything
in or about the Premises that is prohibited by, or that will cause a
cancellation of or an increase in the existing premium for, any insurance policy
covering the Property or any part thereof. Tenant shall not permit the Premises
to be occupied or used in any manner that will constitute waste or a nuisance,
or disturb the quiet enjoyment of or otherwise annoy other tenants in the
Building. Without limiting the foregoing, the Premises shall not be used for
educational activities, practice of medicine or any of the healing arts,
providing social services, for any governmental use (including embassy or
consulate use), or for personnel agency, customer service office, studios for
radio, television or other media, travel agency or reservation center operations
or uses. Tenant shall not, without the prior consent of Landlord, (i) bring into
the Building or the Premises or the Building or any cause substantial noise,
odor or vibration, overload the floors in the Premises or the Building or any of
the heating, ventilating and air-conditioning ("HVAC"), mechanical, elevator,
plumbing, electrical, fire protection, life safety, security or other systems in
the Building ("Building Systems"), or jeopardize the structural integrity of the
Building or any part thereof; (ii) connect to the utility systems of the
Building any apparatus, machinery or other equipment other than typical office
equipment; or (iii) connect to any electrical circuit in the Premises any
equipment or other load with aggregate electrical power requirements in excess
of 80% of the rated capacity of the circuit.
5.2 Hazardous Materials.
-------------------
(a) Definitions.
-----------
(1) "Hazardous Materials" shall mean any substance: (A) that now
or in the future is regulated or governed by, requires investigation or
remediation under, or is defined as a hazardous waste, hazardous substance,
pollutant or contaminant under any governmental statute, code, ordinance,
regulation, rule or order, and any amendment thereto, including the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
(S)9601 et seq.,
-- ---
-7-
<PAGE>
and the Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq., or
-- ---
(B) that is toxic, explosive, corrosive, flammable, radioactive, carcinogenic,
dangerous or otherwise hazardous, including gasoline, diesel fuel, petroleum
hydrocarbons, polychlorinated biphenyls (PCBs), asbestos, radon and urea
formaldehyde foam insulation.
(2) "Environmental Requirements" shall mean all present and
future Laws, orders, permits, licenses, approvals, authorizations and other
requirements of any kind applicable to Hazardous Materials.
(3) "Handled by Tenant" and "Handling by Tenant" shall mean and
refer to any installation, handling, generation, storage, use, disposal,
discharge, release, abatement, removal, transportation, or any other activity of
any type by Tenant or its agents, employees, contractors, licensees, assignees,
sublessees, transferees or representatives (collectively, "Representatives") or
its guests, customers, invitees, or visitors (collectively, "Visitors"), at or
about the Premises in connection with or involving Hazardous Materials.
(4) "Environmental Losses" shall mean all costs and expenses of
any kind, damages, including foreseeable and unforeseeable consequential
damages, fines and penalties incurred in connection with any violation of and
compliance with Environmental Requirements and all losses of any kind
attributable to the diminution of value, loss of use or adverse effects on
marketability or use of any portion of the Premises or Property.
(b) Tenant's Covenants. No Hazardous Materials shall be Handled by
------------------
Tenant at or about the Premises or Property without Landlord's prior written
consent, which consent may be granted, denied, or conditioned upon compliance
with Landlord's requirements, all in Landlord's absolute discretion.
Notwithstanding the foregoing, normal quantities and use of those Hazardous
Materials customarily used in the conduct of general office activities, such as
copier fluids and cleaning supplies ("Permitted Hazardous Materials"), may be
used and stored at the Premises without Landlord's prior written consent,
provided that Tenant's activities at or about the Premises and Property and the
Handling by Tenant of all Hazardous Materials shall comply at all times with all
Environmental Requirements. At the expiration or termination of the Lease,
Tenant shall promptly remove from the Premises and Property all Hazardous
Materials Handled by Tenant at the Premises or the Property. Tenant shall keep
Landlord fully and promptly informed of all Handling by Tenant of Hazardous
Materials other than Permitted Hazardous Materials. Tenant shall be responsible
and liable for the compliance with all of the provisions of this Section by all
of Tenant's Representatives and Visitors, and all of Tenant's obligations under
this Section (including its indemnification obligations under paragraph (e)
below) shall survive the expiration or termination of this Lease.
(c) Compliance. Tenant shall at Tenant's expense promptly take all
----------
actions required by any governmental agency or entity in connection with or as a
result of the Handling by Tenant of Hazardous Materials at or about the Premises
or Property, including inspection and testing, performing all cleanup, removal
and remediation work required with respect to those Hazardous Materials,
complying with all closure requirements and post-closure monitoring, and filing
all required reports or plans. All of the foregoing work and all Handling by
Tenant of all Hazardous Materials shall be performed in a good, safe and
workmanlike manner by consultants
-8-
<PAGE>
qualified and licensed to undertake such work and in a manner that will not
interfere with any other tenant's quiet enjoyment of the Property or Landlord's
use, operation, leasing and sale of the Property. Tenant shall deliver to
Landlord prior to delivery to any governmental agency, or promptly after receipt
from any such agency, copies of all permits, manifests, closure or remedial
action plans, notices, and all other documents relating to the Handling by
Tenant of Hazardous Materials at or about the Premises or Property. If any lien
attaches to the Premises or the Property in connection with or as a result of
the Handling by Tenant of Hazardous Materials, and Tenant does not cause the
same to be released, by payment, bonding or otherwise, within ten (10) days
after the attachment thereof, Landlord shall have the right but not the
obligation to cause the same to be released and any sums expended by Landlord
(plus Landlord's administrative costs) in connection therewith shall be payable
by Tenant on demand.
(d) Landlord's Rights. Landlord shall have the right, but not the
-----------------
obligation, to enter the Premises at any reasonable time (i) to confirm Tenant's
compliance with the provisions of this Section 5.2, and (ii) to perform Tenant's
obligations under this Section if Tenant has failed to do so after reasonable
notice to Tenant. Landlord shall also have the right to engage qualified
Hazardous Materials consultants to inspect the Premises and review the Handling
by Tenant of Hazardous Materials, including review of all permits, reports,
plans, and other documents regarding same. Tenant shall pay to Landlord on
demand the costs of Landlord's consultants' fees and all costs incurred by
Landlord in performing Tenant's obligations under this Section. Landlord shall
use reasonable efforts to minimize any interference with Tenant's business
caused by Landlord's entry into the Premises, but Landlord shall not be
responsible for any interference caused thereby.
(e) Tenant's Indemnification. Tenant agrees to indemnify, defend,
------------------------
protect and hold harmless Landlord and its partners or members and its or their
partners, members, directors, officers, shareholders, employees and agents from
all Environmental Losses and all other claims, actions, losses, damages,
liabilities, costs and expenses of every kind, including reasonable attorneys',
experts' and consultants' fees and costs, incurred at any time and arising from
or in connection with the Handling by Tenant of Hazardous Materials at or about
the Property or Tenant's failure to comply in full with all Environmental
Requirements with respect to the Premises.
(f) Asbestos. Tenant acknowledges that Tenant has received the
--------
asbestos notification letter attached as Exhibit E hereto pursuant to California
---------
Health and Safety Code Sections 25915 et seq. (as amended from time to time, the
"Connelly Act"), disclosing the existence of asbestos in the Building. As part
of Tenant's obligations under paragraph (c) of this Section, Tenant agrees to
comply with the Connelly Act, including providing copies of Landlord's asbestos
notification letter to all of Tenant's "employees" and "owners," as those terms
are defined in the Connelly Act
6. TENANT IMPROVEMENTS & ALTERATIONS.
6.1 Landlord and Tenant shall perform their respective obligations with
respect to design and construction of any improvements to be constructed and
installed in the Premises (the "Tenant Improvements"), as provided in the
Construction Rider. Except for any Tenant Improvements to be constructed by
Tenant as provided in the Construction Rider, Tenant shall not
-9-
<PAGE>
make any alterations, improvements or changes to the Premises, including
installation of any security system or telephone or data communication wiring,
("Alterations"), without Landlord's prior written consent. Any such Alterations
shall be completed by Tenant at Tenant's sole cost and expense: (i) with due
diligence, in a good and workmanlike manner, using new materials; (ii) in
compliance with plans and specifications approved by Landlord; (iii) in
compliance with the construction rules and regulations promulgated by Landlord
from time to time; (iv) in accordance with all applicable Laws (including all
work, whether structural or non-structural, inside or outside the Premises,
required to comply fully with all applicable Laws and necessitated by Tenant's
work); and (v) subject to all conditions which Landlord may in Landlord's
discretion impose. Such conditions may include requirements for Tenant to: (i)
provide payment or performance bonds or additional insurance (from Tenant or
Tenant's contractors, subcontractors or design professionals); (ii) use
contractors or subcontractors designated by Landlord; and (iii) remove all or
part of the Alterations prior to or upon expiration or termination of the Term,
as designated by Landlord. If any work outside the Premises, or any work on or
adjustment to any of the Building Systems, is required in connection with or as
a result of Tenant's work, such work shall be performed at Tenant's expense by
contractors designated by Landlord. Landlord's right to review and approve (or
withhold approval of) Tenant's plans, drawings, specifications, contractor(s)
and other aspects of construction work proposed by Tenant is intended solely to
protect Landlord, the Property and Landlord's interests. No approval or consent
by Landlord shall be deemed or construed to be a representation or warranty by
Landlord as to the adequacy, sufficiency, fitness or suitability thereof or
compliance thereof with applicable Laws or other requirements. Except as
otherwise provided in Landlord's consent, all Alterations shall upon
installation become part of the realty and be the property of Landlord.
6.2 Before making any Alterations, Tenant shall submit to Landlord for
Landlord's prior approval reasonably detailed final plans and specifications
prepared by a licensed architect or engineer, a copy of the construction
contract, including the name of the contractor and all subcontractors proposed
by Tenant to make the Alterations and a copy of the contractor's license. Tenant
shall reimburse Landlord upon demand for any expenses incurred by Landlord in
connection with any Alterations made by Tenant, including reasonable fees
charged by Landlord's contractors or consultants to review plans and
specifications prepared by Tenant and to update the existing as-built plans and
specifications of the Building to reflect the Alterations. Tenant shall obtain
all applicable permits, authorizations and governmental approvals and deliver
copies of the same to Landlord before commencement of any Alterations.
6.3 Tenant shall keep the Premises and the Property free and clear of
all liens arising out of any work performed, materials furnished or obligations
incurred by Tenant. If any such lien attaches to the Premises or the Property,
and Tenant does not cause the same to be released by payment, bonding or
otherwise within ten (10) days after the attachment thereof, Landlord shall have
the right but not the obligation to cause the same to be released, and any sums
expended by Landlord (plus Landlord's administrative costs) in connection
therewith shall be payable by Tenant on demand with interest thereon from the
date of expenditure by Landlord at the Interest Rate (as defined in Section 16.2
- - INTEREST). Tenant shall give Landlord at least ten (10) days' notice prior to
the commencement of any Alterations and cooperate with Landlord in posting and
maintaining notices of non-responsibility in connection therewith.
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<PAGE>
6.4 Subject to the provisions of Section 5 - Use and Compliance with
Laws and the foregoing provisions of this Section, Tenant may install and
maintain furnishings, equipment, movable partitions, business equipment and
other trade fixtures ("Trade Fixtures") in the Premises, provided that the Trade
Fixtures do not become an integral part of the Premises or the Building. Tenant
shall promptly repair any damage to the Premises or the Building caused by any
installation or removal of such Trade Fixtures.
7. MAINTENANCE AND REPAIRS.
7.1 By taking possession of the Premises Tenant agrees that the Premises
are then in a good and tenantable condition. During the Term, Tenant at Tenant's
expense but under the direction of Landlord, shall repair and maintain the
Premises, including the interior walls, floor coverings, ceiling (ceiling tiles
and grid), Tenant Improvements, Alterations, fire extinguishers, outlets and
fixtures, and any appliances in the Premises, in a first class condition, and
keep the Premises in a clean, safe and orderly condition.
7.2 Landlord shall maintain or cause to be maintained in reasonably
good order, condition and repair, the structural portions of the roof,
foundations, floors and exterior walls of the Building, the Building Systems,
and the public and common areas of the Property, such as elevators, stairs,
corridors and restrooms; provided, however, that Tenant shall pay the cost of
repairs for any damage occasioned by Tenant's use of the Premises or the
Property or any act or omission of Tenant or Tenant's Representatives or
Visitors, to the extent (if any) not covered by Landlord's property insurance.
Landlord shall be under no obligation to inspect the Premises. Tenant shall
promptly report in writing to Landlord any defective condition known to Tenant
hereby Landlord is required to repair. As a material part of the consideration
for this Lease, Tenant hereby waives any benefits of any applicable existing or
future Law, including the provisions of California Civil Code Sections 1932(1),
1941 and 1942, that allows a tenant to make repairs at its landlord's expense.
7.3 Landlord hereby reserves the right, at any time and from time to
time, without liability to Tenant, and without constituting an eviction,
constructive or otherwise, or entitling Tenant to any abatement of rent or to
terminate this Lease or otherwise releasing Tenant from any of Tenant's
obligations under this Lease:
(a) To make alterations, additions, repairs, improvements to or in
or to decrease the size of area of, all or any part of the Building, the
fixtures and equipment therein, and the Building Systems;
(b) To change the Building's name or street address;
(c) To install and maintain any and all signs on the exterior and
interior of the Building;
(d) To reduce, increase, enclose or otherwise change at any time
and from time to time the size, number, location, lay-out and nature of the
common areas (including the Parking
-11-
<PAGE>
Facility) and other tenancies and premises in the Property and to create
additional rentable areas through use or enclosure of common areas; and
(e) If any governmental authority promulgates or revises any Law or
imposes mandatory or voluntary controls or guidelines on Landlord or the
Property relating to the use or conservation of energy or utilities or the
reduction of automobile or other emissions or reduction or management of traffic
or parking on the Property (collectively "Controls"), to comply with such
Controls, whether mandatory or voluntary, or make any alterations to the
Property related thereto.
8. TENANT'S TAXES. "Tenant's Taxes" shall mean (a) all taxes, assessments,
license fees and other governmental charges or impositions levied or assessed
against or with respect to Tenant's personal property or Trade Fixtures in the
Premises, whether any such imposition is levied directly against Tenant or
levied against Landlord or the Property, (b) all rental, excise, sales or
transaction privilege taxes arising out of this Lease (excluding, however, state
and federal personal or corporate income taxes measured by the income of
Landlord from all sources) imposed by any taxing authority upon Landlord or upon
Landlord's receipt of any rent payable by Tenant pursuant to the terms of this
Lease ("Rental Tax"), and (c) any increase in Taxes attributable to inclusion of
a value placed on Tenant's personal property, Trade Fixtures or Alterations.
Tenant shall pay any Rental Tax to Landlord in addition to and at the same time
as Base Rent is payable under this Lease, and shall pay all other Tenant's Taxes
before delinquency (and, at Landlord's request, shall furnish Landlord
satisfactory evidence thereof). If Landlord pays Tenant's Taxes or any portion
thereof, Tenant shall reimburse Landlord upon demand for the amount of such
payment, together with interest at the Interest Rate from the date of Landlord's
payment to the date of Tenant's reimbursement.
9. UTILITIES AND SERVICES.
9.1 Description of Services. Landlord shall furnish to the Premises:
-----------------------
reasonable amounts of heat, ventilation and air-conditioning during the Business
Hours specified in the Basic Lease Information ("Business Hours") on weekdays
except public holidays ("Business Days"); reasonable amounts of electricity; and
janitorial services five days a week (except public holidays). Landlord shall
also provide the Building with normal fluorescent tube replacement, window
washing, elevator service, and common area toilet room supplies. Any additional
utilities or services that Landlord may agree to provide (including lamp or tube
replacement for other than Building Standard lighting fixtures) shall be at
Tenant's sole expense.
9.2 Payment for Additional Utilities and Services.
---------------------------------------------
(a) Upon request by Tenant in accordance with the procedures
established by Landlord from time to time for furnishing HVAC service at times
other than Business Hours on Business Days, Landlord shall furnish such service
to Tenant and Tenant shall pay for such services on an hourly basis at the then
prevailing rate established for the Building by Landlord.
(b) If the temperature otherwise maintained in any portion of the
Premises by the HVAC systems of the Building is affected as a result of (i) any
lights, machines or equipment used by Tenant in the Premises, or (ii) the
occupancy of the Premises by more than one person per
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<PAGE>
150 square feet of rentable area, then Landlord shall have the right to install
any machinery or equipment reasonably necessary to restore the temperature,
including modifications to the standard air-conditioning equipment. The cost of
any such equipment and modifications, including the cost of installation and any
additional cost of operation and maintenance of the same, shall be paid by
Tenant to Landlord upon demand.
(c) If Tenant's usage of electricity, water or any other utility
service exceeds the use of such utility Landlord determines to be typical,
normal and customary for the Building, Landlord may determine the amount of such
excess use by any reasonable means (including the installation at Landlord's
request but at Tenant's expense of a separate meter or other measuring device)
and charge Tenant for the cost of such excess usage. In addition, Landlord may
impose a reasonable charge for the use of any additional or unusual janitorial
services required by Tenant because of any unusual Tenant Improvements or
Alterations, the carelessness of Tenant or the nature of Tenant's business
(including hours of operation).
9.3 Interruption of Services. In the event of an interruption in or
------------------------
failure or inability to provide any services or utilities to the Premises or
Building for any reason (a "Service Failure"), such Service Failure shall not,
regardless of its duration, impose upon Landlord any liability whatsoever,
constitute an eviction of Tenant, constructive or otherwise, entitle Tenant to
an abatement of rent or to terminate this Lease or otherwise release Tenant from
any of Tenant's obligations under this Lease. Tenant hereby waives any benefits
of any applicable existing or future Law, including the provisions of California
Civil Code Section 1932(1), permitting the termination of this Lease due to such
interruption, failure or inability.
10. EXCULPATION AND INDEMNIFICATION.
10.1 Landlord's Indemnification of Tenant. Landlord shall indemnify,
------------------------------------
protect, defend and hold Tenant harmless from and against any claims, actions,
liabilities, damages, costs or expenses, including reasonable attorneys' fees
and costs incurred in defending against the same ("Claims") asserted by any
third party against Tenant for loss, injury or damage, to the extent such loss,
injury or damage is caused by the willful misconduct or negligent acts or
omissions of Landlord or its authorized representatives.
10.2 Tenant's Indemnification of Landlord. Tenant shall indemnify,
------------------------------------
protect, defend and hold Landlord and Landlord's authorized representatives
harmless from and against Claims arising from (a) the acts or omissions of
Tenant or Tenant's Representatives or Visitors in or about the Property, or (b)
any construction or other work undertaken by Tenant on the Premises (including
any design defects), or (c) any breach or default under this Lease by Tenant, or
(d) any loss, injury or damage, howsoever and by whomsoever caused, to any
person or property, occurring in or about the Premises during the Term,
excepting only Claims described in this clause (d) to the extent they are caused
by the willful misconduct or negligent acts or omissions of Landlord or its
authorized representatives.
10.3 Damage to Tenant and Tenant's Property. Landlord shall not be liable
--------------------------------------
to Tenant for any loss, injury or other damage to Tenant or to Tenant's property
in or about the Premises or the Property from any cause (including defects in
the Property or in any equipment in the Property;
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<PAGE>
fire, explosion or other casualty; bursting, rupture, leakage or overflow of any
plumbing or other pipes or lines, sprinklers, tanks, drains, drinking fountains
or washstands in, above, or about the Premises or the Property; or acts of other
tenants in the Property). Tenant hereby waives all claims against Landlord for
any such loss, injury or damage and the cost and expense of defending against
claims relating thereto, including any loss, injury or damage caused by
Landlord's negligence (active or passive) or willful misconduct. Notwithstanding
any other provision of this Lease to the contrary, in no event shall Landlord be
liable to Tenant for any punitive or consequential damages or damages for loss
of business by Tenant.
10.4 Survival. The obligations of the parties under this Section 10 shall
--------
survive the expiration or termination of this Lease.
11. INSURANCE.
11.1 Tenant's Insurance.
------------------
(a) Liability Insurance. Tenant shall maintain in full force
-------------------
throughout the Term, commercial general liability insurance providing coverage
on an occurrence form basis with limits of not less than Two Million Dollars
($2,000,000.00) each occurrence for bodily injury and property damage combined,
Two Million Dollars ($2,000,000.00) annual general aggregate, and Two Million
Dollars ($2,000,000.00) products and completed operations annual aggregate.
Tenant's liability insurance policy or policies shall: (i) include premises and
operations liability coverage, products and completed operations liability
coverage, broad form property damage coverage including completed operations,
blanket contractual liability coverage including, to the maximum extent
possible, coverage for the indemnification obligations of Tenant under this
Lease, and personal and advertising injury coverage; (ii) provide that the
insurance company has the duty to defend all insureds under the policy; (iii)
provide that defense costs are paid in addition to and do not deplete any of the
policy limits; (iv) cover liabilities arising out of or incurred in connection
with Tenant's use or occupancy of the Premises or the Property; (v) extend
coverage to cover liability for the actions of Tenant's Representatives and
Visitors; and (vi) designate separate limits for the Property. Each policy of
liability insurance required by this Section shall: (i) contain a cross
liability endorsement or separation of insureds clause; (ii) provide that any
waiver of subrogation rights or release prior to a loss does not void coverage;
(iii) provide that it is primary to and not contributing with, any policy of
insurance carried by Landlord covering the same loss; (iv) provide that any
failure to comply with the reporting provisions shall not affect coverage
provided to Landlord, its partners, property managers and Mortgagees; and (v)
name Landlord, its partners, the Property Manager identified in the Basic Lease
Information (the "Property Manager"), and such other parties in interest as
Landlord may from time to time reasonably designate to Tenant in writing, as
additional insureds. Such additional insureds shall be provided at least the
same extent of coverage as is provided to Tenant under such policies. All
endorsements effecting such additional insured status shall be at least as broad
as additional insured endorsement form number CG 20 11 11 85 promulgated by the
Insurance Services Office.
(b) Property Insurance. Tenant shall at all times maintain in
------------------
effect with respect to any Alterations and Tenant's Trade Fixtures and personal
property, commercial property insurance providing coverage, on an "all risk" or
"special form" basis, in an amount equal to at least
-14-
<PAGE>
90% of the full replacement cost of the covered property. Tenant may carry such
insurance under a blanket policy, provided that such policy provides coverage
equivalent to a separate policy. During the Term, the proceeds from any such
policies of insurance shall be used for the repair or replacement of the
Alterations, Trade Fixtures and personal property so insured. Landlord shall be
provided coverage under such insurance to the extent of its insurable interest
and, if requested by Landlord, both Landlord and Tenant shall sign all documents
reasonably necessary or proper in connection with the settlement of any claim or
loss under such insurance. Landlord will have no obligation to carry insurance
on any Alterations or on Tenant's Trade Fixtures or personal property.
(c) Requirements For All Policies. Each policy of insurance
-----------------------------
required under this Section 11.1 shall: (i) be in a form, and written by an
insurer, reasonably acceptable to Landlord, (ii) be maintained at Tenant's sole
cost and expense, and (iii) require at least thirty (30) days' written notice to
Landlord prior to any cancellation, nonrenewal or modification of insurance
coverage. Insurance companies issuing such policies shall have rating
classifications of "A" or better and financial size category ratings of "VII" or
better according to the latest edition of the A.M. Best Key Rating Guide. All
insurance companies issuing such policies shall be admitted carriers licensed to
do business in the state where the Property is located. Any deductible amount
under such insurance shall not exceed $5,000. Tenant shall provide to Landlord,
upon request, evidence that the insurance required to be carried by Tenant
pursuant to this Section, including any endorsement effecting the additional
insured status, is in full force and effect and that premiums therefor have been
paid.
(d) Updating Coverage. Tenant shall increase the amounts of
-----------------
insurance as required by any Mortgagee, and, not more frequently than once every
three (3) years, as recommended by Landlord's insurance broker, if, in the
opinion of either of them, the amount of insurance then required under this
Lease is not adequate. Any limits set forth in this Lease on the amount or type
of coverage required by Tenant's insurance shall not limit the liability of
Tenant under this Lease.
(e) Certificates of Insurance. Prior to occupancy of the Premises
-------------------------
by Tenant, and not less than thirty (30) days prior to expiration of any policy
thereafter, Tenant shall furnish to Landlord a certificate of insurance
reflecting that the insurance required by this Section is in force, accompanied
by an endorsement showing the required additional insureds satisfactory to
Landlord in substance and form. Notwithstanding the requirements of this
paragraph, Tenant shall at Landlord's request provide to Landlord a certified
copy of each insurance policy required to be in force at any time pursuant to
the requirements of this Lease or its Exhibits.
11.2 Landlord's Insurance. During the Term, to the extent such coverages
--------------------
are available at a commercially reasonable cost, Landlord shall maintain in
effect insurance on the Building with responsible insurers, on an "all risk" or
"special form" basis, insuring the Building and the Tenant Improvements in an
amount equal to at least 90% of the replacement cost thereof, excluding land,
foundations, footings and underground installations. Landlord may, but shall not
be obligated to, carry insurance against additional perils and/or in greater
amounts.
11.3 Mutual Waiver of Right of Recovery & Waiver of Subrogation. Landlord
----------------------------------------------------------
and Tenant each hereby waive any right of recovery against each other and the
partners, managers,
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<PAGE>
members, shareholders, officers, directors and authorized representatives of
each other for any loss or damage that is covered by any policy of property
insurance maintained by either party (or required by this Lease to be
maintained) with respect to the Premises or the Property or any operation
therein, regardless of cause, including negligence (active or passive) of the
party benefiting from the waiver. If any such policy of insurance relating to
this Lease or to the Premises or the Property does not permit the foregoing
waiver or if the coverage under any such policy would be invalidated as a result
of such waiver, the party maintaining such policy shall obtain from the insurer
under such policy a waiver of all right of recovery by way of subrogation
against either party in connection with any claim, loss or damage covered by
such policy.
12. DAMAGE OR DESTRUCTION.
12.1 Landlord's Duty to Repair.
-------------------------
(a) If all or a substantial part of the Premises are rendered
untenantable or inaccessible by damage to all or any part of the Property from
fire or other casualty then, unless either party is entitled to and elects to
terminate this Lease pursuant to Sections 12.2 - LANDLORD'S RIGHT TO TERMINATE
and 12.3 - TENANT'S RIGHT TO TERMINATE, Landlord shall, at its expense, use
reasonable efforts to repair and restore the Premises and/or the Property, as
the case may be, to substantially their former condition to the extent permitted
by then applicable Laws; provided, however, that in no event shall Landlord have
any obligation for repair or restoration beyond the extent of insurance proceeds
received by Landlord for such repair or restoration, or for any of Tenant's
personal property, Trade Fixtures or Alterations.
(b) If Landlord is required or elects to repair damage to the
Premises and/or the Property, this Lease shall continue in effect, but Tenant's
Base Rent and Additional Rent shall be abated with regard to any portion of the
Premises that Tenant is prevented from using by reason of such damage or its
repair from the date of the casualty until substantial completion of Landlord's
repair of the affected portion of the Premises as required under this Lease. In
no event shall Landlord be liable to Tenant by reason of any injury to or
interference with Tenant's business or property arising from fire or other
casualty or by reason of any repairs to any part of the Property necessitated by
such casualty.
12.2 Landlord's Right to Terminate. Landlord may elect to terminate this
-----------------------------
Lease following damage by fire or other casualty under the following
circumstances:
(a) If, in the reasonable judgment of Landlord, the Premises and
the Property cannot be substantially repaired and restored under applicable Laws
within one (1) year from the date of the casualty;
(b) If, in the reasonable judgment of Landlord, adequate proceeds
are not, for any reason, made available to Landlord from Landlord's insurance
policies (and/or from Landlord's funds made available for such purpose, at
Landlord's sole option) to make the required repairs;
(c) If the Building is damaged or destroyed to the extent that, in
the reasonable judgment of Landlord, the cost to repair and restore the Building
would exceed twenty-five percent
-16-
<PAGE>
(25%) of the full replacement cost of the Building, whether or not the Premises
are at all damaged or destroyed; or
(d) If the fire or other casualty occurs during the last year of
the Term.
If any of the circumstances described in subparagraphs (a), (b), (c) or (d) of
this Section 12.2 occur or arise, Landlord shall give Tenant notice within one
hundred and twenty (120) days after the date of the casualty, specifying whether
Landlord elects to terminate this Lease as provided above and, if not,
Landlord's estimate of the time required to complete Landlord's repair
obligations under this Lease.
12.3 Tenant's Right to Terminate. If all or a substantial part of the
---------------------------
Premises are rendered untenantable or inaccessible by damage to all or any part
of the Property from fire or other casualty, and Landlord does not elect to
terminate as provided above, then Tenant may elect to terminate this Lease if
Landlord's estimate of the time required to complete Landlord's repair
obligations under this Lease is greater than one (1) year, in which event Tenant
may elect to terminate this Lease by giving Landlord notice of such election to
terminate within thirty (30) days after Landlord's notice to Tenant pursuant to
Section 12.2 - LANDLORD'S RIGHT TO TERMINATE.
12.4 Waiver. Landlord and Tenant each hereby waive the provisions of
California Civil Code Sections 1932(2), 1933(4) and any other applicable
existing or future Law permitting the termination of a lease agreement in the
event of damage or destruction under any circumstances other than as provided in
Sections 12.2 -LANDLORD'S RIGHT TO TERMINATE and 12.3 - TENANT'S RIGHT TO
TERMINATE.
13. CONDEMNATION.
13.1 Definitions.
-----------
(a) "Award" shall mean all compensation, sums, or anything of
value awarded, paid or received on a total or partial Condemnation.
(b) "Condemnation" shall mean (i) a permanent taking (or a
temporary taking for a period extending beyond the end of the Term) pursuant to
the exercise of the power of condemnation or eminent domain by any public or
quasi-public authority, private corporation or individual having such power
("Condemnor"), whether by legal proceedings or otherwise, or (ii) a voluntary
sale or transfer by Landlord to any such authority, either under threat of
condemnation or while legal proceedings for condemnation are pending.
(c) "Date of Condemnation" shall mean the earlier of the date that
title to the property taken is vested in the Condemnor or the date the Condemnor
has the right to possession of the property being condemned.
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13.2 Effect on Lease.
---------------
(a) If the Premises are totally taken by Condemnation, this Lease
shall terminate as of the Date of Condemnation. If a portion but not all of the
Premises is taken by Condemnation, this Lease shall remain in effect; provided,
however, that if the portion of the Premises remaining after the Condemnation
will be unsuitable for Tenant's continued use, then upon notice to Landlord
within thirty (30) days after Landlord notifies Tenant of the Condemnation,
Tenant may terminate this Lease effective as of the Date of Condemnation.
(b) If twenty-five percent (25%) or more of the Project or of the
parcel(s) of land on which the Building is situated or of the Parking Facility
or of the floor area in the Building is taken by Condemnation, or if as a result
of any Condemnation the Building is no longer reasonably suitable for use as an
office building, whether or not any portion of the Premises is taken, Landlord
may elect to terminate this Lease, effective as of the Date of Condemnation, by
notice to Tenant within thirty (30) days after the Date of Condemnation.
(c) If all or a portion of the Premises is temporarily taken by a
Condemnor for a period not extending beyond the end of the Term, this Lease
shall remain in full force and effect.
13.3 Restoration. If this Lease is not terminated as provided in Section
-----------
13.2 - EFFECT ON LEASE, Landlord, at its expense, shall diligently proceed to
repair and restore the Premises to substantially its former condition (to the
extent permitted by then applicable Laws) and/or repair and restore the Building
to an architecturally complete office building; provided, however, that
Landlord's obligations to so repair and restore shall be limited to the amount
of any Award received by Landlord and not required to be paid to any Mortgagee
(as defined in Section 20.2 below). In no event shall Landlord have any
obligation to repair or replace any improvements in the Premises beyond the
amount of any Award received by Landlord for such repair or to repair or replace
any of Tenant's personal property, Trade Fixtures, or Alterations.
13.4 Abatement and Reduction of Rent. If any portion of the Premises is
-------------------------------
taken in a Condemnation or is rendered permanently untenantable by repairs
necessitated by the Condemnation, and this Lease is not terminated, the Base
Rent and Additional Rent payable under this Lease shall be proportionally
reduced as of the Date of Condemnation based upon the percentage of rentable
square feet in the Premises so taken or rendered permanently untenantable. In
addition, if this Lease remains in effect following a Condemnation and Landlord
proceeds to repair and restore the Premises, the Base Rent and Additional Rent
payable under this Lease shall be abated during the period of such repair or
restoration to the extent such repairs prevent Tenant's use of the Premises.
13.5 Awards. Any Award made shall be paid to Landlord, and Tenant hereby
------
assigns to Landlord, and waives all interest in or claim to, any such Award,
including any claim for the value of the unexpired Term; provided, however, that
Tenant shall be entitled to receive, or to prosecute a separate claim for, an
Award for a temporary taking of the Premises or a portion thereof by a Condemnor
where this Lease is not terminated (to the extent such Award relates to the
unexpired Term), or an Award or portion thereof separately designated for
relocation expenses or the
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interruption of or damage to Tenant's business or as compensation for Tenant's
personal property, Trade Fixtures or Alterations.
13.6 Waiver. Landlord and Tenant each hereby waive the provisions of
------
California Code of Civil Procedure Section 1265.130 and any other applicable
existing or future Law allowing either party to petition for a termination of
this Lease upon a partial taking of the Premises and/or the Property.
14. ASSIGNMENT AND SUBLETTING.
14.1 Landlord's Consent Required. Tenant shall not assign this Lease or
---------------------------
any interest therein, or sublet or license or permit the use or occupancy of the
Premises or any part thereof by or for the benefit of anyone other than Tenant,
or in any other manner transfer all or any part of Tenant's interest under this
Lease (each and all a "Transfer"), without the prior written consent of
Landlord, which consent (subject to the other provisions of this Section 14)
shall not be unreasonably withheld.
14.2 Reasonable Consent.
------------------
(a) Prior to any proposed Transfer, Tenant shall submit in writing
to Landlord (i) the name and legal composition of the proposed assignee,
subtenant, user or other transferee (each a "Proposed Transferee"); (ii) the
nature of the business proposed to be carried on in the Premises; (iii) a
current balance sheet, income statements for the last two years and such other
reasonable financial and other information concerning the Proposed Transferee as
Landlord may request; and (iv) a copy of the proposed assignment, sublease or
other agreement governing the proposed Transfer. Within seven (7) Business Days
after Landlord receives all such information it shall notify Tenant whether it
approves or disapproves such Transfer or if it elects to proceed under Section
14.7 - LANDLORD'S RIGHT TO SPACE.
(b) Tenant acknowledges and agrees that, among other circumstances
for which Landlord could reasonable withhold consent to a proposed Transfer, it
shall be reasonable for Landlord to withhold consent where (i) the Proposed
Transferee does not intend itself to occupy the entire portion of the Premises
assigned or sublet, (ii) Landlord reasonably disapproves of the Proposed
Transferee's business operating ability or history, reputation or
creditworthiness or the character of the business to be conducted by the
Proposed Transferee at the Premises, (iii) or (vi) Landlord otherwise determines
that the proposed Transfer would have the effect of decreasing the value of the
Building or increasing the expenses associated with operating, maintaining and
repairing the
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Property. In no event may Tenant publicly offer or advertise all or any portion
of the Premises for assignment or sublease at a rental less than that then
sought by Landlord for a direct lease (non-sublease) of comparable space in the
Project. Landlord agrees that during the initial Term of the Lease, Landlord may
not withhold consent to a Proposed Transferee solely based on the fact that such
Proposed Transferee is an existing tenant in the Project.
14.3 Excess Consideration. If Landlord consents to the Transfer, Tenant
--------------------
shall pay to Landlord as additional rent, within ten (10) days after receipt by
Tenant, any consideration paid by any transferee (the "Transferee") for the
Transfer, including, in the case of a sublease, the excess of the rent and other
consideration payable by the subtenant over the amount of Base Rent and
Additional Rent payable hereunder applicable to the subleased space.
14.4 No Release Of Tenant. No consent by Landlord to any Transfer shall
--------------------
relieve Tenant of any obligation to be performed by Tenant under this Lease,
whether occurring before or after such consent, assignment, subletting or other
Transfer. Each Transferee shall be jointly and severally liable with Tenant (and
Tenant shall be jointly and severally liable with each Transferee) for the
payment of rent (or, in the case of a sublease, rent in the amount set forth in
the sublease) and for the performance of all other terms and provisions of this
Lease. The consent by Landlord to any Transfer shall not relieve Tenant or any
such Transferee from the obligation to obtain Landlord's express prior written
consent to any subsequent Transfer by Tenant or any Transferee. The acceptance
of rent by Landlord from any other person (whether or not such person is an
occupant of the Premises) shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any Transfer.
14.5 Expenses and Attorneys' Fees. Tenant shall pay to Landlord on demand
----------------------------
all costs and expenses (including reasonable attorneys' fees) incurred by
Landlord in connection with reviewing or consenting to any proposed Transfer
(including any request for consent to, or any waiver of Landlord's rights in
connection with, any security interest in any of Tenant's property at the
Premises).
14.6 Effectiveness of Transfer. Prior to the date on which any permitted
-------------------------
Transfer (whether or not requiring Landlord's consent) becomes effective, Tenant
shall deliver to Landlord a counterpart of the fully executed Transfer document
and Landlord's standard form of Consent to Assignment or Consent to Sublease
executed by Tenant and the Transferee in which each of Tenant and the Transferee
confirms its obligations pursuant to this Lease. Failure or refusal of a
Transferee to execute any such instrument shall not release or discharge the
Transferee from liability as provided herein. The voluntary, involuntary or
other surrender of this Lease by Tenant, or a mutual cancellation by Landlord
and Tenant, shall not work a merger, and any such surrender or cancellation
shall, at the option of Landlord, either terminate all or any existing subleases
or operate as an assignment to Landlord of any or all of such subleases.
14.7 Landlord's Right to Space. Notwithstanding any of the above
-------------------------
provisions of this Section to the contrary, if Tenant notifies Landlord that it
desires to enter into a Transfer, Landlord, in lieu of consenting to such
Transfer, may elect (x) in the case of an assignment or a sublease of the entire
Premises, to terminate this Lease, or (y) in the case of a sublease of less than
the entire Premises, to terminate this Lease as it relates to the space proposed
to be subleased by Tenant. In
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such event, this Lease will terminate (or the space proposed to be subleased
will be removed from the Premises subject to this Lease and the Base Rent and
Tenant's Share under this Lease shall be proportionately reduced) on the earlier
of sixty (60) days after the date of Landlord's notice to Tenant making the
election set forth in this Section 14.7 or the date the Transfer was proposed to
be effective, and Landlord may lease such space to any party, including the
prospective Transferee identified by Tenant.
14.8 Assignment of Sublease Rents. Tenant hereby absolutely and
----------------------------
irrevocably assigns to Landlord any and all rights to receive rent and other
consideration from any sublease and agrees that Landlord, Tenant for purposes
hereof, or a receiver for Tenant appointed on Landlord's application may (but
shall not be obligated to) collect such rents and other consideration and apply
the same toward Tenant's obligations to Landlord under this Lease; provided,
however, that Landlord grants to Tenant at all times prior to occurrence of any
breach or default by Tenant a revocable license to collect such rents (which
license shall automatically and without notice be and be deemed to have been
revoked and terminated immediately upon any Event of Default).
15. DEFAULT AND REMEDIES.
15.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" by Tenant:
(a) Tenant fails to make any payment of rent when due, or any
amount required to replenish the security deposit as provided in Section 4
above, if payment in full is not received by Landlord within three (3) days
after written notice that it is due.
(b) Tenant abandons the Premises.
(c) Tenant fails timely to deliver any subordination document,
estoppel certificate or financial statement requested by Landlord within the
applicable time period specified in Sections 20 - ENCUMBRANCES - and 21 -
ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS - below.
(d) Tenant violates the restrictions on Transfer set forth in
Section 14 - ASSIGNMENT AND SUBLETTING.
(e) Tenant ceases doing business as a going concern; makes an
assignment for the benefit of creditors; is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of a petition)
seeking relief under any state or federal bankruptcy or other statute, law or
regulation affecting creditors' rights; all or substantially all of Tenant's
assets are subject to judicial seizure or attachment and are not released within
30 days, or Tenant consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for Tenant or for all or any substantial part of Tenant's
assets.
(f) Tenant fails, within ninety (90) days after the commencement of
any proceedings against Tenant seeking relief under any state or federal
bankruptcy or other statute, law or regulation affecting creditors' rights, to
have such proceedings dismissed, or Tenant fails, within
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ninety (90) days after an appointment, without Tenant's consent or acquiescence,
of any trustee, receiver or liquidator for Tenant or for all or any substantial
part of Tenant's assets, to have such appointment vacated.
(g) Tenant fails to perform or comply with any provision of this Lease
other than those described in (a) through (f) above, and does not fully cure
such failure within fifteen (15) days after notice to Tenant or, if such failure
cannot be cured within such fifteen (15)-day period, Tenant fails within such
fifteen (15)-day period to commence, and thereafter diligently proceed with, all
actions necessary to cure such failure as soon as reasonably possible but in all
events within ninety (90) days of such notice; provided, however, that if
Landlord in Landlord's reasonable judgment determines that such failure cannot
or will not be cured by Tenant within such ninety (90) days, then such failure
shall constitute an Event of Default immediately upon such notice to Tenant.
15.2 Remedies. Upon the occurrence of an Event of Default, Landlord shall
--------
have the following remedies, which shall not be exclusive but shall be
cumulative and shall be in addition to any other remedies now or hereafter
allowed by law:
(a) Landlord may terminate Tenant's right to possession of the
Premises at any time by written notice to Tenant. Tenant expressly acknowledges
that in the absence of such written notice from Landlord, no other act of
Landlord, including re-entry into the Premises, efforts to relet the Premises,
reletting of the Premises for Tenant's account, storage of Tenant's personal
property and Trade Fixtures, acceptance of keys to the Premises from Tenant or
exercise of any other rights and remedies under this Section, shall constitute
an acceptance of Tenant's surrender of the Premises or constitute a termination
of this Lease or of Tenant's right to possession of the Premises. Upon such
termination in writing of Tenant's right to possession of the Premises, as
herein provided, this Lease shall terminate and Landlord shall be entitled to
recover damages from Tenant as provided in California Civil Code Section 1951.2
and any other applicable existing or future Law providing for recovery of
damages for such breach, including the worth at the time of award of the amount
by which the rent which would be payable by Tenant hereunder for the remainder
of the Term after the date of the award of damages, including Additional Rent as
reasonably estimated by Landlord, exceeds the amount of such rental loss as
Tenant proves could have been reasonably avoided, discounted at the discount
rate published by the Federal Reserve Bank of San Francisco for member banks at
the time of the award plus one percent (1%).
(b) Landlord shall have the remedy described in California Civil Code
Section 1951.4 (Landlord may continue this Lease in effect after Tenant's breach
and abandonment and recover rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations).
(c) Landlord may cure the Event of Default at Tenant's expense. If
Landlord pays any sum or incurs any expense in curing the Event of Default,
Tenant shall reimburse Landlord upon demand for the amount of such payment or
expense with interest at the Interest Rate from the date the sum is paid or the
expense is incurred until Landlord is reimbursed by Tenant.
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(d) Landlord may remove all Tenant's property from the Premises, and
such property may be stored by Landlord in a public warehouse or elsewhere at
the sole cost and for the account of Tenant. If Landlord does not elect to store
any or all of Tenant's property left in the Premises, Landlord may consider such
property to be abandoned by Tenant, and Landlord may thereupon dispose of such
property in any manner deemed appropriate by Landlord. Any proceeds realized by
Landlord on the disposal of any such property shall be applied first to offset
all expenses of storage and sale, then credited against Tenant's outstanding
obligations to Landlord under this Lease, and any balance remaining after
satisfaction of all obligations of Tenant under this Lease shall be delivered to
Tenant.
16. LATE CHARGE AND INTEREST.
16.1 Late Charge. If any payment of rent is not received by Landlord when
-----------
due, Tenant shall pay to Landlord on demand as a late charge an additional
amount equal to four percent (4%) of the overdue payment. A late charge shall
not be imposed more than once on any particular installment not paid when due,
but imposition of a late charge on any payment not made when due does not
eliminate or supersede late charges imposed on other (prior) payments not made
when due or preclude imposition of a late charge on other installments or
payments not made when due.
16.2 Interest. In addition to the late charges referred to above, which are
--------
intended to defray Landlord's costs resulting from late payments, any payment
from Tenant to Landlord not paid when due shall at Landlord's option bear
interest from the date due until paid to Landlord by Tenant at the rate of
fifteen percent (15%) per annum or the maximum lawful rate that Landlord may
charge to Tenant under applicable laws, whichever is less (the "Interest Rate").
Acceptance of any late charge and/or interest shall not constitute a waiver of
Tenant's default with respect to the overdue sum or prevent Landlord from
exercising any of its other rights and remedies under this Lease.
17. WAIVER. No provisions of this Lease shall be deemed waived by Landlord
unless such waiver is in a writing signed by Landlord. The waiver by Landlord of
any breach of any provision of this Lease shall not be deemed a waiver of such
provision or of any subsequent breach of the same or any other provision of this
Lease. No delay or omission in the exercise of any right or remedy of Landlord
upon any default by Tenant shall impair such right or remedy or be construed as
a waiver. Landlord's acceptance of any payments of rent due under this Lease
shall not be deemed a waiver of any default by Tenant under this Lease
(including Tenant's recurrent failure to timely pay rent) other than Tenant's
nonpayment of the accepted sums, and no endorsement or statement on any check or
payment or in any letter or document accompanying any check or payment shall be
deemed an accord and satisfaction. Landlord's consent to or approval of any act
by Tenant requiring Landlord's consent or approval shall not be deemed to waive
or render unnecessary Landlord's consent to or approval of any subsequent act by
Tenant.
18. ENTRY, INSPECTION AND CLOSURE. Upon reasonable oral or written notice to
Tenant (and without notice in emergencies), Landlord and its authorized
representatives may enter the Premises at all reasonable times to: (a) determine
whether the Premises are in good condition, (b) determine whether Tenant is
complying with its obligations under this Lease, (c) perform any maintenance or
repair of the Premises or the Building that Landlord has the right or obligation
to
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perform, (d) install or repair improvements for other tenants where access to
the Premises is required for such installation or repair, (e) serve, post or
keep posted any notices required or allowed under the provisions of this Lease,
(f) show the Premises to prospective brokers, agents, buyers, transferees,
Mortgagees or tenants, or (g) do any other act or thing necessary for the safety
or preservation of the Premises or the Building. When reasonably necessary
Landlord may temporarily close entrances, doors, corridors, elevators or other
facilities in the Building without liability to Tenant by reason of such
closure. Landlord shall conduct its activities under this Section in a manner
that will minimize inconvenience to Tenant without incurring additional expense
to Landlord. In no event shall Tenant be entitled to an abatement of rent on
account of any entry by Landlord, and Landlord shall not be liable in any manner
for any inconvenience, loss of business or other damage to Tenant or other
persons arising out of Landlord's entry on the Premises in accordance with this
Section. No action by Landlord pursuant to this paragraph shall constitute an
eviction of Tenant, constructive or otherwise, entitle Tenant to an abatement of
rent or to terminate this Lease or otherwise release Tenant from any of Tenant's
obligations under this Lease.
19. SURRENDER AND HOLDING OVER.
19.1 Surrender. Upon the expiration or termination of this Lease, Tenant
---------
shall surrender the Premises and all Tenant Improvements and Alterations to
Landlord broom-clean and in their original condition, except for reasonable wear
and tear, damage from casualty or condemnation and any changes resulting from
approved Alterations; provided, however, that prior to the expiration or
termination of this Lease Tenant shall remove all telephone and other cabling
installed in the Building by Tenant and remove from the Premises all Tenant's
personal property and any Trade Fixtures and all Alterations that Landlord has
elected to require Tenant to remove as provided in Section 6.1 - TENANT
IMPROVEMENTS & ALTERATIONS, and repair any damage caused by such removal. If
such removal is not completed before the expiration or termination of the Term,
Landlord shall have the right (but no obligation) to remove the same, and Tenant
shall pay Landlord on demand for all costs of removal and storage thereof and
for the rental value of the Premises for the period from the end of the Term
through the end of the time reasonably required for such removal. Landlord shall
also have the right to retain or dispose of all or any portion of such property
if Tenant does not pay all such costs and retrieve the property within ten (10)
days after notice from Landlord (in which event title to all such property
described in Landlord's notice shall be transferred to and vest in Landlord).
Tenant waives all Claims against Landlord for any damage or loss to Tenant
resulting from Landlord's removal, storage, retention, or disposition of any
such property. Upon expiration or termination of this Lease or of Tenant's
possession, whichever is earliest, Tenant shall surrender all keys to the
Premises or any other part of the Building and shall deliver to Landlord all
keys for or make known to Landlord the combination of locks on all safes,
cabinets and vaults that may be located in the Premises. Tenant's obligations
under this Section shall survive the expiration or termination of this Lease.
19.2 Holding Over. If Tenant (directly or through any Transferee or other
------------
successor-in-interest of Tenant) remains in possession of the Premises after the
expiration or termination of this Lease, Tenant's continued possession shall be
on the basis of a tenancy at the sufferance of Landlord. No act or omission by
Landlord, other than its specific written consent, shall constitute permission
for Tenant to continue in possession of the Premises, and if such consent is
given or declared to have been given by a court judgment, Landlord may terminate
Tenant's holdover
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tenancy at any time upon seven (7) days written notice. In such event, Tenant
shall continue to comply with or perform all the terms and obligations of Tenant
under this Lease, except that the monthly Base Rent during Tenant's holding over
shall be twice the Base Rent Payable in the last full month prior to the
termination hereof. Acceptance by Landlord of rent after such termination shall
not constitute a renewal or extension of this Lease; and nothing contained in
this provision Tenant shall indemnify, defend and hold Landlord harmless from
and against all Claims arising or resulting directly or indirectly from Tenant's
failure to timely surrender the Premises, including (i) any rent payable by or
any loss, cost, or damages claimed by any prospective tenant of the Premises,
and (ii) Landlord's damages as a result of such prospective tenant rescinding or
refusing to enter into the prospective lease of the Premises by reason of such
failure to timely surrender the Premises.
20. ENCUMBRANCES.
20.1 Subordination. This Lease is expressly made subject and subordinate
-------------
to any mortgage, deed of trust, ground lease, underlying lease or like
encumbrance affecting any part of the Property or any interest of Landlord
therein which is now existing or hereafter executed or recorded ("Encumbrance");
provided, however, that such subordination shall only be effective, as to future
Encumbrances, if the holder of the Encumbrance agrees that this Lease shall
survive the termination of the Encumbrance by lapse of time, foreclosure or
otherwise so long as Tenant is not in default under this Lease. Provided the
conditions of the preceding sentence are satisfied, Tenant shall execute and
deliver to Landlord, within ten (10) days after written request therefor by
Landlord and in a form reasonably requested by Landlord, any additional
documents evidencing the subordination of this Lease with respect to any such
Encumbrance and the nondisturbance agreement of the holder of any such
Encumbrance. If the interest of Landlord in the Property is transferred pursuant
to or in lieu of proceedings for enforcement of any Encumbrance, Tenant shall
immediately and automatically attorn to the new owner, and this Lease shall
continue in full force and effect as a direct lease between the transferee and
Tenant on the terms and conditions set forth in this Lease.
20.2 Mortgagee Protection. Tenant agrees to give any holder of any
--------------------
Encumbrance covering any part of the Property ("Mortgagee"), by registered mail,
a copy of any notice of default served upon Landlord, provided that prior to
such notice Tenant has been notified in writing (by way of notice of assignment
of rents and leases, or otherwise) of the address of such Mortgagee. If Landlord
shall have failed to cure such default within thirty (30) days from the
effective date of such notice of default, then the Mortgagee shall have an
additional thirty (30) days within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
to cure such default (including the time necessary to foreclose or otherwise
terminate its Encumbrance, if necessary to effect such cure), and this Lease
shall not be terminated so long as such remedies are being diligently pursued.
21. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS.
21.1 Estoppel Certificates. Within ten (10) days after written request
---------------------
therefor, Tenant shall execute and deliver to Landlord, in a form provided by or
satisfactory to Landlord, a
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certificate stating that this Lease is in full force and effect, describing any
amendments or modifications hereto, acknowledging that this Lease is subordinate
or prior, as the case may be, to any Encumbrance and stating any other
information Landlord may reasonably request, including the Term, the monthly
Base Rent, the date to which Rent has been paid, the amount of any security
deposit or prepaid rent, whether either party hereto is in default under the
terms of the Lease, and whether Landlord has completed its construction
obligations hereunder (if any). Tenant irrevocably constitutes, appoints and
authorizes Landlord as Tenant's special attorney-in-fact for such purpose to
complete, execute and deliver such certificate if Tenant fails timely to execute
and deliver such certificate as provided above. Any person or entity purchasing,
acquiring an interest in or extending financing with respect to the Property
shall be entitled to rely upon any such certificate. If Tenant fails to deliver
such certificate within ten (10) days after Landlord's second written request
therefor, Tenant shall be liable to Landlord for any damages incurred by
Landlord including any profits or other benefits from any financing of the
Property or any interest therein which are lost or made unavailable as a result,
directly or indirectly, of Tenant's failure or refusal to timely execute or
deliver such estoppel certificate.
21.2 Financial Statements. Within ten (10) days after written request
--------------------
therefor, but not more than once a year, Tenant shall deliver to Landlord a copy
of the financial statements (including at least a year end balance sheet and a
statement of profit and loss) of Tenant (and of each guarantor of Tenant's
obligations under this Lease) for each of the three most recently completed
years, prepared in accordance with generally accepted accounting principles
(and, if such is Tenant's normal practice, audited by an independent certified
public accountant), all then available subsequent interim statements, and such
other financial information as may reasonably be requested by Landlord or
required by any Mortgagee.
22. NOTICES. Any notice, demand, request, consent or approval that either party
desires or is required to give to the other party under this Lease shall be in
writing and shall be served personally, delivered by messenger or courier
service, or sent by U.S. certified mail, return receipt requested, postage
prepaid, addressed to the other party at the party's address for notices set
forth in the Basic Lease Information. Any notice required pursuant to any Laws
may be incorporated into, given concurrently with or given separately from any
notice required under this Lease. Notices shall be deemed to have been given and
be effective on the earlier of (a) receipt (or refusal of delivery or receipt);
or (b) one (1) day after acceptance by the independent service for delivery, if
sent by independent messenger or courier service, or three (3) days after
mailing if sent by mail in accordance with this Section. Either party may change
its address for notices hereunder, effective fifteen (15) days after notice to
the other party complying with this Section. If Tenant sublets the Premises,
notices from Landlord shall be effective on the subtenant when given to Tenant
pursuant to this Section.
23. ATTORNEYS' FEES. In the event of any dispute between Landlord and Tenant in
any way related to this Lease, and whether involving contract and/or tort
claims, the non-prevailing party shall pay to the prevailing party all
reasonable attorneys' fees and costs and expenses of any type, without
restriction by statute, court rule or otherwise, incurred by the prevailing
party in connection with any action or proceeding (including any appeal and the
enforcement of any judgment or award), whether or not the dispute is litigated
or prosecuted to final judgment (collectively, "Fees"). The "prevailing party"
shall be determined based upon an assessment
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of which party's major arguments or positions taken in the action or proceeding
could fairly be said to have prevailed (whether by compromise, settlement,
abandonment by the other party of its claim or defense, final decision, after
any appeals, or otherwise) over the other party's major arguments or positions
on major disputed issues. Any Fees incurred in enforcing a judgment shall be
recoverable separately from any other amount included in the judgment and shall
survive and not be merged in the judgment. The Fees shall be deemed an "actual
pecuniary loss" within the meaning of Bankruptcy Code Section 365(b)(1)(B), and
notwithstanding the foregoing, all Fees incurred by either party in any
bankruptcy case filed by or against the other party, from and after the order
for relief until this Lease is rejected or assumed in such bankruptcy case, will
be "obligations of the debtor" as that phrase is used in Bankruptcy Code Section
365(d)(3).
24. QUIET POSSESSION. Subject to Tenant's full and timely performance of all of
Tenant's obligations under this Lease and subject to the terms of this Lease,
including Section 20 - Encumbrances, Tenant shall have the quiet possession of
the Premises throughout the Term as against any persons or entities lawfully
claiming by, through or under Landlord.
25. SECURITY MEASURES. Landlord may, but shall be under no obligation to,
implement security measures for the Property, such as the registration or search
of all persons entering or leaving the Building, requiring identification for
access to the Building, evacuation of the Building for cause, suspected cause,
or for drill purposes, the issuance of magnetic pass cards or keys for Building
or elevator access and other actions that Landlord deems necessary or
appropriate to prevent any threat of property loss or damage, bodily injury or
business interruption; provided, however, that such measures shall be
implemented in a way as not to inconvenience tenants of the Building
unreasonably. If Landlord uses an access card system, Landlord may require
Tenant to pay Landlord a deposit for each after-hours Building access card
issued to Tenant, in the amount specified in the Basic Lease Information. Tenant
shall be responsible for any loss, theft or breakage of any such cards, which
must be returned by Tenant to Landlord upon expiration or earlier termination of
the Lease. Landlord may retain the deposit for any card not so returned.
Landlord shall at all times have the right to change, alter or reduce any such
security services or measures. Tenant shall cooperate and comply with, and cause
Tenant's Representatives and Visitors to cooperate and comply with, such
security measures. Landlord, its agents and employees shall have no liability to
Tenant or its Representatives or Visitors for the implementation or exercise of,
or the failure to implement or exercise, any such security measures or for any
resulting disturbance of Tenant's use or enjoyment of the Premises.
26. FORCE MAJEURE. If Landlord is delayed, interrupted or prevented from
performing any of its obligations under this Lease, including its obligations
under the Construction Rider (if any), and such delay, interruption or
prevention is due to fire, act of God, governmental act or failure to act, labor
dispute, unavailability of materials or any cause outside the reasonable control
of Landlord, then the time for performance of the affected obligations of
Landlord shall be extended for a period equivalent to the period of such delay,
interruption or prevention.
27. RULES AND REGULATIONS. Tenant shall be bound by and shall comply with the
rules and regulations attached to and made a part of this Lease as Exhibit C to
---------
the extent those rules and regulations are not in conflict with the terms of
this Lease, as well as any reasonable rules and
-27-
<PAGE>
regulations hereafter adopted by Landlord for all tenants of the Building, upon
notice to Tenant thereof (collectively, the "Building Rules"). Landlord shall
not be responsible to Tenant or to any other person for any violation of, or
failure to observe, the Building Rules by any other tenant or other person.
28. LANDLORD'S LIABILITY. The term "Landlord," as used in this Lease, shall
mean only the owner or owners of the Building at the time in question. In the
event of any conveyance of title to the Building, then from and after the date
of such conveyance, the transferor Landlord shall be relieved of all liability
with respect to Landlord's obligations to be performed under this Lease after
the date of such conveyance. Notwithstanding any other term or provision of this
Lease, the liability of Landlord for its obligations under this Lease is limited
solely to Landlord's interest in the Building as the same may from time to time
be encumbered, and no personal liability shall at any time be asserted or
enforceable against any other assets of Landlord or against Landlord's partners
or members or its or their respective partners, shareholders, members,
directors, officers or managers on account of any of Landlord's obligations or
actions under this Lease.
29. CONSENTS AND APPROVALS.
29.1 Determination in Good Faith. Wherever the consent, approval,
---------------------------
judgment or determination of Landlord is required or permitted under this Lease,
Landlord may exercise its good faith business judgment in granting or
withholding such consent or approval or in making such judgment or determination
without reference to any extrinsic standard of reasonableness, unless the
specific provision contained in this Lease providing for such consent, approval,
judgment or determination specifies that Landlord's consent or approval is not
to be unreasonably withheld, or that such judgment or determination is to be
reasonable, or otherwise specifies the standards under which Landlord may
withhold its consent. If it is determined that Landlord failed to give its
consent where it was required to do so under this Lease, Tenant shall be
entitled to injunctive relief but shall not to be entitled to monetary damages
or to terminate this Lease for such failure.
29.2 No Liability Imposed on Landlord. The review and/or approval by
--------------------------------
Landlord of any item or matter to be reviewed or approved by Landlord under the
terms of this Lease or any Exhibits or Addenda hereto shall not impose upon
Landlord any liability for the accuracy or sufficiency of any such item or
matter or the quality or suitability of such item for its intended use. Any such
review or approval is for the sole purpose of protecting Landlord's interest in
the Property, and no third parties, including Tenant or the Representatives and
Visitors of Tenant or any person or entity claiming by, through or under Tenant,
shall have any rights as a consequence thereof.
30. WAIVER OF RIGHT TO JURY TRIAL. Landlord and Tenant waive their respective
rights to trial by jury of any contract or tort claim, counterclaim,
cross-complaint, or cause of action in any action, proceeding, or hearing
brought by either party against the other on any matter arising out of or in any
way connected with this Lease, the relationship of Landlord and Tenant, or
Tenant's use or occupancy of the Premises, including any claim of injury or
damage or the enforcement of any remedy under any current or future law,
statute, regulation, code, or ordinance.
-28-
<PAGE>
31. BROKERS. Landlord shall pay the fee or commission of the broker or brokers
identified in the Basic Lease Information (the "Broker") in accordance with
Landlord's separate written agreement with the Broker, if any. Tenant warrants
and represents to Landlord that in the negotiating or making of this Lease
neither Tenant nor anyone acting on Tenant's behalf has dealt with any broker or
finder who might be entitled to a fee or commission for this Lease other than
the Broker. Tenant shall indemnify and hold Landlord harmless from any claim or
claims, including costs, expenses and attorney's fees incurred by Landlord
asserted by any other broker or finder for a fee or commission based upon any
dealings with or statements made by Tenant or Tenant's Representatives.
32. RELOCATION OF PREMISES. For the purpose of maintaining an economical and
proper distribution of tenants acceptable to Landlord throughout the Project,
Landlord shall have the right from time to time during the Term to relocate the
Premises within the Project, provided that (a) the rentable and usable area of
the new Premises is of equivalent size to the existing Premises, subject to a
variation of up to ten percent (10%), (b) Landlord shall pay the cost of
providing tenant improvements in the new Premises, which shall be substantially
comparable in layout to those in the existing Premises, and (c) Landlord shall
pay reasonable costs (to the extent such costs are submitted in writing to
Landlord and approved in writing by Landlord prior to such move) of moving
Tenant's Trade Fixtures and personal property to the new Premises. Landlord
shall deliver to Tenant written notice of Landlord's election to relocate the
Premises, specifying the new location and the amount of rent payable therefor,
at least sixty (60) days prior to the date the relocation is to be effective.
33. ENTIRE AGREEMENT. This Lease, including the Exhibits and any Addenda
attached hereto, and the documents referred to herein, if any, constitute the
entire agreement between Landlord and Tenant with respect to the leasing of
space by Tenant in the Building, and supersede all prior or contemporaneous
agreements, understandings, proposals and other representations by or between
Landlord and Tenant, whether written or oral, all of which are merged herein.
Neither Landlord nor Landlord's agents have made any representations or
warranties with respect to the Premises, the Building, the Project or this Lease
except as expressly set forth herein, and no rights, easements or licenses shall
be acquired by Tenant by implication or otherwise unless expressly set forth
herein. The submission of this Lease for examination does not constitute an
option for the Premises and this Lease shall become effective as a binding
agreement only upon execution and delivery thereof by Landlord to Tenant.
34. MISCELLANEOUS. This Lease may not be amended or modified except by a
writing signed by Landlord and Tenant. Subject to Section 14 - ASSIGNMENT AND
SUBLETTING and Section 28 - LANDLORD'S LIABILITY, this Lease shall be binding on
and shall inure to the benefit of the parties and their respective successors,
assigns and legal representatives. The determination that any provisions hereof
may be void, invalid, illegal or unenforceable shall not impair any other
provisions hereof and all such other provisions of this Lease shall remain in
full force and effect. The unenforceability, invalidity or illegality of any
provisions of this Lease under particular circumstances shall not render
unenforceable, invalid or illegal other provisions of this Lease, or the same
provisions under other circumstances. This Lease shall be construed and
interpreted in accordance with the laws (excluding conflict of laws principles)
of the State in which the Building is located. The provisions of this Lease
shall be construed in accordance with the fair meaning of
-29-
<PAGE>
the language used and shall not be strictly construed against either party, even
if such party drafted the provision in question. When required by the context of
this Lease, the singular includes the plural. Wherever the term "including" is
used in this Lease, it shall be interpreted as meaning "including, but not
limited to" the matter or matters thereafter enumerated. The captions contained
in this Lease are for purposes of convenience only and are not to be used to
interpret or construe this Lease. If more than one person or entity is
identified as Tenant hereunder, the obligations of each and all of them under
this Lease shall be joint and several. Time is of the essence with respect to
this Lease, except as to the conditions relating to the delivery of possession
of the Premises to Tenant. Neither Landlord nor Tenant shall record this Lease.
35. AUTHORITY. If Tenant is a corporation, partnership, limited liability
company or other form of business entity, each of the persons executing this
Lease on behalf of Tenant warrants and represents that Tenant is a duly
organized and validly existing entity, that Tenant has full right and authority
to enter into this Lease and that the persons signing on behalf of Tenant are
authorized to do so and have the power to bind Tenant to this Lease. Tenant
shall provide Landlord upon request with evidence reasonably satisfactory to
Landlord confirming the foregoing representations.
IN WITNESS WHEREOF, Landlord and Tenant have entered into this Lease as
of the date first above written.
TENANT: LANDLORD:
TALK CITY, INC., PRUNEYARD ASSOCIATES, LLC
a Delaware corporation a California limited liability company
By: CORNERSTONE HOLDINGS, LLC.
By: /s/ Jeffrey Snetiker a Delaware limited liability company
-------------------------
Name: JEFFREY SNETIKER Managing Member
-------------------
Title: SVP, CFO & CAO
-------------------
By: /s/ Signature Illegible
------------------------------
By: _________________________ Name: /s/ Signature Illegible
-----------------------
Name: __________________ Title: Authorized Signatory
Title: __________________
-30-
<PAGE>
EXHIBIT A
---------
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF MAY 5, 1999
BETWEEN
PPRUNEYARD ASSOCIATES, LLC, AS LANDLORD,
AND
TALK CITY, INC., AS TENANT ("LEASE")
THE PREMISES
------------
[FOOR PLAN APPEARS HERE]
INITIALS:
Landlord /s/ Signature Illegible
-----------------------
Tenant /s/ Signature Illegible
-----------------------
Exhibit A, Page 1
<PAGE>
EXHIBIT B
----------
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF MAY 5, 1999
BETWEEN
PPRUNEYARD ASSOCIATES, LLC, AS LANDLORD,
AND
TALK CITY, INC., AS TENANT ("LEASE")
CONSTRUCTION RIDER
------------------
1. No Work to be Performed by Landlord. Tenant has inspected and
-----------------------------------
examined the Premises and has elected to lease the Premises as provided in the
Lease on a strictly "AS IS" basis. Other than shampooing the carpet, Landlord
shall have no obligation to perform any work to prepare the Premises for use or
occupancy by Tenant. Tenant shall be solely responsible for making any
alterations or improvements to the Premises required or desired by Tenant,
subject to and in accordance with the provisions of Article 6 - ALTERATIONS - of
the Lease.
2. Delivery of Premises. Landlord shall use reasonable efforts to
--------------------
deliver possession of the Premises to Tenant on or before the Scheduled
Commencement Date specified in the Lease. If Landlord is unable for any reason
to delivery possession of the Premises to Tenant on or before the Scheduled
Commencement Date, neither Landlord nor Landlord's representatives shall be
liable to Tenant for any damage resulting from the delay in delivering
possession to Tenant and the Lease shall remain in full force and effect unless
and until it is terminated under the express provisions of this Paragraph. If
the Commencement Date has not occurred within six (6) months after the Scheduled
Commencement Date, either party, by written notice to the other party given
within ten (10) days after the expiration of such six (6) month period, may
terminate the Lease without any liability to the other party.
3. Access to Premises. Landlord may allow Tenant and Tenant's
------------------
Representatives to enter the Premises prior to the Commencement Date to permit
Tenant to make the Premises ready for Tenant's use and occupancy; provided,
however, that prior to such entry of the Premises, Tenant shall provide evidence
reasonably satisfactory to Landlord that Tenant's insurance, as described in
Section 11.1 -Tenant's Insurance of the Lease, shall be in effect as of the time
of such entry. Such permission may be revoked at any time upon twenty-four (24)
hours' notice. Tenant agrees that Landlord shall not be liable in any way for
any injury, loss or damage which may occur to any of Tenant's property placed
upon or installed in the Premises prior to the Commencement Date, the same being
at Tenant's sole risk, and Tenant shall be liable for all injury, loss or damage
to persons or property arising as a result of such entry into the Premises by
Tenant or Tenant's Representatives.
4. Ownership of Tenant Improvements. All Tenant Improvements,
--------------------------------
whether installed by Landlord or Tenant, shall become a part of the Premises,
shall be the property of Landlord
Exhibit B, Page 1
<PAGE>
and, subject to the provisions of the Lease, shall be surrendered by Tenant with
the Premises, without any compensation to Tenant, at the expiration or
termination of the Lease in accordance with the provisions of the Lease.
INITIALS:
Landlord /s/ Signature Illegible
-----------------------
Tenant /s/ Signature Illegible
-----------------------
Exhibit B, Page 2
<PAGE>
EXHIBIT C
---------
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF MAY 5, 1999
BETWEEN
PPRUNEYARD ASSOCIATES, LLC, AS LANDLORD,
AND
TALK CITY, INC., AS TENANT ("LEASE")
BUILDING RULES
--------------
The following Building Rules are additional provisions of the
foregoing Lease to which they are attached. The capitalized terms used herein
have the same meanings as these terms are given in the Lease.
1. Use of Common Areas. Tenant will not obstruct the sidewalks,
-------------------
halls, passages, exits, entrances, elevators or stairways of the Building
("Common Areas"), and Tenant will not use the Common Areas for any purpose other
than ingress and egress to and from the Premises. The Common Areas, except for
the sidewalks, are not open to the general public and Landlord reserves the
right to control and prevent access to the Common Areas of any person whose
presence, in Landlord's opinion, would be prejudicial to the safety, reputation
and interests of the Building and its tenants.
2. No Access to Roof. Tenant has no right of access to the roof of
-----------------
the Building and will not install, repair or replace any antenna, aerial, aerial
wires, fan, air-conditioner or other device on the roof of the Building, without
the prior written consent of Landlord. Any such device installed without such
written consent is subject to removal at Tenant's expense without notice at any
time. In any event Tenant will be liable for any damages or repairs incurred or
required as a result of its installation, use, repair, maintenance or removal of
such devices on the roof and agrees to indemnify and hold harmless Landlord from
any liability, loss, damage, cost or expense, including reasonable attorneys'
fees, arising from any activities of Tenant or of Tenant's Representatives on
the roof of the Building.
3. Signage. No sign, placard, picture, name, advertisement or notice
-------
visible from the exterior of the Premises will be inscribed, painted, affixed or
otherwise displayed by Tenant on or in any part of the Building without the
prior written consent of Landlord. Landlord reserves the right to adopt and
furnish Tenant with general guidelines relating to signs in or on the Building.
All approved signage will be inscribed, painted or affixed at Tenant's expense
by a person approved by Landlord, which approval will not be unreasonably
withheld.
4. Prohibited Uses. The Premises will not be used for manufacturing,
---------------
for the storage of merchandise held for sale to the general public, for lodging
or for the sale of goods to the general public. Tenant will not permit any food
preparation on the Premises except that Tenant
Exhibit C, Page 1
<PAGE>
may use Underwriters' Laboratory approved equipment for brewing coffee, tea, hot
chocolate and similar beverages so long as such use is in accordance with all
applicable federal, state and city laws, codes, ordinances, rules and
regulations.
5. Janitorial Services. Tenant will not employ any person for the
-------------------
purpose of cleaning the Premises or permit any person to enter the Building for
such purpose other than Landlord's janitorial service, except with Landlord's
prior written consent. Tenant will not necessitate, and will be liable for the
cost of, any undue amount of janitorial labor by reason of Tenant's carelessness
in or indifference to the preservation of good order and cleanliness in the
Premises. Janitorial service will not be furnished to areas in the Premises on
nights when such areas are occupied after 9:30 p.m., unless such service is
extended by written agreement to a later hour in specifically designated areas
of the Premises.
6. Keys and Locks. Landlord will furnish Tenant, free of charge, two
--------------
keys to each door or lock in the Premises. Landlords may make a reasonable
charge for any additional or replacement keys. Tenant will not duplicate any
keys, alter any locks or install any new or additional lock or bolt on any door
of its Premises or on any other party of the Building without the prior written
consent of Landlord and, in any event, Tenant will provide Landlord with a key
for any such lock. On the termination of the Lease, Tenant will deliver to
Landlord all keys to any locks or doors in the Building which have been obtained
by Tenant.
7. Freight. Upon not less than twenty-four hours prior notice to
-------
Landlord, which notice may be oral, an elevator will be made available for
Tenant's use for transportation of freight, subject to such scheduling as
Landlord in its discretion deems appropriate. Tenant shall not transport freight
in loads exceeding the weight limitations of such elevator. Landlord reserves
the right to prescribe the weight, size and position of all equipment,
materials, furniture or other property brought into the Building, and no
property will be received in the Building or carried up or down the freight
elevator or stairs except during such hours and along such routes and by such
persons as may be designated by Landlord. Landlord reserves the right to require
that heavy objects will stand on wood strips of such length and thickness as is
necessary to properly distribute the weight. Landlord will not be responsible
for loss of or damage to any such property from any cause, and Tenant will be
liable for all damage or injuries caused by moving or maintaining such property.
8. Nuisances and Dangerous Substances. Tenant will not conduct
----------------------------------
itself or permit Tenant's Representatives or Visitors to conduct themselves, in
the Premises or anywhere on or in the Property in a manner which is offensive or
unduly annoying to any other Tenant or Landlord's property managers. Tenant will
not install or operate any phonograph, radio receiver, musical instrument, or
television or other similar device in any part of the Common Areas and shall not
operate any such device installed in the Premises in such manner as to disturb
or annoy other tenants of the Building. Tenant will not use or keep in the
Premises or the Property any kerosene, gasoline or other combustible fluid or
material other than limited quantities thereof reasonably necessary for the
maintenance of office equipment, or, without Landlord's prior written approval,
use any method of heating or air conditioning other than that supplied by
Landlord. Tenant will not use or keep any foul or noxious gas or substance in
the Premises or permit or suffer the Premises to be occupied or used in a manner
offensive or objectionable to
Exhibit C, Page 2
<PAGE>
Landlord or other occupants of the Building by reason of noise, odors or
vibrations, or interfere in any way with other tenants or those having business
therein. Tenant will not bring or keep any animals in or about the Premises or
the Property.
9. Building Name and Address. Without Landlord's prior written
-------------------------
consent, Tenant will not use the name of the Building in connection with or in
promoting or advertising Tenant's business except as Tenant's address.
10. Building Directory. A directory for the Building will be provided
------------------
for the display of the name and location of tenants. Landlord reserves the right
to approve any additional names Tenant desires to place in the directory and, if
so approved, Landlord may assess a reasonable charge for adding such additional
names.
11. Window Coverings. No curtains, draperies, blinds, shutters,
----------------
shades, awnings, screens or other coverings, window ventilators, hangings,
decorations or similar equipment shall be attached to, hung or placed in, or
used in or with any window of the Building without the prior written consent of
Landlord, and Landlord shall have the right to control all lighting within the
Premises that may be visible from the exterior of the Building.
12. Floor Coverings. Tenant will not lay or otherwise affix linoleum,
---------------
tile, carpet or any other floor covering to the floor of the Premises in any
manner except as approved in writing by Landlord. Tenant will be liable for the
cost of repair of any damage resulting from the violation of this rule or the
removal of any floor covering by Tenant or its contractors, employees or
invitees.
13. Wiring and Cabling Installations. Landlord will direct Tenant's
--------------------------------
electricians and other vendors as to where and how data, telephone, and
electrical wires and cables are to be installed. No boring or cutting for wires
or cables will be allowed without the prior written consent of Landlord. The
location of burglar alarms, smoke detectors, telephones, call boxes and other
office equipment affixed to the Premises shall be subject to the written
approval of Landlord.
14. Office Closing Procedures. Tenant will see that the doors of the
-------------------------
Premises are closed and locked and that all water faucets, water apparatus and
utilities are shut off before Tenant or its employees leave the Premises, so as
to prevent waste or damage. Tenant will be liable for all damage or injuries
sustained by other tenants or occupants of the Building or Landlord resulting
from Tenant's carelessness in this regard or violation of this rule. Tenant will
keep the doors to the Building corridors closed at all times except for ingress
and egress.
15. Plumbing Facilities. The toilet rooms, toilets, urinals, wash
-------------------
bowls and other apparatus shall not be used for any purpose other than that for
which they were constructed and no foreign substance of any kind whatsoever
shall be disposed of therein. Tenant will be liable for any breakage, stoppage
or damage resulting from the violation of this rule by Tenant, its employees or
invitees.
Exhibit C, Page 3
<PAGE>
16. Use of Hand Trucks. Tenant will not use or permit to be used in
------------------
the Premises or in the Common Areas any hand trucks, carts or dollies except
those equipped with rubber tires and side guards or such other equipment as
Landlord may approve.
17. Refuse. Tenant shall store all Tenant's trash and garbage within
------
the Premises or in other facilities designated By Landlord for such purpose.
Tenant shall not place in any trash box or receptacle any material which cannot
be disposed of in the ordinary and customary manner of removing and disposing of
trash and garbage in the city in which the Building is located without being in
violation of any law or ordinance governing such disposal. All trash and garbage
removal shall be made in accordance with directions issued from time to time by
Landlord, only through such Common Areas provided for such purposes and at such
times as Landlord may designate. Tenant shall comply with the requirements of
any recycling program adopted by Landlord for the Building.
18. Soliciting. Canvassing, peddling, soliciting and distribution of
----------
handbills or any other written materials in the Building are prohibited, and
Tenant will cooperate to prevent the same.
19. Parking. Tenant will use, and cause Tenant's Representatives and
-------
Visitors to use, any parking spaces to which Tenant is entitled under the Lease
in a manner consistent with Landlord's directional signs and markings in the
Parking Facility. Specifically, but without limitation, Tenant will not park, or
permit Tenant's Representatives or Visitors to park, in a manner that impedes
access to and from the Building or the Parking Facility or that violates space
reservations for handicapped drivers registered as such with the California
Department of Motor Vehicles. Landlord may use such reasonable means as may be
necessary to enforce the directional signs and markings in the Parking Facility,
including but not limited to towing services, and Landlord will not be liable
for any damage to vehicles towed as a result of non-compliance with such parking
regulations.
20. Fire, Security and Safety Regulations. Tenant will comply with
-------------------------------------
all safety, security, fire protection and evacuation measures and procedures
established by Landlord or any governmental agency.
21. Responsibility for Theft. Tenant assumes any and all
------------------------
responsibility for protecting the Premises from theft, robbery and pilferage,
which includes keeping doors locked and other means of entry to the Premises
closed.
22. Sales and Auctions. Tenant will not conduct or permit to be
------------------
conducted any sale by auction in, upon or from the Premises or elsewhere in the
Property, whether said auction be voluntary, involuntary, pursuant to any
assignment for the payment of creditors or pursuant to any bankruptcy or other
insolvency proceeding.
23. Waiver of Rules. Landlord may waive any one or more of these
---------------
Building Rules for the benefit of any particular tenant or tenants, but no such
waiver by Landlord will be construed as a waiver of such Building Rules in favor
of any other tenant or tenants nor prevent
Exhibit C, Page 4
<PAGE>
Landlord from thereafter enforcing these Building Rules against any or all of
the tenants of the Building.
24. Effect on Lease. These Building Rules are in addition to, and shall
---------------
not be construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease. Violation of these Building
Rules constitutes a failure to fully perform the provisions of the Lease, as
referred to in Section 15.1 - "EVENTS OF DEFAULT".
25. Non-Discriminatory Enforcement. Subject to the provisions of the Lease
------------------------------
(and the provisions of other leases with respect to other tenants), Landlord
shall use reasonable efforts to enforce these Building Rules in a non-
discriminatory manner, but in no event shall Landlord have any liability for any
failure or refusal to do so (and Tenant's sole and exclusive remedy for any such
failure or refusal shall be injunctive relief preventing Landlord from enforcing
any of the Building Rules against Tenant in a manner that discriminates against
Tenant).
26. Additional and Amended Rules. Landlord reserves the right to rescind
----------------------------
or amend these Building Rules and/or adopt any other and reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building and for the preservation of good order
therein.
INITIALS:
Landlord /s/ Signature Illegible
-----------------------------------
Tenant /s/ Signature Illegible
---------------------------------
Exhibit C, Page 5
<PAGE>
EXHIBIT D
---------
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF MAY 5, 1999
BETWEEN
PPRUNEYARD ASSOCIATES, LLC, AS LANDLORD,
AND
TALK CITY, INC., AS TENANT ("LEASE")
ADDITIONAL PROVISIONS RIDER
---------------------------
NONE
INITIALS:
Landlord /s/ Signature Illegible
-----------------------------------
Tenant /s/ Signature Illegible
--------------------------------
Exhibit D, Page 1
<PAGE>
EXHIBIT E
---------
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF MAY 5, 1999
BETWEEN
PPRUNEYARD ASSOCIATES, LLC, AS LANDLORD,
AND
TALK CITY, INC., AS TENANT ("LEASE")
ASBESTOS NOTIFICATION
---------------------
In accordance with California law (Health & Safety Code Section 25915),
we are writing to provide you with information concerning the presence of
asbestos-containing construction materials ("ACM") in your building.
ACM is present in spray-applied fireproofing on the structural steel
above suspended ceilings in the building, within vinyl floor sheeting in various
parts of the building, and within transit baffles of the cooling tower on the
roof. While ACM was found only in these locations, there are other construction
materials in the building that might contain asbestos, including insulation,
adhesives for floor and wall coverings, roofing materials, and gypsum drywall
mudding compound.
We have been advised that the presence of this ACM at the building,
undisturbed, should not present any health hazards. However, when ACM is broken
up or disturbed, asbestos fibers may become airborne, and exposure to high
levels of airborne asbestos has been associated with an increased incidence of
cancer and respiratory disease. In order to preserve the air quality in the
building and prevent exposure to ACM, any activity that could disturb this
material should be undertaken with care and in accordance with applicable law
and your lease. As a general rule, you should not move, drill or bore any floor,
wall or ceiling panel, attempt to clean textured ceilings, raise suspended
ceiling panels or handle air filters. You should review any contemplated
improvements, alterations, repairs, or other construction with us well in
advance.
The building management has developed and implemented an asbestos
management plan, which provides for the training of custodial and operations and
maintenance personnel in proper techniques and work practices for working in the
building, procedures for monitoring the condition of ACM, procedures for
responding to emergency asbestos fiber releases, and recordkeeping to document
the plan's implementation. The plan is available for your inspection at our
offices during business hours, and a copy of the plan will also be provided to
you if you so request.
Please be aware that you will be responsible for complying with all
legal requirements for notifying your own employees, contractors, subtenants and
agents, if any, of the
Exhibit E, Page 1
<PAGE>
information contained in this letter. Please contact us at 408/371-4700 if you
have any questions or would like more information regarding the use and
management of ACM in the building.
INITIALS:
Landlord /s/ Signature Illegible
----------------------------------
Tenant /s/ Signature Illegible
--------------------------------
Exhibit E, Page 2
<PAGE>
EXHIBIT 10.22
TALK CITY, INC. CONSENT FORM
Media Metrix hereby consents to the use of this statement in Talk City's
Registration Statement.
According to Media Metrix, in April 1999, we ranked sixteenth out of the top 500
sites on the Internet based on average minutes spent per usage day for home
users.
/s/ [SIGNATURE ILLEGIBLE]^^
- ----------------------------
(Media Metrix) Sr. VP/xxxx
6/21/99
- ----------------------------
(Date)
<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 22, 1999
