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_______________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 0F THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-77455
TALK CITY, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 77-0426524
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1919 S. Bascom Avenue
Campbell, California 95008
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (408) 871-5200
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 21, 2000, 24,746,484 shares of Common Stock of Registrant was
outstanding. The aggregate market value of the shares held by non-
affiliates of the Registrant (based upon the closing price of the
Registrant's Common Stock on March 21, 2000 of $8.00 per share) was
approximately $207 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A promulgated by the Securities and Exchange Commission under
the Securities Act of 1934, which is anticipated to be filed within 120
days after the end of the Registrant's fiscal year ended December 31, 1999,
are incorporated by reference in Part III hereof.
_______________________________________________________________________________
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business 2
Item 2. Description of Property 34
Item 3. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 34
Item 6. Selected Consolidated Financial Data 37
Item 7. Management's Discussion and Analysis of Financial Condition 37
and Results of Operations
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 44
Item 8. Financial Statements and Supplementary Data 45
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting 65
and Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant 65
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners and Management 65
Item 13. Certain Relationships and Related Transactions 65
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 65
SIGNATURES 70
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PART I
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.
Item: 1 Business
Talk City (Nasdaq: TCTY) is a leading provider of scalable online communities
and Internet-based relationship solutions for businesses and consumers.
Talk City offers businesses a wide range of services that help them develop
and expand online interactive dialog with their 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, Talk City operates a network of online communities located at
www.talkcity.com. The 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. Talk City has also established partnerships across multiple industries
and media forms, including partnerships with major media companies, Internet
content companies and Internet service providers. We refer to these companies
as our "network participants". Talk City works with these network participants
to co-produce, co-brand and co-market community services that leverage the
participant's content, brand or customer relationships. By integrating these co-
branded services into Talk City's community network, we enjoy exceptional
distribution, content and marketing leverage. Our network participants include
Cox Interactive Media, Inc., Hearst Communications, Inc., National Broadcasting
Company, Inc., WebTV Network, Inc., a wholly-owned subsidiary of Microsoft
Corporation, Excite@Home Corporation and AT&T WorldNet Service.
Talk City's community network has achieved critical mass in terms of traffic,
registered users and the loyalty of our users. In December 1999,
www.talkcity.com had approximately 5.7 million unique visitors according to
Internet Profiles Corporation, or I/PRO. As of December 1999, the consumer
network had over 4.2 million user registrations. The community network also
features the highest ratings of customer usage, compared to other consumer
community sites, as measured by Media Metrix' At Home Report. For the period
January 1999 to December 1999, users at www.talkcity.com generated higher
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minutes per usage day and minutes per usage month rankings than Geocities,
theglobe.com, and Xoom.com.
Established in 1996, Talk City has been an innovator in Internet-based
relationship management, often referred to as 'e-relationships' or 'business
communities', and marketing services. We believe the Internet has created a
demand for businesses to communicate in real-time, to establish deeper and
broader relationships with their customers, to increase market understanding,
reduce customer acquisition costs, increase customer retention, and design
products and services more closely aligned with customer needs. Talk City
responds to this demand by offering its business clients one of the industry's
most comprehensive portfolios of e-relationship and business community services,
including:
. online event production;
. online focus groups;
. online polls and surveys;
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. moderated chat rooms;
. moderated discussion boards;
. home page community management and technology; and
. online meetings and presentations.
Many of Talk City's business clients choose to integrate these services into a
comprehensive business community for its customers, or what we refer to as a
"Customized Community." Some of Talk City's business clients include American
Airlines, British Airways, H&R Block, Hewlett-Packard, Kemper Funds, Microsoft,
Novell, Procter & Gamble and Starbucks.
Talk City's business services have established strong momentum in the
marketplace. We have exceeded our forecasted revenue growth in this sector of
our business in 1999. In addition, Talk City's business services have obtained
broad acceptance across multiple industries, from financial services and retail
to entertainment and automotive.
We began providing online community services in April 1996 as LiveWorld
Productions, Inc. and changed our name to Talk City, Inc. in August 1998. Since
April 1996, our operating activities have been focused on building our business
services client base, developing our business services product line, 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. Published industry reports, including McKinsey &
Company and International Data Corporation, estimate that the number of Web
users worldwide will increase from 131 million at the end of 1999 to more than
500 million by the year 2003. 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. In addition, the Internet is increasingly being recognized as a
convenient and useful tool for customer relationship management for businesses.
The Yankee Group estimates that the worldwide customer relationship management
market will grow from $3 billion in 2000 to $7.1 billion in 2003.
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
compounded annual growth rate of 42%.
The Importance of Online Customer Relationship Management and Online Communities
Businesses of all types and in all industries are realizing the great
benefits, in cost, time and customer retention, of managing their customer
relationships online. They are realizing that, in the "new economy," goods and
services must be more than simply personalized to meet the unique, individual
needs of consumers. These companies need real-time, customer support 24 hours
per day, seven days per
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week, response and dialog, and they understand that the Internet is a
convenient, affordable and efficient medium for providing these services.
Companies are realizing they need to strategically manage online customer
relationships, and that online community services are an effective tool to meet
this need. In addition, 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 loyalty 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.
Online communities represent a significant opportunity for businesses to
deepen their relationship with existing customers or expand their markets by
doing the following:
. reducing customer acquisition, education and support costs;
. increasing customer satisfaction, loyalty and retention;
. capitalizing on the propensity of customers to buy their products or
services;
. enhancing businesses' ability to target customers and understand their
individual needs;
. reducing fixed capital costs;
. broadening geographic reach; and
. providing an opportunity to minimize the use of middlemen such as retailers,
wholesalers, distributors and brokers.
Online communities can also provide significant benefits to consumers, such
as:
. satisfying consumers' basic social need for communication in a convenient
manner that is not limited by the same time and geographic constraints;
. 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 Customer Relationship Management and Communities
To date, many businesses and advertisers have been unable to capitalize on
the benefits of online customer relationship management and communities.
Most businesses 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
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other tasks associated with providing interactive services or effectively
managing an online community. In addition, most 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. Further, many businesses find
it difficult to migrate their traditional customer bases into online
communities.
Many mainstream consumers find existing community sites unsatisfactory.
First, many community sites lack a friendly and welcoming atmosphere. Second,
chat rooms on many existing community sites sometimes include participants who
behave in obnoxious or inappropriate ways, with no practical recourse for users
to object and stop such behavior. As a result, mainstream consumers,
particularly parents of young children, are often reluctant to participate or
allow their children to participate in the community. Third, many community
sites lack structured programming, which makes it difficult for newcomers to
find community programming that meets their needs and desires.
While advertisers have begun to promote their products on community sites,
several factors have limited their use of community sites as a marketing
vehicle. Advertisers are concerned that consumers might associate the
advertisers' brand with inappropriate behavior that may sometimes occur within
community Web sites. In addition, some Internet programming is so generic that
it is difficult for advertisers to focus on their targeted audiences.
The Talk City Solution
We have created one of the industry's broadest portfolios of online customer
relationship management and community services that meet the needs of our
business clients, 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 manage customer relationships
online. These tools help businesses to attract, retain, support and sell their
products and services to current or potential customers. Our business services
range from online events and market research to fully integrated, customized
communities. Our business services offer several key advantages. First, our
services allow businesses to interact closely and frequently with their
customers, all at a fraction of the cost and time of traditional customer
relationship services. 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
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leverage. The Talk City community consists of three types of network
participants: major media companies, Internet service providers and Internet
content companies. This extensive community provides us with one of the largest
distributed and integrated networks of community services on the Internet.
Critical Mass. Our network of consumer community sites at www.talkcity.com
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has achieved critical mass in terms of traffic, registered users and the loyalty
of our users. In December 1999, we had approximately 5.7 million unique visitors
according to I/PRO. As of December 1999, we had over 4.2 million user
registrations. 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. For every month from January 1999 to December 1999,
www.talkcity.com outranked our community site competitors on metrics commonly
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associated with customer loyalty, or "stickiness," according to Media Metrix.
In each of those months, www.talkcity.com outperformed these competitors in the
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segments of minutes per usage day and minutes per usage month rankings.
Through our broad portfolio of customer relationship and community services, 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:
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Customers Benefits
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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 to meet people of shared
interests
. 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
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Strategy
Our objective is to be the leading Internet provider of online customer
relationship solutions and high quality online communities. Key elements of our
strategy include the following:
Expand Business Services. We intend to increase the revenues we generate from
our business services by:
. acquiring and investing in companies that increase our ability to help
businesses constructively interact with and understand their customers;
. aggressively increasing the number of personnel dedicated to selling and
implementing our business services, including personnel with expertise in
specific industries;
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. focusing on selling long-term customized communities which integrate a wide
range of our business services;
. creating specialized solutions for targeted business needs, such as ecommerce,
customer support and customer retention; and
. enhancing the functionality and usability of our business services products.
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 high-value demographic groups within our
audience;
. align advertiser offerings more precisely with users' interests;
market Talk City sponsorship benefits to the advertising community; 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, the frequency with
which they return, and the ease with which users can invite friends and family
to join them. We plan to do this by increasing the number of community services
available to our users, especially in the area of group or "club" functionality,
as well as new chat and home page technologies. We intend to make it easier for
people to engage their friends and family in www.talkcity.com activities by
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developing more public clubs and online activities.
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 a broad portfolio of e-relationship and community
services. These services include designing fully integrated customized
communities, producing online events and conducting online market research.
These services help our business clients develop and expand online relationships
with their employees, customers and suppliers.
Customized Community
Many businesses have the assets needed to build an online community, such as
strong brands, loyal customers and relevant content, but lack the skills to
operate a community effectively. We help these businesses deploy such assets to
build and organize online communities, improving their relationship marketing
and support. Customized communities are tailored to complement a client's
specific products, brands and targeted audience, and typically include
customized sets of one or more of the following:
chats;
message boards;
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. home pages; and
. surveys and events.
For example, we created customized communities for Hewlett-Packard that
improve communication and customer support relations between customers who have
recently purchased Hewlett-Packard products.
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 managed
special online discussions with presidential and senatorial candidates Al Gore,
John McCain and Hillary Clinton for iVillage's special election programming.
Market Research
The combination of Talk City's online market research technologies with our
large, moderated online community gives us a unique opportunity to offer one of
the most reliable online market research services to our business clients. In
January 2000, Talk City acquired Research Connections, Inc. ("RCI"), a leading
online market research firm. We believe RCI will strengthen our business
services product portfolio as it will provide us with a unique source of primary
market research and analysis of the Internet's growing population. Some of RCI's
clients include IBM, Medscape.com, Fidelity Investments, Microsoft Corporation
and AT&T, as well as several major advertising and marketing research firms.
RCI will complement our current market research services, such as online
focus groups, polls and quantitative surveys. Together, our 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 and analyzing
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 Coca-Cola, Toyota and
Starbucks.
Network Participants
Overview
As of December 31, 1999, our community included 31 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
acquire new users and traffic cost-effectively, utilize our network
participants' content and programming expertise and access their personnel and
celebrity talent. Simultaneously, by increasing our usage, brand
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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 December 31, 1999, approximately 40% of our advertising
and sponsorship revenues were 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 6% of
our advertising and sponsorship revenues, except WebTV Network which was
responsible for approximately 28% of our advertising and sponsorship revenues
for the period. For the quarter ended December 31, 1999, none of our network
participants drove user volume responsible for more than 9% of our advertising
and sponsorship revenues, except WebTV Network which was responsible for
approximately 23% of our revenues for the 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 capabilities and message boards, for a number
of Cox Interactive Media destinations including the following:
AccessArizona.com GoPBI.com
AccessAtlanta.com GreatOutdoors.scom
ActiveDayton.com HamptonRoads.com
Austin360.com Insidecentralflorida.com
BayInsider.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:
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. 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 1999 and 1998, 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:
. 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."
. NBC Interactive Neighborhood--We provide the capability to host locally-
oriented chats to several of NBC's 200 local affiliate television stations.
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. In addition, NBC provided us with advertising in 1999 and 1998
on various NBC television programs in connection with the advertising agreements
signed with NBC.
Internet Service Providers
Our Internet service provider participants direct their users to Talk City as
their primary community offering. Pursuant to 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, BellSouth.Net, Concentric Network, WebTV
Network, 2Trom.com and Sprint Canada. 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
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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:
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Internet Content Participant Co-Branded Service
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@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
Hispanic Online......................... An Internet site for the Hispanic market for which we
provide chat and special events production for featured
guests
Learfield Communications................. We provide chat rooms for their Gamecruiser site, the
official Internet broadcast site for 13 of the nations'
top college athletic programs, for listeners to chat
during live broadcasts
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
NetNoir.................................. An Internet site for the African American market 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
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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
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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 chats 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,
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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 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 300 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 high-traffic events which we
produced or co-produced with our network participants and clients in 1999:
<TABLE>
<S> <C>
Nick Carter of the Backstreet Boys GRAMMY awards (NARA and IBM)
(Zoog Disney) John McCain, Al Gore, Hillary Clinton (iVillage)
Eric von Detten (actor) (ABC) Premier of "The 60s" (NBC.com)
Britney Spears (Zoog Disney) Mark McGwire and Howard Schultz (Starbucks)
Hanson (ZoogDisney) Liam Neeson (LucasFilm)
Susan Lucci--(ABC) Garth Brooks (NBC)
Christina Aguilera (Zoog Disney)
</TABLE>
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:
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<PAGE>
<TABLE>
<CAPTION>
Ages: 20s to Seniors Computing and Technology Movies, TV and Radio
<S> <C> <C>
Numerous chat rooms based ComputerTalk Movie City
on particular ages (20s, 30s, 40s) MacTalk TV Forum
Senior-Citizens New2Internet NBC.com
New2TalkCity NBC Interactive Neighborhoods
Art and Books New2WebTV
Art City Music
Books Forum Ethnic and Lifestyle @Music
Science Fiction LifeStyles
Hispanic Online News and Sports
Auto Latino Chat News Talk
AutoOnRamp NetNoir TCSports
Trefpunt Sailing Forum
Business Finance Deutschland
Business City Center Israeli Cafe Romance and Social
City Pub
Cities and Travel Games Courtship Corner
Canada Fantasy Forum Talk City Personals
Women Together Games Galore Town Talk
Cox Interactive Media sites
India Health and Wellness Spirituality
Local Transformations Jesus Cafe
Travel Forum Wellness Forum Religions and Spiritualities
Europe International
Home and Family Teen
Collectibles and Hobbies Animal Forum The InSite
Collectibles EduCenter CosmoGIRL!
Hobbies Hobbies Teen Talk
Parent Center TNBC MaxChat
College Hearst New Media & Youth Online
College Connection Technology sites
Science Visions Women
Women Together
Kids Women Online Worldwide
KidszKorner
</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;
. group tools--allowing people to invite friends and family into a virtual club
with shared chat, message boards, calendars;
. 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;
. instant messaging--private chats between users;
. 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.
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.
Business Services. Sales of our business services are generated by our
internal sales force. 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. On a limited basis, we also utilize a third-
party service to sell advertising on our Web sites.
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Marketing
We employ targeted marketing activities primarily to build recognition for
our business services offerings and increase advertising and sponsorship
opportunities, but also to leverage our users' loyalty and strong usage pattern
to cost-effectively increase user traffic and usage on our consumer network.
Business Services Testimonial and Brand Awareness Promotion. We aggressively
promote our business services offerings through national advertising in major
business print and broadcast media. This campaign, called the "We Helped"
campaign, focuses on highlighting our business clients success stories, such as
with Hewlett-Packard, Kemper Funds and Kraft Foods. Our direct mail activity
also focuses on educating the marketplace about our capabilities through our
success story examples. These promotions drive traffic to our interactive Web
site, www.business.talkcity.com, which offers potential clients online
-------------------------
demonstrations and explanations of our capabilities.
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, NBC provided us with
advertising on their 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.
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 its
sitcom "Friends," the NBC.com user has access to our community and programming
as well.
Viral Community Growth. To date, the majority of our user base growth has
resulted from word-of-mouth recommendations within our community. This greatly
reduces our cost of new customer acquisition, allowing us to focus our marketing
efforts directly on revenue-producing activities. We extend this marketplace
advantage by making it easy for users to invite friends and family to join them
on the service, through group tools functionality, or friend-finder
functionality, among others activities.
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 140 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 and Apache 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 personals, TelePost to provide
online conferencing services, and MyPoints to provide affinity rewards programs.
We have developed a variety
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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 Global Center. Our operations are dependent upon Frontier
Global Center'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;
. 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 Yahoo for live events production,
Well Engaged, Koz, and Participate.com 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 are currently dominant in the business services area.
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<PAGE>
In the consumer community area, we also compete with numerous companies, none
of which are currently dominant. These competitors include Delphi, theglobe.com,
Yahoo, Xoom, Homestead.com, WBS.net, Angelfire, Fortune City, iVillage, Tripod
and Third Age. 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.
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
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<PAGE>
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, 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.
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Employees
As of December 31, 1999, we had a total of 197 employees, all of whom were
located in the United States. Of the total, 123 were engaged in product
development and programming, 53 in sales and marketing and 21 in general and
administrative. None of our employees are represented by a labor union. We have
not experienced any work stoppages and consider our relations with our employees
to be good.
Executive Officers
The executive officers of the Company and certain information about them are
as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------- ------------- ---------------------------------------------------
<S> <C> <C>
Peter H. Friedman 44 Chairman of the Board and Chief Executive
Officer
V. David Watkins 43 President and Chief Operating Officer
Jeffrey Snetiker 51 Senior Vice President, Chief Financial and
Administrative Officer
Jenna Woodul 51 Senior Vice President of Community
Patricia Griffith 48 Vice President of Sales
Chris N. Christensen 39 Vice President of Engineering and Operations
Christopher J. Escher 41 Vice President of Marketing
</TABLE>
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.
V. David Watkins has served as our President and Chief Operating since
December 1999. From March 1999 to November 1999, Mr. Watkins served as the
President of Diamond Multimedia, Inc.'s RioPort.com Division. Mr. Watkins and
his team successfully identified a new market opportunity for MP3 audio on the
Internet. From April 1996 to February 1999, Mr. Watkins served as Vice
President of the Multimedia Division for Diamond Multimedia, Inc. and was
chartered to oversee the management of the audio and core graphics product
lines. From June 1995 to March 1996, Mr. Watkins served as Executive Vice
President of Catapult Entertainment, a company specializing in networked
consumer entertainment game play. From June 1989 to May 1995, Mr. Watkins held
various executive positions for Borland International including Vice President
of Worldwide Marketing and Technical Support and Vice President and General
Manager of the dBase and Paradox Business Groups. From June 1986 to May 1989,
Mr. Watkins was a Vice President at Symantec Corporation. Mr. Watkins received
a M.B.A. degree from Stanford University and a B.A. degree in Economics from
Connecticut College.
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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.
Jenna Woodul has served as our Senior 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.
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.
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.
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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Risk Factors That May Affect Results of Operations and Financial Condition
We have incurred losses since inception and we may be unable to achieve
profitability or generate positive cash flow
We incurred net losses of $40.1 million in 1999, $15.7 million in 1998, $6.4
million in 1997 and $1.3 million in 1996, 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 and functionality of our business service offerings;
. 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 e-commerce 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
December 31, 1999, we had an accumulated deficit of approximately $63.5 million,
including noncash advertising and promotional charges of $14.1 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 for the quarter ended June 30,1999 decreased
from $15 million to $8.8 million for the quarter ended September 30, 1999.
However, our net loss increased from $8.8 million as of September 30, 1999 to
$9.4 million as of December 31, 1999. 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.
These factors are described in more detail in the risk factors described
below. Many of these factors are beyond our control.
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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, particularly with our
business services clients. 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 may cause our accumulated deficit to increase and could result
in our inability to achieve profitability.
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 33% of our total
revenues in 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 hired many of our business services sales
personnel, including our Vice President of Business Services, in order to expand
and develop our business services.
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 have recently launched our marketing campaign to increase awareness of our
business services offerings, with no guarantee of success, which could decrease
our results of operations.
We recently began our "We Helped" marketing campaign to increase the
industry's awareness of our business services offerings. If this campaign does
not increase awareness or generate sales of our business services at the level
we anticipate, or at all, our limited sales and marketing resources will have
been expended with no increase in our revenues, which could decrease our results
of operations. In addition, if our campaign is not successful, our sales and
marketing personnel will have been diverted and focused on this failed campaign
when they could have been focused on other activities, such as sales and
marketing efforts towards our advertisers and sponsors or network participants.
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. Advertising and sponsorship revenue represented 88% of our
total revenues in 1997, 64% of our total revenues in 1998 and 67% of our total
revenues in 1999. As a result, our success is highly dependent on
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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 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
twelve 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 58% 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 58% 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,
including volume provided by our network participants. Of our total advertising
and sponsorship revenues for the year ended December 31, 1999, approximately 40%
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 40% of our
advertising and sponsorship revenues. We would need to replace these revenues
with increased revenues from our business services. For the year ended December
31, 1999, none of our network participants individually drove volume responsible
for more than 7% of our advertising and sponsorship revenues, except WebTV
Network which was responsible for approximately 28% of our advertising and
sponsorship revenues for the year.
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
41% 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 of which would
result in
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an unexpected diversion of management efforts or increased operating
expenses. In addition, if we were unable to replace this volume, we would also
be unable to replace the 28% of our advertising and sponsorship revenues
generated by WebTV Network. For the year ended 1999, WebTV Network was
responsible for approximately 41% of our volume.
We recently acquired Research Connections, Inc. ("RCI") and if we are not
successful in integrating RCI's operations with ours, our revenue and operating
results could decline
Our recent acquisition of Research Connections, Inc., an online market
research company, will only be successful if we are able to integrate its
operations with ours, which could substantially divert attention from the day-
to-day operations of the combined company. The diversion of the attention of
management, especially our Vice President of Business Services and other key
business services sales personnel, and any difficulties encountered in the
transition process could cause the revenues and operating results of the
combined company to decline. We must successfully integrate RCI's services
offerings, specifically online market research, with ours.
In addition, integrating personnel with disparate business backgrounds and
corporate cultures may be difficult. Further, this integration must occur at a
time when we are significantly increasing our focus and sales and marketing
efforts on our business services, including online market research sales. The
sales personnel of RCI must effectively work with our personnel for this to be
successful. It is possible that neither we nor RCI will retain key management
and sales personnel.
The acquisition of RCI could also cause our business clients or clients of
RCI to be uncertain about our ability to support the combined company's services
and the direction of the combined company's development efforts. This may
result in the delay or cancellation of orders, a significant decrease in our
business services revenues and limit our ability to implement our business
strategy.
We recently invested in SocialNet, Inc. and our investment could be at risk if
SocialNet, Inc. does not grow as expected, or at all
In December 1999, we invested $3 million in SocialNet, Inc. ("SocialNet"), an
online relationships company, in return for 1,554,404 shares of Series C
Preferred Stock of SocialNet which represents approximately 7.6% of SocialNet's
outstanding shares. The price per share for the Series C Preferred Stock was
$1.93.
Our investment in this start-up company is at risk if SocialNet does not grow
at the level we anticipate or at all. In addition, the benefits to us,
including enhancing our demographic targeting, may not be realized if SocialNet
fails to perform as we expect or achieve its business strategy. Many of these
factors are out of our control.
Our uncertain sales cycle may cause us to incur substantial expenses and expend
management time without generating the corresponding revenues which would reduce
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:
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. 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 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 December 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 continue 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
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corresponding increase in revenues, which would contribute to our not
achieving profitability. We spent approximately $7.4 million in 1998 and $11.4
million in 1999 on these activities. We expect to spend over $7.8 million in
fiscal year 2000, 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.business.talkcity.com business experience or
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www.talkcity.com community experience to be of high quality or if we introduce
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new services or enter into new business ventures that are not well received.
We are growing rapidly and must effectively manage and support our growth in
order for our business strategy to succeed
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Managing and sustaining our
growth will place significant demands on management as well as on our
administrative, operational and financial systems and controls. If we are unable
to do this effectively, we would have to divert resources, such as management
time, away from the continued growth of our business and implementation of our
business strategy. We had 56 employees as of December 31, 1998 compared to 197
employees as of December 31, 1999. We anticipate further significant increases
in the number of our employees, especially in our sales and engineering
departments in order to take full advantage of our relationships with Cox,
Hearst and NBC, as well as to increase the sales of our business services
offerings. This rapid growth caused us to outgrow our previous office facilities
sooner than we expected. Accordingly, we recently relocated our corporate
headquarters to a 56,000 square foot facility in Campbell, CA.
Our Chief Executive Officer and Senior 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 and Chief Executive
Officer, and Jenna Woodul, our Senior 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 additional highly skilled sales personnel, especially business services
sales personnel, technical, managerial, marketing and customer support
personnel. Competition for these people 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 and
qualified employees.
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We may be unable to consummate future 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,
additional complementary businesses, technologies, services or products if
appropriate opportunities arise in the future. We may be unable to identify
additional 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 in the future, 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.
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 approximate 300 paid moderators as independent contractors. Our
paid moderators sign independent contractor agreements and receive a flat
monthly fee or are paid hourly. 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 1,700
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. 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 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.
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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 Center 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 use 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. Enhancements or new services or features
must meet the requirements of our current and prospective users and must achieve
significant market acceptance. Our success also will depend on our ability to
adapt to rapidly changing technologies by continually improving the performance
features and reliability of our services. We may experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new products and services. We could also incur substantial costs if we need to
modify our services or infrastructure to adapt to these changes.
We may be liable for misappropriation by others of our users' personal or credit
card information
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information or credit card information, we
could be subject to liability. These could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims.
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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 expend 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.
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 such breaches. 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.
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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 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. 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 are dominant in its respective area
of operation.
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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 trademark ''Talk City'' and if we could not use this
mark, we would need to reimplement our Web site and re-build our brand identity
We are dependent on the trademark ''Talk City.'' If we were prevented from
using this trademark, we would need to reimplement our Web site 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 site.
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.
Our stock price has traded at or below the initial offering price and 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 has traded at or below the initial
public offering price and may 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
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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. Since our initial public offering, at times the market price of our
common stock has traded at or below the initial offering price of $12.00 per
share. If the price per share does not increase, our investors may incur a
loss on their investment. Historically, we have experienced significant losses,
which totaled $40.1 million and $15.7 million in 1999 and 1998, respectively. In
addition, we have experienced fluctuations in our volume of users and usage
patterns, which could lead to a further decrease, or to extreme volatility, of
our stock price. We cannot assure you that our stock price will increase to
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 extremely volatile due to broad market and industry factors
beyond our control
Our stock price is 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;
. announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
. conditions or trends in the Internet and online services industries;
. changes in the market valuations of other Internet companies;
. 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.
If we raise additional capital through the issuance of new securities, existing
shareholders 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 current stockholders.
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 acquirers may not
make acquisition bids for us, our stock price may fall and the voting rights of
existing stockholders may diminish as a result. Our board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series. Our board of directors can fix the price, rights, preferences,
privileges and restrictions of the preferred stock without any further vote or
action by our stockholders.
33
<PAGE>
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.
Item: 2 Properties
Our principal administrative, sales, marketing, product development and
programming facilities are located in Campbell, CA and consist of three separate
facilities aggregating approximately 81,000 square feet of office space held
under leases which expire in December 2002 and March 2009. As of December 31,
1999, we also lease sales office space elsewhere in the United States as
follows: a 6,000 square foot facility in New York under a lease that expires in
March 2004, a 4,000 square foot facility in Chicago under a lease that expires
in August 2004, a 4,000 square foot facility in San Francisco under a lease that
expires in June 2004 and a 1,000 square foot facility in Los Angeles under a
lease that expires in October 2000.
Item: 3 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.
Item: 4 Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
1999.
PART II
Item: 5 Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Talk City's Common Stock is traded on The Nasdaq National Market under the
symbol "TCTY." The following table sets forth the range of the high and low
closing sale prices by quarter as reported on the Nasdaq National Market since
July 20, 1999, the date our Common Stock commenced public trading.
<TABLE>
<CAPTION>
Fiscal year ended December 31, 1999: High Low
- ---------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Third Quarter (since July 20, 1999) 13 13/16 8 3/8
Fourth Quarter 26 1/8 7 1/4
</TABLE>
On March 21, 2000, there were approximately 6,820 stockholders of record of
the Talk City's common stock.
34
<PAGE>
Dividends
We have never paid cash dividends on our common stock. We intend to retain
our earnings for use in our business and, therefore, do not anticipate paying
any cash dividends on the Common Stock.
Recent Sales of Unregistered Securities
The following table sets forth information regarding all securities of Talk
City sold by the Company from January 1, 1999 to December 31, 1999. References
to warrants below assume full exercise of warrants. Preferred Stock numbers are
presented on an as-if converted to Common Stock basis.
<TABLE>
<CAPTION>
Class of Title of Number of Aggregate Form of
Purchasers Date of Sale Securities Securities Purchase Consideration
Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Officers, directors, January 8, 1999 to Exercise of options to 188,188 $ 650,265 Cash and promissory
employees and other December 16, 1999 purchase Common Stock notes
eligible
participants
2 investors April 15, 1999 Issuance of Series D 1,350,000 5,400,000 In-kind advertising and
Preferred Stock promotion
1 investor April 15, 1999 Issuance of a warrant 266,667 2,250,000 In-kind advertising and
to purchase Series D promotion
Preferred Stock;
exercisable for cash or
pursuant to a net
exercise provision
contained therein
1 investor April 23, 1999 Issuance of a warrant 11,893 95,144 In consideration for
to purchase Series E investment banking
Preferred Stock; services
exercisable for cash
only
14 investors April 15, 1999 Issuance of Series E 2,499,882 19,999,056 Cash
Preferred Stock
3 investors December 16, 1999 Exercise of warrants to 70,628 211,884 Net Exercise
purchase Common Stock
17 investors March 14, 1999 to Exercise of warrants to 28,300 99,900 Cash
November 22, 1999 purchase Common Stock
</TABLE>
All sales of Common Stock made pursuant to the exercise of stock options
granted under the stock option plans of Talk City were made pursuant to the
exemption from the registration requirements of the Securities Act afforded by
Rule 701 promulgated under the Securities Act.
35
<PAGE>
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. The securities were
sold to a limited number of people with no general solicitation or advertising.
The purchasers were sophisticated investors with access to all relevant
information necessary to evaluate the investment and who represented to us that
the shares were being acquired for investment only.
Use of Proceeds From Sales of Registered Securities
On July 20, 1999, Talk City consummated its initial public offering of its
Common Stock. The managing underwriters in the offering were Lehman Brothers,
Inc., U.S. Bancorp Piper Jaffray, Volpe Brown Whelan & Company and E*Trade
Securities, Inc. The shares of Common Stock sold in the offering were
registered under the Securities Act on a Registration Statement (No. 333-77455)
on Form S-1 which was declared effective by the Securities and Exchange
Commission on July 19, 1999. All 5.1 million shares of Common Stock registered
under the Registration Statement, including shares covered by an over-allotment
option that was exercised by the underwriters, were sold at a price to the
public of $12.00 per share. The aggregate offering amount registered was $61.2
million. In connection with the offering, Talk City paid an aggregate of
$4,284,000 in underwriting discounts to the underwriters. In addition, the
following table sets forth the other material expenses incurred in connection
with the offering.
<TABLE>
<S> <C>
SEC Registration Fee $ 19,207
NASD Filing Fee 11,710
Nasdaq National Market Listing Fee 90,000
Printing Expenses 223,000
Legal Fees and Expenses 413,000
Accounting Fees and Expenses 408,000
Blue Sky Fees and Expenses 8,000
Other 314,000
----------
$1,486,917
==========
</TABLE>
Talk City used the net proceeds of approximately $55.4 million from its
initial public offering of Common Stock to invest in short-term, interest
bearing, investment grade securities and has used its existing cash balances to
fund its general operations. Talk City estimates that it will use the net
proceeds as follows: 25% for marketing, including brand development, promotion
and growth of user volume; 25% for expansion of our sales infrastructure; and
50% for working capital and general corporate purposes.
In addition, Talk City may use a portion of the net proceeds to acquire or
invest in complementary businesses, technologies, or products. Pending these
uses, the net proceeds of the offering will continue to be invested in short-
term, interest bearing, investment grade instruments. We have no formal plan
for use of the offering proceeds, nor have we sought the advice of or received
reports from any of our professional advisors regarding the use of the offering
proceeds. As a result, our use of the proceeds are subject to change at
management's discretion. The amounts actually expended for each of the purposes
listed above may vary significantly depending upon a number of factors,
including the progress of our marketing programs, capital spending requirements
and developments in the Internet industry. None of our net proceeds of the
offering will be paid directly or indirectly to any of our directors, officers,
or our general partners or their associates, persons owning 10% or more of
any class of our equity securities, or an affiliate.
36
<PAGE>
Item: 6 Selected Financial Data
The following selected financial data should be read in conjunction with our
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
March 29,
1996
(Inception) to
Years ended December 31, December 31,
-----------------------------
1999 1998 1997 1996
---- ---- ---- ----
Statement of Operations Data
Revenues:
<S> <C> <C> <C> <C>
Business services........................................ $ 2,580 $ 522 $ 25 $ --
Advertising and sponsorships............................. 5,152 931 183 14
-------- -------- ------- -------
Total revenues........................................ 7,732 1,453 208 14
Operating expenses:
Product development and programming...................... 15,520 5,383 3,472 771
Sales and marketing...................................... 17,730 6,668 2,492 252
General and administrative............................... 5,691 1,804 974 335
Noncash advertising and promotional charges.............. 11,162 2,890 -- --
-------- -------- ------- -------
Total operating expenses.............................. 50,103 16,745 6,938 1,358
-------- -------- ------- -------
Loss from operations.................................. (42,371) (15,292) (6,730) (1,344)
Interest income (expense), net............................ 2,264 (367) 339 36
-------- -------- ------- -------
Net loss.............................................. (40,107) (15,659) (6,391) (1,308)
Accretion of redeemable convertible preferred
stock and warrants.................................... 159 558 38 8
-------- -------- ------- -------
Net loss applicable to common stockholders............ $(40,266) $(16,217) $(6,429) $(1,316)
======== ======== ======= =======
Net loss per share:
Basic and diluted........................................ $(3.14) $(4.92) $(2.10) $(0.49)
Weighted average shares.................................. 12,840 3,295 3,068 2,679
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and short-term investments........... $55,653 $ 14,437 $ 2,055 $ 8,930
Working capital............................................. 52,861 13,493 1,844 8,651
Total assets................................................ 74,527 18,490 2,811 9,062
Long-term obligations, net of current portion............... 107 273 -- --
Redeemable convertible preferred stock and warrants......... -- 38,973 10,081 10,042
Total stockholders' (deficit) equity........................ 66,323 (22,463) (7,669) (1,270)
</TABLE>
Item: 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of financial condition and results of operations of
Talk City should be read in conjunction with the financial statements and notes
thereto. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors That May Affect Results of
Operations and Financial Condition" and elsewhere in this Report.
Overview
We provide online communities and customer relationship management for
businesses and consumers. From inception through December 1999, our operating
activities have primarily been focused on:
37
<PAGE>
. 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 which coincides with when the services are
performed, 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 third party 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 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, human resources, 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 along with promotional services attributable to the
operating agreements with NBC. 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 December 31, 1999, noncash
charges of $4.6 million will be charged to operations as the related advertising
is run or promotional services are received. We expect that $4 million of this
$4.6 million will be charged to operations during the year ended December 31,
2000. These amounts were determined based on the fair value of our common stock
and warrants exchanged for the services received. See Note 9 of the notes to our
financial statements.
We incurred losses of $40.1 million in 1999, $15.7 million in 1998, $6.4
million in 1997, and $1.3 million in 1996. These losses include noncash
advertising and promotional charges of $14.1 million
38
<PAGE>
through December 31, 1999. At December 31, 1999, we had an accumulated deficit
of $63.5 million. We anticipate that we will incur additional operating losses
for the foreseeable future.
Quarterly Results of Operations
The following table presents certain statement of operations data for our
eight most recent quarters ended December 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 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
------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1999 1999 1999 1998 1998 1998
--------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Revenues:
Business services................................ $ 1,292 $ 521 $ 410 $ 357 $ 229 $ 167
Advertising and sponsorships..................... 2,034 1,505 990 623 433 231
-------- ------- -------- ------- ------- -------
Total revenues................................ 3,326 2,026 1,400 980 662 398
Operating expenses:
Product development and programming.............. 5,550 4,367 3,379 2,224 1,642 1,268
Sales and marketing.............................. 5,348 4,694 4,263 3,425 3,512 1,983
General and administrative....................... 1,975 1,605 1,137 974 663 467
Noncash advertising and promotional charges...... 897 934 7,921 1,410 322 1,411
-------- ------- -------- ------- ------- -------
Total operating expenses...................... 13,770 11,600 16,700 8,033 6,139 5,129
-------- ------- -------- ------- ------- -------
Loss from operations.......................... (10,444) (9,574) (15,300) (7,053) (5,477) (4,731)
Interest income (expense), net..................... 1,001 809 300 154 154 (280)
-------- ------- -------- ------- ------- -------
Net loss...................................... (9,443) (8,781) (15,000) (6,899) (5,323) (5,011)
Accretion of redeemable convertible preferred stock
and warrants...................................... - 16 71 72 40 478
-------- ------- -------- ------- ------- -------
Net loss applicable to common
$ (9,443) $(8,781) $(15,071) $(6,971) $(5,363) $(5,489)
stockholders................................ ======== ======= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, Mar. 31,
1998 1998
--------- ----------
<S> <C> <C>
(in thousands)
Revenues:
Business services................................ $ 66 $ 60
Advertising and sponsorships..................... 202 65
------- -------
Total revenues................................ 268 125
Operating expenses:
Product development and programming.............. 1,298 1,175
Sales and marketing.............................. 697 476
General and administrative....................... 338 336
Noncash advertising and promotional charges...... 118 1,039
------- -------
Total operating expenses...................... 2,451 3,026
------- -------
Loss from operations.......................... (2,183) (2,901)
Interest income (expense), net..................... (251) 10
------- -------
Net loss...................................... (2,434) (2,891)
Accretion of redeemable convertible preferred stock
and warrants...................................... 20 20
------- -------
Net loss applicable to common
stockholders................................ $(2,454) $(2,911)
======== ========
</TABLE>
39
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items reflected in our results of
operations:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Revenues, net:
Business services 33 % 36 % 12 %
Advertising and sponsorships 67 64 88
----- ------- -------
Total revenues 100 100 100
Operating expenses:
Product development and programming 201 370 1,669
Sales and marketing 229 459 1,198
General and administrative 74 124 468
Noncash advertising and promotional 144 199 -
charges ----- ------- -------
Total operating expenses 648 1,152 3,335
----- ------- -------
Loss from operations (548) (1,052) (3,235)
Interest income (expense), net 29 (25) 163
----- ------- -------
Net loss (519) (1,077) (3,072)
Accretion of redeemable convertible preferred stock
and warrants 2 38 18
----- ------- -------
Net loss applicable to common stockholders (521)% (1,115)% (3,090)%
===== ======= =======
</TABLE>
Years Ended December 31, 1999, 1998 and 1997
Revenues. Total revenues were $7.7 million in 1999, $1.5 million in 1998
and $208,000 in 1997. Business services revenues were $2.6 million, or 33% of
total revenues, in 1999, $522,000, or 36% of total revenues, in 1998 and
$25,000, or 12% of total revenues, in 1997. Advertising and sponsorship revenues
were $5.2 million, or 67% of total revenues, in 1999, $931,000, or 64% of total
revenues, in 1998 and $183,000, or 88% of total revenues, in 1997. 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 $15.5 million, or 201% of total revenues, in 1999, $5.4 million,
or 370% of total revenues, in 1998 and $3.5 million, or 1,669% of total
revenues, in 1997. The increase in absolute dollars in product development and
programming from 1998 to 1999 was primarily attributable to an increase in
personnel and recruiting-related costs of $4.5 million, an increase in
consulting and contractor fees of $1.7 million and an increase in chat hosting,
partner and server-related costs of $3.1 million associated with the rapid
growth in user volume from our supervised chats and enhancements of
functionality to our Web sites. 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 in both periods due to growth in total revenues. We
expect that product development and programming expenses will increase in
absolute dollars in the future as we incur
40
<PAGE>
additional costs related to expanding our engineering staff, establishing a
secondary location for our servers and enhancing our content and functionality
of our Websites.
Sales and Marketing. Sales and marketing expenses were $17.7 million, or
229% of total revenues, in 1999, $6.7 million, or 459% of total revenues, in
1998 and $2.5 million, or 1,198% of total revenues, in 1997. The increase in
sales and marketing expenses from 1998 to 1999 was primarily attributable to an
increase of approximately $5.9 million associated with the development and
implementation of our branding, promotion and marketing campaigns and an
increase in sales personnel and commission-related costs of $2.8 million as a
result of implementing our sales and marketing strategy. 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. Sales and marketing expenses as a percentage of
total revenues decreased in both periods due to growth in total revenues. We
expect that sales and marketing expenses will increase in absolute dollars in
the future as we incur additional costs related to expanding our internal sales
force and increasing our expenditures to market and promote our business
services offerings.
General and Administrative. General and administrative expenses were $5.7
million, or 74% of total revenues, in 1999, $1.8 million, or 124% of total
revenues, in 1998 and $974,000, or 468% of total revenues, in 1997. The increase
in general and administrative expenses from 1998 to 1999 was primarily due to
stock-based compensation expense of $763,000 related to the issuance of stock
options and personnel and recruiting-related expenses of $1 million. In
addition, we incurred an increase in legal, accounting and insurance fees of
$540,000 due to increased expenses associated with being a public company and an
increase in facilities expenses of $740,000 in order to support the growth of
our business. The increase in general and administrative expenses from 1997 to
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
both periods due to the growth in total revenues. We expect that general and
administrative expenses will increase in absolute dollars in the future as we
incur additional costs related to the growth of our business, our recent
relocation of our corporate headquarters to a new 56,000 square foot facility
and operations as a public company.
Noncash Advertising and Promotional Charges. We incurred charges of $11.2
million, or 145% of total revenues, for 1999 and $2.9 million, or 198% of total
revenues, in 1998 representing noncash in-kind expenses associated with the
advertising and operating agreements with NBC and Hearst.
Interest Income (Expense), Net. Net interest income was $2.3 million, or
29% of total revenues, in 1999, 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. Interest income increased in 1999 compared to 1998 due to
higher cash equivalent and investment balances as a result of proceeds received
from sale of Preferred Stock in April 1999 and our initial public offering of
Common Stock in July 1999. We incurred interest expense in 1998 as a result of
our convertible loan financing in 1998.
Income Taxes. 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 to utilize those deferred tax
assets.
Financial Condition
Our total assets were $74.5 million and $18.5 million at December 31, 1999
and 1998, respectively, representing an increase of $56.0 million, or 303%. This
increase was primarily due to cash proceeds received from the sale of our Common
Stock in our July 1999 initial public offering and our April 1999
41
<PAGE>
private placement of Preferred Stock. As of December 31, 1999, we had $55.6
million of cash and cash equivalents and short-term investments, compared to
$14.4 million at December 31, 1998, representing an increase of $41.2 million,
or 286%. During April 1999, we issued 2,499,882 shares of Series E redeemable
convertible preferred stock resulting in proceeds of approximately $20.0
million. In July 1999, we issued 5.1 million shares of our Common Stock in
connection with our IPO resulting in net proceeds of approximately $55.4
million.
Our accounts receivable balance, net of allowance for doubtful accounts,
was $3.5 million and $763,000 as of December 31, 1999 and 1998, respectively,
representing an increase of $2.8 million, or 363%. This increase was principally
a result of increased business service revenues and advertising revenues. Days
sales outstanding, or DSO, in accounts receivable was 76 days and 81 days as of
December 31, 1999 and 1998, respectively. We expect DSO will fluctuate
significantly in future quarters, and may even increase.
Our total current liabilities were $8.1 million and $1.7 million as of
December 31, 1999 and 1998, respectively, representing an increase of 374%. This
increase consists primarily of an increase in accounts payable, accrued
liabilities and deferred revenue. The increase in accounts payable and accrued
liabilities was primarily due to increases in accrued liabilities for vacation,
commissions, moderator costs, marketing expenses and partner fees associated
with our increased growth and ongoing business activities. The growth in
deferred revenues at December 31, 1999 was due to our increased sales in the
current quarter over the same period last year. Sales in the fourth quarter of
1999 were up 402% from the same quarter in 1998.
Liquidity and Capital Resources
Since our inception in March 1996, we have financed our operations
primarily through the private placement of our Preferred Stock, our initial
public offering in July 1999 and, to a lesser extent, through equipment
financing. As of December 31, 1999, we had approximately $14.1 million in cash
and cash equivalents and approximately $41.5 million in short-term investments.
Net cash used in operating activities was approximately $25.2 million,
$11.0 million and $6.3 million for the years ended December 31, 1999, 1998 and
1997, respectively, representing increases of $14.6 million, or 133% from 1998
to 1999 and $4.7 million or 75% from 1997 to 1998. Cash used in operating
activities in each of these periods was primarily the result of net operating
losses, excluding the effects of noncash advertising expenses, and increases in
accounts receivable and prepaid expenses, partially offset by increases in
accrued expenses and accounts payable. For such periods, net cash used by
operating activities was primarily a result of funding our business growth and
ongoing operations.
Net cash used in investing activities was approximately $44.9 million, $6.5
million and $572,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Our investing activities have consisted primarily of net purchases
of short-term investments, purchases of property and equipment, and a cost
investment in Socialnet.com. Net purchases of short-term investments were $35.8
million, $5.7 million, and $0 for the years ended December 31, 1999, 1998 and
1997, respectively. The increases in short-term investment purchases were due to
the investment of proceeds from our private placement of preferred stock in
August 1998, private placement of preferred stock in April 1999 and initial
public offering in July 1999. Property and equipment acquisitions totaled $5.8
million, $797,000 and $550,000 for the years ended December 31, 1999, 1998 and
1997. The increase in acquisitions of property and equipment from 1998 to 1999
was due to our growth in operations, server requirements and opening of sales
offices in San Francisco and Chicago, as well as the expansion of our New York
City sales office. On December 21, 1999, we made a $3 million cost investment in
SocialNet, Inc. in exchange for 1,554,404 shares of Series C Preferred Stock,
representing approximately 7.6% of the fully diluted shares outstanding of
SocialNet, Inc. as of the investment date.
42
<PAGE>
Net cash provided by financing activities was approximately $75.6 million,
$24.2 million and $0 for the years ended December 31, 1999, 1998 and 1997,
respectively. In the year ended December 31, 1999, cash provided consisted
primarily of net proceeds of approximately $20 million from the private
placement of preferred stock in April 1999 and approximately $55.4 million from
our initial public offering in July 1999, partially offset by principal payments
on notes payable. Net cash provided by financing activities for the year ended
December 31, 1998 consisted primarily of the our private placement of Series D
Preferred Stock with net proceeds of approximately $21.2 million in August and
September 1998 and net proceeds of $2.9 million from our convertible loan
financing.
As of December 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 consistent with our anticipated growth in operations,
infrastructure and personnel. In October 1999, we signed a nine-year, three and
one-half month lease for a new 56,000 square foot corporate headquarters in
Campbell, California, which commenced on December 15, 1999. The Company is
required to provide a $2,100,000 letter of credit as security for the lease. The
letter of credit may be reduced by specified amounts in the lease agreement
after every twelve months through December 14, 2005, provided no default has
occurred. A $2,100,000 certificate of deposit with a one year maturity is held
as collateral by a bank for guarantee of the letter of credit. The certificate
of deposit is included in short-term investments. Future minimum lease payments
under all non-cancelable operating leases total $18.8 million.
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 four-year term that expires in April 2002. As of December
31, 1999, the amount outstanding under this line of credit was $261,000.
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, brand promotions and other factors. We have
experienced substantial increases in our expenditures since 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 and investments in
complementary businesses, technologies, services or products and to expand our
sales and marketing programs. We believe that our available cash and cash
equivalents will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next 12 months. Thereafter, 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.
43
<PAGE>
Item: 7a Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We place our investments with high quality issuers
and, by policy, limit the amount of credit risk exposure to any one issuer. We
are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default, market and reinvestment risk. We classify
our cash equivalents and short-term investments as "fixed rate" if the rate of
return on such instruments remains fixed over their term. These "fixed rate"
investments include fixed-rate commercial paper and corporate notes. We classify
our cash equivalents and short-term investments as "variable rate" if the rate
of return on such investments varies based on the change in a predetermined
index or set of indices during their term. These "variable rate" investments
primarily include market auction preferred securities held at two securities
brokers.
As of December 31, 1999, 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. Auction rate securities held for more than 90 days are included
in short term investments.
The table below presents the amounts and related weighted average interest
rates of our investment portfolio at December 31, 1999:
<TABLE>
<CAPTION>
Average Book Fair
Interest Rate Value Value
------------------- ------------------- ------------------
<S> <C> <C> <C>
Cash equivalents:
Fixed rate 6.18% $ 6,417 $ 6,417
Variable rate 6.15% 6,700 6,700
Short-term investments:
Fixed rate 5.94% 27,136 27,136
Variable rate 6.33% 14,405 14,405
</TABLE>
44
<PAGE>
Item: 8 Financial Statements and Supplementary Data
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of KPMG LLP, Independent Auditors 46
Balance Sheets as of December 31, 1999 and 1998 47
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 48
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997 49
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 50
Notes to Financial Statements 51
</TABLE>
45
<PAGE>
Report of KPMG LLP, Independent Auditors
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, 1999 and 1998, and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
February 2, 2000
46
<PAGE>
Talk City, Inc.
Balance Sheets
(in thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................... $ 14,112 $ 8,697
Short term investments...................................................... 41,541 5,740
Accounts receivable, net of allowances of $254 and $100
in 1999 and 1998, respectively.............................................. 3,533 763
Prepaid expenses and other current assets................................... 1,772 --
-------- --------
Total current assets........................................................ 60,958 15,200
-------- --------
Property and equipment, net................................................. 5,689 999
Other assets, net........................................................... 7,880 2,291
-------- --------
Total assets................................................................ $ 74,527 $ 18,490
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable, current portion.............................................. $ 154 $ 127
Accounts payable............................................................ 3,977 1,205
Accrued liabilities......................................................... 3,302 320
Deferred revenue........................................................... 664 55
-------- --------
Total current liabilities................................................... 8,097 1,707
Notes payable, less current portion......................................... 107 273
-------- --------
Total liabilities........................................................... 8,204 1,980
Commitments
Redeemable convertible preferred stock:
Authorized-- None and 19,000,000 in 1999 and 1998, respectively
Issued and outstanding-- None and 10,929,909 in 1999 and 1998,
respectively.
-- 38,973
Stockholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares authorized; no shares
issued and outstanding...................................................... -- --
Common stock, $0.001 par value:
Authorized--100,000,000 and 60,000,000 in 1999 and 1998,
respectively
Issued and outstanding--24,461,370 and 4,191,666 in 1999
and 1998, respectively...................................................... 24 4
Additional paid-in capital.................................................. 131,306 1,792
Deferred compensation..................................................... (550) (598)
Notes receivable from stockholders........................................ (992) (303)
Accumulated deficit....................................................... (63,465) (23,358)
-------- --------
Total stockholders' equity (deficit)........................................ 66,323 (22,463)
-------- --------
Total liabilities and stockholders' equity (deficit)........................ $ 74,527 $ 18,490
======== ========
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
Talk City, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Revenues:
Business services................................ $ 2,580 $ 522 $ 25
Advertising and sponsorships..................... 5,152 931 183
-------- -------- -------
Total revenues............................... 7,732 1,453 208
-------- -------- -------
Operating expenses:
Product development and programming.............. 15,520 5,383 3,472
Sales and marketing.............................. 17,730 6,668 2,492
General and administrative....................... 5,691 1,804 974
Noncash advertising and promotional
charges...................................... 11,162 2,890 --
-------- -------- -------
Total operating expenses.................. 50,103 16,745 6,938
-------- -------- -------
Loss from operations...................... (42,371) (15,292) (6,730)
Interest income (expense), net....................... 2,264 (367) 339
-------- -------- -------
Net loss.................................. (40,107) (15,659) (6,391)
Accretion of redeemable convertible preferred
stock and warrants................................. 159 558 38
-------- -------- -------
Net loss applicable to common
stockholders............................ $(40,266) $(16,217) $(6,429)
======== ======== =======
Net loss per share:
Basic and diluted................................ $(3.14) $(4.92) $(2.10)
======== ======== =======
Weighted average shares.......................... 12,840 3,295 3,068
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
Talk City, Inc.
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred stock Common stock Additional
------------------------ -------------------- paid-in
Shares Amount Shares Amount capital
------------ --------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996..................................... 3,794,785 10,043 3,837,200 4 328
Repurchase of common stock...................................... -- -- (150,000) -- (30)
Accretion attributable to redeemable preferred stock............ -- 38 -- -- (38)
Amortization of stock-based compensation........................ -- -- -- -- --
Net loss........................................................ -- -- -- -- --
----------- -------- ---------- --- --------
Balances, December 31, 1997..................................... 3,794,785 10,081 3,687,200 4 260
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 convertible
loan agreements............................................ -- -- -- -- 490
Issuance of common stock upon exercise of stock options, net of
repurchases................................................ -- -- 504,466 -- 133
Deferred stock-based compensation related to option grants...... -- -- -- -- 892
Amortization of stock-based compensation........................ -- -- -- -- --
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
Issuance of common stock upon exercise of stock options and
warrants, net of repurchases............................... -- -- 324,994 -- 996
Issuance of convertible preferred stock, net of $38 issuance
costs....................................................... 2,499,884 19,961 -- -- --
Noncash issuance of preferred stock pursuant to the NBC
and Hearst agreements....................................... 1,350,000 10,261 -- -- --
Noncash issuance of preferred stock warrants pursuant to the
NBC agreement............................................... -- 2,283
Revaluation of warrants related to the NBC operating agreements -- 30 -- -- 886
Conversion of convertible preferred stock into common stock..... (14,779,793) (71,667) 14,844,710 15 71,652
Proceeds from initial public offering, net of $5,771 issuance.. -- -- 5,100,000 5 55,424
costs
Deferred stock-based compensation related to option grants...... -- -- -- -- 715
Amortization of stock-based compensation........................ -- -- -- -- --
Accretion attributable to redeemable preferred stock............ -- 159 -- -- (159)
Net loss........................................................ -- -- -- -- --
------------ -------- ---------- --- --------
Balances, December 31, 1999.................................... -- $ -- 24,461,370 $24 $131,306
=========== ======== ========== === ========
<CAPTION>
Notes
receivable Total
Deferred from Accumulated stockholders'
compensation stockholders deficit equity (deficit )
------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996..................................... (89) (205) (1,308) (1,270)
Repurchase of common stock...................................... -- 30 -- --
Accretion attributable to redeemable preferred stock............ -- -- -- (38)
Amortization of stock-based compensation........................ 30 -- -- 30
Net loss........................................................ -- -- (6,391) (6,391)
----- ----- -------- --------
Balances, December 31, 1997..................................... (59) (175) (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 convertible
loan agreements........................................... -- -- -- 490
Issuance of common stock upon exercise of stock options, net of
repurchases............................................... -- (128) -- 5
Deferred stock-based compensation related to option grants...... (892) -- -- --
Amortization of stock-based compensation........................ 353 -- -- 353
Accretion attributable to redeemable preferred stock............ -- -- -- (120)
Net loss........................................................ -- -- (15,659) (15,659)
----- ----- -------- --------
Balances, December 31, 1998..................................... (598) (303) (23,358) (22,463)
Issuance of common stock upon exercise of stock options and
warrants, net of repurchases............................... -- (689) -- 307
Issuance of convertible preferred stock, net of $38 issuance
costs...................................................... -- -- -- --
Noncash issuance of preferred stock pursuant to the NBC
and Hearst agreements....................................... -- -- -- --
Noncash issuance of preferred stock warrants pursuant to the
NBC agreement
Revaluation of warrants related to the NBC operating agreements. -- -- -- 886
Conversion of convertible preferred stock into common stock..... -- -- -- 71,667
Proceeds from initial public offering, net of $5,771 issuance
costs....................................................... -- -- -- 55,429
Deferred stock-based compensation related to option grants...... (715) -- -- --
Amortization of stock-based compensation........................ 763 -- -- 763
Accretion attributable to redeemable preferred stock............ -- -- -- (159)
Net loss........................................................ -- -- (40,107) (40,107)
----- ----- -------- --------
Balances, December 31, 1999.................................... $(550) $(992) $(63,465) $ 66,323
===== ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
Talk City, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $(40,107) $(15,659) $(6,391)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................................ 1,140 347 125
Stock-based compensation expense......................................... 763 353 30
Common stock warrants issued pursuant to the loan financing.............. -- 490 --
Noncash advertising and promotional charges.............................. 11,162 2,890 --
Provision for accounts receivable allowance.............................. 318 100 --
Changes in operating assets and liabilities:
Accounts receivable...................................................... (3,088) (742) (111)
Prepaid expenses and other current assets................................ (1,772) 67 (66)
Accounts payable......................................................... 2,772 814 102
Accrued liabilities...................................................... 2,982 312 8
Deferred revenue......................................................... 609 55 --
-------- -------- -------
Net cash used in operating activities.................................... (25,221) (10,973) (6,303)
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment...................................... (5,839) (797) (550)
Investment in private company............................................ (3,000) -- --
Purchases of short-term investments...................................... (48,011) (5,740) --
Proceeds from sale of short-term investments............................. 12,210 -- --
Other assets............................................................. (282) (22) (22)
-------- -------- -------
Net cash used in investing activities...................................... (44,922) (6,559) (572)
-------- -------- -------
Cash flows from financing activities:
Proceeds from initial public offering, net of issuance costs............. 55,429 -- --
Proceeds from sale of redeemable preferred stock, net of issuance
costs.................................................................... 19,961 21,197 --
Proceeds from issuance of common stock from exercise
of stock options and warrants............................ 307 5 --
Proceeds from convertible loan financing, net of issuance costs.......... -- 2,903 --
Repayment of convertible loan financing.................................. -- (331) --
Proceeds from notes payable.............................................. -- 491 --
Repayment of notes payable............................................... (139) (91) --
-------- -------- -------
Net cash provided by financing activities................................... 75,558 24,174 --
-------- -------- -------
Net (decrease) increase in cash and cash equivalents..................... 5,415 6,642 (6,875)
Cash and cash equivalents at beginning of period......................... 8,697 2,055 8,930
-------- -------- -------
Cash and cash equivalents at end of period............................... $ 14,112 $ 8,697 $ 2,055
======== ======== =======
Cash paid during the period for interest................................. $ 74 $ 113 $ --
======== ======== =======
Supplemental disclosure of noncash financing activities:
Conversion of redeemable preferred stock to common stock................. $ 71,667 $ -- $ --
======== ======== =======
Accretion of redeemable convertible preferred stock and warrants......... $ 159 $ 558 $ 38
======== ======== =======
Common stock issued for notes receivable................................. $ 689 $ 128 $ --
======== ======== =======
Issuance of stock and warrants and revaluation of warrants
$ 13,460 $ 5,140 $ --
for advertising and promotional services................................. ======== ======== =======
Issuance of preferred stock for conversion of loan financing............. $ -- $ 2,572 $ --
======== ======== =======
Deferred stock-based compensation related to option grants............... $ 715 $ 892 $ --
======== ======== =======
</TABLE>
See accompanying notes to financial statements
50
<PAGE>
Talk City, Inc.
Notes to Financial Statements
(1) Description of Business and Nature of Operations
Talk City, Inc. (the Company), incorporated in March 1996, is a provider of
online communities and customer relationship management services for businesses
and consumers. The Company offers businesses, at www.business.talkcity.com, 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 in the United States of various
sizes within several industries.
(2) Summary of Significant Accounting Policies
(a) 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 for a period of time up to two
years in which the Company designs customized communities, produces online
events, conducts market research, and facilitates online discussion boards
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.
(b) Cash Equivalents
All highly liquid financial instruments purchased with an original
maturity of three months or less are reported as cash equivalents.
51
<PAGE>
(c) Short-term Investments
Marketable securities are stated at fair value at the balance sheet
date. By policy, the Company invests primarily in high-grade marketable
securities. Marketable securities are classified as available-for-sale
securities under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
Management determines the appropriate classification of its investments
in marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. The Company has classified its
marketable securities as available-for-sale, which are carried at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. At December 31, 1999 and 1998, the fair
value of marketable securities (consisting primarily of commercial paper,
corporate notes and market auction securities) approximates their cost.
Therefore, no unrealized gain or loss has been recorded. Realized gains and
losses have not been material for any period presented.
(d) Fair Values of Financial Instruments
The Company has the following financial instruments: cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities, long-term debt and a standby letter of credit. The
carrying value of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximates
fair value based on liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt and standby
letter of credit approximates fair value based on the market interest rates
available to the Company for debt of similar risk and maturities. The
Company does not have any foreign currency hedging or other derivative
financial instruments as of December 31, 1999.
(e) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives
of the equipment, generally ranging from three to five years. Leasehold
improvements are amortized over the shorter of their estimated useful lives
or the related lease life, generally ranging from three to six years.
(f) 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 exceeds 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.
(g) 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.
52
<PAGE>
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
was 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's
adoption of this standard did not have a material effect on the Company's
capitalization policy.
(h) Advertising and Marketing Expense
The cost of advertising is expensed as incurred. Advertising costs were
$22,606,000, $7,410,000, and $1,245,000, for the years ended December 31,
1999, 1998 and 1997, respectively. For the years ended December 31, 1999
and 1998, these costs included, $11,162,000, and $2,890,000, respectively,
of noncash advertising and promotional charges pursuant to the NBC and
Hearst advertising and operating agreements. See Note 9--Advertising and
Operating Agreements.
(i) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" which utilizes the 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.
(j) 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, "Accounting for Stock Issued to
Employees." 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 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 5--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.
(k) 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.
53
<PAGE>
(l) 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 share 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 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>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Stock options............................................ 1,248 343 675
Unvested common stock subject to repurchase.............. 374 752 647
Preferred and common stock warrants...................... 1,205 1,311 --
Redeemable convertible preferred stock (as if converted). -- 6,467 3,795
----- ----- -----
2,827 8,873 5,117
===== ===== =====
</TABLE>
(m) 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.
(n) Reverse Stock Split and Reincorporation
On July 12, 1999, the Company effected 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 was adjusted to equal $0.001 per
share and the number of common shares authorized was increased to
100,000,000. 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.
(o) Segment Reporting
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.
(p) 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 three domestic financial institutions. From time to
time, the Company's cash balances with its financial institutions 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
54
<PAGE>
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, 1999 and 1998, the allowance for bad debts
was $254,000 and 100,000, respectively.
The Company's operations and assets are based in the United States, and
its revenues have substantially all been earned from customers in the
United States. Revenues from one major customer were $947,000 and $319,000
for the years ended December 31, 1999 and 1998, respectively. Total
receivables from this customer were $377,000 and $171,000 at December 31,
1999 and 1998, respectively. No customer accounted for more than 10% of
revenues for the year ended December 31, 1997.
(q) Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
and for hedging activities. The Company believes the adoption of SFAS No.
133 will not have a material effect on its results of operations, financial
position or cash flows. This statement will be effective for the Company
beginning January 1, 2001.
(3) 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, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
--------- -----------
<S> <C> <C>
Cash equivalents:
Money markets funds.............................................................. $ 163 $ 21
Commercial paper................................................................. 6,417 4,445
Auction rate securities.......................................................... 6,700 1,300
Corporate notes.................................................................. -- 2,347
------- -------
13,280 8,113
------- -------
Short-term investments:
Commercial paper................................................................. 13,414 980
Auction rate securities.......................................................... 13,722 --
Corporate notes.................................................................. 14,405 4,760
------- -------
41,541 5,740
------- -------
$54,821 $13,853
======= =======
</TABLE>
As of December 31, 1999 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. Auction rate securities held for more than 90 days are
included in short term investments.
55
<PAGE>
(b) Property, Plant and Equipment
Property and equipment consisted of the following as of December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Computer equipment................................................................ $5,016 $1,435
Furniture and fixtures............................................................ 1,188 50
Leasehold improvements............................................................ 1,120 --
------ ------
7,324 1,485
Less accumulated depreciation and amortization.................................... 1,635 486
------ ------
$5,689 $ 999
====== ======
</TABLE>
(c) Other Assets
Other assets consisted of the following as of December 31, 1999 and
1998 (in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Capitalized in-kind advertising and promotional expenses, net (Note 9)....... $4,559 $2,253
Cost investment in SocialNet, Inc (Note 10).................................. 3,000 --
Deposits..................................................................... 321 38
------ ------
$7,880 $2,291
====== ======
</TABLE>
(d) Accrued Liabilities
Accrued liabilities consisted of the following as of December 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Accrued compensation and benefits.............................................. $ 953 $ 202
Accrued sales and marketing expenses........................................... 987 --
Accrued moderator expenses..................................................... 390 --
Other accrued liabilities...................................................... 972 118
------ -----
$3,302 $ 320
====== =====
</TABLE>
(e) Interest Income (Expense), Net
Interest income (expense), net consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1999 1998 1997
-------------- --------- ---------
<S> <C> <C> <C>
Interest income........................................................ $2,341 $ 241 $ 339
Interest and other expense............................................. (77) (608) --
------ ----- -----
$2,264 $(367) $ 339
====== ===== =====
</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
5--Capitalization.
56
<PAGE>
(4) 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, 1999 and
1998, $261,000 and $400,000, respectively, 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, 1999 are as follows: 2000, $154,000; 2001, $93,000; and 2002,
$14,000.
(5) Capitalization
(a) Redeemable Convertible Preferred Stock
A summary of redeemable convertible preferred stock issued by the Company
since inception follows:
<TABLE>
<CAPTION>
Noncumulative Liquidation Redemption
Shares dividend preference price
issued 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.......................................... 8,100,509 0.32 4.00 4.00
Series E.......................................... 2,499,884 0.32 8.00 8.00
----------
14,779,793
==========
</TABLE>
Each share of the Series A, A1, B, D and E redeemable preferred stock was
convertible into common stock at a rate of 1.00 shares of common stock for one
share of preferred. Pursuant to antidilution adjustments, the Series C Stock was
convertible at a rate of 1.17 shares of common stock for 1 share of Series C
Stock. The redeemable preferred stock automatically converted to common stock
upon completion of the Company's public offering of common stock in July 1999.
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 $2,572,000, including accrued interest, were converted
into 658,476 shares of Series D Stock and the remaining notes were repaid in
full.
No dividends have been declared or paid on either the preferred stock or
common stock since inception of the Company.
(b) Common Stock
The Company completed its initial public offering ("IPO") of approximately
5.1 million shares of Common Stock, including 100,000 shares of the underwriters
over-allotment option, on July 23, 1999 (the 100,000 shares of the underwriters
over-allotment option was completed on August 24, 1999) and raised approximately
$55.4 million, net of offering costs of $5,771,000. Talk City is listed on the
NASDAQ National Market under the symbol "TCTY."
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 rates ranging between 5.2% and 6.9% and
expire on various dates
57
<PAGE>
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, 1999, there were 374,049 shares
subject to repurchase. These options were exercised at prices ranging from $0.20
to $5.00 with a weighted average exercise price of $1.83 per share.
(c) Stock Option Plans and Employee Stock Purchase 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.
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 on the first day of the Company's fiscal year
beginning in 2000 by the lesser of 750,000 shares, 4% of the then outstanding
shares of common stock or an amount determined by the Board of Directors.
The Board of Directors approved, on April 23, 1999, the 1999 Employee Stock
Purchase Plan ("ESPP"). 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. Qualified employees may elect to have a certain percentage not to
exceed 15% of their salary withheld pursuant to the 1999 Plan. The salary
withheld is then used to purchase shares of the Company's common stock at a
price equal to 85% of the market value of the stock at the beginning of the 24
month offering period or end of the six-month purchase period, whichever is
lower. Under this Plan, 42,409 shares were issued during fiscal 1999
representing approximately $261,000 in employee contributions.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
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............................... 342,998 $ 0.82 674,801 $0.26 207,750 $0.20
Options granted...................... 1,213,425 11.06 315,623 0.92 520,551 0.28
Options exercised.................... (188,188) 3.46 (534,519) 0.26 -- --
Options canceled..................... (82,122) 3.53 (112,907) 0.38 (53,500) 0.28
---------- --------- --------
Outstanding at end of year............. 1,247,537 10.08 342,998 0.82 674,801 0.26
========== ========= ========
Shares available for future grant...... 731,892 315,336 488,000
========== ========= ========
Weighted Average fair value of
options granted during the year:
Granted at fair value $ 8.65 $ 0.70 $ 0.28
Granted below fair value 6.25 2.16 --
All options granted 8.46 2.10 0.28
</TABLE>
58
<PAGE>
The Company uses the intrinsic value-based method to account for all its
employee stock-based compensation arrangements. The Company has recorded
deferred stock-based compensation expense of $715,000 and $892,000 relating to
options granted during the years ended December 31, 1999 and 1998, respectively.
These amounts represent the difference between the exercise price and the deemed
fair value for financial reporting purposes of the company's common stock during
the periods in which such options were granted. Amortization of deferred stock
compensation of $763,000 and $353,000 was recognized during the years ended
December 31, 1999 and 1998, respectively.
Information regarding the weighted average remaining contractual life and
weighted average exercise price of options outstanding and options exercisable
as of December 31, 1999, for selected exercise price ranges is as follows:
<TABLE>
<CAPTION>
Options outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life (years) price outstanding price
------ ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.20 - 0.40 155,338 7.68 $ 0.28 103,379 $ 0.26
2.00 - 6.00 153,774 9.02 4.11 34,648 3.77
8.00 - 12.00 267,925 9.52 9.08 43,800 11.05
13.94 - 17.94 670,500 9.96 14.08 -- --
--------- -------
1,247,537 9.46 10.06 181,827 3.53
========= =======
</TABLE>
The following pro forma information regarding stock-based compensation has
been determined as if the Company had accounted for its employee stock options
and employee stock purchase plan shares under the fair market value method of
SFAS 123. The weighted average fair value of employee stock purchase plan
shares issued during 1999 was $7.19. The fair value of these options and
employee stock purchase plan shares were estimated at the date of grant using
the Black Scholes model with the following weighted average assumptions: (i) a
dividend yield of 0% for all periods; (ii) expected volatility of 96% for
employees and nonemployees for 1999, 0% for employees and 135% and 45% for
nonemployees in 1998 and 1997; (iii) risk-free interest rate of 5.0% in 1999,
5.0% in 1998, and 6.0% in 1997; (iv) an expected life of three years for
employees, a contractual life of ten years for nonemployees and six months for
shares issued under the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting periods. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Years ended December 31,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net loss as reported................................................ $(40,266) $(16,217) $(6,429)
Incremental pro forma compensation expense under SFAS 123........... (647) (153) (16)
-------- -------- -------
Pro forma net loss $(40,913) $(16,370) $(6,445)
======== ======== =======
Pro forma net loss per share $ (3.19) $ (4.97) $ (2.10)
======== ======== =======
</TABLE>
Under SFAS 123, compensation expense representing the fair value of the
option grant is recognized over the vesting period. The impact on pro forma net
loss may not be representative of compensation expense in future years, when the
effect of amortization of multiple awards would be reflected in pro forma
earnings.
59
<PAGE>
(d) Warrants
In connection with the Series D Preferred 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 were 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 1999 and 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 522,223
shares of the Series D Stock. See Note 9--Advertising and Operating Agreements.
All of the warrants associated with the Series D Stock were converted into
common stock warrants at a conversion ratio of one Series D Stock warrant to one
common stock warrant at the time of the Company's IPO.
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 were 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: (i) dividend yield of 0%; (ii) expected volatility of
135% for 1998 and 126% for 1999; (iii) weighted average risk-free interest rates
of approximately 5% in 1998 and 6.0% in 1999; and (iv) contractual life of five
years.
During 1999, warrants representing 98,928 shares were exercised. No
warrants were exercised during 1998. As of December 31, 1999 and 1998, warrants
outstanding were 1,204,946 and 1,311,353 respectively.
(6) 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 years ended December 31, 1999, 1998 and 1997, follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Income tax benefit at statutory rate................................. $(13,636) $(5,270) $(2,173)
Current year net operating loss and temporary differences for
which no benefit has been recgnized................................ 13,414 4,969 2,153
Other................................................................ 222 301 20
-------- ------- -------
Total......................................................... $ - $ - $ -
======== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1999 and
1998, are as follows (in thousands):
60
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------- ----------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards......................................... $ 21,767 $ 8,812
Preferred and common stock warrants...................................... 1,889 582
Property and equipment................................................... 329 179
Research credit carryforwards............................................ 585 233
Other.................................................................... 533 117
-------- -------
Total gross deferred tax assets.................................. 25,103 9,923
Valuation allowance........................................................... (25,103) (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, 1999,
1998 and 1997 was approximately $15,180,000, $6,556,000 and $2,826,000,
respectively.
The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $56,383,000 and $28,780,000, respectively,
available to reduce future taxable income subject to income taxes. The net
operating loss carryforwards expire beginning in 2011 through 2019 for federal
income tax purposes and in 2004 for California income tax purposes.
The Company also has research credit carryforwards for federal and
California income tax return purposes of approximately $402,000 and $220,000,
respectively, available to reduce future income taxes. The federal research
credit carryforward expires beginning in 2011 through 2019. The California
research credit carryforward can be utilized indefinitely.
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 $402,000 and $220,000,
respectively, available to reduce future income taxes. The federal research
credit carryforward expires beginning in 2011 through 2019. The California
research credit carryforward can be utilized indefinitely.
Included in gross deferred tax assets as of December 31, 1999 is
approximately $464,000 related to stock options and warrants for which the
benefit, when realized will be recorded to equity.
(7) Commitments
The Company leases its facilities under noncancelable operating leases
expiring at various dates through March 2009. In October 1999, the Company
signed a nine-year three and one-half month lease for a new 56,000 square foot
corporate headquarters in Campbell, California, which commenced on December 15,
1999. The Company is required to provide a $2,100,000 letter of credit as
security for the lease. The letter of credit may be reduced by specified amounts
in the lease agreement after every twelve months through December 14, 2005
provided no default has occurred. A $2,100,000 certificate of deposit with a
one year maturity is held as collateral by a bank for guarantee of the letter of
credit. The certificate of deposit is included in short-term investments.
61
<PAGE>
Rent expense was approximately $790,000, and $211,000, $63,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................................................ $ 2,108
2001........................................................................................ 2,290
2002........................................................................................ 2,366
2003........................................................................................ 2,093
2004 and thereafter......................................................................... 9,898
-------
Total minimum lease payments......................................................... $18,755
=======
</TABLE>
(8) 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 1999, 1998 or 1997.
(9) Advertising and Operating Agreements
Advertising Agreements
The Company entered into three separate agreements with the National
Broadcasting Company (NBC) whereby NBC provided the Company with advertising
time and promoted 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 in exchange for advertising 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 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 was 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 would 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 with a face value of
$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. For
every $800,000 in advertising, the Company would 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. On April 15, 1999, as NBC had not provided any
advertising spots pursuant to this agreement, the Board of Directors
amended the agreement with NBC to effect the immediate issuances of
600,000 shares of Series D Stock and warrants to purchase 266,667
shares of Series D Stock. The warrants were valued on April 15, 1999
at approximately $1,871,000 using the Black Scholes option pricing
model.
62
<PAGE>
On October 30, 1998, the Company entered into an agreement with the New
Media and Technology division of Hearst Communications, Inc. (Hearst) whereby
Hearst would provide advertising space to the Company in selected national
publications. The advertising has an aggregate discounted rate card value of
$3,000,000 and would be provided in exchange for 750,000 shares of Series D. For
every $4.00 of print advertising provided by Hearst, the Company would issue one
share of Series D Stock. On April 15, 1999, as Hearst had not provided all the
advertising pursuant to this agreement, the Board of Directors amended the
agreement with Hearst to effect the immediate issuance of 750,000 shares of
Series D Stock.
All the warrants and preferred stock issued pursuant to the above are
noncancelable and nonforfeitable. Accordingly, the fair market value of these
instruments was measured and fixed on the date of their respective issuance. The
total fair value was recorded in Other Assets and is being charged to operations
as the advertisements are run. The fair values attributable to the amended NBC
and Hearst agreements were based on the fair value of the Series E Redeemable
Convertible Preferred Stock issued at $8.00 per share on April 15, 1999. For
the years ended December 31, 1999 and 1998, advertising expense related to these
agreements of $9,198,000 and $2,228,000, respectively, was recorded to noncash
advertising and promotional charges in the statement of operations. As of
December 31, 1999 and 1998, the unamortized value attributable to the
noncancelable stock and warrants of $3,007,000 and $0, respectively, was
recorded in Other Assets.
In connection with the Company's IPO, the preferred stock issued in the
above arrangements was converted to common stock at their respective ratios. In
addition, the warrants are exercisable into shares of common stock, determined
based on the respective conversion ratios.
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. Pursuant to the original agreement,
of the shares issuable upon exercise of the warrants, 50% and 25% are
subject to cancellation, if not previously exercised, in the event NBC
Multimedia cancelled the agreement for convenience prior to February
25, 1999 and February 25, 2000, respectively. On April 15, 1999, the
Board of Directors amended the operating agreement with NBC to effect
the immediate issuance of a noncancelable warrant to purchase 375,000
shares of common stock in exchange for the previous warrant issued to
NBC under this agreement. 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. Pursuant to the
original terms, of the shares issuable upon exercise of the warrant,
25% are subject to cancellation, if not previously exercised, in the
event NBC multimedia cancelled the agreement for convenience prior to
August 2001. On April 15, 1999, the Board of Directors amended the
operating agreement with NBC to effect the immediate issuance of a
noncancelable warrant to purchase 130,556 shares of Series D Stock in
exchange for and upon cancellation of the previous warrant issued to
NBC under this agreement. The warrant was initially valued at
approximately $439,000 using the Black-Scholes option pricing model.
63
<PAGE>
In accordance with ETIF 96-18, the warrants subject to cancellation were
required to be revalued at each balance sheet date based on the current fair
value through the date the related cancellation or repurchase rights lapsed. As
a result of the amendments described above, the value of the warrants that were
initially subject to cancellation was fixed and measured on April 15, 1999 based
on the Series E Redeemable Preferred Stock price per share. The fair value of
the Series D Stock of $2,000,000 and the fair value of the warrants of
$2,179,000 issued in connection with the operating agreements was recorded in
Other Assets and is being amortized over the remaining term of the respective
operating agreements, which coincides with when the services are received. For
the years ended December 31, 1999 and 1998, amortization expense related to
these agreements of $1,964,000 and $662,000, respectively, was recorded to
noncash advertising and promotional charges in the statement of operations. As
of December 31, 1999 and 1998, the unamortized value attributable to the
noncancelable preferred stock and warrants of $1,552,000 and $2,253,000,
respectively, was recorded in Other Assets.
(10) Related Party Transactions
On December 21, 1999, the Company entered into a Series C Preferred Stock
Agreement with SocialNet, Inc. ("SocialNet"), a privately held corporation. In
accordance with the Series C Preferred Stock Agreement, the Company purchased
1,554,404 shares of Series C Preferred Stock of SocialNet, representing a 7.6%
ownership interest in SocialNet, for $3.0 million. The Company accounts for
this investment under the cost method. Additionally, the Company recorded
$129,000 in revenue for the sale of advertising and business services to
SocialNet in 1999. Accounts receivable from SocialNet were $30,000 at December
31, 1999.
In 1999 and 1998, the Company recorded revenue totaling $569,000 and
$92,000, respectively, for the sale of advertising and business services to
various stockholders of the Company. Accounts receivable from the stockholders
were $192,000 and $31,000, respectively. Accounts payable to stockholders were
$22,000 and $2,000 at December 31, 1999 and 1998, respectively.
(11) Network Participants
As of December 31, 1999, the Company's community included 31 network
participants with whom it produces co-branded versions of Talk City for their
approximate 50 Internet sites. The network participants consist of three types
of companies: major media, Internet service providers and Internet content.
Through its network participants, the Company receives user volume driven by the
network participants. The volume is considered to be "driven" by network
participant if the user comes to the Company's site via a participant's site.
For the year ended December 31, 1999, approximately 35% of the Company's
advertising and sponsorship revenues were based on volume driven by its network
participants. For this period, one network participant was responsible for
approximately 28% of the Company's advertising and sponsorship revenue. If the
Company were to terminate or otherwise lose the benefit of its network
participants, the Company could be at risk of being unable to replace the
network participant's volume and associated advertising and sponsorship revenues
which could have a negative impact on the Company's operating results.
(12) Subsequent Event
On January 3, 2000, the Company acquired Research Connections, Inc.,
("RCI"), a privately-held online market research company. The Company will pay
$500,000 in cash and issue 242,424 shares of its common stock with an
approximate fair value of $3 million in exchange for all outstanding shares of
RCI. Cash consideration of $500,000 is due as follows: $250,000 was paid on
January 3, 2000; $125,000 will be paid on April 3, 2000; and $125,000 will be
paid on July 3, 2000. In addition, contingent cash consideration of $1.5
million, subject to an employment agreement with the sole shareholder of RCI,
was placed into an escrow fund. Funds will be released over four years with
25% released on January 3, 2001 and the remainder released evenly over the
following thirty-six months. In the event the shareholder is terminated for
cause or voluntarily leaves employment of the Company, then all remaining cash
in the escrow fund shall be forfeited to the Company and the shareholder will
have no further right to such cash.
64
<PAGE>
The Company will record the cash consideration of $1.5 million as compensation
expense as the funds are released from escrow.
The acquisition will be accounted for as a purchase. Therefore, the results
of operations of RCI and the fair value of the assets acquired and liabilities
assumed will be included in the Company's financial statements beginning on the
acquisition date. The preliminary allocation of the purchase price will result
in goodwill of approximately $3.4 million, which will be capitalized and
amortized on a straight line basis over five years.
PART III
Item: 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item: 10 Directors and Executive Officers of the Registrant
We will furnish to the Securities and Exchange Commission a definitive
Proxy Statement (the "Proxy Statement") not later than 120 days after the close
of the fiscal year ended December 31, 1999. The information required by this
item is incorporated herein by reference to the Proxy Statement.
Item: 11 Executive Compensation
The information required by this item is incorporated herein by reference
to the Proxy Statement.
Item: 12 Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the Proxy Statement.
Item: 13 Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to
the Proxy Statement.
PART IV
Item: 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Reorganization between the registrant and
Research Connections, Inc., dated January 3, 2000.
3.2 Second Amended and Restated Certificate of Incorporation of the
Company.*
3.3 Bylaws of the 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.*
10.1 Form of Indemnification Agreement entered into by the registrant
with each of its directors and executive officers.*
65
<PAGE>
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.*
10.21 Lease Agreement, dated May 5, 1999, by and between the registrant
and Pruneyard Associates, LLC.*
10.22 Sublease Agreement, Second Amendment to Lease and Consent to
Sublease Agreement, and Tri-Party Construction Agreement dated
October 20, 1999, by and between the registrant, Compuware
Corporation and Pruneyard Associates, LLC. **
23.1 Consent of KPMG LLP, Independent Auditors.
27.1 Financial Data Schedule (filed only with the electronic submission
of Form 10-K in accordance with the Edgar requirements).
______________
66
<PAGE>
* Incorporated by reference from registrant's 424(b) Prospectus, dated July
19, 1999, as declared effective by the Securities and Exchange Commission on
July 19, 1999.
** Incorporated by reference from the registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1999.
(b) Financial Statement Schedule
67
<PAGE>
The following financial statement schedule for the years ended December 31,
1999, 1998, and 1997 should be read in conjunction with the financial
statements of Talk City, Inc. filed as part of this Annual Report on Form
10-K.
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Charged to
Balance at Charged to other
beginning of costs and accounts - Deduction - Balance at
Description period expenses describe (1) describe (2) end of period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $100,000 $214,084 $104,000 164,084 $254,000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts -- 100,000 -- -- 100,000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Charges to revenue
(2) Uncollectible accounts written off, net of recoveries
(c) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed for the last
quarter of the fiscal year.
68
<PAGE>
REPORT ON SCHEDULE OF KPMG, LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Talk City, Inc.:
The audits referred to in our report included herein dated February 2, 2000,
included the accompanying financial statement schedule as of December 31,
1999, and for each of the years in the three-year period ended December 31,
1999. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits. In our opinion, the accompanying
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ KPMG LLP
Mountain View, California
February 2, 2000
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TALK CITY, INC.
By: /s/ Peter Friedman
-------------------------------
Peter H. Friedman
Chief Executive Officer
and Chairman of the Board
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Name Title Date
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Principal Executive Officer:
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Peter H. Friedman Chief Executive Officer and March 28, 2000
- --------------------- Chairman of the Board
Peter H. Friedman
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Principal Financial Officer and Principal
Accounting Officer:
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Jeffrey Snetiker Senior Vice President, March 28, 2000
- -------------------- Chief Financial and
Jeffrey Snetiker Administrative Officer
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Directors:
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
/s/ John Sculley Director March 28, 2000
- ----------------
John Sculley
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Joseph A. Graziano Director March 28, 2000
- ----------------------
Joseph A. Graziano
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Kenneth A. Bronfin Director March 28, 2000
- ----------------------
Kenneth A. Bronfin
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Barry M. Weinman Director March 28, 2000
- --------------------
Barry M. Weinman
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Thomas P. Hirschfeld Director March 28, 2000
- ------------------------
Thomas P. Hirschfeld
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Martin J. Yudkovitz Director March 28, 2000
- -----------------------
Martin J. Yudkovitz
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
Dated as of January 3, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 - THE MERGER.................................................................................. 1
1.1 Merger; Effective Time...................................................................... 1
1.2 Closing..................................................................................... 1
1.3 Effects of the Merger....................................................................... 1
1.4 Certificate of Incorporation; Bylaws; Directors; Officers................................... 2
1.5 Tax-Free Reorganization..................................................................... 2
SECTION 2 - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE............................................ 2
2.1 Effect on Capital Stock..................................................................... 2
2.2 Exchange of Certificates.................................................................... 4
SECTION 3 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SOLE SHAREHOLDER...................... 5
3.1 Organization, Standing and Corporate Power.................................................. 6
3.2 Company Capital Structure................................................................... 6
3.3 Subsidiaries................................................................................ 6
3.4 Authority/Noncontravention.................................................................. 6
3.5 Financial Statements; No Undisclosed Liabilities............................................ 7
3.6 Absence of Certain Changes or Events........................................................ 8
3.7 Litigation.................................................................................. 8
3.8 Contracts................................................................................... 8
3.9 Compliance With Laws........................................................................ 9
3.10 Absence of Changes in Benefit Plans; Employment Agreements; Labor Relations................. 10
3.11 ERISA Compliance............................................................................ 10
3.12 Taxes....................................................................................... 11
3.13 No Excess Parachute Payments................................................................ 13
3.14 Title to Properties......................................................................... 13
3.15 Intellectual Property....................................................................... 13
3.16 Year 2000 Compliance........................................................................ 14
3.17 Voting Requirements......................................................................... 15
3.18 Payments.................................................................................... 15
3.19 Transactions with Related Parties........................................................... 15
3.20 Restrictions on Business Activities......................................................... 16
3.21 Accounts Receivable; Inventory.............................................................. 16
3.22 Minute Books................................................................................ 16
3.23 Environmental Matters....................................................................... 16
3.24 Insurance................................................................................... 17
3.25 Warranties; Indemnities..................................................................... 17
3.26 Representations Complete.................................................................... 17
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF PARENT.................................................... 18
4.1 Organization, Standing and Corporate Power.................................................. 18
4.2 Authority/Noncontravention.................................................................. 18
4.3 SEC Documents; Parent Financial Statements.................................................. 18
4.4 Parent Common Stock......................................................................... 19
SECTION 5 - COVENANTS................................................................................... 19
5.1 Conduct of Business of the Company.......................................................... 19
5.2 No Solicitation............................................................................. 21
5.3 Shareholder Approval........................................................................ 22
5.4 Access to Information....................................................................... 22
5.5 Confidentiality............................................................................. 22
5.6 Expenses.................................................................................... 22
5.7 Public Disclosure........................................................................... 22
5.8 Consents.................................................................................... 22
5.9 FIRPTA Compliance........................................................................... 23
5.10 Reasonable Efforts.......................................................................... 23
5.11 Notification of Certain Matters............................................................. 23
5.12 Blue Sky Laws............................................................................... 23
5.13 Noncompetition and Employment Agreements.................................................... 23
5.14 Investment Representation Agreements........................................................ 23
SECTION 6 - CONDITIONS TO THE MERGER.................................................................... 24
6.1 Conditions to the Obligations of Parent and Sub............................................. 24
6.2 Additional Conditions to Obligations of Company............................................. 25
SECTION 7 - INDEMNIFICATION............................................................................. 26
7.1 General Indemnification..................................................................... 26
7.2 Limitation and Expiration................................................................... 27
7.3 Escrow Fund................................................................................. 27
7.4 Indemnification Procedures.................................................................. 28
7.5 Survival of Representations, Warranties and Covenants....................................... 31
SECTION 8 - TERMINATION, AMENDMENT AND WAIVER........................................................... 31
8.1 Termination................................................................................. 31
8.2 Effect of Termination....................................................................... 32
8.3 Amendment................................................................................... 32
8.4 Extension; Waiver........................................................................... 32
8.5 Notice of Termination....................................................................... 32
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 9 - MISCELLANEOUS.............................................................................. 32
9.1 Notices.................................................................................... 32
9.2 Interpretation............................................................................. 33
9.3 Counterparts............................................................................... 34
9.4 Entire Agreement; Assignment............................................................... 34
9.5 Severability............................................................................... 34
9.6 Other Remedies............................................................................. 35
9.7 Governing Law.............................................................................. 35
9.8 Further Assurances......................................................................... 35
9.9 Absence of Third Party Beneficiary Rights.................................................. 35
9.10 Mutual Drafting............................................................................ 35
9.11 Further Representations.................................................................... 35
</TABLE>
-iii-
<PAGE>
INDEX OF EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Form of Noncompetition Agreement
Exhibit C Form of Investment Representation Agreement
Exhibit D Form of Legal Opinion of Counsel to the Company
Exhibit E Form of Registration Rights Agreement
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of January 3, 2000 between Talk City, Inc., a Delaware
corporation ("Parent"), and Research Connections, Inc., a New Jersey corporation
(the "Company"), and Amy J. Yoffie, an individual and sole shareholder of the
Company (the "Sole Shareholder").
RECITAL
The Boards of Directors of each of the Company and Parent believe it is in
the best interests of each company and their respective shareholders that the
Company and Parent combine into a single company through the merger of the
Company with and into Parent (the "Merger") pursuant to the terms of this
Agreement and, in furtherance thereof, have approved the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
SECTION 1
THE MERGER
1.1 Merger; Effective Time. Subject to the terms and conditions of this
----------------------
Agreement, the Company will be merged into Parent (the "Merger") in accordance
with the New Jersey Business Corporation Act (the "New Jersey Act") and the
Delaware General Corporation Law (the "DGCL", and together with the New Jersey
Act, the "State Corporation Law").
Subject to the provisions of this Agreement, a Certificate of Merger (the
"Certificate of Merger") shall be filed in accordance with the State Corporation
Law on the Closing Date (as defined in Section 1.2). The Merger shall become
effective upon confirmation of such filing of the Certificate of Merger (the
date of confirmation of such filing is referred to as the "Effective Date" and
the time of confirmation of such filing is referred to as the "Effective Time").
1.2 Closing. The closing of the Merger (the "Closing") will take place as
-------
soon as practicable on the first business day after satisfaction or waiver of
the latest to occur of the conditions set forth in Section 6 (the "Closing
Date"), at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road,
Palo Alto, California 94304-1050, unless a different date or place is agreed to
in writing by the parties hereto.
1.3 Effects of the Merger. At the Effective Time, the separate existence
---------------------
of the Company shall cease and the Company shall be merged with and into Parent,
and the effects of the Merger shall be as provided in this Agreement and the
applicable provisions of the State Corporation Law. Parent after the Merger is
sometimes referred to as the "Surviving Corporation." Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of the Company shall vest in
the Surviving Corporation, and all
<PAGE>
debts, liabilities, obligations and duties of the Company shall become the
debts, liabilities, obligations and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws; Directors; Officers. At the
---------------------------------------------------------
Effective Time, (i) the Certificate of Incorporation of Parent shall be the
Certificate of Incorporation of the Surviving Corporation; (ii) the Bylaws of
Parent as in effect immediately prior to the Effective Time shall be the Bylaws
of the Surviving Corporation until altered, amended or repealed; (iii) the
directors of Parent shall be the initial directors of the Surviving Corporation
and will hold office from the Effective Time until their respective successors
are duly elected or appointed and qualified in the manner provided in the
Certificate of Incorporation and Bylaws of the Surviving Corporation, as the
same may be amended from time to time or otherwise as provided by law; and (iv)
the officers of Parent shall be the initial officers of the Surviving
Corporation.
1.5 Tax-Free Reorganization. The Merger is intended to be a reorganization
-----------------------
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). The parties have consulted with their own tax advisors
regarding the tax consequences of the Merger.
SECTION 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
-----------------------
Merger and without any action on the part of the holder of any shares of capital
stock of the Company:
(a) Cancellation of Certain Shares of Capital Stock of the Company.
--------------------------------------------------------------
All shares of capital stock of the Company that are owned directly or indirectly
by the Company shall be canceled and no stock of Parent or other consideration
shall be delivered in exchange therefor.
(b) Conversion of Capital Stock of the Company. Subject to Sections
------------------------------------------
2.1(c), (d) and (e) below, all issued and outstanding shares of common stock of
the Company, no par value ("Company Common Stock") (other than shares to be
canceled pursuant to Section 2.1(a)), that are issued and outstanding
immediately prior to the Effective Time shall automatically be canceled and
extinguished and converted, without any action on the part of the holder
thereof, into the right to receive an aggregate of 242,424 shares of common
stock of Parent (the "Parent Common Stock") and $500,000 in cash (the "Cash
Consideration", and together with the Parent Common Stock, the "Merger
Consideration"). All such shares of Company Common Stock, when so converted,
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right to
receive the Merger Consideration to be issued or paid in consideration therefor
upon the surrender of such certificate in accordance with Section 2.2 of this
Agreement. The ratio pursuant to which each share of Company Common Stock will
be exchanged for shares of Parent Common Stock, determined in accordance with
the foregoing provisions, is referred to as the "Exchange Ratio."
-2-
<PAGE>
(c) Payment Schedule and Escrow.
---------------------------
(i) The Merger Consideration will be paid as follows: $250,000
of the Cash Consideration will be paid on the Closing, $125,000 of the Cash
Consideration will be paid three (3) months after the Closing and the remaining
$125,000 of the Cash Consideration will be paid six (6) months after the
Closing. The Parent Common Stock will be distributed as follows:
(A) 121,212 shares of Parent Common Stock will be
distributed on Closing; and
(B) 121,212 shares of Parent Common Stock will be
distributed on Closing and placed in an escrow account to be released over four
(4) years, with 25% released twelve (12) months after the Closing (the "First
Anniversary") and the remainder released evenly over the 36 months following the
First Anniversary.
(ii) As collateral security for the payment of any
indemnification obligations of the Sole Shareholder pursuant to Section 7 of
this Agreement, at the Closing the Company and the Sole Shareholder shall, and
by execution hereof does hereby, transfer, pledge and assign to Parent, for the
benefit of Parent, a security interest in the following assets:
(A) 121,212 shares of Parent Common Stock issuable by
Parent in the Merger pursuant to Section 2.1(c)(i)(B) (the "Pledged Shares"), as
well as the certificates and instruments representing or evidencing the Pledged
Shares, and all non-cash dividends and other property at any time received or
otherwise distributed in respect of or in exchange or substitution for any or
all of the Pledged Shares; and in the event the Company or the Sole Shareholder
receives any such property, the Company and the Sole Shareholder shall
immediately deliver such property to Parent as part of the Pledged Shares;
(B) $1.5 million in cash paid by Parent to the Sole
Shareholder pursuant to a supplemental employment letter of even date herewith
from Parent to the Sole Shareholder (the "Supplemental Cash"); and
(C) all rights, titles, interests, privileges and
preferences appertaining or incident to the foregoing property, except as
provided for in Section 2.1(c)(iv).
(iii) Each certificate evidencing the Pledged Shares issued in
the name of the Sole Shareholder in the Merger, shall, at the Closing, be
delivered to Parent, together with an undated stock power duly signed in blank
by the Sole Shareholder, such certificate bearing no restrictive or cautionary
legend other than those imprinted by the transfer agent at Parent's request.
(iv) The Sole Shareholder shall be entitled to exercise any
voting powers incident to the Pledged Shares until such time, if ever, that they
are demanded to be transferred to Parent to satisfy the indemnification
obligations of the Sole Shareholder pursuant to Section 7 hereof.
-3-
<PAGE>
(d) Adjustment of Exchange Ratio. If, between the date of this
----------------------------
Agreement and the Effective Time, the outstanding shares of Parent Common Stock
(or, subject to Section 5.1 below, Company Common Stock) shall have been changed
into a different number of shares or a different class by reason of any
reclassification, split-up, stock dividend, stock combination, then the Exchange
Ratio shall be correspondingly adjusted.
(e) Fractional Shares. No fractional shares of Parent Common Stock
-----------------
shall be issued, but in lieu thereof each holder of shares of Company Common
Stock who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock shall receive from Parent an amount of cash equal to the per share
market value of Parent Common Stock (based on the last sales price of Parent
Common Stock, as published in the Wall Street Journal, on December 15, 1999)
multiplied by the fraction of a share of Parent Common Stock to which such
holder would otherwise be entitled. The fractional share interests of each
shareholder of the Company shall be aggregated, so that no Company shareholder
shall receive cash in an amount greater than the value of one full share of
Parent Common Stock.
2.2 Exchange of Certificates.
------------------------
(a) Exchange Agent. Prior to the Effective Time, Parent shall
--------------
designate its transfer agent or a bank or trust company, reasonably acceptable
to the Company, to act as exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Cash Consideration and Common Stock. Promptly
-----------------------------------------------------
after the Effective Time, Parent shall deliver to the Exchange Agent in
accordance with this Section 2 and the Merger Agreement, the Cash Consideration
payable by federal wire transfer of immediately available funds pursuant to wire
transfer instructions provided by the Sole Shareholder at least two business
days prior to Closing and the shares of Parent Common Stock issuable pursuant to
Section 2.1 and the Merger Agreement in exchange for outstanding shares of
capital stock of the Company (including cash in an amount sufficient for payment
in lieu of fractional shares pursuant to Section 2.1(e)).
(c) Exchange Procedures. As soon as practicable after the Effective
-------------------
Time, the Surviving Corporation shall cause to be mailed to the Sole Shareholder
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "Certificates") shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor the Merger Consideration to
which the Sole Shareholder is entitled pursuant to Section 2.1. The Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock which is not registered on the transfer
records of the Company, the appropriate number of shares of Parent Common Stock
may be delivered to a
-4-
<PAGE>
transferee if the Certificate representing such capital stock of the Company is
presented to the Exchange Agent and accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.2, each Certificate shall be deemed at any time after the Effective Time to
represent the right to receive upon such surrender the Merger Consideration as
provided by this Section 2 and the provisions of the State Corporation Law.
(d) No Further Ownership Rights in Capital Stock of the Company. The
-----------------------------------------------------------
Merger Consideration to be delivered upon the surrender for exchange of shares
of Company Common Stock in accordance with the terms hereof shall be deemed to
have been delivered in full satisfaction of all rights pertaining to such shares
of Company Common Stock, and following the Effective Time, the Certificates
shall have no further rights to, or ownership in, shares of capital stock of the
Company. There shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Company Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Section 2.
(e) Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
certificates evidencing shares of Company Common Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall make payment in exchange for such
lost, stolen or destroyed certificates, upon the making of an affidavit of that
fact by the holder thereof, such Merger Consideration and cash for fractional
shares, if any, as may be required pursuant to Section 2.1(e); provided,
--------
however, that Parent may, in its discretion and as a condition precedent to the
- -------
issuance thereof, require the owner of such lost, stolen or destroyed
certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 2.2, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Company Common Stock for any
amount paid to a public official pursuant to any applicable abandoned property,
escheat or similar law.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SOLE SHAREHOLDER
Except as disclosed in writing in a disclosure letter referring
specifically to the representations and warranties in this Agreement that
specifically identifies the section and subsection to which such disclosure
relates and that is delivered to Parent by the Company and the Sole Shareholder
and certified by a duly authorized officer of the Company and the Sole
Shareholder prior to the date of this Agreement (the "Company Schedules"), each
of the Company and the Sole Shareholder represents and warrants to Parent as set
forth below.
-5-
<PAGE>
3.1 Organization, Standing and Corporate Power. The Company is a
------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization and has all requisite corporate power
and authority to carry on its business as now being conducted. The Company is
duly qualified to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary. The Company has
delivered to Parent complete and correct copies of its Articles of Incorporation
and Bylaws.
3.2 Company Capital Structure. The authorized capital stock of the Company
-------------------------
consists of 100,000 shares of Common Stock, of which 100 shares are issued and
outstanding. All of such outstanding shares have been duly authorized, validly
issued, fully paid and non-assessable and have been issued in compliance with
all applicable federal and state securities laws. The outstanding shares of
capital stock of the Company are not subject to preemptive rights created by
statute, the Articles of Incorporation or Bylaws of the Company, or any
agreement to which the Company is a party or by which it may be bound. There are
no voting agreements or voting trusts with respect to any of the outstanding
shares of capital stock of the Company. The outstanding shares of capital stock
of the Company are held by the persons and in the amounts set forth in Section
3.2 of the Company Schedules.
3.3 Subsidiaries. The Company does not have and has never had any
------------
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
3.4 Authority/Noncontravention. The Company has the requisite corporate
--------------------------
power and authority to execute and deliver this Agreement and, subject to the
approval and adoption of this Agreement and approval of the Merger by the Sole
Shareholder, to consummate the transactions contemplated by this Agreement. The
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated by this Agreement
have been duly authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby, subject, in each case, to the approval and adoption of this
Agreement and approval of the Merger by the Sole Shareholder. This Agreement has
been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms. The execution and delivery of this Agreement do not, and subject
to the approval and adoption of this Agreement and approval of the Merger by the
Sole Shareholder as required in connection with this Agreement and the
transactions contemplated by this Agreement, the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit or require any consent, approval or authorization
under, or result in the creation of any pledges, claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens") in or upon any of the properties or assets of the
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Company under, any provision of (a) the Articles of Incorporation or Bylaws of
the Company, (b) any loan or credit agreement, bond, debenture, note, mortgage,
indenture, lease or other material contract, commitment, agreement, arrangement,
obligation, undertaking, instrument, permit, concession, franchise or license
applicable to the Company or its properties or assets (including, without
limitation, any of the contracts of the Company set forth in the Company
Schedules) or (c) subject to the governmental filings and other matters referred
to in the following sentence, any statute, law, ordinance, rule or regulation or
judgment, order or decree, in each case, applicable to the Company or its
properties or assets, other than, in the case of clauses (b) and (c), any such
conflicts, violations, defaults, rights, or Liens or other occurrences that
individually or in the aggregate would not have a Material Adverse Effect (as
defined in Section 9.2) on the Company. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Federal,
state or local, domestic or foreign, government or any court, administrative
agency or commission or other governmental authority or agency, domestic or
foreign (a "Governmental Entity"), is required by or with respect to the Company
in connection with the execution and delivery of this Agreement by the Company
or the consummation by the Company of the Merger or the other transactions
contemplated by this Agreement, except for (a) the receipt of a valid exemption
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), (b) the filing of the Certificate of Merger as required
by the State Corporation Law and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business and
(c) such other consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made
individually or in the aggregate would not have a Material Adverse Effect on the
Company or impair the ability of the Company to perform its obligations under
this Agreement.
3.5 Financial Statements; No Undisclosed Liabilities.
------------------------------------------------
(a) The unaudited compiled balance sheet (the "Company Balance Sheet")
of the Company as of September 30, 1999 (the "Balance Sheet Date") and the
related profit and loss statement for the year ended September 30, 1999 (the
"Company Financial Statements") are in accordance with the books and records of
the Company and are complete and correct in all material respects, have each
been prepared in accordance with GAAP (with the exception that no statement of
cash flows or footnotes have been included) in conformity with the practices
consistently applied by the Company throughout the periods involved and, to the
best of the Company's and the Sole Shareholder's knowledge, present fairly the
financial position and results of operations of the Company as of the dates and
for the periods specified. True and complete copies of the Company Financial
Statements have previously been supplied to Parent.
(b) As of the Balance Sheet Date, the Company did not have any
indebtedness, obligations or liabilities of any kind (whether accrued, absolute,
contingent or otherwise, and whether due or to become due or asserted or
unasserted), which were not fully reflected in, reserved against or otherwise
described in the Company Balance Sheet that would be required to be disclosed on
a balance sheet prepared as of the Balance Sheet Date in conformity with GAAP
applied on a basis consistent with the Company Financial Statements. Since the
Balance Sheet Date, the Company has not incurred any indebtedness, obligations
or liabilities of any kind (whether accrued,
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<PAGE>
absolute, contingent or otherwise, and whether due or to become due or asserted
or unasserted) that would be required to be disclosed on a balance sheet
prepared as of the date hereof in conformity with GAAP applied on a basis
consistent with the Company Financial Statements, other than those incurred in
the ordinary course of business consistent with past practice, none of which
would have a Material Adverse Effect on the Company.
3.6 Absence of Certain Changes or Events. Except as set forth in Section
------------------------------------
3.6 of the Company Schedules, since the Balance Sheet Date and until the date
hereof, the Company has conducted its business only in the ordinary course
consistent with past practice, and there has not been (a) any Material Adverse
Effect with respect to the Company, (b) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) with respect to any of the Company's capital stock, (c) any split,
combination, reclassification or repurchase of any of the Company's capital
stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of the
Company's capital stock, (d) (i)any granting by the Company to any officer of
the Company of any increase in compensation, except in the ordinary course of
business consistent with past practice or as required under employment
agreements in effect as of the date hereof, (ii) any granting by the Company to
any officer of the Company of any increase in severance or termination pay,
except as was required under any employment, severance or termination agreement
in effect as of the date hereof, or (iii) any entry by the Company into (A) any
currently effective employment, severance, termination or indemnification
agreement, or consulting agreement (other than in the ordinary course of
business consistent with past practice), with any current or former officer,
director, employee or consultant or (B) any agreement with any current or former
officer, director, employee or consultant the benefits of which are contingent,
or the terms of which are materially altered, upon the occurrence of a
transaction involving the Company of the nature contemplated by this Agreement,
(e) any damage, destruction or loss, whether or not covered by insurance, that
individually or in the aggregate would exceed $25,000, (f) any change in
accounting methods, principles or practices by the Company, except insofar as
may have been required by a change in GAAP or (g) any tax election that
individually or in the aggregate would have an adverse effect on the Company.
3.7 Litigation. There is no suit, claim, action, proceeding or
----------
investigation, pending or threatened, against or affecting the Company, nor is
there any judgment, order, decree or injunction of any Governmental Entity or
arbitrator outstanding against, or, to the best knowledge of the Company,
investigation by any Governmental Entity involving, the Company.
3.8 Contracts. Except as set forth in Section 3.8 of the Company
---------
Schedules, as of the date hereof, the Company is not a party to, nor are any of
their properties or assets bound by, any currently binding (i) contracts,
licenses or agreements, with respect to any intellectual property with a value
or cost in excess of $50,000, (ii) any employment or consulting agreement or
contract (or commitment to enter into any such agreement or contract) with an
employee or individual consultant or salesperson or consulting or sales
agreement or contract (or commitment to enter into any such agreement or
contract) with a firm or other organization in excess of $50,000 annually, (iii)
any agreement or plan, including, without limitation, any stock option plan,
stock appreciation rights plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of benefits
-8-
<PAGE>
of which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement, (iv) any fidelity or surety bond or completion bond, (v) any lease of
personal property having a value individually in excess of $50,000, (vi) any
agreement of indemnification, agreement providing for reimbursement of payments
or providing a right of rescission, hold harmless or guaranty, or any obligation
or liability with respect to infringement of the intellectual property rights of
another person, in excess of, or entered into in connection with a transaction
in excess of, $50,000, (vii) any agreement, contract or commitment containing
any covenant limiting the freedom of such party, any of its subsidiaries or the
Surviving Corporation to engage in any line of business or to compete with any
person, (viii) any agreement, contract or commitment relating to capital
expenditures and involving future payments by such party or any of its
subsidiaries in excess of $50,000 in one or in a series of transactions, (ix)
any agreement, contract or commitment relating to the disposition or acquisition
of assets or any interest in any business enterprise outside the ordinary course
of business, (x) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, (xi) any purchase order or contract for the purchase of
materials involving in excess of $50,000, (xii) any construction contracts,
(xiii) contracts that relate to corporate governance, the voting or transfer of
any equity securities of such party, the registration of any securities of such
party under the Securities Act or that grants any redemption or preemptive
rights or (xiv) any other agreement, contract or commitment that involves
$50,000 or more or is not cancelable without penalty within thirty (30) days
(collectively, the "Contracts"). The Company has delivered or otherwise made
available to Parent true, correct and complete copies of the Contracts listed in
Section 3.8 of the Company Schedules, together with all amendments,
modifications and supplements thereto and all side letters to which the Company
is a party affecting the obligations of any party thereunder. The Company is not
in violation of or in default (with or without notice or lapse of time, or both)
under any lease, permit, concession, franchise, license or any other Contract,
commitment, agreement, arrangement, obligation or understanding to which it is a
party or by which it or any of its properties or assets is bound. As of the
Closing, after giving effect to the Merger and the transactions contemplated
hereby, the Surviving Corporation shall be entitled to all of the benefits under
the agreements (as the same may be amended) set forth on Section 3.8 of the
Company Schedules to which the Company is entitled on the date hereof.
3.9 Compliance With Laws. The Company is in compliance with all statutes,
--------------------
laws, ordinances, rules, regulations, judgments, orders and decrees of any
Governmental Entity applicable to its business or operations, except for
instances of possible noncompliance that individually or in the aggregate would
not impair in any material respect the ability of the Company to perform its
obligations under this Agreement or prevent or materially delay the consummation
of any of the transactions contemplated by this Agreement. The Company has in
effect all Federal, state and local, domestic and foreign, governmental
consents, approvals, orders, authorizations, certificates, filings, notices,
permits, franchises, licenses and rights (collectively "Permits") necessary for
it to own, lease or operate its properties and assets and to carry on its
business as now conducted and there has occurred no violation of, or default
under, any such Permit.
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<PAGE>
3.10 Absence of Changes in Benefit Plans; Employment Agreements; Labor
-----------------------------------------------------------------
Relations. Since the Balance Sheet Date and until the date hereof, there has not
- ---------
been any termination, adoption, amendment or agreement to amend in any material
respect by the Company any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
appreciation, restricted stock, stock option, phantom stock, performance,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other material plan, arrangement or understanding providing benefits
to any current or former officer, director or employee of such party or any of
its subsidiaries (collectively, "Benefit Plans"). Except as set forth in Section
3.10 of the Company Schedules, as of the date hereof there exist no currently
binding employment, severance or termination agreements or consulting agreements
between the Company and any current or former officer of the Company. There are
no collective bargaining or other labor union agreements to which the Company is
a party or by which it is bound. The Company has not encountered any labor union
organizing activity, nor had any actual or threatened employee strikes, work
stoppages, slowdowns or lockouts.
3.11 ERISA Compliance.
----------------
(a) Section 3.11(a) of the Company Schedules contains a list of all
"employee pension benefit plans" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes
referred to herein as "Pension Plans"), "employee welfare benefit plans" (as
defined in Section 3(1) of ERISA) and all other Benefit Plans maintained or
contributed to by the Company or any person or entity that, together with the
Company, is treated as a single employer under Section 414(b), (c), (m) or (o)
of the Code (a "Commonly Controlled Entity") for the benefit of any current or
former officers, directors or employees of the Company. The Company has made
available to Parent true, complete and correct copies of (i) each Benefit Plan
(or, in the case of any unwritten Benefit Plans, descriptions thereof), (ii) the
most recent annual report on Form 5500 required to be filed with the Internal
Revenue Service (the "IRS") with respect to each Benefit Plan (if any such
report was required), (iii) the most recent summary plan description for each
Benefit Plan for which such summary plan description is required and (iv) each
trust agreement and group annuity contract relating to any Benefit Plan. Each
Benefit Plan has been administered in accordance with its terms. The Company
and all the Benefit Plans are all in compliance with applicable provisions of
ERISA and the Code.
(b) Each of the Pension Plans has been the subject of a determination
letter (or its equivalent) from the IRS to the effect that such Pension Plan is
qualified and exempt from United States Federal income taxes under Sections
401(a) and 501(a), respectively, of the Code, and no such determination letter
(or its equivalent) has been revoked nor has any event occurred since the date
of its most recent determination letter (or its equivalent) or application
therefor that would adversely affect its qualification or materially increase
its costs.
(c) Neither the Company nor any Commonly Controlled Entity of the
Company has maintained, contributed to or been obligated to contribute to any
Benefit Plan that is subject to Title IV of ERISA.
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<PAGE>
(d) No officer or employee of the Company will be entitled to any
additional compensation or benefits or any acceleration of the time of payment
or vesting of any compensation or benefits under any Benefit Plan as a result of
the transactions contemplated by this Agreement or any benefits under any
Benefits Plan the value of which will be calculated on the basis of any of the
transactions contemplated by this Agreement.
3.12 Taxes.
-----
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
-------------------
or, collectively, "Taxes", means (i) any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits.
----------------------
(i) The Company as of the Closing will have prepared and
timely filed all required federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") relating to any and all Taxes
concerning or attributable to the Company or its operations and such Returns are
true and correct and have been completed in accordance with applicable law.
(ii) The Company as of the Closing (A) will have paid all Taxes
it is required to pay and will have withheld with respect to its employees all
federal and state income taxes, Federal Insurance Contribution Act ("FICA"),
Federal Unemployment Tax Act ("FUTA") and other Taxes required to be withheld,
and (B) will have accrued on the Current Balance Sheet all Taxes attributable to
the periods covered by the Current Balance Sheet and will not have incurred any
liability for Taxes for the period prior to the Closing other than in the
ordinary course of business.
(iii) The Company has not been delinquent in the payment of any
Tax, nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(iv) No audit or other examination of any Return of the Company
is presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
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<PAGE>
(v) The Company has no liabilities for unpaid federal, state,
local and foreign Taxes which have not been accrued or reserved against in
accordance with GAAP on the Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and the Company has not incurred any
liability for Taxes since the date of the Current Balance Sheet other than in
the ordinary course of business.
(vi) The Company has made available to Parent or its legal
counsel, copies of all foreign, federal, state and local income and all state
and local sales and use Returns for the Company filed for all periods since its
inception.
(vii) There are (and immediately following the Closing there
will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort (collectively,
"Tax Liens") on the assets of the Company relating to or attributable to Taxes
other than Tax Liens for Taxes not yet due and payable.
(viii) Neither the Company nor any Shareholder has knowledge
of any basis for the assertion of any claim relating or attributable to Taxes
which, if adversely determined, would result in any Tax Lien on the assets of
the Company.
(ix) None of the Company's assets is treated as "tax exempt use
property," within the meaning of Section 168(h) of the Code.
(x) As of the Closing, there will not be any contract,
agreement, plan or arrangement, including, but not limited to, the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount to
such employee or former employee that would not be deductible by the Company as
an expense under applicable law.
(xi) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(xii) The Company is not a party to any tax sharing,
indemnification or allocation agreement nor does the Company owe any amount
under any such agreement.
(xiii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income Tax
deductions is accurately reflected on the Company's tax books and records.
(xiv) The Company is not, and has not been at any time, a
"United States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(xv) No adjustment relating to any Return field by the Company
has been proposed formally or informally by any tax authority to the Company or
any representative thereof.
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<PAGE>
(c) Executive Compensation Tax. There is no contract, agreement, plan
--------------------------
or arrangement to which the Company is a party as of the dates hereof, including
but not limited to the provisions of this Agreement, covering any employee or
former employee of the Company, which, individually or collectively, could give
rise to the payment of any amount that would not be deductible pursuant to
Sections 280G, 404 or 162(m) of the Code.
(d) Subchapter C Corporation Status. The Company is, and at all times
-------------------------------
during its existence has been, an C Corporation under and within the meaning of
the Code, and under all applicable state Tax laws and regulations.
3.13 No Excess Parachute Payments. No amount that could be received
----------------------------
(whether in cash or property or the vesting of property) in connection with any
of the transactions contemplated by this Agreement by any employee, officer or
director of the Company who is a "disqualified individual" (as such term is
defined in proposed Treasury Regulation Section 1.280G-1) under any employment,
severance or termination agreement, other compensation arrangement or Benefit
Plan currently in effect would be an "excess parachute payment" (as such term is
defined in Section 280G(b)(1) of the Code). No such person is entitled to
receive any additional payment from the Company, the Surviving Corporation or
any other person (a "Parachute Gross-Up Payment") in the event that the excise
tax of Section 4999(a) of the Code is imposed on such person. The Board of
Directors of the Company has not granted to any officer, director or employee of
the Company any right to receive any Parachute Gross-Up Payment.
3.14 Title to Properties.
-------------------
(a) Except for those personal items of the Sole Shareholder set forth
in Section 3.14 of the Company Schedules, the Company has good and marketable
title to, or valid leasehold interests in, all of its properties and assets
except for such as are no longer used or useful in the conduct of its business
or as have been disposed of in the ordinary course of business. All such
material assets and properties, other than assets and properties in which the
Company has a leasehold interest, are free and clear of all Liens (other than
Liens for current taxes not yet due and payable).
(b) The Company has complied in all material respects with the terms
of all leases to which it is a party and under which it is in occupancy, all
such leases are in full force and effect and have been made available to Parent.
The Company enjoys peaceful and undisturbed possession under all such leases.
3.15 Intellectual Property.
---------------------
(a) The Company owns, or has the right to use, sell or license all
intellectual property necessary or required for the conduct of its business as
presently conducted and as presently contemplated (such intellectual property
and the rights thereto are collectively referred to as the "Company IP Rights").
(b) Section 3.15 of the Company Schedules sets forth with respect to
the intellectual property of the Company: (i) for each patent and patent
application, the number, normal
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expiration date, title and priority information for each country in which such
patent has been issued, or, the application number, date of filing, title and
priority information for each country, (ii) for each trademark, trade name or
service mark, whether or not registered, the date first used, and, if
registered, the application serial number or registration number, the class of
goods covered, the nature of the goods or services, the countries in which the
names or mark is used and the expiration date for each country in which a
trademark has been registered and (iii) for each copyright for which
registration has been sought, whether or not registered, the date of creation
and first publication of the work, the number and date of registration for each
country in which a copyright application has been registered.
(c) The Company has taken all reasonable steps necessary or
appropriate (including, entering into appropriate confidentiality, nondisclosure
agreements with officers, directors, subcontractors, independent contractors,
full-time and part-time employees, licensees and customers) to safeguard and
maintain the secrecy and confidentiality of, and the proprietary rights in, the
Company IP Rights.
(d) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any instrument or agreement governing any Company IP Right (the
"Company IP Rights Agreements"), will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any Company IP Right or
impair the right of the Company, the Surviving Corporation or Parent to use,
sell or license any Company IP Right or portion thereof.
(e) (i) Neither the manufacture, marketing, license, sale or intended
use of any product or technology currently licensed or sold by the Company
violates any license or agreement between the Company and any third party or
infringes any proprietary right of any other party; and (ii) there is no pending
or, to the best knowledge of the Company, threatened claim or litigation
contesting the validity, ownership or right to use, sell, license or dispose of
any Company IP Right or operate the Company's Web service.
3.16 Year 2000 Compliance.
--------------------
(a) All of the current or past products and services offered by the
Company, including each item of hardware, software, or firmware, any system,
equipment, or products consisting of or containing one or more thereof, any and
all enhancements, upgrades, customizations, modifications, maintenance and the
like are Year 2000 Compliant (as defined below). The Company is not subject to
any pending or threatened claim, regulatory action, processing or investigation
concerning the Year 2000 Compliance of its respective products, services or
operations, and, to the best knowledge of the Company, there is no basis for any
such claim, regulatory action, investigation or proceeding. To the best
knowledge of the Company, all of the internal management information systems
(including hardware, firmware, operating system software, utilities, and
applications software) and all facilities and systems used in the ordinary
course of business by or on behalf of the Company, including payroll,
accounting, billing/receivables, customer service, human resources, and e-mail
systems used by the Company, are Year 2000 Compliant. To the best of the
Company's knowledge, all vendors of products or
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<PAGE>
services to the Company, and its respective products, services and operations,
are Year 2000 Compliant, and each such vendor will continue to furnish its
products or services to the Company, without interruption or material delay, on
and after January 1, 2000.
(b) For purposes of this Agreement, "Year 2000 Compliant" means that
(i) the products, services, or other items (s) at issue accurately process,
provide and/or receive all date/time data (including calculating, comparing, and
sequencing) within, from, into, and between centuries (including the twentieth
and twenty-first centuries and the years 1999 and 2000), including leap year
calculations, and (ii) neither the performance nor the functionality nor the
Company's provision of the products, services, and other item (s) at issue will
be affected by any dates/times prior to, on, after, or spanning January 1, 2000.
The design of the products, services, and other item (s) at issue includes
proper date/time data century recognition and recognition of 1999 and 2000,
calculations that accommodate single century and multi-century formulae and
date/time values before, on, after spanning January 1, 2000, and date/time data
interface values that reflect the century, 1999, and 2000.
3.17 Voting Requirements. The affirmative vote of the holders of a
-------------------
majority of the outstanding shares of Company Common Stock are the only votes of
the holders of any capital stock of the Company necessary to approve and adopt
this Agreement and approve the Merger.
3.18 Payments. Neither the Company nor any of its representatives acting
--------
on its behalf have, directly or indirectly, paid or delivered any fee,
commission or other sum of money or property, however characterized, to any
finder, agent, government official or other party, in the U.S. or any other
country which the Company knows or has reason to believe to have been illegal
under any federal, state or local laws of the U.S. or any other country having
jurisdiction. Neither the Company nor any of its representatives acting on its
behalf, have accepted or received any unlawful contributions, payments, gifts or
expenditures.
3.19 Transactions with Related Parties. Except for compensation
---------------------------------
arrangements in the ordinary course of business, as disclosed on Section 3.19 of
the Company Schedules or for amounts less than $10,000, no Related Party (as
defined below) of the Company has (a) borrowed or loaned money or other property
to the Company which has not been repaid or returned, (b) any currently
enforceable contractual or other claims, express or implied, of any kind
whatsoever against the Company or (c) has or had any material economic interest
in any property currently used by the Company or any subsidiary thereof. For
purposes of this Agreement, (i) "Related Party" means as to any person, any of
such person's officers and directors, any Affiliate thereof or the respective
officers and directors of any such Affiliate, or any other person in which any
of the foregoing persons have any direct or material indirect interest, (ii)
"Affiliate" of a person means any other person which directly or indirectly
controls, is controlled by, or is under common control with, such person and
(iii) "control" (including, with correlative meaning, the terms "controlled by"
and "under common control with"), as used with respect to any person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of voting securities, by contract or otherwise.
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<PAGE>
3.20 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete, grant of exclusivity or otherwise), commitment, judgment,
injunction, order or decree to which the Company is a party or otherwise binding
upon the Company which has or reasonably could be expected to have the effect of
prohibiting or impairing any business practice of the Company, any acquisition
of property (tangible or intangible) by the Company or the conduct of business
by the Company.
3.21 Accounts Receivable; Inventory.
------------------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company reflected on the Balance Sheet ("Accounts Receivable")
along with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company are collectible except to
the extent of reserves therefor set forth in the Balance Sheet. No person has
any Lien on any of such Accounts Receivable and no request or agreement for
deduction or discount has been made with respect to any of such Accounts
Receivable.
(c) All of the inventories of the Company reflected on the Balance
Sheet and the Company's books and records on the date of this Agreement were
purchased, acquired or produced in the ordinary and regular course of business
and in a manner consistent with the Company's regular inventory practices and
are set forth on the Company's books and records in accordance with the
practices and principles of the Company consistent with the method of treating
said items in prior periods.
3.22 Minute Books. The minute books of the Company made available to
------------
counsel for Parent are the only minute books of the Company and contain an
accurate summary of all meetings of directors (or committees thereof) and
shareholders or actions by written consent since the date of incorporation of
the Company.
3.23 Environmental Matters.
---------------------
(a) Except as set forth in Section 3.23 of the Company Schedules, to
the best knowledge of the Company, no underground storage tanks and no amount of
any substance that has been designated by any Governmental Entity or by
applicable federal, state, local or other applicable law to be radioactive,
toxic, hazardous or otherwise a danger to health or the environment, including,
without limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all
substances listed as hazardous substances pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, or
defined as a hazardous waste pursuant to the United States Resource Conservation
and Recovery Act of 1976, as amended, and the regulations promulgated pursuant
to said laws, but excluding office and janitorial supplies properly and safely
maintained (a "Hazardous Material"), are present in, on or under any property,
including the land and the improvements, ground water and surface water thereof,
that the Company has at any time owned, operated, occupied or leased.
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<PAGE>
(b) The Company has not transported, stored, used, manufactured,
disposed of, released or exposed its employees or others to Hazardous Materials
in violation of any law in effect on or before the Closing, nor has the Company
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively, "Company Hazardous Materials Activities") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) To the best knowledge of the Company, the Company currently holds
all environmental approvals, permits, licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct of the Company's Hazardous
Material Activities and other business of the Company as such activities and
business are currently being conducted. All Environmental Permits are in full
force and effect. The Company (A) is in compliance with all material terms and
conditions of the Environmental Permits and (B) is in compliance in all material
respects with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
the laws of all Governmental Entities relating to pollution or protection of the
environment or contained in any regulation, code, plan, order, decree, judgment,
notice or demand letter issued, entered, promulgated or approved thereunder.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending, or to the best knowledge of the
Company, threatened, concerning any Environmental Permit, Hazardous Material or
any Company Hazardous Materials Activity. The Company is not aware of any fact
or circumstance which could involve the Company in any environmental litigation
or impose upon the Company any material environmental liability.
3.24 Insurance. Section 3.24 of the Company Schedules lists all insurance
---------
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company. There
is no claim by the Company pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and the Company is otherwise in material compliance with
the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). The Company has not received any
notice that the insurers intend to terminate or materially increase the premiums
payable under any of such policies.
3.25 Warranties; Indemnities. Section 3.25 of the Company Schedules sets
-----------------------
forth a list of all agreements containing warranties and indemnities relating to
products sold or services rendered by the Company, and no warranty or indemnity
has been given by the Company which differs therefrom in any material respect.
Section 3.25 of the Company Schedules also indicates all warranty and indemnity
claims in excess of $5,000 made against the Company.
3.26 Representations Complete. None of the representations or warranties
------------------------
made by the Company, nor any document, written information, statement, financial
statement, certificate, schedule or exhibit prepared or furnished by the Company
or its representatives pursuant to this Agreement or in connection with the
transactions contemplated hereby contains or will contain at the
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Effective Time, any untrue statement of a material fact, or omits or will omit
at the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading. To the best knowledge of the Company, there is no
event, fact or condition that has resulted in, or could reasonably be expected
to result in, a Material Adverse Effect that has not been set forth in this
Agreement or in the Company Schedules.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as disclosed in writing in a disclosure letter referring
specifically to the representations and warranties in this Agreement that
specifically identifies the section and subsection to which such disclosure
relates and that is delivered to the Company by Parent certified by a duly
authorized officer of Parent prior to the date of this Agreement, Parent
represents and warrants to the Company as follows:
4.1 Organization, Standing and Corporate Power. Parent is a corporation
------------------------------------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite corporate power and
authority to carry on its business as now being conducted. Parent is duly
qualified to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary, other than in such
jurisdictions where the failure to be so qualified or licensed or be in good
standing individually or in the aggregate would not have a Material Adverse
Effect on Parent.
4.2 Authority/Noncontravention. Parent has the requisite corporate power
--------------------------
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated by this Agreement. The execution, delivery and
performance of this Agreement by the Company and the consummation by Parent of
the transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of each of Parent and no other corporate
proceedings on the part of each of Parent are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by each of Parent and constitutes valid and
binding obligations of Parent, enforceable against in accordance with its terms.
No consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required by or with respect to Parent in
connection with the execution and delivery of this Agreement by Parent or the
consummation by Parent of the Merger or the other transactions contemplated by
this Agreement, except for (a) the receipt of a valid exemption from the
registration requirements of the Securities Act and (b) the filing of the
Certificate of Merger as required by the State Corporation Law and appropriate
documents with the relevant authorities of other states in which Parent is
qualified to do business.
4.3 SEC Documents; Parent Financial Statements. Parent has furnished or
------------------------------------------
made available to the Company a true and complete copy of its Registration
Statement on Form S-1 dated July 19, 1999 and its Quarterly Reports on Form 10-Q
for the periods ending June 30, 1999 and
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<PAGE>
September 30, 1999 (collectively, the "SEC Documents") which Parent filed under
the Securities Act with the Securities and Exchange Commission (the "SEC"). As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading. The financial statements
of Parent, including the notes thereto, included in the SEC Documents (the
"Parent Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
consistently applied (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by applicable rules and regulations
of the SEC) and fairly present the consolidated financial position of Parent at
the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, recurring audit
adjustments). There has been no change in Parent accounting policies except as
described in the notes to the Parent Financial Statements. Parent has no
material obligations other than (i) those set forth in the Parent Financial
Statements and (ii) those not required to be set forth in the Parent Financial
Statements under generally accepted accounting principles.
4.4 Parent Common Stock. The shares of Parent Common Stock, when issued in
-------------------
the Merger in compliance with this Agreement, will be validly issued, fully paid
and nonassessable. Such shares will be issued in compliance with applicable
state and federal securities laws.
SECTION 5
COVENANTS
5.1 Conduct of Business of the Company. During the period from the date of
----------------------------------
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company shall carry on its business in the
usual, regular and ordinary course in substantially the same manner as conducted
prior to the date of this Agreement and, to the extent consistent with such
business, use all commercially reasonable efforts consistent with past practice
and policies to preserve intact its present business organization, keep
available the services of its present officers and key employees and preserve
its relationships with customers, suppliers, distributors, licensors, licensees,
and others having business dealings with it, with the objective that its
goodwill and ongoing business shall be unimpaired at the Effective Time. The
Company shall promptly notify Parent of any event or occurrence not in the
ordinary course of business of the Company. Except as expressly contemplated by
this Agreement or disclosed in the Company Schedules, the Company shall not,
without the prior written consent of Parent:
(a) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock, or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock;
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<PAGE>
(b) Issue, deliver or sell, authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities or
authorize or propose any change in its equity capitalization;
(c) Solicit approval for or effect any amendments to the Company's
Articles of Incorporation or Bylaws;
(d) Acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the Company;
(e) Sell, lease, license, pledge or otherwise dispose of or encumber
any of its properties or assets except in the ordinary course of business
consistent with past practice (including without limitation any indebtedness
owed to it or any claims held by it);
(f) Except in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee, endorse or
otherwise become responsible for the obligations of others, or make loans or
advances;
(g) Pay, discharge or satisfy in an amount in excess of $10,000 in any
one case any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business consistent with past practice of
liabilities reflected or reserved against in the Company's Financial Statements
or those incurred after the Balance Sheet in the ordinary course of business;
(h) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates of its officers or employees other than in the ordinary
course of business, consistent with past practice, or change in any material
respect any management policies or procedures;
(i) Commence a lawsuit other than for the routine collection of bills;
(j) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Company IP Rights or
enter into grants to future patent rights, other than in the ordinary course of
business;
(k) Except in the ordinary course of business with prior notice to
Parent, violate, amend or otherwise modify the terms of any of the Company's
contracts binding on the Company as set forth in Section 3.8 of the Company
Schedules;
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<PAGE>
(l) Revalue any of its assets, including without limitation, writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business and consistent with past practice;
(m) Make any material tax election other than in the ordinary course
of business and consistent with past practice, change any material tax election,
adopt any material tax accounting method other than in the ordinary course of
business and consistent with past practice, change any material tax accounting
method, file any material tax return (other than any estimated tax returns,
payroll tax returns or sale tax returns) or any amendment to a material tax
return, enter into any closing agreement, settle any tax claim or assessment, or
consent to any tax claim or assessment, without the prior written consent of
Parent, which consent will not be reasonably withheld;
(n) Engage in any activities or transactions that are outside the
ordinary course of its business consistent with past practice;
(o) Fail to pay or otherwise satisfy its monetary obligations as they
become due, except such as are being contested in good faith; or waive or commit
to waive any rights of substantial value; or cancel, materially amend or renew
any insurance policy; or
(p) Take, or agree (in writing or otherwise) to take, any of the
actions described in Sections 5.1(a) through (o) above, or any action which
would make any of the representations or warranties of the Company contained in
this Agreement untrue or incorrect or result in any of the conditions to the
Merger set forth in Section 6 not being satisfied.
5.2 No Solicitation. Until the earlier of the Effective Time or the
---------------
termination of this Agreement pursuant to the provisions of Section 8.1, neither
the Company nor the Sole shareholder will (nor will the Company permit any of
the Company's officers, directors, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party other
than Parent and its designees: (a) solicit, conduct discussions with or engage
in negotiations with any person or take any other action intended or designed to
facilitate the efforts of any person, other than Parent, relating to the
possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of its capital
stock or assets, (b) provide information with respect to it to any person, other
than Parent, relating to the possible acquisition of the Company (whether by way
of merger, purchase of capital stock, purchase of assets or otherwise) or any
portion of its or their capital stock or assets, (c) enter into an agreement
with any person, other than Parent, providing for the acquisition of the Company
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any portion of its capital stock or assets or (d) make or
authorize any statement, recommendation or solicitation in support of any
possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of its capital
stock or assets by any person, other than by Parent. In addition to the
foregoing, if the Company or the Sole shareholder receives any unsolicited bona
fide offer or proposal relating to any of the above, the Company or the Sole
shareholder (as the case may be) shall immediately notify Parent thereof,
including information as to the identity of the offeror or the party making any
such offer or proposal and the specific terms of such offer or proposal, as the
case may be.
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<PAGE>
5.3 Shareholder Approval. The Sole Shareholder agrees to vote in favor of
--------------------
the Merger, this Agreement and the transactions contemplated hereby, and agrees
to take all actions and execute all documents necessary to effect the foregoing.
5.4 Access to Information. Upon reasonable notice, the Company shall
---------------------
afford Parent and its accountants, counsel and other representatives, reasonable
access during normal business hours during the period prior to the Effective
Time to (a) all of the Company's properties, books, contracts, commitments and
records, and (b) all other information concerning the business, properties and
personnel (subject to restrictions imposed by applicable law) of the Company as
Parent may reasonably request, including without limitation access upon
reasonable request to the Company's employees, customers and vendors for due
diligence inquiry. The Company agrees to provide to Parent and its accountants,
counsel and other representatives copies of internal financial statements,
business plans and projections promptly upon request. No information or
knowledge obtained in any investigation pursuant to this Section 5.4 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
5.5 Confidentiality. Each of the parties agrees to keep such information
---------------
or knowledge obtained in any investigation pursuant to Section 5.4, or pursuant
to the negotiation and execution of this Agreement or the effectuation of the
transactions contemplated hereby, confidential pursuant to a mutual
Nondisclosure Agreement dated as of January 3, 2000 by and between Parent and
the Company (the "Confidentiality Agreement").
5.6 Expenses. Whether or not the Merger is consummated, all reasonable and
--------
customary fees and expenses incurred in connection with the Merger including,
without limitation, all legal, accounting, financial advisory, consulting and
all other fees and expenses of third parties incurred by a party in connection
with the negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby, shall be the obligation of
the respective party incurring such fees and expenses. Such fees and expenses of
the Company and the Sole Shareholder shall be incurred entirely by the Company,
and after the Merger shall be paid for by the Sole Shareholder.
5.7 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
--------
shall not be unreasonably withheld, subject, in the case of Parent, to Parent's
obligation to comply with applicable securities laws.
5.8 Consents. Each of Parent and the Company shall promptly apply for or
--------
otherwise seek, and use its reasonable efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger, and
the Company shall use all reasonable efforts to obtain all consents, waivers and
approvals under any of the Company's agreements, contracts, licenses or leases
in order to preserve the benefits thereunder for the Surviving Corporation and
otherwise in connection with the Merger. All of such Company consents and
approvals are set forth in Section 5.8 of the Company Schedules.
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5.9 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
-----------------
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.10 Reasonable Efforts. Subject to the terms and conditions provided in
------------------
this Agreement, each of the parties hereto shall use all reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
- --------
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
5.11 Notification of Certain Matters. The Company shall give prompt notice
-------------------------------
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which may cause any representation or warranty of the Company and Parent,
respectively, contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time and (ii) any failure of the
Company or Parent, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section 5.11
- -------- -------
shall not limit or otherwise affect any remedies available to the party
receiving such notice.
5.12 Blue Sky Laws. Parent shall take such steps as may be necessary to
-------------
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of Parent Common Stock pursuant hereto. The Company
shall use its best efforts to assist Parent as may be necessary to comply with
the securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of Parent Common Stock pursuant hereto.
5.13 Noncompetition and Employment Agreements. Prior to the Effective Time
----------------------------------------
(a) Parent and the Sole Shareholder shall enter into a noncompetition agreement
substantially in the form attached as Exhibit B (the "Noncompetition Agreement")
---------
and (b) the Sole Shareholder shall enter into an employment agreement with
Parent in a form satisfactory to the parties thereto (the "Employment
Agreement"). The Noncompetition Agreement and the Employment Agreement shall
become effective as of the Effective Time.
5.14 Investment Representation Agreements. All of the holders of
------------------------------------
outstanding shares of capital stock of the Company shall execute and deliver to
Parent Investment Representation Agreements in the form attached as Exhibit C.
---------
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SECTION 6
CONDITIONS TO THE MERGER
6.1 Conditions to the Obligations of Parent and Sub. The obligations of
-----------------------------------------------
Parent to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing,
exclusively by Parent:
(a) Shareholder Approval. This Agreement, the agreements contemplated
--------------------
hereunder and the Merger and other transactions contemplated hereby and thereby
shall have been approved and adopted by the affirmative vote or consent of the
Sole Shareholder, in compliance with applicable law and the Company's Articles
of Incorporation and Bylaws.
(b) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Sole Shareholder in this Agreement shall
be true and correct on and as of the date of this Agreement and as of the
Closing Date as though such representations and warranties were made on and as
of such time and the Company and the Sole Shareholder shall have performed and
complied with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by each of them as of the Closing
Date. Parent shall have been provided with a certificate dated as of the
Closing Date executed on behalf of the Company by its Chief Executive Officer
and Chief Financial Officer to such effect.
(c) Legal Opinion. Parent shall have received a legal opinion from
-------------
Foss Bowe San Filippo & Caruso, LLC, legal counsel to the Company, substantially
in the form of Exhibit D.
---------
(d) No Injunctions or Restraints on Conduct of Business. No temporary
---------------------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
provision challenging Parent's proposed acquisition of the Company, or limiting
or restricting Parent's conduct or operation of the business of the Company (or
its own business) following the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending.
(e) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against Parent or the Company,
their respective properties or any of their officers or directors, arising out
of, or in any way connected with, the Merger or the other transactions
contemplated by the terms of this Agreement, or that could materially and
adversely affect the business, assets, liabilities, financial condition, results
of operations or prospects of the Company.
(f) Due Diligence. Parent shall be satisfied with the results of its
-------------
due diligence review of the Company.
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<PAGE>
(g) Investment Representations. Parent shall have received from the
--------------------------
Sole Shareholder an executed Investment Representation Agreement which shall be
in full force and effect.
(h) Employment Agreement; Employment Generally. The Employment
------------------------------------------
Agreement shall have been executed and delivered by the parties thereto, Parent
shall have received reasonable assurances from Jennifer Dale, which assurances
are satisfactory to Parent, that Ms. Dale will continue her employment with
Parent, and all officers of the Company shall have resigned from their
respective positions.
(i) Escrow Agreement. The Escrow Agreement shall have been duly
-----------------
executed and delivered by the parties thereto.
(j) Noncompetition Agreement. The Noncompetition Agreement shall have
------------------------
been duly executed and delivered by the parties thereto.
(k) Confidentiality Agreement. The Confidentiality Agreement shall
-------------------------
have been duly executed and delivered by the Sole Shareholder.
(l) Vesting of Stock Options or Warrants. There shall be no
--------------------------------------
acceleration of vesting of stock options or warrants as a result of the Merger
except upon the termination without cause of the Sole Shareholder by Parent or
the death or disability of the Sole Shareholder.
(m) Financial Condition. Parent shall be satisfied that the
-------------------
liabilities of the Company as of the date hereof do not exceed the liabilities
set forth on the Company Balance Sheet as of September 30, 1999, except as set
forth in the Company Schedules.
(n) Securities Law Compliance. Parent shall have received from Sole
-------------------------
Shareholder an executed investment representation statement and completed
questionnaire in form and substance satisfactory to Parent that the issuance of
the shares of Parent Common Stock pursuant to the Merger is exempt from the
registration requirements of the Securities Act and is exempt from registration
under applicable state securities laws.
(o) Board of Directors' Approval. The Board of Directors of Parent
----------------------------
shall have approved the Merger.
6.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent in this Agreement shall be true and correct in all
material respects on and as of the date of this Agreement and as of the Closing
Date as though such representations and warranties were made on and as of such
time and each of Parent shall have performed and complied with all
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<PAGE>
covenants, obligations and conditions of this Agreement required to be performed
and complied with by it as of the Closing Date. The Company shall have been
provided with a certificate dated as of the Closing Date and executed on behalf
of Parent by an executive officer of Parent to such effect.
(b) Registration Rights Agreement. The Registration Rights Agreement
-----------------------------
in the form of Exhibit E shall have been executed and delivered by Parent.
---------
(c) Employment Agreement. The Employment Agreement shall have been
--------------------
executed and delivered by the parties thereto.
SECTION 7
INDEMNIFICATION
7.1 General Indemnification. The Sole Shareholder covenants and agrees to
-----------------------
indemnify, defend, protect and hold harmless Parent and the Surviving
Corporation and their respective officers, directors, employees, shareholders,
assigns, successors and affiliates (individually, an "Indemnified Party" and
collectively, "Indemnified Parties") from, against and in respect of:
(a) all liabilities, losses, claims, damages, punitive damages,
courses of actions, lawsuits, administrative proceedings (including informal
proceedings), investigations, audits, demands, assessments, adjustments,
judgments, settlement payments, deficiencies, penalties, fines, interest
(including interest from the date of such damages) and costs and expenses
(including without limitation reasonable attorneys' fees and disbursements of
every kind, nature and description) (collectively, "Damages") suffered,
sustained or incurred by the Indemnified Persons in connection with, resulting
from or arising out of, directly or indirectly:
(i) any breach of any representation or warranty of the Company
or the Sole Shareholder set forth in this Agreement or any certificate, document
or instrument delivered by or on behalf of the Company or the Sole Shareholder
in connection herewith;
(ii) any nonfulfillment of any covenant or agreement on the part
of the Company or the Sole Shareholder in this Agreement;
(iii) the business, operations or assets of the Company prior to
the Closing Date, including without limitation all taxes due and payable prior
to the Closing Date, except as otherwise disclosed in the Company Financial
Statements or the Company Schedules; or
(iv) the actions or omissions of the Company's directors,
officers, shareholders, employees or agents prior to the Closing Date; and
(b) any and all Damages incident to any of the foregoing or to the
enforcement of this Section 7.1.
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7.2 Limitation and Expiration. Notwithstanding the above:
-------------------------
(a) There shall be no liability for indemnification under Section 7.1
unless the aggregate amount of Damages exceeds $25,000 (the "Indemnification
Threshold"), in which event the liability for indemnification will apply to the
entire aggregate amount of Damages. For purposes of satisfying indemnification
obligations pursuant to Section 7.1, the Pledged Shares shall be valued at
$12.375 per share (subject to adjustment for stock splits, recapitalizations and
the like).
(b) From and after the Effective Date, the Escrow Fund (as defined in
Section 7.3) shall be Parent's and the other Indemnified Parties' exclusive
remedy for any breach of a representation, warranty or covenant made by the
Company or the Sole Shareholder in this Agreement (except in the case of (i)
fraud, (ii) willful misrepresentation or (iii) willful failure to disclose in
breach of this Agreement).
(c) The indemnification obligations under this Section 7 shall
terminate as follows:
(i) with respect to claims or demands (a "Claim") relating to a
breach of the representations and warranties set forth in Section 3.12 (Taxes)
and 3.23 (Environmental Matters) or fraud or willful misconduct, upon the later
of the expiration of the applicable statute of limitations period or the final
resolution of any and all such Claims pending as of such date; and
(ii) with respect to all other Claims for indemnification under
this Section 7, upon the later of the second anniversary of the Closing Date or
the final resolution of any such claims pending as of the second anniversary.
The term "Indemnification Deadline Date" refers to the expiration date of
the applicable statute of limitations period with respect to Claims under clause
(i) above and the second anniversary with respect to claims under clause (ii)
above. The term "Pending Claims" refers to the pending claims described in
clauses (i) and (ii) above. From and after the applicable Indemnification
Deadline Date, the indemnification obligations under this Section 7 shall
survive only to the extent of Pending Claims and all remaining Supplemental Cash
as provided in Section 7.4(h), Pledged Shares and other property in the Escrow
Fund (except as otherwise provided in the Escrow Agreement) shall be released to
the Sole Shareholder pursuant to the terms of the Escrow Agreement.
7.3 Escrow Fund. The deposit of the Pledged Shares and Supplemental Cash
-----------
(collectively, the "Escrow Amount") pursuant to Section 2.1(c)(ii), together
with all interest accruing thereon, shall constitute the "Escrow Fund" and shall
be governed by the terms set forth in this Agreement and in the Escrow
Agreement. The Escrow Fund shall be available to satisfy the indemnification
obligations to Indemnified Persons pursuant to the terms of this Section 7.
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7.4 Indemnification Procedures. All Claims for indemnification under this
--------------------------
Section 7 shall be asserted and resolved as follows:
(a) In the event the Indemnified Party has a Claim hereunder which
does not involve a Claim being asserted against or sought to be collected by a
third party, the Indemnified Party shall with reasonable promptness send a Claim
Notice (as defined in Section 7.4(c) below) with respect to such Claim to the
Sole Shareholder. If the Sole Shareholder does not notify the Indemnified Party
within 45 days from the date of receipt of such Claim Notice that the Sole
Shareholder disputes such Claim, the amount of such Claim shall be conclusively
deemed a liability of the Sole Shareholder hereunder. In case the Sole
Shareholder shall object in writing to any Claim made in accordance with this
Section 7.4(a), the Indemnified Party shall have fifteen (15) days to respond in
a written statement to the objection of the Sole Shareholder. If after such
fifteen (15) day period there remains a dispute as to any Claims, the parties
shall attempt in good faith for sixty (60) days to agree upon the rights of the
respective parties with respect to each of such Claims. If the parties should
so agree, a memorandum setting forth such agreement shall be prepared and signed
by both parties. If no such agreement can be reached after good faith
negotiation, either party may demand arbitration of the matter unless the amount
of the damage or loss is at issue in pending litigation with a third party, in
which event arbitration shall not be commenced until such amount is ascertained
or both parties agree to arbitration; and in either such event the matter shall
be settled by arbitration conducted by three arbitrators. Parent and the Sole
Shareholder shall each select one arbitrator, and the two arbitrators so
selected shall select a third arbitrator, each of which arbitrators shall be
independent and have at least ten years relevant experience. The arbitrators
shall set a limited time period and establish procedures designed to reduce the
cost and time for discovery while allowing the parties an opportunity, adequate
in the sole judgment of the arbitrators, to discover relevant information from
the opposing parties about the subject matter of the dispute. The arbitrators
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys fees and costs, to the extent
as a court of competent law or equity, should the arbitrators determine that
discovery was sought without substantial justification or that discovery was
refused or objected to without substantial justification. The decision of a
majority of the three arbitrators as to the validity and amount of any Claim in
such Claim Notice shall be binding and conclusive upon the parties to this
Agreement. Such decision shall be written and shall be supported by written
findings of fact and conclusions which shall set forth the award, judgment,
decree or order awarded by the arbitrators.
(b) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. Any such arbitration shall be held in Santa
Clara County, California under the rules then in effect of the American
Arbitration Association. For purposes of this Section 7.4, in any arbitration
hereunder in which any claim or the amount thereof stated in the Claim Notice is
at issue, the Indemnified Party shall be deemed to be the Non-Prevailing Party
in the event that the arbitrators award such Indemnified Party less than the sum
of one-half (1/2) of the disputed amount plus any amounts not in dispute;
otherwise, the Indemnifying Party shall be deemed to be the Non-Prevailing
Party. The Non-Prevailing Party to an arbitration shall pay its own expenses,
the fees of each arbitrator, the administrative costs of the arbitration, and
the expenses, including without limitation, reasonable attorneys' fees and
costs, incurred by the other party to the arbitration.
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(c) In the event that any Claim for which the Sole Shareholder would
be liable to an Indemnified Party hereunder is asserted against an Indemnified
Party by a third party, the Indemnified Party shall with reasonable promptness
notify the Sole Shareholder of such Claim, including a copy of the Claim made if
the Claim was made in writing, specifying the nature of such claim and the
amount or the estimated amount thereof to the extent then feasible (which
estimate shall not be conclusive of the final amount of such Claim) (the "Claim
Notice"). The Sole Shareholder shall have 30 days from the receipt of the Claim
Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not
the Sole Shareholder disputes her liability to the Indemnified Party hereunder
with respect to such Claim and (ii) if the Sole Shareholder does not dispute
such liability, whether or not the Sole Shareholder desires, at her sole cost
and expense, to defend against such Claim, provided that the Sole Shareholder is
hereby authorized (but not obligated) prior to and during the Notice Period to
file any motion, answer or other pleading and to take any other action which the
Sole Shareholder shall deem necessary or appropriate to protect her interests.
In the event that the Sole Shareholder notifies the Indemnified Party within the
Notice Period that the Sole Shareholder does not dispute her obligation to
indemnify hereunder and desires to defend the Indemnified Party against such
Claim and except as hereinafter provided, the Sole Shareholder shall have the
right to defend by appropriate proceedings, which proceedings shall be
diligently settled or prosecuted by the Sole Shareholder to a final conclusion;
provided that, unless the Indemnified Party otherwise agrees in writing, the
- --------
Sole Shareholder may not settle any matter (in whole or in part) unless such
settlement includes a complete and unconditional release of the Indemnified
Party. If the Indemnified Party desires to participate in, but not control, any
such defense or settlement the Indemnified Party may do so at the Indemnified
Party's sole cost and expense. If the Sole Shareholder elects not to defend the
Indemnified Party against such Claim, whether by failure of the Sole Shareholder
to give the Indemnified Party timely notice as provided above or otherwise, then
the Indemnified Party, without waiving any rights against the Sole Shareholder,
may settle or defend against any such Claim in the Indemnified Party's sole
discretion and the Indemnified Party shall be entitled to recover from the Sole
Shareholder the amount of any settlement or judgment and, on an ongoing basis,
all indemnifiable costs and expenses of the Indemnified Party with respect
thereto, including interest from the date such costs and expenses were incurred.
(d) Notwithstanding Section 7.4(b) above, the Indemnified Party shall
have the right to control or assume (as the case may be) the defense of any
Claim and the amount of any judgment or settlement and the reasonable costs and
expenses of defense shall be included as part of the indemnification obligations
of the Sole Shareholder hereunder if any Claim seeks material prospective relief
which, in the reasonable opinion of the Indemnified Party, could have a material
adverse effect on the assets, liabilities, financial condition, results of
operations or business prospects of Parent and the Indemnified Party shall have
given the Sole Shareholder written notice of the same. If the Indemnified Party
should elect to exercise such right, the Sole Shareholder shall have the right
to participate in, but not control, the defense of such claim or demand at the
sole cost and expense of the Sole Shareholder. Notwithstanding the foregoing,
the Indemnified Party shall not settle any Claim without the written consent of
the Sole Shareholder, which consent shall not be unreasonably withheld.
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(e) Nothing herein shall be deemed to prevent the Indemnified Party
from making a Claim, and an Indemnified Party may make a Claim hereunder, for
potential or contingent claims or demands provided the Claim Notice sets forth
the specific basis for any such potential or contingent claim or demand to the
extent then feasible and the Indemnified Party has reasonable grounds to believe
that such a claim or demand may be made.
(f) The Indemnified Party's failure to give reasonably prompt notice
to the Sole Shareholder of any actual, threatened or possible claim or demand
which may give rise to a right of indemnification hereunder shall not relieve
the Sole Shareholder of any liability which she may have to the Indemnified
Party unless the failure to give such notice materially and adversely prejudices
the Sole Shareholder.
(g) The parties will make appropriate adjustments for any tax
benefits, tax detriments or insurance proceeds in determining the amount of any
indemnification obligation under Section 7, provided that the Sole Shareholder
--------
shall not be obligated to seek any payment pursuant to the terms of any
insurance policy.
(h) The Supplemental Cash and Pledged Shares shall be available to
satisfy the indemnification obligations of the Sole Shareholder pursuant to this
Section 7 through the second anniversary of this Agreement; provided, however,
-------- -------
that in the event that any Pending Claims are outstanding as of such date, an
amount of Pledged Shares and Supplemental Cash equal to 125% of such Pending
Claims shall remain available to satisfy such Pending Claims until the
resolution of such Pending Claims (the "Escrow Amount Expiration Date"). As
soon as reasonably practicable following the Escrow Amount Expiration Date,
Parent shall distribute all Supplemental Cash and Pledged Shares not required to
satisfy indemnification obligations under this Section 7 to the Sole
Shareholder. The Pledged Shares shall bear a restrictive legend preventing
their transfer pending expiration of such indemnification obligations in
substantially the form set forth below:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN PLEDGED AS
COLLATERAL PURSUANT TO THAT CERTAIN AGREEMENT AND PLAN OF
REORGANIZATION DATED JANUARY 3, 2000 BY AND AMONG TALK CITY,
INC., RESEARCH CONNECTIONS, INC. AND AMY J. YOFFIE. PRIOR TO THE
EXPIRATION OF THE PLEDGE AS SET FORTH IN SUCH AGREEMENT, SUCH
SHARES MAY NOT BE OFFERED, SOLD, EXCHANGED, TRANSFERRED OR
OTHERWISE DISPOSED OF."
Within three (3) business days following the Indemnification Deadline Date,
Parent shall use its reasonable commercial efforts to remove any stop transfer
orders made to its transfer agent, shall authorize the transfer agent to remove
the restrictive legend relating to the obligations of this Section 7 and shall
release the number of Pledged Shares referred to above in this clause (h). Upon
final resolution of all Pending Claims, Parent shall remove any stop transfer
orders made to the transfer agent, shall authorize its transfer agent to remove
the restrictive legend relating to the indemnification obligations of this
Section 7 and shall release the number of Pledged Shares then to
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be released. For purposes of this Agreement, the term "Value" per Pledged Share
shall mean $12.375 per share (subject to stock splits, recapitalizations and the
like).
7.5 Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations, warranties and covenants made by the Company and the Sole
Shareholder in or pursuant to this Agreement or in any document delivered
pursuant hereto will survive the Closing and will remain in effect until, and
will expire upon the Indemnification Deadline Date, provided, however, that the
-------- -------
indemnification obligations with respect to any Pending Claim (and the related
representations, warranties and covenants) will survive until the final
resolution of such Pending Claim.
SECTION 8
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated and the Merger abandoned
-----------
at any time prior to the Effective Time, whether before or after approval of the
Merger by the Sole Shareholder of the Company:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if the Closing has not occurred by
February 28, 2000; provided, however, that the right to terminate this Agreement
-------- -------
under this Section 8.1(b) shall not be available to any party whose action or
failure to act has been the principal cause of the failure of the Merger to
occur on or before such date and such action or failure to act constitutes a
material breach of this Agreement;
(c) by Parent or the Company if there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger; or there shall be any action taken, or any statute, rule, regulation or
order enacted, promulgated or issued or deemed applicable to the Merger by any
Governmental Entity which would make the consummation of the Merger illegal;
(d) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of all or a portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate all
or a portion of the business or assets of the Company or Parent as a result of
the Merger;
(e) by Parent if it is not in breach of its obligations under this
Agreement and there has been a breach of any representation, warranty, covenant
or agreement contained in this Agreement on the part of the Company or the Sole
Shareholder and such breach has not been cured within five (5) business days
after written notice to the Company and the Sole Shareholder (provided that no
--------
cure period shall be required for a breach which by its nature cannot be cured);
or
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(f) by the Company if it is not in breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of Parent and such
breach has not been cured within five (5) business days after written notice to
Parent (provided that no cure period shall be required for a breach which by its
--------
nature cannot be cured).
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub, the Company or
the Sole Shareholder, or their respective officers, directors or shareholders,
provided that each party shall remain liable for any breaches of this Agreement
- --------
prior to its termination; and provided further that, the provisions of Sections
-------- -------
5.5, 5.6, 7 and 8 of this Agreement shall remain in full force and effect and
survive any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto at any
---------
time prior to the Closing by execution of an instrument in writing signed on
behalf of each of the parties hereto, provided, however, that no amendment shall
-------- -------
be made which by law requires the further approval of the Sole Shareholders
without obtaining such approval.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent, on
-----------------
the one hand, and the Company, on the other, may, to the extent legally allowed,
(i) extend the time for the performance of any of the obligations of the other
party hereto, (ii) waive any inaccuracies in the representations and warranties
made to such party contained herein or in any document delivered pursuant
hereto, and (iii) waive compliance with any of the agreements or conditions for
the benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
8.5 Notice of Termination. Any termination of this Agreement under Section
---------------------
8.1 above will be effective immediately upon the delivery of written notice of
the terminating party to the other parties hereto.
SECTION 9
MISCELLANEOUS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
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(a) if to Parent, to:
Talk City, Inc.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer
Telephone No.: (408) 871-5200
Facsimile No.: (408) 871-5300
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Page Mailliard, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 496-4088
(b) if to the Company, to:
Research Connections, Inc.
414 Central Avenue
Westfield, NJ 07090
Attention: Amy J. Yoffie
Telephone No.: (800) 665-9724
Facsimile No.: (908) 654-9364
with a copy to:
Foss Bowe San Filippo & Caruso, LLC
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attention: William J. Bowe
Telephone No.: (732) 741-2525
Facsimile No.: (732) 741-2192
(c) if to the Sole Shareholder, to:
Amy J. Yoffie
c/o: Research Connections, Inc.
414 Central Avenue
Westfield, NJ 07090
9.2 Interpretation.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise indicated.
When a reference is made in this
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Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When reference is made herein to "the business
of" an entity, such reference shall be deemed to include the business of all
direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement the term "knowledge" means with
respect to a party hereto, with respect to any matter in question, that any of
the chief executive officer, chief operating officer, president, chief financial
officer, general counsel or controller of such party, has actual knowledge of
such matter.
(c) For purposes of this Agreement, the term "Material Adverse Effect"
when used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or other matter, if such change, event, violation,
inaccuracy, circumstance or other matter would have a material adverse effect on
the business, assets (including intangible assets), capitalization, financial
condition, results of operations or prospects of (i) such entity and its
subsidiaries taken as a whole, or (ii) the Surviving Corporation.
(d) For purposes of this Agreement, the term "subsidiary" of any
entity means any other entity of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are directly or indirectly owned or
controlled by such entity.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the schedules and
----------------------------
Exhibits hereto, the Confidentiality Agreement and the documents and instruments
and other agreements among the parties hereto referenced herein: (a) constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof; (b) are not
intended to confer upon any other person any rights or remedies hereunder; and
(c) shall not be assigned by operation of law or otherwise except as otherwise
specifically provided, except that Parent may assign its rights and delegate its
obligations hereunder to its affiliates. This Agreement is binding upon and will
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
9.5 Severability. In the event that any provision of this Agreement or the
------------
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably
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<PAGE>
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
9.8 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
9.9 Absence of Third Party Beneficiary Rights. No provision of this
-----------------------------------------
Agreement is intended, nor will be interpreted, to provide to create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, employee, partner of any party hereto or any
other person or entity.
9.10 Mutual Drafting. This Agreement is the joint product of the parties
---------------
hereto, and each provision hereof has been subject to the mutual consultation,
negotiation and agreement of each of the parties, and shall not be construed for
or against any party hereto.
9.11 Further Representations. Each party to this Agreement acknowledges and
-----------------------
represents that it has been represented by its own legal counsel in connection
with the transactions contemplated by this Agreement, with the opportunity to
seek advice as to its legal rights from such counsel. Each party further
represents that it is being independently advised as to the tax consequences of
the transactions contemplated by this Agreement and is not relying on any
representation or statements made by the other party as to such tax
consequences.
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<PAGE>
IN WITNESS WHEREOF, Parent, the Company and the Sole Shareholder have entered
into this Agreement as of the date first written above.
RESEARCH CONNECTIONS, INC. TALK CITY, INC.
By: /s/ Amy J. Yoffie By: /s/ Jeffrey Snetiker
----------------------------- -------------------------------------
Name: Amy J. Yoffie Name: Jeffrey Snetiker
---------------------------- -----------------------------------
Title: President Title: Sr Vice President
--------------------------- ----------------------------------
Chief Financial & Admin. Officer
SOLE SHAREHOLDER
By /s/ Amy J. Yoffie
------------------------------
Name: Amy J. Yoffie
[Signature page to Reorganization Agreement]
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<PAGE>
EXHIBIT A
FORM OF ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Escrow Agreement") is made and entered into as
of February 11, 2000 by and among Talk City, Inc., a Delaware corporation ("Talk
City"), Research Connections, Inc., a New Jersey corporation ("Research
Connections"), Amy J. Yoffie (the "Sole Shareholder") and Firstar Bank, N.A., as
escrow agent (the "Escrow Agent").
RECITALS
--------
A. Talk City, Research Connections and the Sole Shareholder are parties
to that certain Agreement and Plan of Reorganization dated as of January 3, 2000
(the "Reorganization Agreement"), providing for the merger (the "Merger") of
Research Connections with and into Talk City. Capitalized terms used but not
defined herein shall have the meanings set forth in the Reorganization
Agreement.
B. One of the conditions to the closing of the Merger, as set forth in
the Reorganization Agreement, is the execution and delivery of this Escrow
Agreement.
C. Pursuant to Section 2.1(c)(ii) of the Reorganization Agreement, Talk
City shall deposit with the Escrow Agent (i) 121,212 shares of Talk City Common
Stock (the "Pledged Shares") and (ii) $1.5 million in cash (the "Supplemental
Cash," and together with the Pledged Shares, the "Escrow Amount") into an escrow
fund (the "Escrow Fund") to be used to satisfy any potential indemnification
obligations of Research Connections or the Sole Shareholder to any Indemnified
Party for Damages under Section 7 of the Reorganization Agreement.
D. This Escrow Agreement sets forth the basis on which the Escrow Agent
will receive and hold, and make distributions from, the Escrow Fund and the
duties for which the Escrow Agent will be responsible.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
agree as follows:
1. Appointment. Talk City and the Sole Shareholder hereby appoint the
-----------
Escrow Agent as escrow agent to serve in such capacity in accordance with the
terms and conditions set forth in this Escrow Agreement. The Escrow Agent
hereby accepts such appointment.
2. Reorganization Agreement. The Escrow Agent acknowledges receipt of a
------------------------
copy of the Reorganization Agreement; however, except for reference thereto for
definitions of certain words or terms not defined herein, the Escrow Agent is
not charged with any duties or responsibilities with respect to the
Reorganization Agreement.
<PAGE>
3. Escrow Amount. Immediately following the Effective Time, Talk City
--------------
shall deposit the Supplemental Cash and stock certificates evidencing the
Pledged Shares directly with the Escrow Agent, the receipt of which shall be
acknowledged, and the same accepted, by the Escrow Agent as escrow agent
hereunder. The Escrow Fund, as such term is used herein, shall include the
Escrow Amount deposited pursuant to this Section 3, less any distributions made
hereunder.
4. Investment.
-----------
(a) The Supplemental Cash placed in the Escrow Fund, together with all
interest accruing thereon, shall be invested by the Escrow Agent, without
distinction as to principal and income, in one or more of the following
investments: (i) interest bearing open-ended or time deposits of any domestic
bank (including deposit in the Escrow Agent's bank money market deposit
accounts), including one or more accounts maintained in the commercial banking
department (if any) of the Escrow Agent; provided, however, that any amount not
-------- -------
invested in the Escrow Agent's bank money market deposit accounts shall be
invested, to the extent reasonably possible, in accounts that are insured by the
Federal Deposit Insurance Corporation ("FDIC") or (ii) short-term U.S.
Department of Treasury bills, or any short-term government obligation money
market fund that includes similar investments. Talk City shall indemnify and
hold the Escrow Agent harmless from any and all liability for acting upon the
investment instructions given in this Section 4.
(b) For the purpose of investing funds held in escrow, the Escrow
Agent may accept and act upon the oral instructions of Talk City. The Escrow
Agent will confirm all oral investment instructions in writing within three (3)
business days. If there is any discrepancy between any oral instructions and a
written confirmation of those instructions, the Escrow Agent's records of oral
investment instructions shall govern. Talk City shall indemnify and hold the
Escrow Agent harmless from any and all liability for acting on any oral
investment instructions purported to be given by Talk City. The Escrow Agent
shall not be responsible for the authenticity of any such instructions, whether
or not the person giving the instructions was, in fact, an authorized
representative of Talk City. In no event shall the Escrow Agent be liable to
Talk City hereunder for any consequential, special or exemplary damages,
including, but not limited to lost profits, from any cause whatsoever arising
out of, or in any way connected with acting upon oral instructions believed by
the Escrow Agent to be genuine. The Escrow Agent will act upon investment
instructions the day such instructions are received, provided the requests are
communicated within a sufficient amount of time to allow the Escrow Agent to
make the specified investment. Instructions received after an applicable
investment cutoff deadline will be treated as being received by the Escrow Agent
on the next business day, and the Escrow Agent shall not be liable for any loss
arising directly or indirectly, in whole or in part, from the inability to
invest funds on the day the instructions are received. The Escrow Agent shall
not be liable for any loss incurred by the actions of third parties or for any
loss arising by error, failure or delay in making an investment that is caused
by circumstances beyond the Escrow Agent's reasonable control.
(c) All interest earned pursuant to this Section 4 shall be
distributed quarterly by the Escrow Agent to Talk City, unless otherwise agreed
to by the Escrow Agent and Talk City. Talk City acknowledges that payment of any
interest earned on the funds invested in the Escrow Fund will be subject to
backup withholding penalties unless either a properly completed Internal Revenue
Service Form W8 or W9 certification is submitted to the Escrow Agent.
-2-
<PAGE>
5. Release of Escrow Amount. Subject to Sections 5(c) and 6 below, the
------------------------
Escrow Amount shall be released to the Sole Shareholder as follows:
(a) 121,212 shares of Parent Common Stock will be distributed on
Closing and placed in the Escrow Fund to be released over four (4) years, with
25% released twelve (12) months after the Closing (the "First Anniversary") and
the remainder released evenly over the 36 months following the First
Anniversary.
(b) $1.5 million in cash will be placed in the Escrow Fund on Closing
to be released over four (4) years, with 25% released on the First Anniversary
and the remainder released evenly over the 36 months following the First
Anniversary. Notwithstanding the foregoing, the Supplemental Cash is subject to
the Sole Shareholder's continued employment by Talk City at the time of the
distributions. In the event the Sole Shareholder is terminated for cause (as
defined below) or voluntarily leaves the employment of Talk City, then all
remaining cash in the Escrow Fund shall be forfeited to Talk City and the Sole
Shareholder shall have no further right to such cash. The Sole Shareholder's
death, disability or termination by Talk City other than for cause shall not be
grounds for forfeiture of the Supplemental Cash. Amounts released from the
Escrow Fund will be subject to all applicable withholding taxes. The term
"cause" shall mean (i) the conviction of, plea of nolo contendere, a guilty plea
or confession by the Sole Shareholder to a felony or the commission of any act
of fraud or material dishonesty against, or the embezzlement, theft or
misappropriation of property belonging to Talk City or its affiliates, (ii) the
continuous failure by the Sole Shareholder to perform the material duties and
responsibilities that are reasonably consistent with the Sole Shareholder's
position which remain uncured for a period of fifteen (15) days after receipt of
notice thereof from Talk City, (iii) the use of illegal substances by the Sole
Shareholder, (iv) engaging in conduct that is seriously injurious to the
business of Talk City or its affiliates (it being understood that business
decisions made by the Sole Shareholder in good faith are not to be considered
grounds for termination for cause) or (v) the material breach by the Sole
Shareholder of the Confidentiality Agreement, the Noncompetition Agreement or
any agreement related thereto which is not cured fifteen (15) days after receipt
of notice thereof from Talk City. Termination for cause or voluntary
resignation, without the Sole Shareholder's consent, shall not include the
forced relocation of the Sole Shareholder's principal place of business to more
than 20 miles from its present location in Westfield, New Jersey. A date of
delivery of any Escrow Amount is referred to as a "Delivery Date."
(c) Notwithstanding the above, any Escrow Amount to be delivered on a
Delivery Date shall not be delivered to the Sole Shareholder in the event and to
the extent that there is a Pending Claim then outstanding pursuant to Section 7
of the Reorganization Agreement.
6. Claims Upon Escrow Fund.
-----------------------
(a) Upon receipt by the Escrow Agent at any time prior to the
Indemnification Deadline Date of a certificate signed by an officer of Talk City
(an "Officer's Certificate") providing notice of a Claim and specifying in
reasonable detail the date the Damages relating to such Claim were paid,
incurred or otherwise arose, and the nature of the misrepresentation or breach
to which such Damages are related, the Escrow Agent shall, subject to the
provisions of Section 6(b) below, deliver to Talk City, as promptly as
practicable, the amount in cash or the number of shares out of
-3-
<PAGE>
the Escrow Fund equal to such Damages as indemnity; provided, however, that
-------- -------
payment shall not be made unless and until the aggregate amount of Damages
exceeds $25,000, at which point payment shall be made from the first dollar of
Damages. Pledged Shares shall only be delivered as payment for Damages after all
Supplemental Cash has been delivered as payment for Damages. For purposes of
this Escrow Agreement, the Pledged Shares shall be valued at $12.375 per share
(subject to adjustments for stock splits, recapitalizations and the like).
(b) At the time of delivery of any Officer's Certificate to the Escrow
Agent, a duplicate copy of such Officer's Certificate shall be delivered to the
Sole Shareholder and for a period of forty-five (45) days after such delivery,
the Escrow Agent shall make no delivery of Supplemental Cash or Pledged Shares
from the Escrow Fund pursuant to Section 6(a) above unless the Escrow Agent
shall have received written authorization from the Sole Shareholder to make such
delivery. After the expiration of such forty-five (45) day period, the Escrow
Agent shall make delivery of Supplemental Cash and/or Pledged Shares equal to
the amount of Damages from the Escrow Fund in accordance with Section 6(a)
above, provided that no such payment or delivery shall be made if the Sole
--------
Shareholder delivers written notice to the Escrow Agent and to Talk City prior
to the expiration of such forty-five (45) day period that the Sole Shareholder
disputes in good faith the Claim set forth in the Officer's Certificate, with
the basis for such dispute set forth in reasonable detail.
7. Resolution of Conflicts; Arbitration.
------------------------------------
(a) In case the Sole Shareholder shall object in writing to any Claim
made in any Officer's Certificate as described in Section 6(b), Talk City shall
have fifteen (15) days to respond in a written statement to the objection of the
Sole Shareholder. If after such fifteen (15) day period there remains a dispute
as to any Claim, the Sole Shareholder and Talk City shall attempt in good faith
for sixty (60) days to agree upon the rights of the respective parties with
respect to each of such Claim. If the Sole Shareholder and Talk City should so
agree, a memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall
be entitled to rely on any such memorandum and shall make the distributions from
the Escrow Fund only in accordance with the terms thereof or of the Escrow
Agreement.
(b) If no such agreement can be reached after good faith negotiation,
either Talk City or the Sole Shareholder may, by written notice to the other,
demand arbitration of the matter in accordance with Section 7.4 of the
Reorganization Agreement, unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration.
The decision of the arbitrators as to the validity and amount of any Claim in
such Officer's Certificate shall be binding and conclusive upon the parties to
this Agreement, and, notwithstanding anything in Section 6 hereof, the Escrow
Agent shall be entitled to act in accordance with such decision and make or
withhold payments out of the Escrow Fund in accordance therewith.
-4-
<PAGE>
8. Escrow Provisions.
-----------------
(a) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other paper or document from any
duly authorized officer or agent of Talk City or any other Indemnified Party or
from the Sole Shareholder, not only as to its due execution and the validity and
effectiveness of its provisions, but also as to the truth of any information
therein contained, that the Escrow Agent in good faith believes to be genuine
and as to which the Escrow Agent shall have no actual notice of invalidity, lack
of authority or other deficiency.
(b) The Escrow Agent shall not be liable for any error of judgment, or
for any act done or step taken or omitted by it in good faith, or for any
mistake of fact or law, or for anything which it may do or refrain from doing in
connection therewith, except for any liability arising from its own negligence,
willful misconduct or bad faith.
(c) The Escrow Agent shall be entitled to consult with competent and
responsible counsel of its choice with respect to the interpretation of the
provisions hereof, and any other legal matters relating hereto, and shall be
fully protected in taking any action or omitting to take any action in good
faith in accordance with the advice of such counsel.
(d) Talk City and the Sole Shareholder jointly and severally agree to
indemnify and hold the Escrow Agent harmless for any and all claims,
liabilities, costs, payments and expenses, including fees of counsel (who may be
selected by the Escrow Agent) for court actions, for anything done or omitted by
it in the performance of this Escrow Agreement, except as a result of the Escrow
Agent's own negligence, willful misconduct or bad faith.
(e) All fees and related expenses of the Escrow Agent for its services
hereunder shall be paid by Talk City. Such fees and expenses shall be determined
in accordance with the fee schedule attached hereto as Schedule A or as
----------
otherwise provided to Talk City.
9. Successor Escrow Agent. The Escrow Agent, or any successor, may resign
----------------------
at any time upon giving written notice to Talk City and the Sole Shareholder
thirty (30) days before such resignation shall take effect. In addition, Talk
City and the Sole Shareholder may terminate the Escrow Agent's appointment as
escrow agent upon giving written notice (jointly signed by Talk City and the
Sole Shareholder) to the Escrow Agent thirty (30) days before such termination
shall take effect. If the Escrow Agent shall resign, be terminated or be unable
to serve, then it shall be succeeded by such bank or trust company jointly named
by Talk City and the Sole Shareholder in such thirty (30) day period, or if no
such appointment is made by that time, then by a bank or trust company appointed
by a court of competent jurisdiction upon petition by either Talk City or the
Sole Shareholder (in which action the other party shall be afforded a reasonable
opportunity to participate) to appoint a successor escrow agent. The Escrow
Agent shall transfer the Pledged Shares to its successor and shall thereupon be
discharged, and the successor shall thereupon succeed to all of the rights,
powers and duties and shall assume all of the obligations of the Escrow Agent
originally named in this Escrow Agreement.
-5-
<PAGE>
10. Payment of Taxes. The Sole Shareholder shall be treated as the owner
----------------
of the Pledged Shares for all tax purposes while and to the extent that the
Pledged Shares are held by the Escrow Agent. The Escrow Agent shall cause all
information statements to be prepared in accordance with this Section 10 and all
parties shall prepare their tax returns accordingly.
11. Termination.
-----------
(a) Unless extended in writing by the parties hereto, the escrow
provided for in this Escrow Agreement shall expire upon the Indemnification
Deadline Date; provided, however, that Research Connections' indemnification
-------- -------
obligations with respect to any Pending Claim will survive until the final
resolution of such Pending Claim (the "Termination Date").
(b) Promptly following the Indemnification Deadline Date and receipt
of instructions from Talk City and the Sole Shareholder, the Escrow Agent shall,
to the extent Supplemental Cash and/or Pledged Shares are available therefor in
the Escrow Fund and in the following order of priority:
(i) withhold Supplemental Cash and/or Pledged Shares in the
Escrow Fund in sufficient amount, or to the extent funds are available therefor,
to satisfy 125% of the maximum amount of Damages estimated by Talk City and the
Sole Shareholder relating to any and all Pending Claims as set forth in Section
7.4(h) of the Reorganization Agreement; and
(ii) distribute any Supplemental Cash and/or Pledged Shares
remaining after the allocations and distributions provided for in clause (i)
above to the Sole Shareholder in accordance with her interest in the Escrow
Fund.
(c) Promptly following the Termination Date and receipt of
instructions from the Sole Shareholder, the Escrow Agent shall, to the extent
Supplemental Cash and/or Pledged Shares are available therefor in the Escrow
Fund, distribute such remaining Supplemental Cash and/or Pledged Shares to the
Sole Shareholder in accordance with her interest in the Escrow Fund.
12. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given or delivered if delivered personally or by
express courier, mailed by registered or certified mail (return receipt
requested) or sent by telecopy, confirmation received, to the parties at the
following addresses and telecopy numbers (or at such other address or number for
a party as shall be specified by like notice):
(a) If to Talk City or Sub, to:
TALK CITY, INC.
1919 Bascom Avenue
Campbell, CA 95008
Attn: Peter Friedman
Telecopy No.: (408) 871-5300
Telephone No.: (408) 871-5200
-6-
<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: Page Mailliard, Esq.
Telecopy No.: (650) 493-6811
Telephone No.: (650) 493-9300
(b) if to Research Connections, to:
Research Connections, Inc.
414 Central Avenue
Westfield, NJ 07090
Attention: Amy J. Yoffie
Telecopy No.: (908) 654-9364
Telephone No.: (800) 665-9724
with a copy to:
Foss Bowe San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William Bowe, Esq.
Telecopy No.: (732) 741-2525
Telephone No.: (732) 741-2192
(c) If to the Sole Shareholder:
Amy J. Yoffie
c/o Research Connections
414 Central Avenue
Westfield, New Jersey 07090
with a copy to:
Foss Bowe San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William Bowe, Esq.
Telecopy No.: (732) 741-2525
Telephone No.: (732) 741-2192
(d) If to the Escrow Agent:
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<PAGE>
Firstar Bank, N.A.
101 East Fifth Street
St. Paul, MN 55101
Attn: Frank Leslie
Telecopy No.: 651-229-6415
Telephone No.: 651-229-2600
13. Nonassignability. Notwithstanding anything to the contrary contained
----------------
herein, no Pledged Shares or any beneficial interest therein may be sold,
assigned or otherwise transferred, including by operation of law, by the Sole
Shareholder or be taken or reached by any legal or equitable process in
satisfaction of any debt or other liability of the Sole Shareholder. Any such
attempted transfer in violation of this Section shall be null and void.
14. Successors and Assigns. This Escrow Agreement and all action taken
----------------------
hereunder in accordance with its terms shall be binding upon and inure to the
benefit of Talk City, its subsidiaries, and their respective successors and
assigns, the Escrow Agent and its successors, and the Sole Shareholder and her
successors.
15. Entire Agreement. This Escrow Agreement constitutes the entire
----------------
agreement among the parties with the Escrow Agent, and among the other parties
with respect to this particular escrow except as set forth under the
Reorganization Agreement, and it supersedes all prior or concurrent arrangements
or understandings with respect thereto. The other parties hereby acknowledge and
agree that Escrow Agent's duties and obligations hereunder are limited, and that
Escrow Agent shall have no duties or obligations except as clearly specified
herein, nor shall Escrow Agent have any responsibility for the enforcement of
the obligations of any parties hereto.
16. Waivers. No waiver by any party hereto of any condition or of any
-------
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
17. Counterparts. This Escrow Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute one and the same instrument.
18. Governing Law. This Escrow Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused this Escrow
Agreement to be duly executed as of the day and year first above written.
TALK CITY, INC.
By: /s/ Jeffrey Snetiker
----------------------------------
Title: SR VP, CHIEF FINANCIAL OFFICER
-------------------------------
RESEARCH CONNECTIONS, INC.
By: /s/ Amy J. Yoffie
----------------------------------
Title: President
-------------------------------
AMY J. YOFFIE
("Sole Shareholder")
By: /s/ Amy J. Yoffie
----------------------------------
Title: President
-------------------------------
FIRSTAR BANK, N.A.
("Escrow Agent")
By: /s/ Frank Leslie
----------------------------------
Title: Vice President
-------------------------------
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<PAGE>
SCHEDULE A
----------
ESCROW AGENT FEE SCHEDULE
$2,500 per year (plus out-of-pocket expenses)
<PAGE>
EXHIBIT B
---------
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (the "Agreement") is made as of February 11,
2000 by and among Talk City, Inc., a Delaware corporation ("Talk City"),
Research Connections, Inc., a New Jersey corporation ("Research Connections"),
and Amy J. Yoffie ("Shareholder").
Background
----------
A. Talk City, Research Connections and Amy J. Yoffie have entered into an
Agreement and Plan of Reorganization dated as of January 3, 2000 (the
"Reorganization Agreement"), which provides for the merger (the "Merger") of
Research Connections with and into Talk City whereby Talk City will be the
surviving corporation ("Surviving Corporation").
B. Shareholder is receiving significant consideration pursuant to the
terms of the Reorganization Agreement.
C. As a condition to the closing of the Merger, to preserve the value and
goodwill of the business being acquired by Talk City, Shareholder has agreed
with Talk City to enter into this Agreement effective upon the closing of the
Merger.
NOW THEREFORE, in consideration of the mutual promises made herein, Talk
City and Shareholder (collectively referred to as the "Parties") hereby agree as
follows:
1. Covenant Not to Compete or Solicit.
----------------------------------
(a) For the period beginning on the date hereof and ending on the
earlier of (i) four years after the date of the Reorganization Agreement and
(ii) the date one (1) year after the termination of Shareholder's employment
with Talk City or any subsidiary of Talk City, voluntary or involuntary, for any
reason (the "Non-Compete Period"), Shareholder shall not directly or indirectly,
without the prior written consent of Talk City, (A) engage anywhere in the world
in (whether as an employee, consultant, proprietor, partner, director or
otherwise), or have any ownership interest in (except for ownership of five
percent (5%) or less of the outstanding shares of any entity whose securities
are listed on a national securities exchange), or participate in the financing,
operation, management or control of, any firm, corporation or business that
provides or conducts market research in online communities or interactive
services for businesses and consumers unless agreed to by Talk City in writing;
or (B) approach, contact or solicit any customer of Talk City or any subsidiary
of Talk City or interfere with the business of any customer of Talk City or any
subsidiary of Talk City regarding the provision or conduct of market research in
online communities or interactive services.
<PAGE>
(b) During the Non-Compete Period, Shareholder shall not, directly or
indirectly, without the prior written consent of Talk City, (i) solicit,
encourage, hire or take any other action which is intended to induce any
employee of Talk City or any subsidiary of Talk City to terminate his or her
employment with Talk City or any subsidiary of Talk City, or (ii) interfere in
any manner with the contractual or employment relationship between Talk City or
any subsidiary of Talk City and any employee of Research Connections.
Notwithstanding anything to the contrary in the preceding sentence, nothing in
this Section 1(b) shall prohibit Shareholder from hiring a former employee of
Talk City or any of its subsidiaries.
(c) The covenants contained in the preceding paragraphs shall be
construed as a series of separate covenants, one for each county, city and state
(U.S. or foreign) of any geographic area where any business is presently carried
on by Research Connections. Except for geographic coverage, each such separate
covenant shall be identical in terms to the covenant contained in the preceding
paragraphs. If, in any judicial proceeding, a court refuses to enforce any of
such separate covenants (or any part thereof), then such unenforceable covenant
(or such part) shall be eliminated from this Agreement to the extent necessary
to permit the remaining separate covenants (or portions thereof) to be enforced.
In the event that the provisions of this Section 1 are deemed to exceed the
time, geographic or scope limitations permitted by applicable law, then such
provisions shall be reformed to the maximum time, geographic or scope
limitations, as the case may be, permitted by applicable laws.
(d) Shareholder acknowledges that her services are needed by virtue of
the Merger, and that Shareholder's covenant not to compete or solicit contained
in this Section 1 is given in conjunction with such Merger. Shareholder also
acknowledges that the business of Talk City is worldwide and therefore, any
actions taken by the Shareholder in violation of this Agreement anywhere in the
world would harm Talk City's business.
(e) Shareholder acknowledges that breach of this Section 1 would cause
irreparable injury to Surviving Corporation and agrees that in the event of such
breach, Surviving Corporation shall have available, in addition to any other
right or remedy available (including any award of ascertainable damages) the
right to seek injunctive relief without the necessity of proving actual damages.
2. Arbitration. All disputes or controversies (whether of law or fact)
-----------
of any nature whatsoever arising from or relating to this Agreement and the
transactions contemplated hereby shall be decided by arbitration by the American
Arbitration Association (the "Association") in accordance with the rules and
regulations of the Association.
The parties shall, within 30 days of the date of demand by either
party for arbitration, mutually select one independent, qualified arbitrator.
Each party reserves the right to object to any individual arbitrator who shall
be employed by or affiliated with a competing organization. In the event
objection is made, the Association shall resolve any dispute regarding the
propriety of an individual arbitrator acting in that capacity. The parties
shall each bear one-half of the expenses of the arbitrator. Hearings in the
proceeding shall commence within 120 days of the selection of the arbitrator.
-2-
<PAGE>
Arbitration shall take place in San Francisco, California. At the
request of either party, arbitration proceedings will be conducted
confidentially; in such case all documents, testimony and records shall be
received, heard and maintained by the arbitrators in confidence under seal,
available for the inspection only by the Association, the parties and their
respective attorneys and their respective experts who shall agree in advance and
in writing to receive all such information confidentially and to maintain such
information in confidence. The arbitrator shall be able to decree any and all
relief of an equitable and legal nature, including but not limited to such
relief as a temporary restraining order, a temporary and/or a permanent
injunction, and shall also be able to award damages, with or without an
accounting and costs. The decree or award rendered by the arbitrator may be
entered as a final and binding judgment in any court having jurisdiction
thereof.
Reasonable notice of the time and place of arbitration shall be given
to all persons, other than the parties, as shall be required by law, in which
case such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearings in such manner as the
law shall require.
3. Miscellaneous.
-------------
(a) Severability. If any portion of this Agreement is held by a court
------------
of competent jurisdiction to conflict with any federal, state or local law, and
is not reformed, such portion of this Agreement shall be of no force or effect
and this Agreement shall otherwise remain in full force and effect and be
construed as if such portion had not been included in this Agreement.
(b) No Assignment. Shareholder shall not assign this Agreement or any
-------------
rights or obligations under this Agreement without the prior written consent of
Talk City and Surviving Corporation.
(c) Notice. Any notice or communication required or permitted under
------
this Agreement shall be made in writing and shall be deemed given if delivered
personally or mailed by certified or registered mail, return receipt requested
and postage prepaid or sent by telecopy, confirmation received, to the parties
at the following addresses and telecopy numbers (or at such other address or
number for a party as shall be specified by like notice):
(i) If to Talk City, to:
TALK CITY, INC.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer
Telecopy No.: (408) 871-5300
-3-
<PAGE>
Telephone No.: (408) 871-5200
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Page Mailliard, Esq.
Telecopy No.: (650) 493-6811
Telephone No.: (650) 493-9300
(ii) if to Research Connections, to:
RESEARCH CONNECTIONS, INC.
414 Central Avenue
Westfield, NJ 07090
Attention: Amy J. Yoffie
Telecopy No.: (908) 654-9364
Telephone No.: (800) 665-9724
with a copy to:
Foss, Bowe, San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William J. Bowe, Esq.
Telecopy No.: (732) 741-2525
Telephone No.: (732) 741-2192
(iii) if to Surviving Corporation, to:
TALK CITY, INC.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer
Telecopy No.: (408) 871-5300
Telephone No.: (408) 871-5200
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
-4-
<PAGE>
Palo Alto, California 94304
Attention: Page Mailliard, Esq.
Telecopy No.: (650) 493-6811
Telephone No.: (650) 493-9300
(iv) if to Shareholder, to:
Amy J. Yoffie
c/o Research Connections
414 Central Avenue
Westfield, NJ 07090
with a copy to:
Foss Bowe San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attn: William J. Bowe, Esq.
Telecopy No.: (732) 741-2525
Telephone No.: (732) 741-2192
(d) Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding of the parties and supersedes all prior discussions,
agreements and understandings relating to the subject matter of this Agreement.
This Agreement may not be changed or modified, except by an agreement in writing
executed by Talk City, by Research Connections and/or Surviving Corporation and
by Shareholder.
(e) Waiver of Breach. The waiver of a breach of any term or provision
----------------
of this Agreement shall not operate as or be construed to be a waiver of any
other previous or subsequent breach of this Agreement.
(f) Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of the State of
Delaware (without giving effect to its choice of law principles).
(g) Headings. All captions and section headings used in this
--------
Agreement are for convenient reference only and do not form a part of this
Agreement.
(h) Counterparts. This Agreement may be executed in counterparts, and
------------
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
(i) Jurisdiction. All parties hereto agree to submit to the
------------
jurisdiction of the federal and state courts of the State of California.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
TALK CITY, INC. SHAREHOLDER
By: /s/ Jeffrey Snetiker /s/ Amy J. Yoffie
---------------------------- ----------------------------
Name: JEFFREY SNETIKER Amy J. Yoffie
Title: SR VP, CHIEF FINANCIAL OFFICER
RESEARCH CONNECTIONS, INC.
By: /s/ Amy J. Yoffie
----------------------------
Name: Amy J. Yoffie
Title: President
[Signature Page to Noncompetition Agreement]
-6-
<PAGE>
EXHIBIT C
---------
INVESTMENT REPRESENTATION AGREEMENT
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of January 3, 2000, (the "Reorganization Agreement"),
entered into by and among Talk City, Inc., a Delaware corporation ("Parent"),
Research Connections, Inc., a New Jersey corporation (the "Company"), and Amy J.
Yoffie, an individual and sole shareholder of the Company (the "Sole
Shareholder"), the Company will merge (the "Merger") with and into Parent and
all shares of Company Capital Stock will be exchanged for cash and shares of
Parent Common Stock as set forth in the Reorganization Agreement (the "Merger
Consideration"). Unless otherwise indicated, capitalized terms not defined
herein have the meanings set forth in the Reorganization Agreement.
The undersigned understands that the execution of this Certificate is a
condition precedent to Parent's obligation to consummate the Merger and to the
receipt of the shares of Parent Common Stock in connection with the Merger
(pursuant to the terms and conditions of the Reorganization Agreement).
The undersigned hereby represents and warrants as follows:
1. The Parent Common Stock issued to the undersigned will be acquired for
investment for the undersigned's own account, not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof in violation of the
Securities Act of 1933, as amended (the "1933 Act"), and the undersigned has no
present intention of selling, granting any participation in, or otherwise
distributing the same. The undersigned represents that the entire legal and
beneficial interest of the Parent Common Stock will be held for the
undersigned's account only, and neither in whole or in part for any other person
other than a wholly owned subsidiary of the undersigned. By executing this
Agreement, the undersigned further represents that the undersigned has no
present contract, undertaking, agreement or arrangement with any person to sell,
transfer, or grant participation to such person or to any third person, with
respect to any of the Parent Common Stock.
2. The undersigned represents that (without limiting or affecting the
representations and warranties of Parent under the Reorganization Agreement) it:
(i) has such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of the undersigned's prospective
investment in the shares of Parent Common Stock; (ii) has received copies of
Parent's Registration Statement on Form S-1 dated July 19, 1999; (iii) has
received all the information it has requested from the Parent and the Company it
considers necessary or appropriate for deciding whether to accept the Parent
Common Stock; (iv) has the ability to bear the economic risks of the
undersigned's prospective investment; and (v) is able, without materially
impairing its financial condition, to hold the Parent Common Stock for an
indefinite period of time and to suffer complete loss on its investment.
3. Each certificate representing Parent Company Stock issued pursuant
hereto to the undersigned and any shares issued or issuable in respect of any
such Parent Common Stock upon any
<PAGE>
stock split, stock dividend, recapitalization, or similar event, shall be
stamped or otherwise imprinted with legends in the following form (in addition
to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE
SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION
AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE CORPORATION. SUCH TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE
SHARES.
4. The certificates evidencing the Parent Common Stock shall also bear
any legend required pursuant to any state, local or foreign law governing such
securities or the Reorganization Agreement.
5. The undersigned understands and acknowledges that the Parent Common
Stock has not been registered under the 1933 Act and Parent Common Stock must be
held indefinitely unless subsequently registered under the 1933 Act or an
exemption from such registration is available and that the Parent is obligated
to register the Parent Common Stock only in accordance with the terms of the
Registration Rights Agreement.
6. The undersigned acknowledges that the Parent Common stock shall not be
transferable except upon the conditions specified in this Agreement and the
Reorganization Agreement.
7. Prior to any proposed transfer of any Parent Common Stock, unless
there is in effect a registration statement under the 1933 Act covering the
proposed transfer, the undersigned shall give written notice to the Company of
its intention to effect such transfer. Each such notice shall describe the
manner and circumstances of the proposed transfer in sufficient detail, and
shall, if the Parent so requests, be accompanied by either (i) a written opinion
of legal counsel who shall be satisfactory to Parent, addressed to Parent and
satisfactory in form and substance to Parent's counsel, to the effect that the
proposed transfer of Parent Common Stock may be effected without registration
under the 1933 Act, or (ii) a "No Action" letter from the Securities and
Exchange Commission (the "Commission") to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Parent Common Stock shall be entitled to transfer such shares of
Parent Common Stock in accordance with the terms of the notice delivered by the
holder to Parent.
-2-
<PAGE>
Each certificate evidencing the shares of Parent Common Stock transferred as
above provided shall bear the appropriate restrictive legend set forth in
Section (c) above, except that such certificate shall not bear such restrictive
legend if in the opinion of counsel for Parent such legend is not required in
order to establish compliance with any provisions of the 1933 Act.
8. The undersigned is familiar with the provisions of Rule 144,
promulgated under the 1933 Act, which in substance, permits limited public
resale of "restricted securities" acquired, directly or indirectly from the
issuer thereof (or from an affiliate of such issuer) in a non-public offering
subject to the satisfaction of certain conditions, including, among other
things: (i) a public trading market then exists for the Parent Common Stock;
(ii) the availability of certain public information about Parent; (iii) the
resale occurring not less than one (1) year after the party has purchased, and
made full payment for, within the meaning of Rule 144, the securities to be
sold; and (iv) the sale being made through a broker in an unsolicited "broker
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934) and the amount of securities
being sold during any three (3) month period not exceeding the specified
limitations stated therein, if applicable. The undersigned further understands
that at the time the undersigned wishes to sell the shares of Parent Common
Stock received from Parent there may be no public market upon which to make such
a sale, and that, even if such a public market then exists, Parent may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, the undersigned would be precluded from selling the shares of Parent
Common Stock received from Parent under Rule 144 even if the one (1) year
minimum holding period had been satisfied. The undersigned further understands
that in the event all of the applicable requirements of Rule 144 are not
satisfied, registration under the 1933 Act, compliance with Regulation A, or
some other registration exemption would be required to sell the shares of Parent
Common Stock received from Parent.
9. The undersigned is the sole record and beneficial owner of capital
stock of the Company in the amount set forth next to its name on the signature
page hereto. Such capital stock is not subject to any claim, lien, pledge,
charge, security interest or other encumbrance or to any rights of first refusal
of any kind, and the undersigned has not granted any rights to purchase such
shares to any other person or entity. The undersigned has the sole right to
transfer such shares. Such shares constitute all of the capital stock owned,
beneficially or of record, by the undersigned, and the undersigned has no other
rights to acquire any capital stock of the Company except as set forth on the
signature page hereto.
10. The undersigned has had an opportunity to review with its own tax
advisors the tax consequences to the undersigned of the Merger and the
transactions contemplated by the Reorganization Agreement. The undersigned
understands that it must rely solely on its advisors and not on any statements
or representations by Parent, the Company or any of their agents with respect to
tax matters. The undersigned understands that it (and not Parent or the
Company) shall be responsible for its own tax liability that may arise as a
result of the Merger or the transactions contemplated by the Reorganization
Agreement.
-3-
<PAGE>
11. The undersigned will have sufficient assets, after completion of the
Merger, to satisfy all of the undersigned's obligations to its creditors, as the
same become due and payable.
12. This Agreement shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Delaware.
13. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one agreement.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
11th day of February, 2000.
Amy J. Yoffie
-----------------------------
Print Name of Stockholder
/s/ Amy J. Yoffie
---------------------------------
Signature of Authorized Signatory
Number of Shares and Type of
Capital Stock of the Company:
(indicate class of stock,
i.e., common, preferred)
242,424 shares of Common Stock
[SIGNATURE PAGE TO INVESTMENT REPRESENTATION STATEMENT]
-4-
<PAGE>
EXHIBIT D
Foss Bowe San Filippo & Caruso, LLC
COUNSELLORS AT LAW
225 BROAD STREET
P.O. BOX 896
RED BANK, NEW JERSEY 07701-0896
(732) 741-2525
ROGER J. FOSS Fax: (732) 741-2192 Lakewood Office
PHILIP E. SAN FILIPPO E-Mail: [email protected] 1200 State Highway 9
WILLIAM J. BOWE Cross River Mill Mall
ANTHONY R. CARUSO Lakewood, NJ 08701
KATHLEEN A. SHEEDY (732) 367-2990
GREGORY R. MILNE
NJ & PA BARS Please Reply To: Red Bank
SAMUEL J. VACCHIANO
____________
ANGELA WHITE DALTON
NJ & PA BARS
CHRISTINA D. HARDMAN
NJ & NY BARS
____________
JOHN W. CHRISTIE
Of Counsel
0056/0003
February 11, 2000
Talk City, Inc.
1919 South Bascom Avenue
Campbell, CA 95008
Attention: Chief Executive Officer
Re: Agreement and Plan of Reorganization
Talk City, Inc./Research Connections, Inc.
Gentlemen:
We have acted as counsel to Research Connections, Inc. a New Jersey
corporation ("Company"), in connection with the transactions contemplated by the
Agreement and Plan of Reorganization dated as of January 3, 2000 by and between
the Company and Talk City, Inc. a Delaware corporation (the "Parent")
("Reorganization Agreement"). This letter is being delivered to you pursuant to
Section 6.1 (c) of the Reorganization Agreement. Terms defined in the
Reorganization Agreement and not otherwise defined herein are used herein as
defined therein.
As a basis for the opinions set forth herein, we have reviewed all of the
documents listed on Schedule A attached hereto and made a part hereof (the
"Transaction Documents" collectively with the Reorganization Agreement, the
"Agreements").
We have relied upon certain certificates of the Company and the Sole
Shareholder executed on the date hereof and which have been delivered to you. We
have assumed, without independent investigation, that such statements and
representations are true, correct and complete, but are not aware of any falsity
or incompleteness. We have not examined any records of any court, administrative
tribunal or other similar entity in connection with our opinions.
We have made no investigation as to whether the Parent is authorized to
perform its obligations under the Agreements or whether any person or entity,
other than the Company is
<PAGE>
Talk City, Inc.
Attention: Chief Executive Officer
February 11, 2000
Page 2
authorized to do business in New Jersey. We express no opinion as to whether any
such authorization is required in connection therewith. We assume that if any
such authorization is required, that the parties are so authorized.
In connection with the rendering of this opinion, we have assumed:
(a) that each of the parties thereto (other than the Company and the
Sole Shareholder) has duly and validly executed and delivered each of the
Agreements to which such party is a signatory, each such party's obligations
(other than the obligations of the Company and the Sole Shareholder) set forth
therein are its legal, valid and binding obligations, enforceable in accordance
with their respective terms, the absence of any requirement of consent, approval
or other authorization by any person or entity with respect to the actions of
each such party, the due organization, existence and good standing of each such
party, and the legal right, and power of the Parent under all applicable laws
and regulations to perform its obligations under the Agreements;
(b) that each person executing any such document or agreement on
behalf of any such party (other than the Company and the Sole Shareholder) is
duly authorized to do so;
(c) the legal capacity of all natural persons (but are not aware of
any incapacity);
(d) that there have been no oral or written modifications of or
amendments to the Agreements;
(e) the genuineness of all signatures of all persons signing any
document or agreement; and
(f) the authenticity of all documents and agreements submitted to us
as originals and the conformity to original documents and agreements of all
documents or agreements submitted to us as copies.
The opinions expressed herein are subject to and are limited by:
(a) bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer, moratorium or other similar laws of general application,
now or hereafter in effect, affecting the enforcement of creditors' rights in
general;
<PAGE>
Talk City, Inc.
Attention: Chief Executive Officer
February 11, 2000
Page 3
(b) judicial discretion and general principles of equity (regardless
of whether considered in a proceeding in equity or at law), including, without
limitation, principles that (i) include a requirement that a creditor act with
reasonableness, in good faith and deal fairly with its debtors, or (ii) limit a
creditor's right to accelerate maturity of a debt upon the occurrence of a
default deemed immaterial;
(c) the provisions of the Industrial Site Recovery Act (ISRA) in the
event there occurs a closing, terminating or transferring of operations within
the meaning of N.J.A.C. 7:26B1.5(b) after the date hereof (which provisions may
prevent foreclosure of any lien on any collateral pending compliance with the
requirements of ISRA);
(d) the qualification that any provision requiring the payment of
attorney's fees and costs of suit may be unenforceable except to the extent that
such fees and costs are reasonable and are permitted by applicable Court Rules
of New Jersey;
(e) the non-enforceability under the laws of New Jersey of provisions
requiring amendments or waivers of the provisions of agreements or documents to
be written (other than as provided pursuant to N.J.S.A. 25:1-5);
(f) the non-enforceability of provisions which purport to constitute
or provide for the waiver or release of the rights of the Company, including,
without limitation, the waiver or release of rights to notice; and
(g) the non-enforceability under certain circumstances of provisions
to the effect that failure to exercise or delay in exercising rights or remedies
will not operate as a waiver of the rights or remedies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly existing
under, and by virtue of, the laws of the State of New Jersey and is in good
standing under such laws. The Company has requisite corporate power to own and
operate its properties and assets, and to carry on its business as presently
conducted.
2. The Company has all requisite legal and corporate power to execute and
deliver the Reorganization Agreement and the other Transaction Documents
contemplated thereunder and to carry out and perform its obligations under the
terms of the Agreements.
<PAGE>
Talk City, Inc.
Attention: Chief Executive Officer
February 11, 2000
Page 5
This opinion letter is being provided to you at the request of the Company.
This letter is delivered by us for the purpose of inducing you to accept
delivery of the Transaction Documents with full knowledge that you will rely on
it in finalizing the transactions contemplated by the Agreements.
The members of this firm are admitted to the bar of the State of New Jersey
and we express no opinion as to the laws of any other jurisdiction (including
the applicability of the laws of any other jurisdiction, domestic or foreign, to
the transactions contemplated by the Agreements or the effect of such laws
thereon). To the extent that the laws of any other jurisdiction may apply, we
have assumed that such laws are identical to the laws of the State of New
Jersey.
This opinion is provided to you as a legal opinion only and not as a
guaranty or warranty of the matters discussed herein. This opinion is for your
reliance only in connection with the Agreements and is not intended for the
reliance of, and shall not be relied upon by, any other person or entity without
our express written consent may rely on this opinion. This opinion is not to be
quoted in whole or in part or referred to, nor is it to be filed with or
disclosed to any governmental agency (other than agencies responsible for the
regulation of the Parent) without our prior written consent. No opinion is to be
implied or inferred beyond the opinions expressly stated herein. We undertake no
obligation to inform you of any matters which may subsequently come to our
attention or subsequently occur which affect, in any way, the opinions rendered
herein.
Very truly yours,
FOSS BOWE SAN FILIPPO & CARUSO
A Limited Liability Company
By: /s/ WILLIAM J. BOWE
----------------------------
WILLIAM J. BOWE
A Member of the Firm
<PAGE>
SCHEDULE A
Transaction Documents
---------------------
1. Agreement of Merger by and among Talk City, Inc., Research Connections,
Inc. and Amy J. Yoffie dated as of February 11, 2000.
2. Escrow Agreement by and among Talk City, Inc., Research Connections, Inc.
Amy J. Yoffie and Firstar Bank, N.A. dated as of February 11, 2000.
3. Noncompetition Agreement by and among Talk City, Inc., Research
Connections, Inc. and Amy J. Yoffie dated as of February 11, 2000.
4. Investment Representation Agreement by and among Talk City, Inc., Research
Connections, Inc. and Amy J. Yoffie dated as of January 3, 2000.
5. Registration Rights Agreement by and between Talk City, Inc. and Amy J.
Yoffie dated as of February 11, 2000.
6. Corporate Resolutions dated February 8, 2000
7. Research Connections, Inc. Compliance Certificate dated as of February 8,
2000
<PAGE>
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is made as of
February 11, 2000, by and between Talk City, Inc., a Delaware corporation
("Parent"), and Amy J. Yoffie (the "Sole Shareholder"), the sole former
shareholder of Research Connections, Inc., a New Jersey corporation (the
"Company").
WHEREAS:
A. Pursuant to the terms of the Agreement and Plan of Reorganization
dated as of January 3, 2000 (the "Reorganization Agreement"), by and among
Parent, the Company and the Sole Shareholder, the Company is being merged with
and into Parent (the "Merger"), with Parent being the surviving corporation.
B. In connection with the Merger, the Sole Shareholder shall receive
cash and shares (the "Shares") of Common Stock of Parent ("Parent Common
Stock").
C. The Reorganization Agreement provides for the execution and
delivery of this Agreement at the closing of the transactions contemplated
thereby which grants the Sole Shareholder, subsequent to the first anniversary
of the closing of the Merger (the "First Anniversary") certain piggyback rights
to have her Shares registered under the Securities Act of 1933, as amended.
NOW, THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS.
------------
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
(ii) "Registrable Securities" means the Shares and any shares
of capital stock issued or issuable as a dividend on or in exchange for or
otherwise with respect to the Shares, provided, however, that such securities
-------- -------
shall only be treated as Registrable Securities if and so long as they have not
been (A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold or are, in the
opinion of counsel for Parent, available for sale in a single transaction exempt
from the registration and prospectus delivery requirements of the
<PAGE>
1933 Act so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation such sale.
(iii) "Registration Expenses" shall mean all expenses, except as
otherwise stated below, incurred by Parent in complying with Section 2 below,
including without limitation all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for Parent,
blue sky fees and expenses, the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of Parent which shall be paid in any event by Parent) and the
reasonable fees and disbursements of one counsel for all holders of Registrable
Securities under this Agreement and under the Third Amended and Restated
Shareholders Rights Agreement dated April 23, 1999.
(iv) "Registration Statement" means a registration statement of
Parent under the 1933 Act.
(v) "Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Sole Shareholder and, except as set forth above, all
reasonable fees and disbursements of counsel for the Sole Shareholder.
2. REGISTRATION.
-------------
(a) Notice of Registration. If at any time or from time to time after
----------------------
the First Anniversary, Parent shall determine to register any of its securities,
either for its own account or the account of a security holder or holders, other
than (i) a registration relating solely to employee benefit plans, or (ii) a
registration relating solely to a Commission Rule 145 transaction, Parent will:
(i) promptly give to the Sole Shareholder written notice
thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within twenty (20) days after receipt of such written notice
from Parent, subject to Section 2(b) below.
(b) Underwriting. If the registration of which Parent gives notice is
------------
for a registered public offering involving an underwriting, Parent shall so
advise the Sole Shareholder as a part of the written notice given pursuant to
Section 2(a)(i). In such event the right of the Sole Shareholder to registration
pursuant to Section 2 shall be conditioned upon the Sole Shareholder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. The Sole Shareholder
proposing to distribute her securities through such underwriting shall (together
with Parent and the other holders distributing her securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by Parent. Notwithstanding
any other provision of this
-2-
<PAGE>
Section 2, if the managing underwriter determines that marketing factors require
a limitation of the number of shares to be underwritten, the managing
underwriter and Parent may reduce the Registrable Securities to be included in
such registration to the extent the underwriters deem necessary. Parent shall so
advise the Sole Shareholder and other holders distributing their securities
through such underwriting and the number of shares of Registrable Securities and
other shares that may be included in the registration and underwriting shall be
allocated among all the holders of any such shares in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities and other
shares held by such holders at the time of filing the Registration Statement. To
facilitate the allocation of shares in accordance with the above provisions,
Parent may round the number of shares allocated to any holder to the nearest 100
shares. If any holder disapproves of the terms of any such underwriting, such
holder may elect to withdraw therefrom by written notice to Parent and the
managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of the registration statement relating thereto, or such
other shorter period of time as the underwriters may require.
(c) Right to Terminate Registration. Parent shall have the right to
-------------------------------
terminate or withdraw any registration initiated by it under this Section 2
prior to the effectiveness of such registration whether or not the Sole
Shareholder has elected to include securities in such registration.
3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
------------------------
connection with all registrations pursuant to Section 2 shall be borne by
Parent. Unless otherwise stated, all Selling Expenses relating to securities
registered on behalf of the Sole Shareholder and all other Registration Expenses
shall be borne by the Sole Shareholder pro rata on the basis of the number of
shares so registered.
4. REGISTRATION PROCEDURES. In case of each registration, qualification
-----------------------
or compliance effected by Parent pursuant to Section 2, Parent will keep the
Sole Shareholder advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. At its expense
Parent will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (180) days or until the distribution described in the Registration
Statement has been completed; and
(b) Furnish to the Sole Shareholder and to the underwriters of the
securities being registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other documents as
such underwriters may reasonably request in order to facilitate the public
offering of such securities.
5. INDEMNIFICATION.
---------------
-3-
<PAGE>
(a) Parent will indemnify the Sole Shareholder, and each person
controlling the Sole Shareholder within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification or compliance
has been effected pursuant to this Section 3, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made (which such qualification Parent acknowledges shall not apply to
any registration statement, or any amendment or supplement thereto, pursuant to
Section 11 of the Securities Act), not misleading, or any violation by Parent of
the Securities Act, the Exchange Act, state securities law or any rule or
regulation promulgated under such laws applicable to Parent in connection with
any such registration, qualification or compliance, and within a reasonable
period Parent will reimburse the Sole Shareholder, and each person controlling
the Sole Shareholder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action; provided that Parent will not be liable in any such
-------- ----
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to Parent by an instrument duly executed by the Sole
Shareholder, controlling person or underwriter and stated to be specifically for
use therein.
(b) The Sole Shareholder will, if Registrable Securities held by the
Sole Shareholder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify Parent, each of its
directors and officers, each underwriter, if any, of Parent's securities covered
by such a registration statement, each person who controls Parent or such
underwriter within the meaning of Section 15 of the Securities Act, and the Sole
Shareholder, and each person controlling the Sole Shareholder within the meaning
of Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, and within a
reasonable period will reimburse Parent, the Sole Shareholder, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to Parent
-4-
<PAGE>
by an instrument duly executed by the Sole Shareholder and stated to be
specifically for use therein. Notwithstanding the foregoing, the liability of
the Sole Shareholder under this subsection (b) shall be limited in an amount
equal to the gross proceeds before expenses and commissions to the Sole
Shareholder received for the shares sold by the Sole Shareholder, unless such
liability arises out of or is based on willful misconduct by the Sole
Shareholder.
(c) Each party entitled to indemnification under this Section 5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 5 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
6. INFORMATION BY HOLDER. The Sole Shareholder shall furnish to Parent
---------------------
such information regarding the Sole Shareholder, the Registrable Securities held
by her and the distribution proposed by the Sole Shareholder as Parent may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
7. RULE 144 REPORTING. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, Parent
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that Parent becomes subject to the reporting requirements of
the Securities Act or the Exchange Act;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of Parent under the Securities
Act and the Exchange Act (at any time after it has become subject to such
reporting requirements); and
(c) So long as the Sole Shareholder owns any Restricted Securities to
furnish to the Sole Shareholder forthwith upon request a written statement by
Parent as to its compliance with
-5-
<PAGE>
the reporting requirements of said Rule 144 (at any time after ninety (90) days
after the effective date of the first registration statement filed by Parent for
an offering of its securities to the general public), and of the Securities Act
and the Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of Parent,
and such other reports and documents of Parent and other information in the
possession of or reasonably obtainable by Parent as the Sole Shareholder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing the Sole Shareholder to sell any such securities without
registration.
8. STANDOFF AGREEMENT. In connection with any public offering of Parent's
------------------
securities, the Sole Shareholder agrees, upon request of Parent or the
underwriters managing any underwritten offering of Parent's securities, not to
sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of Parent or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days in the case of Parent's initial public offering, and
ninety (90) days in the case of other public offerings of Parent) from the
effective date of such registration as may be requested by the underwriters;
provided that the officers and directors of Parent who own stock of Parent and
holders of five percent (5%) or more of Parent's outstanding voting securities
also agree to such restrictions.
9. TERMINATION OF REGISTRATION RIGHTS. The registration rights granted
----------------------------------
pursuant to Section 2 shall terminate as to the Sole Shareholder at such time as
a public market for Parent's Common Stock exists and all Registrable Securities
held by the Sole Shareholder have been sold pursuant to Rule 144.
10. AMENDMENT OF REGISTRATION RIGHTS.
---------------------------------
Provisions of this Agreement may be amended and the observance thereof may
be waived only by the mutual written consent of Parent and the Sole Shareholder.
11. MISCELLANEOUS.
--------------
(a) Any notices required or permitted to be given under the terms
hereof shall be sent by certified or registered mail (return receipt requested)
or delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile and shall be effective five days after being placed in
the mail, if mailed by regular U.S. mail, or upon receipt, if delivered
personally or by courier (including a recognized overnight delivery service) or
by facsimile, in each case addressed to a party. The addresses for such
communications shall be:
If to Parent:
Talk City, Inc.
1919 South Bascom Avenue
-6-
<PAGE>
Campbell, CA 95008
Attention: Chief Executive Officer
Facsimile: (408) 871-5300
With copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Page Mailliard, Esq.
Facsimile: (650) 496-4088
If to the Sole Shareholder:
Amy J. Yoffie
Research Connections, Inc.
414 Central Avenue
Westfield, NJ 07090
Facsimile: (908) 654-9364
With a copy to:
Foss Bowe San Filippo & Caruso
225 Broad Street
P.O. Box 896
Red Bank, NJ 07701
Attention: William J. Bowe, Esq.
Facsimile: (732) 741-2525
Each party shall provide notice to the other party of any change of its
address.
(b) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(c) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
-7-
<PAGE>
(d) This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
(e) This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto.
(f) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(g) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
(h) Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
-8-
<PAGE>
IN WITNESS WHEREOF, Parent and the Sole Shareholder have caused this
Agreement to be duly executed as of the date first above written.
TALK CITY, INC.
By: /s/ Jeffrey Snetiker
--------------------------------------
Name: Jeffrey Snetiker
Title: Sr VP, Chief Financial Officer
SOLE SHAREHOLDER
By: /s/ Amy J. Yoffie
--------------------------------------
Amy J. Yoffie
[Signature Page to Registration Rights Agreement]
-9-
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG, LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Talk City, Inc.:
We consent to incorporation by reference in the registration statement (No. 333-
94183) on Form S-8 of Talk City, Inc. of our reports dated February 2, 2000,
relating to the balance sheets of Talk City, Inc. as of December 31, 1999, and
1998, and the related statements of operations, redeemable preferred stock and
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999, and related schedule, which reports
appear in the December 31, 1999 annual report on Form 10-K of Talk City, Inc.
/s/ KPMG LLP
Mountain View, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,112
<SECURITIES> 41,541
<RECEIVABLES> 3,787
<ALLOWANCES> 254
<INVENTORY> 226
<CURRENT-ASSETS> 60,958
<PP&E> 7,324
<DEPRECIATION> 1,635
<TOTAL-ASSETS> 74,527
<CURRENT-LIABILITIES> 8,097
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 66,299
<TOTAL-LIABILITY-AND-EQUITY> 74,527
<SALES> 7,732
<TOTAL-REVENUES> 7,732
<CGS> 0
<TOTAL-COSTS> 50,103
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 214
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> (40,266)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,266)
<EPS-BASIC> (3.14)
<EPS-DILUTED> (3.14)
</TABLE>
