-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CahC+C+dt4+iqdU7OtlzslX1BTX4Txbt6yRVaQ2f2MouFRgrL4FxCR5g+fNxqtBC 2mDlo+woRH/yxGR6dZhvWA== 0001047469-99-026627.txt : 19990709 0001047469-99-026627.hdr.sgml : 19990709 ACCESSION NUMBER: 0001047469-99-026627 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990708 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COBALT GROUP INC CENTRAL INDEX KEY: 0001036290 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 911674947 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-79483 FILM NUMBER: 99660392 BUSINESS ADDRESS: STREET 1: 2030 FIRST AVE STE 300 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2063867535 S-1/A 1 S-1/A As filed with the Securities and Exchange Commission on July 8, 1999 Registration No. 333-79483 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE COBALT GROUP, INC. (Exact name of registrant as specified in its charter) Washington 7375 91-1674947 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
------------------------ 2030 First Avenue, Suite 300 Seattle, WA 98121 (206) 269-6363 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ Geoffrey T. Barker Co-Chief Executive Officer The Cobalt Group, Inc. 2030 First Avenue, Suite 300 Seattle, WA 98121 Telephone: (206) 269-6363 Fax: (206) 269-6350 (Name, address, including zip code, and telephone and facsimile numbers, including area code, of agent for service) ------------------------------ COPIES TO: Ronald J. Lone Alan K. Austin Christopher J. Voss Mark L. Reinstra Ivan A. Gaviria John L. Whittle Marc S. Marchiel Daniel K. Yuen Stoel Rives LLP Wilson Sonsini Goodrich & Rosati 3600 One Union Square Professional Corporation 600 University Street 650 Page Mill Road Seattle, WA 98101 Palo Alto, CA 94304-1050 Tel: (206) 624-0900 Tel: (650) 493-9300 Fax: (206) 386-7500 Fax: (650) 493-6811
------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. / / If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Amount of Title of Each Class of Amount to Offering Price Aggregate Offering Registration Securities Registered be Registered(1) Per Share(2) Price(2) Fee(3) Common stock, $0.01 par value..................... 5,559,615 $15.00 $82,625,000 $22,970
(1) Includes 675,000 shares that may be purchased by the underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o). (3) Previously paid. ------------------------------ THE REGISTRANT AGREES THAT THE SECURITIES AND EXCHANGE COMMISSION MAY CONSIDER IT TO HAVE FILED AN AMENDMENT TO THIS REGISTRATION STATEMENT ON THE DATE NECESSARY TO DELAY THIS REGISTRATION STATEMENT'S EFFECTIVE DATE UNTIL EITHER (1) THE REGISTRANT FILES AN AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE UNDER SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED; OR (2) UNTIL THE DATE THAT THE SECURITIES AND EXCHANGE COMMISSION DECLARES THIS REGISTRATION STATEMENT TO BE EFFECTIVE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JULY 8, 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [LOGO] 4,500,000 SHARES COMMON STOCK The Cobalt Group, Inc. is offering 4,500,000 shares of its common stock. This is Cobalt's initial public offering. We have applied for the common stock to be quoted on the Nasdaq National Market under the symbol "CBLT." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. ------------------------ Investing in our common stock involves risks. See "Risk Factors" beginning on page 4. ---------------------
Per Share Total ----------- ------------- Public Offering Price.................................................................. $ $ Underwriting Discounts................................................................. $ $ Proceeds to Cobalt..................................................................... $ $
Concurrently with the sale of the shares of common stock in this offering, GE Financial Assurance Holdings, Inc. has agreed to purchase directly from Cobalt $5.0 million in aggregate purchase price of shares of common stock at the public offering price. The commitment of GE Financial Assurance Holdings, Inc. to make this purchase is not binding at a per share price above $16.00. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We have granted the underwriters the right to purchase up to an additional 675,000 shares of common stock to cover over-allotments. BancBoston Robertson Stephens expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ BANCBOSTON ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. SG COWEN WIT CAPITAL CORPORATION The date of this prospectus is . DESCRIPTION OF ARTWORK Background is a watermark image of an automobile and a keyboard. Foreground contains three images of people and the heading "The Cobalt Group." Under the heading the text reads: "ebusiness solutions for the automotive industry." The gatefold includes a background watermark image of an automobile and a foreground containing three images of people. In the lower right is the heading "Cobalt." Under the heading the text reads: "integrated internet services for leading automotive manufacturers & retailers." Aligned over the images of people are headings and aligned to the side of each image is text corresponding to the heading. The text associated with each image, from left to right, reads as follows: Heading: Clients Text:13 leading auto manufacturers. More than 50 of the 100 largest U.S. dealer groups. Individual dealers holding more than 12,000 new vehicle franchises. Heading: Services Text:Web site design, development and maintenance. Data extraction, aggregation and management. Internet advertising and promotion. Dealer training. Heading: Benefits Text:Rapid deployment of comprehensive Internet presence. Increased return from traditional advertising investments. Improved customer acquisition and retention. Enhanced internal efficiencies. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. Information contained on the Cobalt Group, DealerNet and YachtWorld Web sites are not part of this prospectus. The information in this document is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Except as the context otherwise requires, the terms "Cobalt," "we," "us," and "our" as used in this prospectus refer to The Cobalt Group, Inc. and its subsidiary PartsVoice, LLC. ------------------------ TABLE OF CONTENTS
Page --- Prospectus Summary.......................................................................................... 1 Risk Factors................................................................................................ 4 Use of Proceeds............................................................................................. 14 Dividend Policy............................................................................................. 14 Capitalization.............................................................................................. 15 Dilution.................................................................................................... 16 Selected Financial Data..................................................................................... 17 Unaudited Pro Forma Combined Financial Information.......................................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Business.................................................................................................... 33 Management.................................................................................................. 46 Recent Acquisition.......................................................................................... 54 Certain Transactions........................................................................................ 54 Principal Shareholders...................................................................................... 55 Description of Capital Stock................................................................................ 57 Shares Eligible for Future Sale............................................................................. 59 Underwriting................................................................................................ 61 Direct Sale to GE Financial Assurance Holdings, Inc......................................................... 63 Legal Matters............................................................................................... 64 Experts..................................................................................................... 64 Additional Information...................................................................................... 64 Index to Financial Statements............................................................................... F-1
------------------------ DEALERNET-REGISTERED TRADEMARK-, PARTSVOICE-Registered Trademark- and YACHTWORLD-Registered Trademark- are our registered trademarks. Additionally, COBALT-TM-, COBALT GROUP-TM-, WEBEDGE-TM-, ADWIZARD-TM-, DEALER'S CHOICE-TM- and INSTANT INCENTIVES-TM- are our trademarks. This prospectus contains other product names and trade names and trademarks of Cobalt and of other organizations. SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THIS ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. Our Company We are a leading provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. We enable our clients to develop and implement effective e-business strategies and to position them to capitalize on the increasing use of the Internet by consumers to research, evaluate and initiate purchases of new and pre-owned vehicles, parts and accessories, and automotive-related services such as financing and insurance. We currently offer our clients: - comprehensive Web site design, development and maintenance services; - data services such as extracting parts and vehicle inventory data from independent management systems and aggregating the information in centralized databases; - Internet advertising and promotional services; and - training and support services to help them use the Internet effectively in their businesses. We currently manage and maintain approximately 3,500 Web sites for clients holding more than 4,300 new vehicle franchises. Our clients include over 50 of the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE NEWS, and we are the manufacturer-endorsed provider of Web site solutions for the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. Our vehicle parts data services are used by clients holding more than 9,000 new vehicle franchises. We also provide vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi, Subaru and Toyota. In total, we provide our services to clients holding approximately 12,000 new vehicle franchises. Manufacturers and dealerships spend heavily on traditional marketing and advertising. According to the National Automobile Dealers Association, dealerships spent in excess of $5.0 billion on advertising in 1998. The emergence of the Internet as a commercial medium has created an opportunity for automobile manufacturers and dealerships to market cost-effectively to and communicate with a large and growing pool of online consumers. Forrester Research projects that automobile dealerships alone will increase their annual spending on Internet marketing to more than $600 million by 2002. We believe our suite of services enables our clients to capitalize on the multiple marketing opportunities that the Internet creates by allowing them to: - rapidly deploy a comprehensive Internet presence; - create an online identity and leverage existing brand assets; - increase the return on investment in traditional advertising media; - improve customer acquisition and retention; and - enhance internal efficiencies. In April 1999 we acquired PartsVoice, LLC. The primary business of PartsVoice consists of collecting automobile parts inventory data from thousands of automobile dealers and aggregating that data in a centralized database. Automobile dealers are able, using PartsVoice's services, to locate and purchase parts held by other dealers. The addition of PartsVoice expands our service offerings and substantially increases our client base of automobile manufacturers and dealerships. We believe Cobalt's acquisition of PartsVoice provides us with significant opportunities to cross-sell within our existing client base, increases the attractiveness of our services to potential clients and enhances our ability to develop additional value-added services. 1 The Offering Common stock offered............................ 4,500,000 shares Common stock to be outstanding after this offering...................................... 16,676,188 shares Use of proceeds................................. For repayment of indebtedness, payment of accrued dividends on preferred stock and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.......... CBLT
Common stock to be outstanding after this offering is based on shares outstanding as of June 30, 1999 and the shares of common stock to be sold in the direct sale to GE Financial Assurance Holdings, Inc. at an assumed price of $14.00 per share. This number does not include: - 2,225,281 shares issuable upon exercise of stock options outstanding under our stock option plan as of June 30, 1999, at a weighted average exercise price per share of $1.73; - 221,500 shares issuable upon exercise of warrants outstanding as of June 30, 1999, at a weighted average exercise price per share of $4.46; - 616,141 shares available for future grant or issuance under our stock option plan as of June 30, 1999; and - 300,000 shares expected to be authorized for issuance under our stock purchase plan. See "Management--Employee Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to The Cobalt Group, Inc. Financial Statements, or Cobalt Financial Statements, beginning on page F-2. ------------------------ Our headquarters are located at 2030 First Avenue, Suite 300, Seattle, Washington, 98121 and our telephone number is (206) 269-6363. Our Web site address is www.cobaltgroup.com. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND REFLECTS THE CONVERSION OF ALL OUTSTANDING PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING. 2 Summary Financial Data (in thousands, except per share data)
Actual --------------------------------------------------------- Since Inception Three Months Pro Forma (March 17, Year Ended Ended ------------------------------ 1995) to December 31, March 31, Year Ended Three Months December 31, ------------------------ --------------- December 31, Ended March 31, 1995 1996 1997 1998 1998 1999 1998 1999 ------------- ------ ------- ------- ------ ------- ------------ --------------- (unaudited) (unaudited) (unaudited) Statement of Operations Data: Net revenues............................ $ 70 $ 312 $ 1,711 $ 6,245 $1,079 $ 2,453 $ 15,773 $ 5,009 Gross profit............................ 54 261 1,426 5,046 928 1,913 12,430 3,886 Loss from operations.................... (415) (826) (2,695) (5,122) (463) (2,343) (5,661) (2,456) Net (loss) income....................... $ (415) $ (828) $(2,665) $(5,105) $1,162 $(2,335) $ (7,592) $(2,947) Basic net (loss) income per share....... $(0.24) $(0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97) $ (5.67) $ (2.42) Diluted net (loss) income per share..... $(0.24) $(0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97) $ (5.67) $ (2.42)
March 31, 1999 ------------------------------------- Pro Forma Actual Pro Forma As Adjusted --------- ----------- ------------- (unaudited) Balance Sheet Data: Cash and cash equivalents...................................................... $ 3,876 $ 876 $ 39,583 Working capital................................................................ 3,129 (23,088) 38,619 Total assets................................................................... 10,665 38,141 76,848 Long-term obligations, net of current portion.................................. 1,376 1,376 1,376 Mandatorily redeemable convertible preferred stock............................. 31,753 -- -- Total shareholders' (deficit) equity........................................... (26,767) 9,367 72,207
The pro forma columns in the Statement of Operations Data present information as if Cobalt's acquisition of PartsVoice had occurred on January 1, 1998. The pro forma column in the Balance Sheet Data presents information as if Cobalt's acquisition of PartsVoice had occurred on March 31, 1999 and also gives effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering. The pro forma as adjusted column in the Balance Sheet Data gives effect to the receipt and application of the estimated net proceeds from (a) the sale by us of the 4,500,000 shares of common stock that we are offering at an assumed initial offering price of $14.00 per share and after deducting underwriting discounts and estimated offering expenses and (b) the direct sale. See "Use of Proceeds," and "Capitalization," and "Unaudited Pro Forma Combined Financial Information." See Note 1 of Notes to Cobalt Financial Statements for an explanation of the methods used to compute basic and diluted net (loss) income per share data. 3 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT. As an early stage company in a new and rapidly changing market, our business strategy is unproven. Accordingly, it is difficult to predict our future growth or operating results. We began operations in March 1995. Accordingly, we have only a limited operating history and our business is in an early stage of development. Before investing, you should evaluate the risks and challenges that an early stage company like ours will face in the rapidly changing and competitive environment of the Internet. We may not successfully meet the challenges of growing our company. Our limited operating history and unproven, evolving business model make it difficult to evaluate our prospects. We began offering our services to automobile dealers in November 1995. We must achieve broad market acceptance of our services and continue to expand our service offerings for our business to succeed. Our client base represents only a small percentage of the total franchised automobile dealer community in the United States, and many of our dealer clients have been clients for only a short time. We cannot assure you that our new and planned future offerings will be successful or that our broader business model, as it evolves, will succeed. We have a history of losses and may never achieve or maintain profitability. If we continue to lose money, our operations may not be financially viable. We have incurred net losses each year since we began operations and we expect that we will not be profitable at least through 2000. We cannot guarantee that our business strategy will be successful or that we will ever achieve or maintain significant revenues or profitability. After giving pro forma effect to Cobalt's acquisition of PartsVoice, we had a net loss of $7.6 million for the year ended December 31, 1998. As of March 31, 1999, on a pro forma basis we had an accumulated deficit of $27.2 million. We have not had operating profits on a quarterly or annual basis. We expect to continue to incur significant operating expenses and, as a result, we will need to generate significant quarterly revenue increases to achieve and maintain profitability. We have relied on issuances of equity securities and borrowings to finance our operations and may need to raise additional capital to fund our future operations. Any failure to obtain additional capital when needed or on satisfactory terms could damage our business and prospects. We do not generate sufficient cash to fully fund operations. To date we have financed our operations principally through the issuance of equity securities and through borrowings, and expect that we will need to raise additional capital in the future to fund our ongoing operations. Any equity or debt financing, if available at all, may be on terms that are not favorable to us and, in the case of equity offerings, may result in dilution to our shareholders. Any difficulty in obtaining additional financial resources could force us to curtail our operations or prevent us from pursuing our growth strategy. Any failure to integrate PartsVoice with Cobalt could compromise our growth strategy and adversely affect our business. To execute our business plan, we must integrate PartsVoice and Cobalt operations and services into a cohesive, combined entity. Cobalt's acquisition of PartsVoice has significantly increased the size and the 4 geographic dispersion of our workforce and operations and has expanded our physical facilities. This dispersion increases the risk that we will fail to effectively gather, store, and communicate information and ideas, including technical knowledge and expertise, throughout our organization, which in turn would negatively impact our business. In addition, if we fail to effectively integrate PartsVoice, we will not achieve the increases in sales to our existing client base that are a key element of our future growth. Finally, we may fail to realize operating efficiencies from combining operations such as extracting parts inventory and other data from automobile dealerships and consequently our results of operations may suffer. If we are unsuccessful in quickly and effectively integrating future acquisitions, our business and results of operations could suffer. A key element of our growth strategy is to pursue strategic acquisitions. Integrating newly-acquired businesses or technologies may be expensive and time-consuming. We may fail to manage these integration efforts successfully. The negotiation of potential acquisitions or strategic relationships as well as the integration of future acquired businesses, products or technologies could divert our management's time and resources. We may not be able to operate any acquired businesses profitably or otherwise implement our growth strategy successfully. If we are unable to integrate any newly-acquired entities or technologies effectively, our business and results of operations could suffer. Acquisitions may cause us to incur contingent liabilities and to amortize expenses related to goodwill and other intangible assets, which could adversely affect our results of operations. Any failure to build strong relationships with current and prospective franchised dealership, multi-franchise dealer group and automobile manufacturer clients could limit our growth prospects and adversely affect our business. For our business to succeed, we must continue to develop relationships with franchised dealerships and multi-franchise dealer groups. We derive a substantial portion of our revenues from fees paid by our automobile dealership clients and our future growth depends in part on expanding our base of dealership clients. We also must maintain close working relationships with manufacturers. While we have established relationships with a number of manufacturers, these relationships are relatively new and we have little experience in maintaining them. In addition, manufacturers may elect to implement their own Internet strategies, which could reduce our potential client base. Excessive turnover of our dealership clients could increase our costs, damage our reputation and slow our growth. Our service agreements with dealerships generally are short-term and cancelable on 30 days' notice. To be successful, we will need to maintain low dealership client turnover. During 1998, 262 Web sites, or approximately 8.0% of our total Web sites as of year end, were terminated. A material decrease in the number of dealerships purchasing our services could have a material adverse effect on our business, results of operations and financial condition. We expend considerable resources in selling our services to prospective new clients. Sales efforts that take longer than expected to complete or that are unsuccessful could negatively affect our results of operations and financial condition. The time, expense and effort of securing dealership engagements may exceed our expectations. The length of the sales cycle varies by dealership and dealer group, but can range from four to eight months. Because the decision to purchase Web site development and Internet marketing services often involves adoption by a dealership of a new way of thinking about the automobile sales process, we often devote significant time and resources to a prospective dealership client, including costs associated with multiple site visits and demonstrations, without any assurance that the prospective client will decide to purchase our services. Larger engagements and efforts to secure manufacturer endorsements have a longer sales cycle. 5 We will face intense competition and, if we are unable to compete successfully, our business will be seriously harmed. The market for Internet marketing and data aggregation services is very competitive. We face competition from Internet development firms, automobile sales lead generation services and data aggregation businesses. Our parts inventory data services, for example, face competition from data aggregation service providers such as The Reynolds and Reynolds Company and Automatic Data Processing, Inc., or ADP. Similarly, our Web site design, development and maintenance services face competition from local and national Internet development firms. In addition, we compete indirectly with automobile sales lead generation service companies, such as autobytel.com, AutoVantage, AutoConnect, CarPoint and Autoweb.com, and advertising agencies because their service offerings compete with ours for a share of the automobile dealership's Internet marketing budget. We anticipate that competition in the market for automotive industry Internet services will increase significantly over time. Barriers to entry on the Internet are relatively low, and we expect to face competitive pressures from numerous companies, particularly those with existing data aggregation capabilities that may be readily integrated with Internet services. Furthermore, our existing and potential competitors may develop offerings that equal or exceed the quality of our offerings or achieve greater market acceptance than ours. Many of our current and future competitors have and will continue to have substantially greater capital, resources and access to additional financing than we do or will. We cannot assure you that we will be able to compete successfully against our current and future competitors or that competition will not have a material adverse effect on our business, results of operations or financial condition. If automobile manufacturers decide to provide Internet marketing and data aggregation services directly to their dealership networks, our revenues and growth prospects will be severely impaired. It is possible that some or all automobile manufacturers may attempt to provide services comparable to those that we provide to our clients. If this occurs, our ability to maintain or expand our client base and revenues will be impaired. In 1997, DaimlerChrysler Corporation announced an internal initiative to bring elements of our parts locator service in-house. This initiative could significantly reduce our contract revenues from parts data services that we currently provide to DaimlerChrysler dealers. In 1998, DaimlerChrysler elected to host the parts locator data internally, although we continue to extract and aggregate parts inventory from its dealers. In 1998, revenues from parts data services provided to the MOPAR division of DaimlerChrysler represented approximately 25% of PartsVoice's total revenues, and 15% of our pro forma combined revenues. Any failure to manage our growth effectively will adversely affect our business and results of operations. We are experiencing rapid growth that, if it continues, will place significant strain upon our management and operational systems and resources. Failure to manage our growth effectively would have a material adverse effect upon our business, results of operations and financial condition. Our ability to compete effectively as a provider of Internet marketing services to the automobile industry and to manage future growth will require us to continue to improve our operational systems, software development organization and our financial and management controls, reporting systems and procedures. We may fail to make these improvements effectively. Additionally, our efforts to make these improvements may divert the focus of our personnel. For example, our conversion to a new database system in late 1998 through early 1999 diverted the focus of our sales personnel from selling our services to maintaining current client relationships. We believe that this diversion contributed to the lower revenue growth rate that we experienced during the first quarter of 1999, as compared to the fourth quarter of 1998. We recently have hired a significant number of new employees, including key executives, and we will continue to add personnel to maintain our ability to grow in the future. For example, our Chief Financial 6 Officer and Vice President of Operations, as well as our Vice Presidents of Development, Business Development, and Field Sales, each have been with us for less than one year. We must integrate our key executives into a cohesive management team and at the same time increase the total number of employees and train and manage our employee work force in a timely and effective manner to expand our business. We cannot guarantee that we will be able to do so successfully. Our quarterly results likely will fluctuate, which may subject the market price of our common stock to rapid and unpredictable change. As our business grows and the market for Internet marketing services matures, we expect that our quarterly operating results will fluctuate. Factors that we expect to lead to such period-to-period changes include: - the level of demand in the automotive industry for Internet marketing and data aggregation services; - the rate and volume of additions to our client base; - the amount and timing of expenditures by clients for our services; - the introduction of new products or services by us or our competitors; - our ability to attract and retain personnel with the necessary technical, sales, marketing and creative skills required to develop our services and to service our clients effectively; - technical difficulties with respect to the Internet or infrastructure; and - economic conditions generally and those specific to the automotive industry. We expect our business to experience seasonality, reflecting seasonal fluctuations in the automotive industry, Internet and commercial online service usage and advertising expenditures. Our expenses are relatively fixed in the short term and are based in part on our expectations of future revenues, which may vary significantly. If we do not achieve expected revenue targets, we may be unable to adjust our spending quickly enough to offset any revenue shortfall. If this were to occur, our results of operations could be significantly affected. We may fail to retain our key executives and to attract and retain technical personnel, which would adversely affect our business and prospects. The loss of the services of one or more of our executive officers could have a material adverse effect on the development of our business and, accordingly, on our operating results and financial condition. We generally do not enter into employment agreements with our key executive officers and cannot guarantee that we will be able to retain them. Qualified technical personnel are in great demand throughout the Internet industry. Our future growth will depend in large part upon our ability to attract and retain highly skilled technical and engineering personnel. Our failure to attract and retain the technical personnel that are integral to our expanding service development needs may limit the rate at which we can develop new services, which could have a material adverse effect on our business, results of operations and financial condition. The failure to effectively manage and expand our sales and marketing organization could impede market acceptance of our services and negatively affect our business and results of operations. Our business, results of operations and financial condition will be materially adversely affected if we fail to expand our sales and marketing infrastructure and resources. We recently reorganized our sales force to include a distributed field sales organization covering a large number of geographic territories and regions. We have very limited experience operating and managing a distributed sales organization. In addition, we expect to continue expanding our headquarters-based sales and customer support organization. Our future 7 revenue growth will depend in large part on our ability to recruit, train and manage sales and marketing personnel and expand those organizations. We have experienced and may continue to experience difficulty in recruiting qualified sales and marketing personnel. We may not be able to successfully expand and manage our direct sales force and distribution channels and this expansion, if it occurs, may not result in increased revenues. If the use of the Internet as a commercial medium does not grow as we anticipate, our business will be seriously harmed. We depend heavily on the growth and use of the Internet. Automobile manufacturers and dealerships will not widely accept and adopt an Internet strategy if the Internet fails to provide consumers with a satisfactory experience. For example, transmission of graphical and other complex information may lead to delays. If data transmission speeds do not increase in step with the complexity of the information available, consumers may become frustrated with their Internet experiences, which could lead users to seek alternatives to Internet-based information retrieval. Furthermore, the recent growth in Internet traffic generally has caused periods of decreased performance. If Internet usage continues to increase rapidly, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. If Internet delays occur frequently, overall Internet usage or usage of our clients' Web sites could increase more slowly or not at all. Our future success and revenue growth will depend substantially upon continued growth in the use of the Internet in the sales and service process. The Internet may prove not to be a viable commercial marketing medium for vehicles and related products and services. If use of the Internet does not continue to increase, our business, results of operations and financial condition would be materially and adversely affected. If we become unable to extract data from our clients' internal management systems, the value of our services would decrease dramatically. A significant component of our business and revenues depends on our ability to extract various data types from our clients' internal management systems. Most dealership information management systems have been developed and sold by The Reynolds and Reynolds Company and ADP and our ability to interface with these systems is essential to the success of our data aggregation service offerings. It is possible that new products, services or information management systems installed by dealerships could limit or otherwise impair our ability to collect data from dealerships. This could have a material adverse effect on our business, results of operations and financial condition. We are vulnerable to disruptions in our computer systems and network infrastructure. System or network failures would adversely affect our operations. We depend on the continued performance of our systems and network infrastructure. Any system or network failure that causes interruption or slower response time for our services could result in less traffic to our clients' Web sites and, if sustained or repeated, could reduce the attractiveness of our services to clients. An increase in the volume of Internet traffic to sites hosted by us could strain the capacity of our technical infrastructure, which could lead to slower response times or system failures. Any failure of our servers and networking systems to handle current or future volumes of traffic would have a material adverse effect on our business and reputation. In addition, our operations depend upon our ability to maintain and protect our computer systems, which are located at facilities in Seattle, Washington; Portland, Oregon; and Austin, Texas. Our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain back-up systems and capabilities and also maintain insurance against fires, 8 floods, earthquakes and general business interruptions, our back-up systems and our insurance coverages may not be adequate in any particular case. The occurrence of a catastrophic event could have a material adverse effect on our business, results of operations and financial condition. Unknown software defects could cause service interruptions, which could damage our reputation and adversely affect our business. Our service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are created. Although we conduct extensive testing, we may not discover software defects that affect our new or current services or enhancements until after they are deployed. These defects could cause service interruptions, which could damage our reputation or increase our service costs. They also could cause us to lose revenue and divert our development resources. If we are unable to keep pace with technological advances relating to the Internet and e-commerce, clients may stop buying our services and our revenues will decrease. The market for Internet services is characterized by rapid technological developments, evolving industry standards and customer demands and frequent new service introductions and enhancements. Our future success will significantly depend on our ability to continually improve the quality of our data aggregation and management, product development, Web site maintenance, management and related services as well as content on our client's Web sites. In addition, the widespread adoption of developing multimedia-enabling technologies could require fundamental and costly changes in our technology and could fundamentally affect the nature of Internet-based content, which could adversely affect our business, results of operations and financial condition. Economic trends that negatively affect the automotive retailing industry may adversely affect our business by decreasing the number of automobile dealers purchasing our services, decreasing the amount our clients spend on our services, or both. Purchases of new vehicles are typically discretionary for consumers and may be particularly affected by negative trends in the economy. The success of our business will depend upon a number of factors influencing the spending patterns of automobile dealerships and manufacturers for marketing and advertising services. These patterns are in part influenced by factors relating to discretionary consumer spending for automobile and automobile-related purchases, including economic conditions affecting disposable consumer income, such as employment, wages and salaries, business conditions, interest rates and availability of credit for the economy as a whole and in regional and local markets. Because the purchase of a vehicle is often a significant investment, any reduction in disposable income and the impact such reduction may have on our clients may affect us more significantly than businesses serving other industries or segments of the economy. Our international expansion could be adversely affected by factors outside our control. Part of our growth strategy includes entering international markets, which will require significant management attention and financial resources. We have no experience operating internationally and cannot be certain that our business model is transferable to foreign markets. If we pursue international expansion, the proportion of our revenues denominated in foreign currencies will increase. We could also be subject to difficulties in staffing and managing international operations and general economic and currency exchange rate conditions in foreign countries. 9 Our business depends on the protection of our intellectual property and proprietary rights and such protection is costly and may be inadequate. The loss of any of these rights or property would seriously harm our business. Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and still evolving, and we cannot predict the future viability or value of any of our proprietary rights. We also cannot assure you that the steps that we have taken to protect our intellectual property rights and confidential information will prevent unauthorized disclosure, misappropriation or infringement of these valuable assets. In addition, our business activities may infringe upon the intellectual property rights of others and other parties may assert infringement claims against us. Any litigation to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others might result in substantial costs and diversion of resources and management attention. Moreover, if we infringe upon the rights of others, we may be required to pay substantial amounts and may be required to either license the infringed intellectual property or to develop alternative technologies independently. We may not be able to obtain suitable substitutes for the infringed technology on acceptable terms or in a timely manner, which could adversely affect our business, results of operations and financial condition. Our ability to use the trademarks around which we have built our brand identities may be limited, which could diminish market acceptance of our services and undermine our marketing efforts. We have filed for federal trademark protection for our trademark "Cobalt," which we use in both word and logo form. Other organizations within the computer and software industries also have filed trademark registration applications for "Cobalt." We have filed an opposition proceeding before the Trademark Trial and Appeal Board of the United States Patent and Trademark Office with respect to two of these competing registration applications. That opposition is pending and we are in discussions with a third party applicant regarding a potential trademark use consent agreement. We may be unsuccessful in these proceedings or negotiations and may be required to limit the use of the tradenames or marks around which we have attempted to build brand identities. We could face liability for information retrieved from or transmitted over the Internet and liability for products sold over the Internet. We could be exposed to liability with respect to third-party information that is accessible through Web sites we create. These claims might assert that, by directly or indirectly providing links to Web sites operated by third parties, we should be liable for copyright or trademark infringement or other wrongful actions by third parties through these sites. It is also possible that if any information provided on our clients' Web sites contains errors, consumers and our clients could make claims against us for losses incurred in relying on this information. We access the systems and databases of our clients and, despite precautions, we may adversely affect these systems. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims and our reputation could suffer dramatically. While we believe our insurance is adequate, our general liability insurance and contractual indemnity and disclaimer provisions may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition. Increasing government regulation could limit the market for Internet services, which could seriously harm our business. Due to concerns arising from the increasing use of the Internet, a number of laws and regulations have been and may be adopted covering issues such as user privacy, pricing, acceptable content, taxation and 10 quality of products and services. This legislation could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications and commercial medium. Further, due to the global nature of the Internet, it is possible that multiple federal, state or foreign jurisdictions might attempt to regulate Internet transmissions or levy sales or other taxes relating to Internet-based activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. We cannot assess the impact of any future regulation of the Internet on our business. The failure of our software, technology and other systems, and of the software, technology and systems of our key suppliers and clients, to be Year 2000 compliant may negatively impact our business and results of operations. We may not accurately identify all potential Year 2000 problems that could affect our business, and the corrective measures that we implement may be ineffective or incomplete. Any Year 2000-related problems could interrupt our ability to provide services to our clients, process orders or accurately report operating and financial data. Similar problems and consequences could result if any of our key suppliers and clients experience Year 2000 problems. To the extent that our clients rely on hardware or software that may not be Year 2000 compliant, our ability to provide our services, in particular our data extraction, aggregation and management services, could be materially and adversely affected. Our failure or the failure of our significant suppliers and clients to adequately address the Year 2000 issue could adversely affect our business, operating results and financial condition. For more information about our Year 2000 compliance efforts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000." Substantial sales or the perception of future sales of our common stock may depress the market price for our stock. Future sales of substantial amounts of our common stock in the public market could adversely affect the market prices for our common stock. Of the 16,676,188 shares of our common stock outstanding after this offering, all of the 4,500,000 shares sold in this offering and the estimated 357,143 shares sold in the direct sale will be freely tradable. Substantially all of the remaining shares of common stock outstanding after this offering are subject to lock-up agreements that prohibit the sale of these shares for 180 days after this offering. Immediately after this 180 day period, 10,738,607 shares will become available for sale. The remaining shares of common stock will become available for sale at various times thereafter upon the expiration of one-year holding periods. Investors in this offering will suffer immediate and substantial dilution. The initial public offering price is expected to be substantially higher than the per share value of our assets, after deducting our liabilities, immediately after the offering. Accordingly, purchasers of the common stock in this offering will experience immediate and substantial dilution of approximately $11.47 in net tangible book value per share, or approximately 82% of the assumed offering price of $14.00 per share. Upon completion of the offering, new investors will have contributed approximately 65% of our capitalization, but will own only 30% of our outstanding capital stock. To the extent that outstanding options or warrants to purchase our common stock are exercised, there will be further dilution. We have in the past granted a substantial number of options to purchase common stock to employees as part of compensation packages at exercise prices per share lower than the price per share in this offering, and we expect that we will continue to grant options in the future. We also may issue shares of common stock in connection with strategic acquisitions or alliances. Any of the foregoing could also result in additional dilution to shareholders. 11 Our principal shareholder and its affiliates will continue to influence matters affecting us, which could conflict with your interests. As of June 30, 1999, E.M. Warburg, Pincus & Co., LLC beneficially owned approximately 78% of our outstanding common stock. After this offering, Warburg will beneficially own approximately 47% of our common stock and will be able to exercise significant influence over us, including on matters submitted to our shareholders for a vote, such as: - the election of our board of directors; - the removal of any of our directors; - the amendment of our articles of incorporation or bylaws; and - the adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. Actions taken by Warburg could conflict with interests of other shareholders. As a result of Warburg's significant shareholdings, a potential acquirer could be discouraged from attempting to obtain control of us, which could have a material adverse effect on the market price of our common stock. See "Management" and "Principal Shareholders." Our articles of incorporation and Washington law contain provisions that could discourage third parties from acquiring us or limit the price that they would be willing to pay for our stock. Our articles of incorporation and the Washington Takeover Act could have the effect of delaying or preventing a change in control. ARTICLES OF INCORPORATION. Our board of directors, without shareholder approval, has the authority under our articles of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock could be issued quickly and easily, could adversely affect the rights of holders of common stock and could be issued with terms calculated to delay or prevent a change in control of Cobalt or make removal of management more difficult. Our articles of incorporation provide for the division of our board of directors into three classes, as nearly equal in number as possible, with the directors in each class serving for a three-year term, and one class being elected each year by our shareholders. Directors may be removed only for cause. Because this system of electing and removing directors generally makes it more difficult for shareholders to replace a majority of the board of directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to gain control of Cobalt. WASHINGTON TAKEOVER ACT. Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a corporation, with some exceptions, from engaging in significant business transactions with an "acquiring person," which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the corporation, for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the corporation's board of directors prior to the time of acquisition. Significant business transactions include: - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; - termination of 5% or more of the employees of the corporation as a result of the acquiring person's acquisition of 10% or more of the shares; and - allowing the acquiring person to receive any disproportionate benefit as a shareholder. 12 After the five-year period, a significant business transaction may occur, as long as it complies with the fair price provisions of the statute. A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of Cobalt. Our stock price may be volatile, which could result in substantial losses for individual shareholders. The market price of our common stock is likely to be highly volatile following this offering and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of new services by us or our competitors, market conditions in the automobile industry, changes in financial estimates by securities analysts or other events or factors, many of which are beyond our control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology and services companies and that often have been unrelated to the operating performance of these companies. If our stock price is volatile, the likelihood that we will be subject to securities class action litigation will increase. In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we were sued in a securities class action, it could result in substantial costs and a diversion of management's attention and resources, and could cause our stock price to decline. We have not designated a specific use for all of the net proceeds. Our management may fail to allocate a portion of the proceeds to productive uses. Our management will have significant discretion in applying a substantial part of the net proceeds of this offering. In addition to repayment of indebtedness and payment of accrued dividends on our outstanding preferred stock, we currently expect to use the net proceeds for general corporate purposes, including capital expenditures and working capital. We also may use a portion of the net proceeds for the acquisition of companies, technology or services that complement our business or for strategic alliances with, or investments in, companies that provide complementary products and services. Failure to allocate the net proceeds of this offering to productive uses would adversely affect our business, operations and revenues. 13 USE OF PROCEEDS We estimate our net proceeds from the sale of the 4,500,000 shares of common stock in this offering, after deducting underwriting discounts and estimated offering expenses, and from the shares of common stock in the direct sale will be approximately $62,840,000. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $71,628,500. The principal purposes of this offering are to repay indebtedness, to obtain additional working capital, to create a public market for our common stock and to facilitate future access to public equity markets. We expect to use the net proceeds of this offering as follows: - up to $23.0 million to repay indebtedness incurred in connection with Cobalt's acquisition of PartsVoice. Of this indebtedness, which bears interest at an annual rate of 8.75%, $8.0 million is due and payable on the earlier of the completion of this offering or July 30, 1999, and $15.0 million is due and payable on the earlier of the completion of this offering or January 25, 2000. See "Recent Acquisition" and Note 14 of Notes to Cobalt Financial Statements; - up to $5.0 million to repay principal and interest under our secured line of credit, which bears interest at prime plus 2.0%, currently 10.0%, and is due on the earlier of completion of this offering or December 31, 1999; and - approximately $2.0 million to pay accrued and unpaid dividends on our outstanding preferred stock. The remaining balance of approximately $32,840,000 will be used for general corporate purposes, including continued investment in services development, expansion of sales and marketing activities and working capital. We may, when the opportunity arises, use an unspecified portion of the net proceeds to acquire or invest in complementary businesses, services and technologies. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development efforts, marketing and sales activities, the amount of cash generated by operations and competition. Pending use of the net proceeds for the above purposes, we intend to invest the net proceeds from this offering in short-term, interest bearing, investment grade securities. DIVIDEND POLICY We have not paid any cash dividends since our inception and, except with respect to the payment of accrued dividends on the outstanding shares of our preferred stock as described above, do not intend to pay any cash dividends in the foreseeable future. 14 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999 (a) on an actual basis, (b) on a pro forma basis to reflect Cobalt's acquisition of PartsVoice as if it had occurred on March 31, 1999 and the conversion of all outstanding shares of preferred stock into shares of common stock upon the closing of this offering, and (c) on a pro forma as adjusted basis to reflect the receipt and application of the estimated net proceeds from the sale by us of 4,500,000 shares of common stock pursuant to this offering at an assumed initial offering price of $14.00 per share, after deducting underwriting discounts and estimated offering expenses and $5.0 million from the direct sale and after repayment of the notes payable issued in conjunction with Cobalt's acquisition of PartsVoice.
March 31, 1999 --------------------------------- Pro Forma, Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Long-term debt: Software financing contract, non-current portion.............................. $ 405 $ 405 $ 405 Capital lease obligations, non-current portion................................ 971 971 971 -------- --------- ----------- Total long-term debt............................................................ 1,376 1,376 1,376 -------- --------- ----------- Mandatorily redeemable convertible preferred stock(1)........................... 31,753 -- -- -------- --------- ----------- Shareholders' (deficit) equity: Preferred stock, $0.01 par value per share; 100,000,000 shares authorized, 9,153,902 issued and outstanding as mandatorily redeemable convertible preferred stock; no shares issued and outstanding, pro forma and pro forma as adjusted..................................................................... -- -- -- Common stock, $0.01 par value per share; 200,000,000 shares authorized, 1,821,979 issued and outstanding; 11,475,881 and 16,333,024 shares issued and outstanding pro forma and pro forma as adjusted, respectively(2)............. 18 115 163 Additional paid-in capital.................................................... 2,502 38,539 101,331 Deferred compensation......................................................... (1,948) (1,948) (1,948) Notes receivable from shareholders............................................ (144) (144) (144) Accumulated deficit........................................................... (27,195) (27,195) (27,195) -------- --------- ----------- Total shareholders' (deficit) equity........................................ (26,767) 9,367 72,207 -------- --------- ----------- Total capitalization...................................................... $ 6,362 $ 10,743 $ 73,583 -------- --------- ----------- -------- --------- -----------
- --------- (1) See Note 9 of Notes to Cobalt Financial Statements. (2) Excludes: - 1,827,919 shares issuable upon exercise of stock options outstanding under our stock option plan as of March 31, 1999, at a weighted average exercise price per share of $0.69, - 61,500 shares issuable upon exercise of warrants outstanding as of March 31, 1999, at a weighted average exercise price per share of $0.45, - 1,330,000 shares available for future grant or issuance under our stock option plan as of March 31, 1999, and - 300,000 shares authorized for issuance under our stock purchase plan. See "Management--Employee Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to Cobalt Financial Statements. 15 DILUTION The pro forma net tangible book value of Cobalt at March 31, 1999 was $(21,532,000), or $(1.88) per share of common stock, assuming the conversion of all outstanding shares of preferred stock into shares of common stock. Pro forma net tangible book value per share represents the amount of our shareholders' equity, less intangible assets, divided by the total number of shares of common stock outstanding for the period immediately prior to this offering. After giving effect to the sale of the 4,500,000 shares of common stock offered in this prospectus and the shares of common stock in the direct sale at an assumed initial offering price of $14.00 per share and after deducting underwriting discounts and estimated offering expenses, the pro forma net tangible book value of Cobalt as of March 31, 1999 would have been $41,308,000, or $2.53 per share. This represents an immediate increase in pro forma net tangible book value of $4.41 per share to existing shareholders and an immediate dilution of $11.47 per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: Initial public offering price per share...................................... $ 14.00 Pro forma net tangible book value per share as of March 31, 1999............. (1.88) Increase per share attributable to new investors............................. 4.41 --------- Pro forma net tangible book value per share after this offering.............. 2.53 --------- Net tangible book value dilution per share to new investors.................. $ 11.47 --------- ---------
The following table summarizes as of March 31, 1999, on the pro forma basis described above, the number of shares of common stock purchased from Cobalt, the total consideration paid to Cobalt and the average price per share paid by existing shareholders and by investors purchasing shares of common stock in this offering and before deducting underwriting discounts and estimated offering expenses:
Total Shares Purchased Consideration Average ---------------- ---------------- Price Number Percent Amount Percent Per Share ------ ------- ------ ------- --------- Existing shareholders....................................... 11,475,881 70% 3$6,035,000 35% $ 3.14 New investors............................................... 4,857,143 30 68,000,000 65 14.00 ------ ------- ------ ------- Total................................................... 16,333,024 100% 1$04,035,000 100% ------ ------- ------ ------- ------ ------- ------ -------
The foregoing discussion and tables assume no exercise of any stock options or warrants after March 31, 1999. As of March 31, 1999, there were options and warrants outstanding to purchase a total of 1,889,419 shares of common stock. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. See "Capitalization," "Management--Employee Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to Cobalt Financial Statements. 16 SELECTED FINANCIAL DATA The following selected financial data of Cobalt should be read together with the financial statements and related notes, "Unaudited Pro Forma Combined Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The statement of operations data for each of the years in the three year period ended December 31, 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from the audited financial statements of Cobalt included elsewhere in the prospectus. The balance sheet data as of December 31, 1996 is derived from audited financial statements of Cobalt, which are not included in the prospectus. The statement of operations data for the period from March 17, 1995, Cobalt's inception date, to December 31, 1995 and for the three months ended March 31, 1998 and 1999, and the balance sheet data as of December 31, 1995 and March 31, 1999 are derived from our unaudited financial statements. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations as of and for the respective periods. Our pro forma results of operations in the table below assume that Cobalt's acquisition of PartsVoice had occurred on January 1, 1998. The pro forma balance sheet data reflects adjustments for transactions related to Cobalt's acquisition of PartsVoice assuming the transaction had occurred on that date and also gives effect to the conversion of all outstanding shares of preferred stock into common stock upon closing of this offering.
Actual ------------------------------------------------------------------------ Pro Forma Since ------------------------ Inception Three (March 17, 1995) Three Months Ended Months to Year Ended December 31, March 31, Year Ended Ended December 31, ------------------------------- -------------------- December 31, March 31, 1995 1996 1997 1998 1998 1999 1998 1999 ---------------- --------- --------- --------- --------- --------- ------------ --------- (in thousands, except per share data) (unaudited) (unaudited) (unaudited) Statement of Operations Data: Net revenues.................. $ 70 $ 312 $ 1,711 $ 6,245 $ 1,079 $ 2,453 $ 15,773 $ 5,009 Cost of revenues.............. 16 51 285 1,199 151 540 3,343 1,123 ---------------- --------- --------- --------- --------- --------- ------------ --------- Gross profit.............. 54 261 1,426 5,046 928 1,913 12,430 3,886 Operating expenses Sales and marketing......... 55 286 1,740 4,048 564 1,650 5,710 2,170 Product development......... 39 125 361 961 157 401 961 401 General and administrative............. 375 676 1,614 4,627 629 1,870 10,888 3,436 Amortization of deferred compensation............... 406 532 41 335 532 335 ---------------- --------- --------- --------- --------- --------- ------------ --------- Total operating expenses................. 469 1,087 4,121 10,168 1,391 4,256 18,091 6,342 ---------------- --------- --------- --------- --------- --------- ------------ --------- Loss from operations.......... (415) (826) (2,695) (5,122) (463) (2,343) (5,661) (2,456) Gain on sale of HomeScout..... -- -- -- 1,626 1,626 -- 1,626 -- Common and preferred stock repurchase premium.......... -- -- -- (1,658) -- -- (1,658) -- Interest expense.............. -- (2) (17) (93) (7) (49) (2,107) (552) Other income, net............. -- -- 47 142 6 57 208 61 ---------------- --------- --------- --------- --------- --------- ------------ --------- Net (loss) income............. $ (415) $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335) $ (7,592) $ (2,947) ---------------- --------- --------- --------- --------- --------- ------------ --------- ---------------- --------- --------- --------- --------- --------- ------------ --------- Basic net (loss) income per share....................... $ (0.24) $ (0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97) $ (5.67) $ (2.42) Diluted net (loss) income per share....................... $ (0.24) $ (0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97) $ (5.67) $ (2.42)
December 31, March 31, 1999 -------------------------------------- --------------------- 1995 1996 1997 1998 Actual Pro Forma ----------- ----- ------- -------- -------- ----------- (unaudited) (unaudited) Balance Sheet Data: Cash and cash equivalents........................................... $ 2 $ 4 $ 241 $ 5,756 $ 3,876 $ 876 Working capital..................................................... (235) (712) (1,264) 5,534 3,129 (23,088) Total assets........................................................ 22 168 1,951 10,062 10,665 38,141 Long-term obligations, net of current portion....................... -- 51 424 557 1,376 1,376 Mandatorily redeemable convertible preferred stock.................. -- -- 2,439 31,162 31,753 -- Total shareholders' (deficit) equity................................ (219) (651) (2,897) (24,242) (26,767) 9,367
17 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The unaudited pro forma combined financial information set forth below gives effect to Cobalt's acquisition of PartsVoice as if it had occurred on January 1, 1998. The historical financial information set forth below has been derived from the financial statements of Cobalt and PartsVoice, and should be read in conjunction with those financial statements and the notes to such financial statements included elsewhere in this prospectus. We acquired all of the equity interests in PartsVoice on April 30, 1999. Immediately prior to the closing, PartsVoice distributed to its owners certain assets and liabilities. At closing, we paid aggregate purchase consideration for PartsVoice of: - $3.0 million in cash; - promissory notes in the principal amount of (a) $8.0 million, due on the earlier of completion of this offering or July 30, 1999 and (b) $15.0 million, due on the earlier of completion of this offering or January 25, 2000; - 500,000 shares of Series C Convertible Preferred Stock at $8.00 per share; and - warrants to purchase 160,000 shares of Cobalt common stock at $6.00 per share, which have a fair market value of $381,000. Our obligations under the promissory notes are secured by a pledge of the PartsVoice equity interests. We incurred transaction expenses of approximately $217,000. See "Recent Acquisition" and "Management-- Executive Agreements." We have accounted for the PartsVoice acquisition using the purchase method of accounting. These pro forma financial statements have been prepared on the basis of assumptions described herein. We expect to incur integration expenses to merge administrative functions and to combine marketing efforts. We estimate integration costs for the PartsVoice acquisition to be less than $850,000. At this time, we do not foresee a need to close subsidiary offices or to significantly reduce headcount. However, we do expect changes to the organizational structure and salary scale of PartsVoice to result in $200,000 to $300,000 in integration costs. Additionally, we plan to issue warrants for 40,000 shares of common stock to PartsVoice employees with the same terms as those issued to the sellers. The estimated value of these warrants is $350,000. Planned hardware and software upgrades are estimated to result in an additional $100,000 to $200,000 in integration costs. The Pro Forma Combined Statement of Operations does not include the costs of integration, as these costs will affect future operations and do not qualify as liabilities in connection with a purchase business combination under EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." The unaudited pro forma combined financial information set forth below combines Cobalt's balance sheet as of March 31, 1999, and statements of operations for the year ended December 31, 1998 and for the three months ended March 31, 1999 with the balance sheet and statements of operations of PartsVoice as of and for the same periods. These pro forma financial statements reflect certain adjustments, including adjustments to reflect the amortization of intangible assets and goodwill acquired, interest expense related to acquisition indebtedness and the impact of related agreements that become effective with the acquisition. These adjustments are preliminary and are based on our best estimates. A third party valuation of the assets acquired will be used to finalize these adjustments. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes to the financial statements of Cobalt and PartsVoice which are included elsewhere in this prospectus. The unaudited pro forma combined financial information set forth below does not purport to represent what the consolidated results of operations or financial condition of Cobalt would actually have been if the PartsVoice acquisition and related transactions had in fact occurred on such date or to project the future consolidated results of operations or financial condition of Cobalt. 18 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1999
Pro Forma Cobalt PartsVoice Combined Adjustments Total -------- ---------- -------- ----------- -------- (in thousands) Assets Current Assets Cash and cash equivalents........................................... $ 3,876 $ 461 $ 4,337 $ (461)(1) $ 876 (3,000)(2) Short term investments.............................................. 983 398 1,381 (398)(1) 983 Accounts receivable, net............................................ 1,401 1,081 2,482 (1,081)(1) 1,401 Other current assets................................................ 1,172 8 1,180 (8)(1) 1,050 (122)(6) -------- ---------- -------- ----------- -------- 7,432 1,948 9,380 (5,070) 4,310 Capital assets, net................................................... 2,806 106 2,912 9(1) 2,921 Intangible assets, net................................................ 416 -- 416 217(6) 30,899 30,266(7) Other assets.......................................................... 11 213 224 (213)(1) 11 -------- ---------- -------- ----------- -------- $ 10,665 $2,267 $ 12,932 $25,209 $ 38,141 -------- ---------- -------- ----------- -------- -------- ---------- -------- ----------- -------- Liabilities and Shareholders' Deficit Current Liabilities Accounts payable.................................................... $ 665 $ 211 $ 876 $ (211)(1) $ 665 Accrued liabilities................................................. 1,316 -- 1,316 95(6) 1,411 Deferred revenues................................................... 1,505 -- 1,505 -- 1,505 Software financing contract, current portion........................ 257 -- 257 -- 257 Capital lease obligations, current portion.......................... 560 -- 560 -- 560 Distribution payable to owners...................................... -- 825 825 (825)(1) -- Payable to owners................................................... -- 80 80 (80)(1) -- Notes payable....................................................... -- -- -- 23,000(4) 23,000 -------- ---------- -------- ----------- -------- 4,303 1,116 5,419 21,979 27,398 -------- ---------- -------- ----------- -------- Noncurrent liabilities................................................ 1,376 7 1,383 (7)(1) 1,376 -------- ---------- -------- ----------- -------- Mandatorily redeemable convertible preferred stock.................... 31,753 -- 31,753 4,000(3) 35,753 -------- ---------- -------- ----------- -------- Shareholders' deficit Common stock........................................................ 18 -- 18 -- 18 Additional paid-in capital.......................................... 2,502 -- 2,502 381(5) 2,883 Deferred Compensation............................................... (1,948) (1,948) (1,948) Notes receivable from shareholders.................................. (144) -- (144) -- (144) Owners' equity...................................................... -- 1,259 1,259 (1,029)(1) -- (230)(12) Accumulated deficit................................................. (27,195) (115) (27,310) 115(12) (27,195) -------- ---------- -------- ----------- -------- (26,767) 1,144 (25,623) (763) (26,386) -------- ---------- -------- ----------- -------- Total liabilities and shareholders' deficit........................... $ 10,665 $2,267 $ 12,932 $25,209 $ 38,141 -------- ---------- -------- ----------- -------- -------- ---------- -------- ----------- --------
19 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
Pro Forma Cobalt PartsVoice Combined Adjustments Total ---------- ----------- --------- ----------- ---------- (in thousands, except share and per share data) Net revenues...................................... $ 6,245 $ 9,528 $ 15,773 $ 15,773 Cost of revenues.................................. 1,199 2,144 3,343 3,343 ---------- ----------- --------- ---------- Gross profit.................................. 5,046 7,384 12,430 12,430 ---------- ----------- --------- ---------- Operating expenses Sales and marketing............................. 4,048 1,662 5,710 5,710 Product development............................. 961 961 961 General and administrative...................... 4,627 1,180 5,807 5,081(8) 10,888 Amortization of deferred compensation........... 532 532 532 ---------- ----------- --------- ----------- ---------- Total operating expenses...................... 10,168 2,842 13,010 5,081 18,091 ---------- ----------- --------- ----------- ---------- (Loss) income from operations..................... (5,122) 4,542 (580) (5,081) (5,661) Gain on sale of HomeScout......................... 1,626 1,626 1,626 Common and preferred stock repurchase premium..... (1,658) (1,658) (1,658) Interest expense.................................. (93) (1) (94) (2,013)(9) (2,107) Other income, net................................. 142 66 208 208 ---------- ----------- --------- ----------- ---------- Net (loss) income................................. $ (5,105) $ 4,607 $ (498) $ (7,094) $ (7,592) ---------- ----------- --------- ----------- ---------- ---------- ----------- --------- ----------- ---------- Net (loss) income available to common shareholders.................................... $ (13,930) $ 4,607 $ (9,323) $ (7,334) 10) $ (16,657) ---------- ----------- --------- ----------- ---------- ---------- ----------- --------- ----------- ---------- Basic and diluted net loss per share.............. $ (4.74) $ (5.67)(11) ---------- ---------- ---------- ---------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share.............................. 2,938,460 2,938,460 ---------- ---------- ---------- ----------
20 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
Pro Forma Cobalt PartsVoice Combined Adjustments Total ---------- ----------- ----------- ----------- ---------- (in thousands, except share and per share amounts) Net revenues................................... $ 2,453 $ 2,556 $ 5,009 $ 5,009 Cost of revenues............................... 540 583 1,123 1,123 ---------- ----------- ----------- ---------- Gross profit............................... 1,913 1,973 3,886 3,886 ---------- ----------- ----------- ---------- Operating expenses Sales and marketing.......................... 1,650 520 2,170 2,170 Product development.......................... 401 401 401 General and administrative................... 1,870 296 2,166 1,270(8) 3,436 Amortization of deferred compensation 335 335 335 ---------- ----------- ----------- ----------- ---------- Total operating expenses................... 4,256 816 5,072 1,270 6,342 ---------- ----------- ----------- ----------- ---------- (Loss) income from operations.................. (2,343) 1,157 (1,186) (1,270) (2,456) Interest expense............................... (49) (49) (503)(9) (552) Other income, net.............................. 57 4 61 61 ---------- ----------- ----------- ----------- ---------- Net (loss) income.............................. $ (2,335) $ 1,161 $ (1,174) $ (1,773) $ (2,947) ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Net (loss) income available to common shareholders................................. $ (2,926) $ 1,161 $ (1,765) $ (1,833) 10) $ (3,598) ---------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ---------- Basic and diluted net loss per share........... $ (1.97) $ (2.42) ---------- ---------- ---------- ---------- Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share................... 1,488,681 1,488,681 ---------- ---------- ---------- ----------
21 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION Pro forma adjustments for the unaudited pro forma combined balance sheet as of March 31, 1999 and statements of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 are as follows: (1) Represents the distribution of assets and liabilities of PartsVoice to its owners immediately prior to the acquisition. Substantially all of the tangible assets and liabilities were distributed. (2) Represents the payment of $3.0 million in cash at closing of the acquisition. (3) Represents the issuance of 500,000 shares of Series C Convertible Preferred Stock at a per share value of $8.00. (4) Represents the issuance of the short-term notes at closing. For purposes of this pro forma presentation, we have not assumed repayment of the indebtedness due to the lack of existing capital in these historical periods to fund repayment. (5) Represents the fair value of the warrants issued at closing. The fair value is calculated using the Black Scholes model with the following assumptions: exercise price of $6.00 per share, fair value of common stock of $7.20 per share, expected life of six months, risk-free interest rate of 4.66%, volatility of 90% and dividend yield of 0%. (6) Represents estimated acquisition costs incurred in connection with the acquisition. (7) Reflects the allocation of the purchase price to goodwill and other intangible assets. The intangible assets acquired are believed to include client base, marketing agreements, assembled workforce, technology, covenants not to compete and goodwill. For purposes of these pro forma financial statements, we have estimated the overall amortization period to be six years. We are in the process of obtaining a third party valuation to determine the allocation of intangible assets. Once we have made a final allocation, changes may be appropriate. The impact of the changes could be material. (8) Reflects the amortization of the intangible assets referred to in Note 7. (9) Reflects the interest expense of the acquisition indebtedness at the rate of 8.75% outstanding for the period presented. (10) Reflects the pro forma adjustments described in Notes 8 and 9, as well as cumulative, unpaid dividends relating to the Series C Convertible Preferred Stock at $0.48 per share per annum. (11) Pro forma basic and diluted net loss per share reflects the impact of the adjustments above. The convertible preferred stock and warrants issued in connection with the acquisition are excluded from the computation, as their effect is antidilutive. (12) Reflects elimination of PartsVoice owners' equity. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH INVOLVES RISKS AND UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES," "BELIEVES," "PLANS," "EXPECTS," "FUTURE," "INTENDS" AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS PROSPECTUS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE RISKS DESCRIBED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. Overview We derive our revenues from fees charged to our automobile dealership, dealer group and manufacturer clients for Web site design, development and maintenance and data extraction and aggregation services, as well as for Internet advertising and promotional services. Revenues from Web site design, development and maintenance and data extraction and aggregation services are recognized ratably over the applicable service period. Revenues from initial setup fees and custom projects are recognized at the time of activation. Our obligations for Internet advertising services typically include guarantees of a minimum number of "impressions," or times that an advertisement is viewed. To the extent that minimum guaranteed impressions are not met, we defer recognition of the corresponding revenues until the remaining guaranteed impression levels are achieved. The majority of our services are sold to clients under short-term service agreements with an initial term of six months and month-to-month thereafter. Revenues are recognized net of promotional discounts. We offer some of our services on an initial "free trial" basis, generally for periods of one to three months, in which case revenue is not recognized until the end of the free trial period and the client continues service on a paying basis. Our cost of revenues consists of the costs associated with production, maintenance and delivery of our services. These costs include the costs of production, processing and design personnel, communication expenses related to data transfer, fees payable to third parties for distribution of vehicle inventory data to other Web sites and for banner advertising, site content licensing fees and costs of Web servers used to host client data. In April 1999, we acquired PartsVoice, LLC, an Oregon limited liability company, whose principal business is vehicle parts data acquisition and management services. The purchase price, including transaction expenses, was $30.6 million, of which $3.0 million was paid in cash and $4.4 million was paid by issuance of preferred stock and warrants at closing. The balance of the purchase price was paid by issuance of short-term notes. The notes are secured by a pledge of the PartsVoice equity interests and a security agreement. See "--Liquidity and Capital Resources," "Recent Acquisition" and Note 14 of Notes to Cobalt Financial Statements. The PartsVoice acquisition is being accounted for as a purchase transaction, and we plan to allocate substantially all of the purchase price to intangible assets. We may in the future pursue additional acquisitions of businesses, products or technologies that could complement or expand our business. Integrating newly acquired businesses or technologies may be expensive and time-consuming. The negotiation of potential acquisitions or strategic relationships as well as the integration of future acquired businesses, products or technologies could divert our management's time and resources and could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors-- Any failure to integrate PartsVoice with Cobalt could compromise our growth strategy and adversely affect our business." 23 Since inception, but increasingly during the past year, we have made substantial investments in infrastructure and in staffing and management to accommodate current and anticipated future growth. Since May 1, 1998, we have hired more than 150 employees and invested more than $2.9 million in capital assets. A large portion of these assets is intended to improve our service to clients, including backup computer systems and more stable and scalable database systems. Our planned growth will require additional staff and facilities. Our continued growth and the PartsVoice acquisition have placed and will continue to place a significant strain on our managerial, operational and financial resources. To manage our anticipated growth, we must continue to implement and improve our operational and financial systems and must expand, train and manage our employee base. We may not be able to manage the expansion of our operations effectively, and our systems, procedures or controls may not be adequate to support our operations. Any inability to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors--Any failure to manage our growth effectively will adversely affect our business and results of operations." In October 1998, in conjunction with a preferred stock investment by Warburg, Pincus Equity Partners, L.P., we repurchased shares of common stock and preferred stock from our founders and many of our investors and employees. We recorded an expense of $1.7 million representing the premium paid to redeem sufficient shares to provide Warburg with a 62% equity ownership position, on a fully diluted basis, as of the investment date. See Note 10 of Notes to Cobalt Financial Statements. We have incurred net losses each year since we began operations. After giving pro forma effect to Cobalt's acquisition of PartsVoice, we had a net loss of $7.6 million for the year ended December 31, 1998, which includes $5.1 million of pro forma amortization of intangibles and $2.0 million in pro forma interest expense. We intend to increase our spending on technology infrastructure development, marketing and promotion, services development and strategic relationships. As a result, we expect to continue to incur net losses and negative cash flows from operations at least through 2000. Our limited operating history makes it difficult to forecast further operating results. Although our net revenues have grown in recent quarters, we cannot be certain that net revenues will continue to increase or that they will increase at a rate sufficient to achieve and maintain profitability. Even if we were to achieve profitability in any period, we might fail to sustain or increase that profitability on a quarterly or annual basis. See "Risk Factors--We have a history of losses and may never achieve or maintain profitability. If we continue to lose money, our operations may not be financially viable." We have recorded a total of $3.5 million of deferred compensation costs since our inception through March 31, 1999. These charges represent the difference between the exercise price and the deemed fair value of stock options granted to our employees during this period. These options generally vest ratably over a four-year period. We are amortizing these costs over the vesting period of the options and have recorded deferred compensation charges of $406,000 and $532,000 for the years ended December 31, 1997 and 1998, respectively, and $41,000 and $335,000 for the three months ended March 31, 1998 and 1999, respectively. 24 Results of Operations--Cobalt The following table sets forth for the periods indicated selected statements of operations data expressed as a percentage of net revenues. The quarterly financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the results of operations for each quarter.
Year Ended December Three Months Ended 31, March 31, ---------------------- ------------------- 1996 1997 1998 1998 1999 ------ ------ ------ ----------- ----- (unaudited) Net revenues.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues...................................................... 16.3 16.7 19.2 14.0 22.0 ------ ------ ------ ----- ----- Gross profit...................................................... 83.7 83.3 80.8 86.0 78.0 ------ ------ ------ ----- ----- Operating expenses: Sales and marketing................................................. 91.7 101.7 64.8 52.3 67.3 Product development................................................. 40.1 21.1 15.4 14.6 16.3 General and administrative.......................................... 216.6 94.3 74.1 58.2 76.3 Amortization of deferred compensation............................... 23.7 8.5 3.8 13.7 ------ ------ ------ ----- ----- Total operating expenses.......................................... 348.4 240.8 162.8 128.9 173.6 ------ ------ ------ ----- ----- Loss from operations.................................................. (264.7) (157.5) (82.0) (42.9) (95.6) Gain on sale of HomeScout division.................................... 26.0 150.7 Common and preferred stock repurchase premium......................... (26.5) Interest expense...................................................... (0.7) (1.0) (1.5) (0.7) (1.9) Other income.......................................................... 2.7 2.3 0.6 2.3 ------ ------ ------ ----- ----- Net (loss) income..................................................... (265.4)% (155.8)% (81.7)% 107.7% (95.2)% ------ ------ ------ ----- ----- ------ ------ ------ ----- -----
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 NET REVENUES. Net revenues increased from $1.1 million for the three months ended March 31, 1998 to $2.5 million for the same period in 1999, an increase of $1.4 million, or 127%. This increase in net revenues was primarily due to the significant net increase in our client base. COST OF REVENUES. Cost of revenues increased from $151,000 for the three months ended March 31, 1998 to $540,000 for the same period in 1999, an increase of $389,000, or 258%. Of this increase, 46.4% was attributable to an increase in costs related to increased staffing and facilities required to accommodate our increased client base and, 42.4% was associated with the cost of new service offerings for advertising and distribution of vehicle inventory data to third-party Web sites. Cost of revenues, as a percentage of net revenues, increased from 14.0% for the three months ended March 31, 1998 to 22.0% for the same period in 1999 due partially to the increase in computer system capacity required to accommodate the increased size of our client base, which accounted for 2.4% of the cost increase. There was also a shift in our mix of services to higher cost Internet advertising services from 5.7% to 10.3% of net revenues for the three months ended March 31, 1998 and 1999, which resulted in a 4.4% increase in cost of revenues. We anticipate the investments that we have made in production and design staff and operating equipment will support further growth in our client base, which will decrease our cost of revenues as a percentage of net revenues as we add new customers. Such decreases may be offset if our services mix continues to shift to lower margin Internet advertising services. SALES AND MARKETING. Sales and marketing expenses consist primarily of salary compensation, sales commissions and travel expenses for sales and marketing personnel and expenses for promotional advertising and marketing. Sales and marketing expenses increased from $564,000 for the three months ended March 31, 25 1998 to $1.7 million for the same period in 1999, an increase of $1.1 million, or 193%. Of this cost increase, 55.7% was due to the increase in the number of our sales and marketing personnel and, 32.7% of the increase is attributable to increased corporate brand advertising. PRODUCT DEVELOPMENT. Our product development expenses consist primarily of compensation for product development personnel and costs of related computer equipment. We expense product development costs as they are incurred. We increased our product development costs from $157,000 for the three months ended March 31, 1998 to $401,000 for the same period in 1999, an increase of $244,000, or 155%. This increase was due to the increase in the number of our product development personnel. GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist primarily of compensation for administrative personnel, facilities and communications expenses and fees for outside professional advisors. General and administrative expenses increased from $629,000 for the three months ended March 31, 1998 to $1.9 million for the same period in 1999, an increase of $1.2 million, or 197%. Of this increase, 62.6% was due to the increase in the number of administrative staff and management personnel and the related increase in facilities costs, and 26.9% was attributable to increased consulting, legal and accounting fees. AMORTIZATION OF DEFERRED COMPENSATION. We recorded deferred compensation charges of $41,000 and $335,000 for the three months ended March 31, 1998 and 1999, respectively. See Note 10 of Notes to Cobalt Financial Statements. NET LOSS. During the quarter ended March 31, 1998 we sold the assets of our HomeScout division and realized a gain of $1.6 million. HomeScout was a real estate search service that we developed to give users access to homes for sale on the Internet. See Note 2 of Notes to Cobalt Financial Statements. Excluding the gain on sale of HomeScout, our net loss for the three months ended March 31, 1998 was $464,000 compared to a net loss of $2.3 million for the same period in 1999, an increase of $1.9 million. Increased operating expenses described above offset the increase in net revenues. YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998 NET REVENUES. Our net revenues increased from $312,000 in 1996 to $1.7 million in 1997 and to $6.2 million in 1998. These increases in net revenues are primarily attributable to substantial growth in our dealer client base, net of client attrition. In December 1997 we acquired the assets of the DealerNet division of The Reynolds and Reynolds Company for a purchase price of $800,000, which included approximately 600 client contracts. See Note 3 of Notes to Cobalt Financial Statements. COST OF REVENUES. Cost of revenues increased from $51,000 in 1996 to $285,000 in 1997 and to $1.2 million in 1998. These increases were directly related to the substantial increase in our client base. The increase from 1996 to 1997 primarily consisted of increases in the costs of production and design personnel. The primary components of the increase from 1997 to 1998 were: (1) the increase in costs of resale products, which represented 58.4% of the increase; and (2) the increase in the cost of production and design personnel, which represented 28.2% of the increase. Cost of revenues, as a percentage of net revenues, increased from 16.3% in 1996 to 16.7% in 1997 due primarily to the increase in production and design staffing required to accommodate our increased client base. Cost of revenues increased to 19.2% of net revenues in 1998, primarily due to the shift in our services mix to higher cost Internet advertising services from 1% of net revenue in 1997 to 11% in 1998. SALES AND MARKETING. Sales and marketing expenses increased from $286,000 in 1996 to $1.7 million in 1997 and to $4.0 million in 1998. Our marketing department, initially established in 1997 with two designated employees, had increased to 40 employees by December 31, 1998. We also expanded our sales force to address the substantial increase in our client base and to position us to reach new clients more effectively. Personnel and related expenses comprised 66.8% of the increase from 1996 to 1997 and 80.9% of 26 the increase from 1997 to 1998. Lesser increases resulted from expenditures for a program of nationwide corporate branding and advertising. We expect sales and marketing expenses to continue to increase as we seek to continue to expand our sales and marketing organization and our presence in the marketplace. Sales and marketing expense as a percentage of net revenues decreased from 101.7% in 1997 to 64.8% in 1998 due primarily to the significant increase in net revenues during the same period. PRODUCT DEVELOPMENT. Product development expenses increased from $125,000 in 1996 to $361,000 in 1997 and to $961,000 in 1998. These increases resulted from additional product development personnel and related equipment. We expect that product development expenses will continue to increase in the future as we hire additional personnel in this area. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from $676,000 in 1996 to $1.6 million in 1997. The increase was due primarily to (1) additional personnel, which represented 32.5% of the increase; (2) related facilities expenses, which represented 30.7% of the increase; and (3) increased professional consulting, legal and accounting fees, which represented 14.7% of the increase. The increase to $4.6 million in 1998 was due primarily to: (a) additional staff and management personnel, which represented 38.2% of the increase; (b) related facilities expenses, which represented 17.4% of the increase; (c) increased consulting, legal and accounting fees, which represented 16.6% of the increase; and (d) amortization of intangible assets related to the DealerNet acquisition, which represented 9.3% of the increase. NET LOSS. Our net loss increased from $828,000 in 1996 to $2.7 million in 1997 and to $5.1 million in 1998. Excluding the common and preferred stock repurchase premium of $1.7 million and the gain on the sale of our HomeScout division of $1.6 million, our net loss in 1998 would have been $5.1 million. See Notes 2 and 10 of Notes to Cobalt Financial Statements. Quarterly Results The following table sets forth unaudited statements of operations data expressed in dollars (in thousands) and as a percentage of net revenues for each quarter of 1998 and the first quarter of 1999. These financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the results of operations for each quarter. The results for any quarter are not necessarily indicative of the results we expect in any future period.
Three Months Ended ------------------------------------------------ Mar. Dec. Mar. 31, June 30, Sept. 31, 31, 1998 1998 30, 1998 1998 1999 ------- -------- -------- ------- ------- Net revenues.......................................................... $1,079 $ 1,258 $ 1,647 $ 2,261 $ 2,453 Cost of revenues...................................................... 151 262 333 453 540 ------- -------- -------- ------- ------- Gross profit...................................................... 928 996 1,314 1,808 1,913 ------- -------- -------- ------- ------- Operating expenses: Sales and marketing................................................. 564 784 1,218 1,482 1,650 Product development................................................. 157 191 261 352 401 General and administrative.......................................... 629 959 1,349 1,690 1,870 Amortization of deferred compensation............................... 41 66 172 253 335 ------- -------- -------- ------- ------- Total operating expenses.......................................... 1,391 2,000 3,000 3,777 4,256 ------- -------- -------- ------- ------- Loss from operations.................................................. (463) (1,004) (1,686) (1,969) (2,343) Gain on sale of HomeScout division.................................... 1,626 Common and preferred stock repurchase premium......................... (1,658) Interest expense...................................................... (7) (8) (43) (35) (49) Other income, net..................................................... 6 29 13 94 57 ------- -------- -------- ------- ------- Net income (loss)..................................................... $1,162 $ (983) $ (1,716) $(3,568) $(2,335) ------- -------- -------- ------- ------- ------- -------- -------- ------- -------
27
Three Months Ended ------------------------------------------------ Mar. June Dec. Mar. 31, 30, Sept. 31, 31, 1998 1998 30, 1998 1998 1999 ------- ------- -------- ------- ------- Net revenues.......................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues...................................................... 14.0 20.8 20.2 20.0 22.0 ------- ------- -------- ------- ------- Gross profit...................................................... 86.0 79.2 79.8 80.0 78.0 ------- ------- -------- ------- ------- Operating expenses: Sales and marketing................................................. 52.3 62.3 74.0 65.5 67.3 Product development................................................. 14.6 15.2 15.8 15.6 16.3 General and administrative.......................................... 58.2 76.3 81.9 74.8 76.3 Amortization of deferred compensation............................... 3.8 5.2 10.4 11.2 13.7 ------- ------- -------- ------- ------- Total operating expenses.......................................... 128.9 159.0 182.1 167.1 173.6 ------- ------- -------- ------- ------- Loss from operations.................................................. (42.9) (79.8) (102.3) (87.1) (95.6) Gain on sale of HomeScout division.................................... 150.7 Common and preferred stock repurchase premium......................... (73.3) Interest expense...................................................... (0.7) (0.6) (2.6) (1.6) (1.9) Other income, net..................................................... 0.6 2.3 0.8 4.2 2.3 ------- ------- -------- ------- ------- Net income (loss)..................................................... 107.7% (78.1)% (104.1)% (157.8)% (95.2)% ------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Net revenues increased in 1998 due to increases in the size of our client base. The rate of growth slowed in the first quarter of 1999, due to a decline in the rate of new client acquisition we experienced in the fourth quarter of 1998 and the first quarter of 1999. This decline was due principally to our conversion to a new database system which resulted in a reallocation of sales and marketing resources to maintaining client relationships. Our cost of revenues has increased each quarter, although generally at the same rate as the growth in net revenues. 28 We expect that the rate of growth of our quarterly operating results will fluctuate due to a variety of factors, many of which are beyond our control. These factors include: - the level of demand in the automotive industry for Internet marketing and data aggregation services; - the rate and volume of additions to our client base; - the amount and timing of expenditures by clients for our services; - the introduction of new products or services by us or our competitors; - our ability to attract and retain personnel with the necessary technical, sales, marketing and creative skills required to develop our services and to service our clients effectively; - technical difficulties with respect to the Internet or infrastructure; and - economic conditions generally and specific to the automotive industry. As a strategic initiative or as a response to the competitive environment, we may from time to time make pricing, service, technology or marketing decisions or business or technology acquisitions that could have a material adverse effect on our short-term operating results. We also may experience seasonality in our business in the future resulting in diminished revenues as a result of diminished demand for our services during seasonal periods that correspond to seasonal fluctuations in the automotive industry or to fluctuations in industry spending for Internet marketing services. Due to all or any of the foregoing factors, in some future quarter our operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock would likely be materially and adversely affected. Results of Operations--PartsVoice The following table sets forth for the periods indicated certain historical statements of operations data of PartsVoice expressed in dollars (in thousands) and as a percentage of net revenues.
Year Ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net revenues......................................................................... $ 6,679 $ 7,715 $ 9,528 Cost of revenues..................................................................... 1,714 1,965 2,144 --------- --------- --------- Gross profit......................................................................... 4,965 5,750 7,384 Sales and marketing expense........................................................ 1,339 1,419 1,662 General and administrative expense................................................. 1,012 1,054 1,180 --------- --------- --------- Income from operations............................................................... 2,614 3,277 4,542 Other income (expense)............................................................... (1) 28 65 --------- --------- --------- Net income........................................................................... $ 2,613 $ 3,305 $ 4,607 --------- --------- --------- --------- --------- --------- Year Ended December 31, ------------------------------- 1996 1997 1998 --------- --------- --------- Net revenues......................................................................... 100.0% 100.0% 100.0% Cost of revenues..................................................................... 25.7 25.5 22.5 --------- --------- --------- Gross profit......................................................................... 74.3 74.5 77.5 Sales and marketing expense........................................................ 20.0 18.4 17.4 General and administrative expense................................................. 15.2 13.6 12.4 --------- --------- --------- Income from operations............................................................... 39.1 42.5 47.7 Other income (expense)............................................................... -- 0.3 0.7 --------- --------- --------- Net income........................................................................... 39.1% 42.8% 48.4% --------- --------- --------- --------- --------- ---------
29 YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998 NET REVENUES. Net revenues increased from $6.7 million in 1996 to $7.7 million in 1997 and to $9.5 million in 1998. Of the increase from 1996 to 1997, 52.4% was due to increased services provided to existing manufacturer clients and 47.2% was due to services provided to three new manufacturer clients. Revenues from individual dealership clients did not change significantly. Of the increase in net revenues from 1997 to 1998 83.6% was due to increased services provided to manufacturer clients and 16.4% was due to the increase in the number of individual dealership clients. One of our clients, DaimlerChrysler, announced an internal initiative to bring elements of our parts locater service in-house. In 1998, revenues from this source represented approximately 25% of total PartsVoice revenues. Although we have not experienced a decrease in revenues from this source to date, we believe that the DaimlerChrysler initiative could eventually result in a reduction in revenues from DaimlerChrysler for parts locator services. COST OF REVENUES. Cost of revenues increased from $1.7 million in 1996 to $2.0 million in 1997 and to $2.1 million in 1998. This increase was due to increased personnel and phone charges required to support increased levels of net revenues. However, cost of revenues as a percentage of net revenues decreased from 25.7% of net revenues in 1996 to 22.5% of net revenues in 1998 as PartsVoice was able to leverage existing personnel and facilities to generate additional revenues during those periods. SALES AND MARKETING. Sales and marketing expenses increased from $1.3 million in 1996 to $1.4 million in 1997 and to $1.7 million in 1998. This increase was primarily due to increased personnel costs for sales and sales support personnel required to service the increased client base. Other marketing activities, such as trade shows and other manufacturer meetings, did not change significantly over the three year period. Sales and marketing expenses, as a percentage of net revenues, decreased from 20.0% in 1996 to 17.4% in 1998. GENERAL AND ADMINISTRATIVE. General and administrative expenses were approximately $1.0 million for each year in the three year period. Accordingly, general and administrative costs, as a percentage of net revenues, declined from 15.2% in 1996 to 12.4% in 1998. NET INCOME. Net income increased from $2.6 million in 1996 to $3.3 million in 1997 and to $4.6 million in 1998 due to the increase in net revenues at a rate in excess of the growth in expenses. Net income increased from 39.1% of net revenues in 1996 to 48.4% in 1998. Liquidity and Capital Resources Since inception, we have financed our operations primarily from sales of preferred stock, cash flow from operations and, to a lesser extent, borrowings under short-term debt facilities. Net cash used in operating activities was $374,000 in 1996, $1.8 million in 1997 and $3.8 million in 1998. In each case net cash used was primarily attributable to our net loss before non-operating and noncash items. Net cash used in operations was $99,000 for the three months ended March 31, 1998 and $1.6 million for the same period in 1999. In 1996, our net loss was partially offset by an increase in deferred revenues and accrued liabilities. In 1997, cash used in operating activities primarily consisted of the net loss after noncash items, the increase in accounts receivable and the decrease in accrued liabilities, offset by the increase in deferred revenues. In 1998, cash used in operating activities primarily consisted of the net loss after noncash items and increases in accounts receivable and other assets, offset by increases in accrued liabilities and deferred revenues. For the three months ended March 31, 1998, our net loss after non-operating items approximated our net cash used in operations. For the same period in 1999, net cash used was primarily attributable to our net loss and, to a lesser extent, the increase in other assets, partially offset by current liabilities. Net cash used in investing activities was $101,000 in 1996 and $348,000 in 1997, substantially all of which was used to acquire capital assets consisting primarily of computer equipment and software. In 1998, we used cash of $472,000 to acquire capital assets. Our other significant investing activities in 1998 were the 30 sale of the assets of our former HomeScout division for $1.6 million and a use of $983,000 to purchase short-term investments. Beginning in 1997 and in addition to cash purchases of capital assets, we have leased capital assets under financing leases. The value of the assets acquired under terms of these leases were $21,000 in 1997 and $959,000 in 1998. In March 1998, we sold the assets of our HomeScout division, which generated cash proceeds of $1.0 million for the three months ended March 31, 1998. During the three months ended March 31, 1999 we used cash of $172,000 for investment in capital assets. Net cash provided by financing activities was $477,000 in 1996, $2.4 million in 1997 and $9.2 million in 1998. In 1996, net cash provided by financing activities consisted primarily of proceeds from the issuance of common stock, proceeds from lease financing transactions and officer advances. In 1997 and 1998, net cash provided by financing activities was primarily the result of proceeds from the issuance of preferred stock (net of repurchases), net of repayment of various short-term credit facilities and the $500,000 portion of the DealerNet purchase price that was payable in cash. Net cash used for financing activities was not significant for the three month periods ended March 31, 1998 and 1999. At June 30, 1999, we had cash and cash equivalents of approximately $100,000. In May 1999, we secured a line of credit from an institutional lender under which we may borrow up to $5.0 million, for a fee of 2.0%. Borrowings under this line of credit will bear interest at prime plus 2.0%, or 10.0%, and will be due on the earlier of completion of this offering or December 31, 1999. The line of credit is secured by Cobalt's assets. At June 30, 1999, the balance outstanding was $1.5 million. We also have short-term indebtedness in the principal amount of $23.0 million owed to the former owners of PartsVoice, which we incurred on April 30, 1999. We are required to repay the PartsVoice acquisition indebtedness and any borrowings outstanding under the line of credit with net proceeds from this offering. In addition, we will use approximately $2.0 million of the net proceeds to pay accrued and unpaid dividends on our outstanding preferred stock. See "Use of Proceeds." We had commitments for computer hardware and software purchases at June 30, 1999 amounting to $572,000. As of that date, we had total minimum lease obligations of $657,000 under certain noncancellable operating leases. We also are contractually obligated to make aggregate payments of $435,000 through December 31, 1999 for purchases of third-party advertising services that we are re-selling to clients, and $112,000 for purchases of corporate brand advertising. We believe that the net proceeds from this offering and the direct sale, together with cash flow from operations and funds available under our line of credit, will be sufficient to meet our cash requirements for the next twelve months. Depending on our rate of growth and cash requirements, we may require additional equity or debt financing to meet future working capital needs. We cannot assure you that such additional financing will be available or, if available, that such financing can be obtained on satisfactory terms. Impact of Year 2000 Many existing computer programs and hardware use only two digits to identify a year. These computer programs and hardware were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer programs and hardware could fail or create erroneous results by, at or beyond the year 2000. We have evaluated our internal and third party hardware and software systems and, based on this evaluation and statements published by our hardware and software suppliers, which we have not verified, we have determined that substantially all of our systems are Year 2000 compliant. All of our non-compliant purchased software is used for internal processes only and we intend to upgrade or replace and to test such software prior to December 31, 1999. We intend to replace all of our non-compliant hardware prior to December 31, 1999. We are in the process of assessing our internally developed software for Year 2000 compliance and intend to have all such software fully compliant by September 30, 1999. We also intend to execute a series of test scenarios during the remainder of 1999 to simulate the date change for all critical systems. The products and services used by our clients in connection with our services may not be Year 2000 compliant and as a result may lead to claims against us, the impact of which cannot be currently estimated. 31 The aggregate cost of defending and resolving these claims, if any, could be significant. Year 2000 issues also could affect the purchasing patterns of our clients and potential clients as many automobile dealers, dealer groups and manufacturers are expending significant resources to replace or remedy their current hardware and software systems in order to resolve Year 2000 issues. In addition, our clients may experience interruptions to their businesses as a result of their failure to timely correct their Year 2000 issues. As a result, our clients may postpone or cancel purchases of our services, potentially causing interruptions to our revenue that could have a material adverse effect on our business, operating results and financial condition. In addition, we utilize other services developed and provided by third party vendors that may fail due to Year 2000 issues. We are currently assessing the Year 2000 readiness of our third party supplied services. Based upon the results of this assessment we will develop and implement, if necessary, a remediation plan with respect to third party services that may fail to be Year 2000 compliant. To date, we have expended internal resources associated with assessment and remediation of Year 2000 issues. Total expenses associated with our entire review and assessment are not presently determinable but are expected to be less than $25,000. The failure of our software and computing systems and of our third party vendors to be Year 2000 compliant could have a material adverse effect on our business, results of operations and financial condition. We currently have no contingency plans to address the risks associated with unremediated Year 2000 problems. Quantitative and Qualitative Disclosures about Market Risk Substantially all of our cash equivalents and marketable securities are at fixed interest rates, and, as such, the fair value of these instruments is affected by changes in market interest rates. However, all of our cash equivalents and marketable securities mature within one year. As a result, we believe that the market risk arising from our holding of these financial instruments is minimal. In addition, all of our current clients pay in U.S. dollars and, consequently, our foreign currency exchange rate risk is immaterial. We do not have any derivative instruments and do not engage in hedging transactions. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement became effective on January 1, 1999 and establishes accounting standards for costs incurred in the acquisition or development and implementation of computer software. These new standards will require capitalization of certain software implementation costs relating to software acquired or developed and implemented for our use. This statement does not have a significant effect on our financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement became effective on January 1, 1999 and requires costs of start-up activities and organization costs to be expensed as incurred. This statement does not have a significant effect on our financial position or results of operations. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. We adopted SFAS 130 on January 1, 1998. To date, we have not had any significant transactions that are required to be reported as other comprehensive income other than our net (loss) income. The FASB recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management approach." The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. We adopted SFAS 131 on January 1, 1998. We have determined that we do not have any separately reportable business or geographic segments. 32 BUSINESS Overview We are a leading provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. We enable our clients to develop and implement effective e-business strategies and to position them to capitalize on the increasing use of the Internet by consumers to research, evaluate and initiate purchases of new and pre-owned vehicles, parts and accessories, and automotive-related services such as financing and insurance. We currently offer our clients: - comprehensive Web site design, development and maintenance services; - data services such as extracting parts and vehicle inventory data from independent management systems and aggregating the information in centralized databases; - Internet advertising and promotional services; and - training and support services to help them use the Internet effectively in their businesses. We are developing additional services to help our clients realize the potential of the Internet to attract and retain customers, increase the efficiency of their operations, and improve the productivity of their sales and service departments. We currently manage and maintain approximately 3,500 Web sites for clients holding more than 4,300 new vehicle franchises. Our clients include over 50 of the 100 largest dealer groups in the United States, as ranked by AUTOMOTIVE NEWS, and we are the manufacturer-endorsed provider of Web site solutions for the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. Our vehicle parts data services are used by clients holding more than 9,000 new vehicle franchises. We also provide vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi, Subaru and Toyota. In total, we provide our services to clients holding approximately 12,000 new vehicle franchises. Industry Background THE U.S. AUTOMOBILE RETAIL INDUSTRY The automotive retailing industry is one of the largest retail trade sectors in the United States with revenues totaling more than $1 trillion annually. New vehicle franchised dealerships generated more than $500 billion in new and pre-owned vehicle sales in 1998. In addition, franchised dealerships generate substantial revenues in vehicle service and parts sales and financing. While the automotive retailing industry is large, it remains highly fragmented and is characterized by relatively small, independent dealerships. In 1998, there were over 22,000 automobile dealerships in the United States representing more than 49,000 franchises. According to AUTOMOTIVE NEWS, the top ten U.S. dealer groups sold only 4.1% of the total new and pre-owned vehicles sold in 1998. The automotive retailing industry is highly competitive and characterized by relatively low margins. In many markets, there are numerous dealerships offering consumers identical, or very similar, products and services. Furthermore, the relatively high cost of a new car makes consumers price-sensitive and encourages comparison shopping among dealerships. These market dynamics result in low dealership pre-tax margins and require dealerships to maintain multiple sources of profitability. According to the National Automobile Dealers Association, or NADA, sales of new automobiles in 1998 represented 59% of the industry's revenues, although profits generated by new car sales comprised only 29% of total dealership profitability. In contrast, parts and service revenues and profits were approximately 12% and 47%, respectively. 33 In 1998, dealerships spent more than $5.0 billion and manufacturers spent more than $7.0 billion in marketing and advertising to differentiate themselves in this highly competitive industry. According to NADA, U.S. automobile dealerships spent on average more than $225,000 in advertising in 1997, representing more than $440 per new vehicle sale. GROWTH OF THE INTERNET The Internet has emerged as a significant global medium for communication, content delivery and commerce. International Data Corporation, or IDC, estimates that there were over 38 million Internet users in the United States at the end of 1997. IDC projects these numbers to increase to over 135 million Internet users in the United States by the end of 2002. Increasing Internet usage has facilitated the rapid growth of e-business. As the Internet has gained acceptance as a commercial medium, the dollar volume of online commerce transactions has risen dramatically. IDC estimates that the volume of goods and services purchased over the Internet will increase from $32 billion in 1998 to $425 billion in 2002. In addition to facilitating business transactions, the Internet enables businesses to target and manage a broad customer base and establish and maintain ongoing, direct customer relationships. As the number of businesses and information providers marketing on the Internet has grown, the Internet has become a primary source from which consumers can access a large amount of information regarding products and services, such as pricing, quality and specifications. Jupiter Communications, Inc. estimates that the amount spent on online advertising will increase from $1.9 billion in 1998 to $7.7 billion in 2002. GROWING IMPORTANCE OF THE INTERNET TO THE AUTOMOTIVE RETAILING INDUSTRY The emergence of the Internet as a commercial medium has created an opportunity for automobile manufacturers and dealerships to market cost-effectively to and communicate with a large and growing pool of online consumers. J.D. Power and Associates estimates that 25% of new vehicle purchasers used the Internet to search for information on automobiles or otherwise assist them with their purchases in 1998 and that this figure will increase to approximately 37% by the end of 2001. J.D. Power and Associates estimates that 76% of these prospective customers who use the Internet during the shopping process visit manufacturers' sites to conduct research on vehicles. AutoNation, Inc., the largest multi-franchise dealer group in the United States, estimates that its 1999 Internet-generated automobile sales will exceed $750 million. AutoNation further estimates that 40% of its customers who used the Internet during the car buying process would not have made a purchase from AutoNation if it did not have an Internet presence. Forrester Research projects that dealerships will increase spending on Internet marketing to $600 million annually by 2002. We believe that the increasing demand for Internet marketing solutions in the automotive retailing industry provides a significant market opportunity for a business that: - understands the unique marketing requirements of automobile manufacturers and dealers; - creates compelling Internet content that targets the online automotive consumer; and - delivers a broad suite of services that can improve the productivity and efficiency of traditional automobile dealerships. 34 The Cobalt Group Solution We provide Internet marketing and data aggregation services that enable our clients to use the Internet effectively to attract and retain customers, increase the efficiency of their operations, and improve the productivity and effectiveness of their sales and service departments. We believe that our solution provides the following benefits: RAPID DEPLOYMENT OF A COMPREHENSIVE INTERNET PRESENCE We can rapidly deploy sophisticated Web sites for individual dealerships as well as complex networks of dealership Web sites for a manufacturer's entire dealer network. Our clients are able to modify the design of their Web sites by selecting from a broad range of features that include dealer-specific content pages, a searchable vehicle database, and interactive communications tools. We offer a professional, scalable solution with features appropriate to each client's marketing budget and strategy. We enable our clients to remain focused on their own competencies and implement an e-business strategy and professional Internet presence by outsourcing a large portion of their Internet marketing needs to us. CREATION OF AN ONLINE IDENTITY AND LEVERAGE OF BRAND ASSETS We enable our clients to build a distinct presence on the Internet that contributes to the development of their independent online brand image and reinforces their existing brand identity. Our manufacturer and dealer group clients can achieve a consistent Internet presence across their dealership networks by employing network-wide style and graphics templates that support a cohesive brand-building strategy. In addition, our individual dealership clients can use their Internet presence to build their own local or regional brand identities while leveraging the brand assets of the manufacturers they represent. INCREASED RETURN ON INVESTMENT IN TRADITIONAL ADVERTISING MEDIA Our services enable dealerships to maximize their investments in traditional advertising media. Prospective dealership customers who learn about a dealership's Web site through traditional advertising can access the Web site for information about the dealership, its vehicle inventories and services, and special "Internet-only" promotional offers in an easy to use and interactive manner. We believe that dealerships that pursue an Internet marketing strategy and prominently feature their Web site address in their traditional advertising can expect a greater return on their investment in traditional media. IMPROVED CUSTOMER ACQUISITION AND RETENTION Our services allow dealerships to communicate efficiently and effectively with their prospective and current customers. Our clients can obtain information about consumers and their preferences that enables dealers to present desired information in a targeted manner, thereby enhancing the relevancy of the response to the customer's inquiry. We design our services to help our clients to pursue, enrich and maintain customer relationships, which we believe increase the likelihood that the dealership will complete an initial sale and follow-on sales of vehicles and automotive-related products and services. ENHANCED INTERNAL EFFICIENCIES Our services empower our clients to sell their products and services more efficiently. Our data aggregation and management capabilities enable our clients to present consolidated, system-wide vehicle and parts inventory information, collected from disparate sources and systems, and make this aggregated inventory searchable on a centralized Web site as well as on individual dealership Web sites. By providing an inexpensive mechanism to market vehicle and parts inventories to a broad audience, our clients are able to increase the frequency of inventory turns, thus reducing obsolescence and financing costs. Our dealership 35 clients also can manage their inventory to meet customer needs more effectively and increase the likelihood of closing a sale. In addition, we believe that effective use of the Internet as a communication medium can increase the efficiency and productivity of, and reduce turnover among, a dealership's sales staff. Growth Strategy Our objective is to be the premier provider of Internet marketing and e-business solutions to the automotive retailing industry. We intend to implement the following strategies to achieve this objective: EXPAND OUR CLIENT BASE We intend to increase our market penetration by educating prospective clients about the benefits of deploying our comprehensive Internet marketing and data aggregation solution. We believe that we are perceived by the automotive retailing industry as understanding the needs and attributes of the "online shopper," and can leverage our reputation to continue building key relationships with manufacturers, dealer groups and individual dealerships. To take advantage of our position within the industry, we have adopted a consultative approach in our sales and marketing efforts and seek to be viewed by both current and prospective clients as their e-business partner of choice. SELL ADDITIONAL SERVICES TO OUR EXISTING CLIENTS We seek to enhance our clients' understanding and appreciation of Internet and e-business strategies and encourage them to upgrade their Web sites with additional services and new features. We believe that our best informed clients are the most likely to purchase additional services from us. Consequently, our account management activities include recommending service upgrades that are consistent with a client's e-business strategy, Internet management capabilities, and marketing budget. In addition, we estimate that less than 10% of our client base purchases both Internet marketing and data aggregation services from us. We believe that we have an opportunity to cross-sell our entire service offerings to clients that currently purchase only one service from us. INCREASE OUR SERVICE OFFERINGS We are committed to expanding our suite of Internet services to address the evolving needs of our clients. We have identified a number of opportunities that we believe leverage our large network of dealership clients, our core competencies in data acquisition and integration, and our technical and online marketing expertise. For example, in late 1999 we expect to introduce a service to assist our dealership clients to integrate data captured from their Web sites with data extracted from their existing dealer management systems to track leads and manage existing customers. PURSUE GROWTH BY ACQUISITIONS We are continually assessing strategic investments and acquisitions that are aligned with our goals of increasing our client base and expanding our service offerings. For example, our recent acquisition of PartsVoice provided us with access to clients representing an additional 8,000 franchises as well as a new suite of services. As a result, we are now positioned to cross-sell our comprehensive Internet marketing and data aggregation services to our combined client base. CAPITALIZE ON INTERNATIONAL MARKET OPPORTUNITIES We expect to offer our Internet solution in foreign markets to address the global e-business needs of our manufacturer clients and to leverage our technical expertise and existing service offerings for dealerships in countries with rapidly increasing Internet usage. 36 Service Offerings We currently offer comprehensive Web site design, development and maintenance services; data extraction, aggregation and management services; and Internet advertising and promotional services. We also offer other services such as Internet training and support.
Web Site Design, Development Data Extraction, Aggregation Internet Advertising and and Maintenance Services and Management Services Promotional Services - ------------------------------------ ------------------------------------ ------------------------------------ - - Basic content pages - Vehicle inventory data extraction - Internet classified advertising - - E-mail forms and database management - Banner advertising - - Dealer-managed pages - Parts inventory data extraction - Interactive promotion development - - Web traffic reporter and database management and management - - Multimedia enhancement - Service record data extraction and - DEALERNET Web site - - Creative and development services decoding - Creative and development services - - Client training and support - Additional data extraction - PARTSVOICE parts marketing service services
WEB SITE DESIGN, DEVELOPMENT AND MAINTENANCE SERVICES The foundation of our service offerings is a powerful, cost-effective Web site. We offer a wide range of features and options that enable our clients to have a robust e-business platform. Our core Web site solution has more than 40 features, each of which is available for incremental monthly fees. These features include: BASIC CONTENT PAGES. We believe that effective dealer Web sites provide substantial information about the dealership. Consequently, we offer our clients a range of content templates and format styles that enable them to customize the dealer-specific content of their online presence and highlight the specific benefits and attributes associated with their dealerships. Our available content templates include, among others: - a welcome letter; - a map and directions to the dealership location; - dealership history; - customer testimonials; - financing information; - management and staff profiles; - dealership news and events; and - vehicle maintenance schedules. E-MAIL FORMS. We offer a variety of tailored e-mail forms on the Web site to address specific customer needs and interests, including requests for financing pre-qualification, service appointments, and price quotes on specific vehicles. These forms include dynamically generated content, such as information about a vehicle listing and a photograph of the vehicle about which the customer has inquired. The forms also solicit context-specific information from the customer to enhance the shopping experience and ensure that the dealership receives the information necessary to respond fully and promptly to the inquiry. DEALER-MANAGED PAGES AND CONTENT LIBRARY. Our WEBEDGE Power Marketing Tools include features that allow our clients to build special promotional pages on their sites quickly and easily using a simple step-by-step program and a wide array of stylistic templates, vehicle images and logos. Using our ADWIZARD tool, dealers can create and post custom, new vehicle display advertisements on their Web site. Dealers can use our DEALER'S CHOICE tool to create advertisements for pre-owned vehicles. Similarly, our INSTANT INCENTIVES feature allows our clients to create coupons for services and highlight special offerings. These tools allow users to schedule the start and stop dates for the special offerings, which is particularly important in advertising manufacturer incentive programs. 37 WEB TRAFFIC REPORTER. Our Web site user traffic reporting feature allows dealerships to review activity on their Web sites. Available data include total page views, addresses of referral sites, and parameters of vehicle searches conducted by site visitors. This information enables dealerships to make informed decisions about management of their Internet marketing programs and to allocate their marketing resources more effectively. MULTIMEDIA ENHANCEMENT OPTIONS. We also offer other features, such as streamed audio and video, animated graphics and scrolling "ticker tape" messages, that dealerships may add to enrich their sites. DATA EXTRACTION, AGGREGATION AND MANAGEMENT SERVICES An important component of our services to our clients is our ability to extract data from their dealership management information systems, process this data into standard record structures, and integrate it with data from other sources into our databases. VEHICLE INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. Our vehicle inventory data extraction and management service allows dealerships to include a searchable database of their new and pre-owned vehicle inventory on their Web sites. In most cases, we can extract basic inventory data from a dealership's information system, populate the database with this information, and then permit the dealership to make real time enhancements to their listings by adding photos, descriptive text or other information. PARTS INVENTORY DATA EXTRACTION AND DATABASE MANAGEMENT. We currently extract parts inventory data on behalf of our clients from dealerships representing more than 9,000 dealer franchises, and our database contains information on more than 38 million parts. Manufacturer clients and dealership parts managers can access this database over the Internet or through an interactive voice response telephone system to check parts inventories and to locate parts needed by their customers. In 1998, our parts inventory database received more than nine million queries. SERVICE RECORD EXTRACTION AND DECODING. We recently introduced a service record extraction and decoding service. This service extracts individual vehicle service records from dealership information systems and converts disparate dealership labor operations codes into a standard set of codes, making it possible to review service record information across a network of dealer databases. This process enables automobile manufacturers to aggregate vehicle service records across their entire dealership network. We currently provide this service to DaimlerChrysler. ADDITIONAL DATA EXTRACTION SERVICES. We also perform customized data extraction and aggregation tasks for our manufacturer clients, such as dealership sales and financial performance and parts sales history reporting. CREATIVE AND DEVELOPMENT SERVICES Many of our clients request custom solutions or service upgrades to enhance our standard dealership Web site system. For example, dealer group Web sites generally require significant custom design and development work to enable prospective customers to access information about multiple franchises and dealerships as well as search the aggregated inventory of all dealerships in the group on one central site. We provide these custom development services on a per-project basis and typically charge fees based on the anticipated staff time required to complete the project. INTERNET ADVERTISING AND PROMOTIONAL SERVICES We provide a range of Internet advertising and promotion services for clients that seek to allocate a portion of their marketing budgets to driving increased traffic to their Web sites and generating additional customer leads. 38 INTERNET ADVERTISING PROGRAMS. We provide our dealer group and individual dealership clients with a complete range of advertising services, including creating necessary graphics such as advertising banners, developing interactive media plans, and purchasing interactive media. In addition, we sell participation in and upload our clients' pre-owned vehicle listings to, a variety of national and regional Internet classified advertising services, including TraderOnline.com, Classifieds2000, Yahoo! Classifieds, and others. We provide a complete service to both our clients and the Internet advertising partners by selling the service, collecting, modifying, and enhancing the required data, transmitting the data to the advertising partner, addressing client service issues, and remitting advertising fees to the advertising partner. On behalf of our clients, we have purchased advertising from Internet media companies such as Yahoo!, Big Yellow, MapQuest, and 24/7 Media. We also have purchased blocks of advertising space on high traffic Web sites and are reselling that inventory to our clients for banner and tile advertisements. INTERACTIVE PROMOTION DEVELOPMENT AND MANAGEMENT. We assist our clients in creating and managing Internet promotional events, such as car and other product giveaways, to generate traffic to their Web sites and to promote specific products. Online promotions generate leads for our clients from promotion registrants who request additional information about the dealership, its products and future promotions. DEALERNET WEB SITE. Our DEALERNET Web site is an automotive research destination site that generates visibility for our dealership clients' inventories of new and pre-owned vehicles and increases traffic to our dealership clients' Web sites. Unlike other automotive sites, the names of participating dealership clients and links to their Web sites are prevalent throughout the site. The DEALERNET Web site users may browse model specifications and prices for new cars from every major automobile manufacturer. In addition, users may specify vehicle features and submit new vehicle purchase requests, and search for more than 330,000 new and pre-owned vehicles linked to more than 1,800 Web sites. TRAINING AND SUPPORT We offer both fee-based and complimentary training programs for our clients to educate dealership and dealer group owners, managers, and sales staff, manufacturer marketing personnel, and other client personnel about implementing an effective Internet marketing program. In addition, our direct sales consultants meet with clients to provide one-on-one training and our customer service staff provides unlimited telephone support to our clients to address technical questions about our services that may arise from time to time. See "--Sales and Marketing." YACHTWORLD MARKETING SERVICE When we commenced operations in 1995 we offered Internet solutions to the automotive retailing, residential real estate and yachting industries. In 1997, we began focusing our efforts on the automotive retailing industry. We sold our HomeScout real estate business in 1998 and continue to operate our YACHTWORLD Web site as a distinct line of business. The YACHTWORLD Web site provides prospective yacht buyers with access to thousands of yacht listings from hundreds of yacht brokers. As of May 24, 1999, our YACHTWORLD Web site listed more than 16,000 yachts for sale or charter by more than 500 brokers located in 16 countries. The site also contains a directory of nearly 18,000 marine-related businesses, editorial content from several leading boating publications, and other marine-related content. On average, more than 5,000 users search the YachtWorld database every day. Yacht brokers pay a monthly subscription fee to list their boats on our YACHTWORLD Web site. PLANNED FUTURE SERVICES We have entered into an agreement in principle with GE Capital Management Corporation that calls for us to market its automobile extended warranty services to our dealer network. We expect to offer the warranty services through our standard package of Internet marketing services as well as through DealerNet. As a part 39 of the agreement, Cobalt has agreed to issue GE Capital Management Corporation warrants to purchase 100,000 shares of Cobalt common stock. The warrants will be exercisable for 30 days after the date of this prospectus at an exercise price equal to the public offering price in this offering. Clients INDIVIDUAL DEALERSHIPS We have designed, developed and currently maintain approximately 3,500 Web sites for clients holding more than 4,300 new vehicle franchises. Our vehicle parts data services are used by clients holding more than 9,000 new vehicle franchises. Fewer than 10% of our clients purchase both services, and we believe that we have the opportunity to strengthen our relationships with our dealership clients by cross-selling our other services to clients that currently purchase only one category of service from us. The chart below illustrates the approximate number of franchises for which, as of April 30, 1999, we provided Internet marketing services and for which we provided data aggregation and parts locator services:
Internet Data Aggregation and Franchise Marketing Services Parts Locator Services - -------------------------------------------- ----------------------------- ----------------------- Acura....................................... 159 -- Audi........................................ 32 -- BMW......................................... 52 34 Chrysler.................................... 485 3,888 Ford........................................ 355 1,382 General Motors.............................. 733 1,392 Honda....................................... 232 95 Hyundai..................................... 61 51 Infiniti.................................... 73 -- Isuzu....................................... 62 241 Jaguar...................................... 21 -- Kia......................................... 47 -- Lexus....................................... 174 -- Mazda....................................... 66 589 Mercedes-Benz............................... 316 32 Mitsubishi.................................. 117 264 Nissan...................................... 299 114 Porsche..................................... 34 -- Saab........................................ 65 26 Saturn...................................... 43 * Subaru...................................... 54 286 Suzuki...................................... 22 -- Toyota...................................... 726 629 Volkswagen.................................. 60 78 Volvo....................................... 40 48
- --------- * Included in the 1,392 General Motors franchises listed above. MULTI-FRANCHISE DEALER GROUPS Dealer groups are networks of franchised dealerships under common ownership and management. In general, marketing strategies for dealer groups are designed and implemented on a centralized basis. Our Internet solutions are particularly applicable to the needs of both large dealership consolidation companies and smaller, regional dealership groups that recognize the need to aggressively establish their companies' 40 online brand identities and implement Internet marketing programs across their dealership networks. We provide services to more than 50 of the 100 largest multi-franchise dealer groups in the United States including five of the ten largest multi-franchise dealer groups as ranked by AUTOMOTIVE NEWS: AutoNation, Inc., Hendrick Automotive Group, Planet Automotive, Sonic Automotive Inc., and United Auto Group Inc. MANUFACTURERS We are the manufacturer-endorsed provider of Web site solutions for the U.S. dealership networks of Acura, Hyundai, Infiniti, Jaguar, Lexus, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru and Toyota. In addition, we are a provider of vehicle parts data services to DaimlerChrysler, Hyundai, Mazda, Mitsubishi, Subaru and Toyota. We intend to cross-sell our services offerings to our current manufacturer clients, and continue to pursue relationships with other manufacturers to expand our client base. OTHER CLIENTS We have leveraged our experience in the automotive retailing industry, our technical expertise, and our sales and marketing capabilities to create a Web site program for Case Corporation heavy equipment dealerships and Case/IH farm equipment dealers. In April 1999, we launched default Web sites for approximately 1,500 Case and Case/IH dealerships in North America and recently have begun marketing enhanced services to this dealer group. We believe that there are a number of other dealer-based industries with attributes similar to the automotive retailing industry that would benefit from our Internet solution. We also provide Internet marketing services to multi-franchise regional dealership associations. Regional dealership marketing associations such as the Western Washington Toyota Dealers Association, Infiniti West Region, and the Bay Area Nissan Retailers have established online presences to promote their members' individual sales and marketing programs. Client Case Study The following case study describes what we believe to be an effective implementation of our Internet solution by a dealership. HUEY'S HONDA In 1997 we were retained by Huey's Honda of Frontenac, Missouri to design and build its dealer Web site. The initial Web site consisted of basic content pages, customer e-mail forms, and Web site traffic reports, as well as premium services that allowed Huey's Honda to customize its Web site with advertisements and dealer specials. Since the Huey's Honda site was launched, the dealership has added features such as the ability to search new vehicle inventory, a customer support page, and additional design and graphics elements. In addition, we have assisted Huey's Honda in increasing traffic to its site through inventory listings with Classifieds2000 and TraderOnline, and in coordinating banner advertising purchases from Yahoo! and the St. Louis Post-Dispatch. A prospective customer can view new and pre-owned vehicle inventory, vehicle service and maintenance schedules, dealership hours and directions, new model specials and Internet-only coupons and specials. As the commitment of Huey's Honda to maintaining an online presence has grown, our average monthly billings to Huey's Honda have increased from an average of approximately $900 per month in 1997 to more than $2,000 per month as of June 1999. Traffic to the Huey's Honda Web site in June 1999 reached 1,822 visits and 14,551 page views, and the dealership attributes approximately 25% of its new customer business to its Internet presence. Sales and Marketing SALES AND MARKETING ORGANIZATION. Our sales and marketing staff is responsible for sales to and support of our individual dealership, dealer group and manufacturer clients. Our marketing staff consists of 34 professionals who are principally responsible for initiating and managing our relationships with automobile 41 manufacturers and large dealer groups, as well as for product management and creative services, marketing communications, and online media activities. Our 40 field sales consultants are organized into 21 geographic territories within six regions, and are principally responsible for initiating and maintaining direct contact with our individual dealership and smaller dealer group clients. In addition to our field sales force, our headquarters-based sales team is dedicated to supporting our field sales consultants and providing customer service to our dealership clients. ACCOUNT ACQUISITION AND MANAGEMENT. Our sales and marketing efforts are focused on account acquisition and management. Account acquisition consists of identifying prospective clients, arranging initial meetings to explain the general capabilities and benefits of our solution, identifying the specific needs and interests of prospective clients, and helping prospective clients create an integrated Internet marketing strategy. Once we have launched a client's initial Internet marketing solution, we work to ensure that the client receives the maximum benefit from our services. Finally, we provide a range of support and training to help increase our clients' Internet marketing and e-business expertise and improve their internal processes. In addition, as a client's Internet marketing expertise increases, we suggest additional services that are appropriate for that client's strategy, Internet management capabilities, and budget. We believe that well-informed clients are the most likely to purchase additional services from us. MANUFACTURERS We provide manufacturers with an Internet solution that gives each dealer in the manufacturer's dealer network a unique Web site and allows the dealers to extensively customize their sites while maintaining the manufacturer's graphic look and feel across the dealership network. Our Internet marketing solution allows manufacturers to leverage their considerable investments in brand image and the graphic assets supporting that brand, while enabling each dealership to distinguish itself from others holding the same franchise. Our manufacturer relationships typically begin with meetings between our senior executives and members of the manufacturer's marketing or dealer relations staff. During these initial meetings, we present our capabilities and explain the benefits of our services to both the manufacturer and its dealership network. Once we have been retained, we will work with the manufacturer's advertising agency or other vendors to develop a design template for the dealer Web sites. We then create standard Web sites containing name and contact information for every dealership in the network and follow-up by contacting each dealership to obtain additional information, sell additional enhancements to the manufacturer-provided solution and provide training. Following the launch of Web sites for the dealership network, our ongoing relationship with a manufacturer is assigned to a specific account executive who is responsible for that relationship. The account executive consults with the manufacturer's marketing managers in developing an Internet marketing plan, and helps the client understand the value of our Internet marketing and data aggregation and management capabilities. MULTI-FRANCHISE DEALER GROUPS Our dealer group relationships often result from introductions to the parent organization following our development of a manufacturer-endorsed Web site for a dealership member of the group. Our approach to acquiring and supporting dealer groups is similar to the strategy that we employ with manufacturer prospects and clients. We seek to build a relationship with the dealer group at the corporate level and dedicate a specific account executive to serve the client's needs. The account executive is responsible for selling services such as a central Web site for the group, individual dealership Web sites that present a consistent brand image across the group, searchable inventory listings of vehicles for all dealerships in the group and our online advertising services. In recognition of the importance of this client category to our business strategy, we recently established a sales and marketing team dedicated to identifying and developing relationships with multi-franchise dealer groups. 42 INDIVIDUAL DEALERSHIPS Our field sales consultants generally begin their dialogue with individual dealerships either through a manufacturer or dealer group relationship or through traditional sales calls upon the dealer principal, general manager or other dealership management staff. We also obtain sales leads through our participation at trade shows and similar industry events, direct mail solicitations and telemarketing efforts. When the dialogue is in the context of a manufacturer- or dealer group-endorsed Internet marketing program, our sales consultants and headquarters-based sales associates will introduce the details and benefits of the program, conduct training, collect information about the dealership, and coordinate the launch of the dealer's Web site. Once the Web site is active, the designated sales consultant will make periodic calls upon the dealership to introduce new services, conduct further training, and assess the client's needs for additional services. In addition, our headquarters-based sales team assists dealership clients with changes to their Web sites, inventory data acquisition and management issues, and provides ongoing support services. Technology Infrastructure Our technology infrastructure consists of our proprietary Web site production and publishing system, our data extraction, aggregation and management tools, our software development capabilities and our Web server and database management infrastructure. WEB SITE PRODUCTION AND PUBLISHING We have developed a hardware and software system and a body of software tools that enable us to generate large numbers of Web sites with a consistent look and feel while simultaneously preserving the flexibility to enhance each site with custom content and features. Our Web site production and publishing system has enabled us to launch and maintain thousands of individual dealership Web sites in connection with automobile manufacturer Internet marketing initiatives. DATA EXTRACTION, AGGREGATION AND MANAGEMENT We also have developed tools to collect, aggregate and manipulate efficiently large quantities of data from disparate sources. We currently extract data from a variety of dealership information systems, and we also collect data from our manufacturer and dealer group clients. In addition, we provide our dealer clients with tools to modify and enhance their inventory data when it resides in our database. We then aggregate data from these disparate sources to provide access to and searchability of our dealer clients' vehicle and parts inventory across our entire dealer network, to defined groups of our dealer clients, or to individual dealers. SOFTWARE DEVELOPMENT We believe that strong software development capabilities are essential to implementing our strategy of expanding our customer base successfully, selling more of our services to our existing customers and expanding our service offerings. We spend a substantial amount of time and resources on the development of new services. In an effort to increase our ability to develop and bring new services to market rapidly, we recently augmented our development organization with an Austin, Texas office dedicated to new services development. In addition, we work to enhance our existing suite of services. We believe that our future success will depend in significant part on our ability to improve the performance, functionality and reliability of our Internet marketing and data aggregation and management services. WEB SERVER AND DATABASE MANAGEMENT The demands on our Web site publishing system have increased rapidly with the increase in the number of Web sites maintained on our system, the traffic loads on our Web servers, and the volume of queries to our database servers. Our Web site production and publishing system resides on a range of Web and database servers. We currently have database servers running the Oracle database on Sun hardware. We also operate 43 Digital Equipment VAX servers. This hardware and software support the system that maintains all the Web sites we create, as well as manage the vehicle inventory, parts inventory and other data employed in our data aggregation services. We have invested significantly in hardware and software to support the rapid growth in demands on our hardware and software infrastructure and we continually strive to improve the capacity, efficiency, and performance of our systems. We believe that we have established a scalable technology platform, and we anticipate that continued growth in demands on our system will require substantial additional investments. Our Internet connectivity is established through our bandwidth provider's multiple and redundant private network access points to the Internet backbone. Our system hardware is housed in locked, climate controlled, dedicated server rooms at facilities in Seattle, Washington and Portland, Oregon. Security is provided through features inherent in our operating systems. Competition Our Internet marketing services compete directly with services offered by local and regional Web site development firms and indirectly with advertising agencies. We believe, however, that we currently do not have a direct competitor in our Internet marketing services business that has market penetration, geographic coverage, service offerings, technical expertise or infrastructure comparable to ours. We may be perceived by some dealerships to compete with automobile sales lead generation services such as autobytel.com, AutoVantage, AutoConnect, CarPoint and Autoweb.com, if these dealerships maintain a distinct Internet marketing budget. Our data aggregation and management services compete with data aggregation service providers such as The Reynolds and Reynolds Company and ADP. It is possible that, in the future, some or all automobile manufacturers could attempt to provide services comparable to those that we provide to our dealership clients. In such an event, our ability to retain our dealership clients could be impaired. In 1997, DaimlerChrysler announced an internal initiative to bring elements of our parts locator service in-house. If implemented, this initiative could significantly reduce our contract revenues for parts locator services to DaimlerChrysler. While we believe that we will be able to leverage our expertise and dealership network to provide better quality services at lower cost than dealerships likely would receive from their franchisor, we cannot be certain that we will be successful in doing so, or that our manufacturer clients may not attempt to bring such services in-house for other reasons beyond our control. While the market for Internet-related services is competitive, we believe the following factors will contribute to our future success in providing such services to the automotive industry: - our ability to offer an integrated, comprehensive Internet solution; - our cooperative relationships with a significant number of dealerships, dealer groups, and manufacturers; - the depth and breadth of our industry expertise; - our proprietary technology and technical expertise; and - our commitment to customer service and reputation for responsiveness. The market for providing Internet marketing services is relatively new and rapidly evolving. We anticipate competition in the market for automotive retailing industry Internet services will increase over time. Barriers to entry on the Internet are relatively low, and we may face competitive pressures from numerous companies, particularly those with existing data aggregation capabilities that may be easily integrated with Internet services. Furthermore, our existing and potential competitors may develop offerings that are perceived as better than our services or otherwise achieve greater market acceptance. Intellectual Property We regard substantial elements of our service offerings as proprietary and believe that they are protected by intellectual property rights including trademark, service mark, copyright, and trade secret laws, and contractual restrictions on their use by licensees and others. Although from time to time we may apply for 44 registration of our trademarks, service marks, and copyrights with the appropriate U.S. agencies, we do not rely on such registrations for the protection of these intellectual property rights. We often enter into confidentiality agreements with our employees and consultants and with third parties in connection with our business operations and services offerings. These confidentiality agreements generally seek to control access to, and distribution of, our technology, documentation, and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use or disclose to others our confidential information without authorization or to develop similar technology independently. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or trademarks or to determine the validity and scope of the intellectual property rights of others. Furthermore, our business activities may infringe upon the proprietary rights of others and other parties may assert infringement claims against us, including claims that arise from directly or indirectly providing hyper-text links to Web sites operated by third parties. Moreover, from time to time, we may be subject to claims of alleged infringement by us or our clients of the trademarks, service marks and other intellectual property rights of third parties. These claims and any resultant litigation, should it occur, might subject us to significant liability for damages, might result in invalidation of our intellectual property rights and, even if not meritorious, could result in substantial costs and diversion of resources and management attention and have a material adverse effect on our business, results of operations and financial condition. We currently license from third parties technologies and information incorporated into our products and services. As we continue to introduce new services that incorporate new technologies and information, we may be required to license additional technology and information from others. We cannot assure you that these third party technology and information licenses will continue to be available to us on commercially reasonable terms, if at all. Additionally, we cannot assure you that the third parties from which we currently license our technology and information will be able to defend their proprietary rights successfully against claims of infringement or invalidity. If any of these technology and information licenses are not available to us in the future, we may be delayed in introducing, or fail to introduce, new features, functions or services. It could also adversely affect the performance of our existing services until equivalent technology or information can be identified, obtained and integrated. Employees As of June 30, 1999, we had 302 employees. We engage independent contractors for database management and programming activities. We consider our relations with our employees to be good. We have never had a work stoppage, and no employees are represented under collective bargaining agreements. Facilities Our headquarters are located in a single office building in Seattle, Washington. We occupy approximately 23,500 square feet on two floors, which are leased through October 2000. We have an option to renew the lease for an additional five year term. Our PartsVoice subsidiary operates from approximately 8,800 square feet of office space in Portland, Oregon, that is leased through November 1999. We currently are negotiating an extension of this lease. We also lease approximately 1,200 square feet of office space in Austin, Texas, for our new services development team. We believe that this space is adequate to meet our needs for the present, and that additional space will be required in the near future to accommodate our planned growth and that additional or substitute space will be available as needed to accommodate any expansion of our operations. Legal Proceedings There are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on our business, results of operations and financial condition. 45 MANAGEMENT Directors and Executive Officers The following table sets forth information as of June 30, 1999 regarding our executive officers and directors.
Name Age Position - ----------------------------------------------------- --- ----------------------------------------------------- Geoffrey T. Barker................................... 37 Co-Chief Executive Officer and Director John W. P. Holt...................................... 42 Co-Chief Executive Officer and Director Brian G. Allen....................................... 52 Vice President, Parts Services Jackie L. Davidson................................... 38 Vice President, Finance David M. Douglass.................................... 43 Chief Financial Officer/Vice President, Operations and Secretary Rajan Krishnamurty................................... 42 Vice President, Development Jeffrey B. Lissack................................... 39 Vice President, Business Integration Joseph W. Petrucci................................... 41 Vice President, Field Sales Kenneth D. Pfau...................................... 38 Vice President, Special Projects David L. Potts....................................... 38 Vice President, Business Development Diane R. Wetherington................................ 40 Vice President, Marketing Mark T. Koulogeorge(1)............................... 35 Director Joseph P. Landy(2)................................... 38 Director Ernest H. Pomerantz(1)............................... 57 Director J. D. Power, III..................................... 68 Director Howard A. Tullman(1)(2).............................. 54 Chairman of the Board of Directors
- --------- (1) Member of audit committee (2) Member of compensation committee MR. BARKER co-founded Cobalt in March 1995 and has served as its Co-Chief Executive Officer and as a Director since inception. From March 1994 to February 1995, Mr. Barker was Vice President of New Business at IVI Publishing, Inc., a publicly-held multimedia developer and publisher. From 1989 to 1994, Mr. Barker was a Vice President at Piper Jaffray, Inc., specializing in corporate finance for new media technology companies. Prior to 1989, Mr. Barker held positions in investment banking at Salomon Brothers Inc and securities trading at Kidder, Peabody & Co., Inc. Mr. Barker is a director of GreatFood.com, Inc. Mr. Barker holds an M.B.A. degree from Columbia University and a B.A. degree in Economics from Tufts University. MR. HOLT co-founded Cobalt in March 1995 and has served as its Co-Chief Executive Officer and as a Director since inception. From March 1994 to February 1995, Mr. Holt was Director of Affiliate Label Publishing for IVI Publishing, Inc. where he developed and directed IVI's affiliate label publishing program. From 1989 to 1993, Mr. Holt served as Vice President of Growth and Development at Oceantrawl Inc., a seafood processing company. Mr. Holt holds an M.P.P.M. degree from The Yale School of Organization and Management and a B.A. degree in English from Bowdoin College. MR. ALLEN has served as a Vice President of Cobalt since April 1999, and upon completion of this offering will become the President of PartsVoice, LLC. From 1981 to 1999, Mr. Allen was President of Compu-Time, Inc., a computer services bureau that was one of three owners of PartsVoice LLC, a vehicle parts data acquisition and management company. Mr. Allen holds an M.B.A. degree from the University of Oregon and a B.S. degree in Accounting from the University of Oregon. 46 MS. DAVIDSON has served as Cobalt's Vice President of Finance since December 1996. From 1990 to 1996, Ms. Davidson was Chief Financial Officer of Oceantrawl Inc., a seafood processing company where Ms. Davidson was responsible for operational accounting, financial reporting and management of debt facilities. Ms. Davidson holds a B.A. degree in Business Administration from Washington State University. MR. DOUGLASS has served as Cobalt's Chief Financial Officer and Vice President of Operations since July 1998 and as Secretary since May 1999. From 1977 to 1998, Mr. Douglass was employed by PACCAR Inc, a heavy-duty truck manufacturer encompassing the Kenworth, Peterbilt, Foden and DAF nameplates. His positions included Managing Director of Foden Trucks, Director of Internal Audit--PACCAR, and National Dealer Development Manager--Peterbilt Motors. Mr. Douglass holds an M.B.A. degree from the University of Washington and a B.A. degree in Economics and Finance from the University of Puget Sound. MR. KRISHNAMURTY has served as Cobalt's Vice President of Development since December 1998. From 1997 to 1998, Mr. Krishnamurty was a Manager of Test Execution for Perot Systems, a software services and consulting company. Before joining Perot Systems Corporation, from December 1976 to July 1997, Mr. Krishnamurty held various management positions at International Business Machines Corporation, including General Manager of Professional Services, India, and Program Director of Power Personal Systems in Austin, Texas, where he was responsible for key software solutions to differentiate Power PC-based systems. Mr. Krishnamurty holds an M.S. degree in Electrical Engineering from the University of Texas and a B.S. degree in Electrical Engineering from the University of Houston. MR. LISSACK has served as Cobalt's Vice President of Business Integration since May 1999. From July 1998 to May 1999, Mr. Lissack was Cobalt's Vice President of Business Development. From January 1998 to June 1998, Mr. Lissack was Cobalt's Director of Product Management. From June 1997 to December 1997, Mr. Lissack served as an independent consultant to Cobalt. From July 1990 to May 1997, Mr. Lissack was Director of Market Development for the Massachusetts Department of Environmental Protection's recycling division. Mr. Lissack holds an M.P.P.M. degree from The Yale School of Organization and Management and a B.A. degree in Political Science from Williams College. MR. PETRUCCI has served as Cobalt's Vice President of Field Sales since June 1999. From April 1999 to June 1999 Mr. Petrucci was Cobalt's Director of Sales. From January 1990 to April 1999 Mr. Petrucci was employed by Etak, Inc., a provider of digital mapping services. His positions included: Vice President of Sales; Vice President of Sales & Marketing; Director of Internet Sales; Director of Western Region Sales and Western Region Sales Manager. Prior to his tenure at Etak, Mr. Petrucci was a member of Stanford University's teaching staff and held the positions of Director of Marine Development and Director of Sailing from September 1980 to March 1989. Mr. Petrucci has a B.A. degree in Economics and Geology from Tufts University. MR. PFAU has served as Cobalt's Vice President of Special Projects since June 1999. Since joining the Company in 1995, Mr. Pfau held a variety of sales positions including Sales Manager, Director of Sales and Vice President of Sales. From 1994 to 1995, Mr. Pfau served as Assistant Sales Manager for New Wilson Ford in Seattle, Washington. Prior to joining New Wilson Ford, from 1986 to 1994, Mr. Pfau was with Harris Ford in Seattle, Washington, where he was responsible for Commercial Truck and Fleet Sales and acted as Finance and Insurance Manager. Mr. Pfau holds a B.A. degree in Asian Studies from the University of Puget Sound. MR. POTTS has served as Cobalt's Vice President of Business Development since April 1999. From 1996 to 1999, Mr. Potts was a Managing Director for 2Bridge Software where he was responsible for sales, product management and professional services development. From 1995 to 1996, Mr. Potts was Vice President of Multimedia Business Development for Dataware Technologies, Inc. In 1992, Mr. Potts co-founded Ledge Multimedia, a CD-Rom production company where he served as Executive Vice President until 1995. Mr. Potts holds an M.A. degree in Law & Diplomacy from The Fletcher School at Tufts University and a B.A. degree in History from the University of Virginia. 47 MS. WETHERINGTON has served as Cobalt's Vice President of Marketing since June 1998. Prior to joining Cobalt, Ms. Wetherington was a self-employed consultant from December 1996 to June 1998. From June 1994 to May 1996, Ms. Wetherington was a Senior Vice President with MasterCard International Incorporated. From May 1983 to May 1994, Ms. Wetherington was with AT&T Corp. where she held management positions including President of SmartCard Business. Ms. Wetherington holds an M.A. degree in Economics and a B.A. degree in Economics and German from the University of Pennsylvania. MR. KOULOGEORGE joined the board of directors in March 1997. Since 1994, Mr. Koulogeorge has served as a Managing Director of First Analysis Corporation, a venture capital investment firm where he leads the firm's Internet and e-commerce investment practice. Prior to joining First Analysis in 1994, Mr. Koulogeorge was an executive officer and Vice President of Eagle Industries, Inc., a diversified manufacturer from 1991 through 1994. Mr. Koulogeorge is a director of GreatFood.com, Inc. Mr. Koulogeorge holds an M.B.A. degree from Stanford University and a B.A. degree in Economics from Dartmouth College. MR. LANDY joined the board of directors in October 1998. Since 1985, Mr. Landy has served with E.M. Warburg, Pincus & Co., LLC, a private equity investment firm, and has been a Managing Director since 1994. Throughout his career at E.M. Warburg, Pincus & Co., LLC, Mr. Landy has focused primarily on investments in information technology and specialty semiconductors. Mr. Landy also serves as a director of Covad Communications Group, Inc., Indus International, Inc. and Level One Communications, Inc. and of several privately held companies. Mr. Landy holds an M.B.A. degree from The Stern School of Business at New York University and a B.S. degree in Economics from The Wharton School of Business. MR. POMERANTZ joined the board of directors in October 1998. Since 1978, Mr. Pomerantz has served with E.M. Warburg, Pincus & Co., LLC, a private equity investment firm, and has been a Managing Director since 1982. Mr. Pomerantz also serves as a director of Axxess Technologies, Inc., a manufacturer of key duplication equipment and identification systems, Select Automotive, Inc., an owner of automobile dealerships, and Imark Communications, Inc., a global event management business. Mr. Pomerantz holds an M.B.A. degree from The Stern School of Business at New York University, an M.A. degree from the University of Southern California and London School of Economics and a B.S. degree from Rensselaer Polytechnic Institute. MR. POWER joined the board of directors in April 1999. Mr. Power founded J.D. Power and Associates, a marketing information company. Mr. Power has served as Chief Executive Officer since J.D. Power's inception in 1968, and as Chairman of the Board since 1996. Mr. Power holds an M.B.A. degree from The Wharton School of Business and a B.A. degree from the College of the Holy Cross. MR. TULLMAN joined the board of directors in November 1997. Since June 1997, Mr. Tullman has served as Chief Executive Officer of Tunes.com Inc., which operates an Internet music site specializing in webcasting live music events. From October 1996 to May 1997, Mr. Tullman was one of the co-managers of Digital Entertainment Networks LLC. From October 1993 to September 1996, Mr. Tullman served as President and Chief Executive Officer of Imagination Pilots, Inc., a multimedia software developer which he also founded. Immediately prior to founding Imagination Pilots, Inc., Mr. Tullman served as Chief Executive Officer of Eager Enterprises, Inc., an information industry venture capital firm which he founded in 1990. Mr. Tullman is a director of uBid, Inc. an online auction company. Mr. Tullman holds a B.A. degree from Northwestern University and a J.D. degree from the Northwestern University School of Law. Our amended and restated articles of incorporation provide for the division of our board of directors into three classes as nearly as equal in size as possible with staggered three year terms in connection with our shareholders meeting in 2000. The classification of our board could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, control of us. Board Committees The board of directors has a compensation committee and an audit committee. 48 AUDIT COMMITTEE. The audit committee consists of Messrs. Koulogeorge, Pomerantz and Tullman. The audit committee makes recommendations to the board of directors regarding the selection of independent public accountants, reviews the results and scope of the audit and other services provided by Cobalt's independent public accountants and reviews and evaluates Cobalt's financial control functions. COMPENSATION COMMITTEE. The compensation committee consists of Messrs. Tullman and Landy. The compensation committee administers the issuance of stock options under our stock option plan, makes recommendations regarding Cobalt's various incentive compensation and benefit plans and determines salaries for the executive officers and incentive compensation for employees and consultants. It also will administer the stock purchase plan. Director Compensation Directors do not receive any cash compensation for their services as members of the board of directors although they are reimbursed for certain expenses incurred in connection with attendance at board and committee meetings. Cobalt's bylaws authorize the board of directors to fix director compensation, and Cobalt may compensate non-employee directors in the future for their attendance at board and committee meetings. Non-employee directors receive an initial grant of non-qualified options to acquire 12,000 shares of common stock vesting at a rate of 1,000 shares per month. Thereafter, non-employee directors will receive additional grants of 2,000 options on the anniversary date of commencement of board service. Compensation Committee Interlocks and Insider Participation None of the members of the compensation committee of the board of directors has at any time been an officer or employee of Cobalt. No executive officer of Cobalt serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on Cobalt's board or compensation committee. Mr. Tullman, Chairman of the Board of Directors and a member of the compensation committee, purchased shares of Cobalt's Series C Preferred Stock in April 1999. See "Certain Transactions." Executive Compensation The following table sets forth the compensation we paid to our Co-Chief Executive Officers and all other executive officers of Cobalt receiving compensation in excess of $100,000 for the fiscal year ended December 31, 1998 (the "Named Executive Officers"): Summary Compensation Table
Long-term Compensation ------------- Annual Compensation Securities Name and ---------------------- Underlying All Other Principal Positions Salary Bonus Options Compensation - --------------------------------------------------- ---------- ---------- ------------- ------------- Geoffrey T. Barker................................. 1998 $ 127,083 $ -- -- $ -- Co-Chief Executive Officer John W. P. Holt.................................... 1998 $ 127,083 -- -- -- Co-Chief Executive Officer Kenneth D. Pfau.................................... 1998 $ 43,333 $ 2,000 40,000 $ 62,374 Vice President, Special Projects
- --------- The other compensation represents sales commissions for Mr. Pfau. 49 Option Grants in Last Fiscal Year The following table provides information relating to stock options awarded to each of the Named Executive Officers during the fiscal year ended December 31, 1998.
Individual Grants Potential Realizable ------------------------------------------------------ Value at Assumed Percentage Annual Rates of Stock Number of of Total Price Securities Options Appreciation for Underlying Granted Exercise Option Term Options in Fiscal Price Expiration ---------------------- Name Granted 1998 ($/Sh) Date 5% 10% - ---------------------------------------------------- ----------- --------------- ----------- ----------- ---------- ---------- Geoffrey T. Barker.................................. -- -- -- -- -- -- John W. P. Holt..................................... -- -- -- -- -- -- Kenneth D. Pfau..................................... 40,000 6.1% $ 0.75 8/01/08 $ 191,530 $ 322,749
- --------- - - The options become exercisable at a rate of 25% beginning in the 13th month after the option grant date with monthly vesting of the remaining 75% in 36 equal increments, and expire ten years from the date of the grant or earlier upon termination of employment. - - Based on an aggregate of 655,100 shares subject to options granted to employees and directors of and consultants to Cobalt in the fiscal year ended December 31, 1998. - - Options were granted at an exercise price equal to the fair market value of the common stock as determined by the board of directors on the date of the grant. - - The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Securities and Exchange Commission. There can be no assurance that the actual stock price appreciation over the option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the common stock appreciates over the ten year option term, no value will be realized from the option grants made to the executive officers. The potential realizable value is calculated by multiplying the per share fair market value of the common stock on the date of grant by the stated annual appreciation rate compounded annually for the option term, subtracting the exercise price per share from the product, and multiplying the remainder by the number of shares underlying the option granted. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values The following table sets forth information regarding the aggregate number of options exercised during fiscal 1998 by each of the Named Executive Officers and the number of shares subject to both exercisable and unexercisable stock options as of December 31, 1998.
Number of Securities Value of Unexercised Underlying In-the- Shares Unexercised Options at Money Options at Acquired December 31, 1998 December 31, 1998 on Value -------------------------- -------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------- ----------- ----------- ----------- ------------- ------------ ------------ Geoffrey T. Barker......................... -- $ -- 477,360 -- $ 2,422,536 $ -- John W. P. Holt............................ -- -- 403,060 -- $ 2,054,106 -- Kenneth D. Pfau............................ 10,000 $ 39,000 22,104 71,896 $ 108,351 $ 334,299
- --------- The value of unexercised in-the-money options is based on the difference between the fair market value of the shares of common stock underlying the options at December 31, 1998 as determined by the board of directors and the exercise price of such options. 50 Executive Agreements In February 1997, Cobalt entered into confidentiality and noncompetition agreements with Mr. Barker and Mr. Holt. These provide that during and after the term of their employment, Mr. Barker and Mr. Holt will keep confidential all proprietary information of Cobalt and that any inventions, designs or otherwise copyrightable work produced by Mr. Barker or Mr. Holt during their employment shall be the exclusive property of Cobalt. In addition, Mr. Barker and Mr. Holt agree that for a period of three years following the termination of their employment, they will not participate in any business that sells competing services or products to clients which have purchased similar services or products from Cobalt within the preceding three years and will not solicit employees, customers or other business relations of Cobalt. In April 1999, Cobalt, in connection with its acquisition of PartsVoice, entered into an employment agreement with Brian Allen to serve as Vice President of Cobalt for a three year term. Mr. Allen receives an annual salary of $125,000 and options to acquire 100,000 shares of Cobalt common stock at an exercise price of $1.85 per share. Mr. Allen will also receive a bonus of $25,000 on June 30, 1999. Mr. Allen's options vest over a four-year period. If Mr. Allen is terminated without cause or Mr. Allen terminates his employment for good reason he will be entitled to receive his $125,000 salary for the full term of the agreement and his options will immediately vest. Employee Benefit Plans STOCK OPTION PLAN. Our stock option plan was adopted by the board of directors and approved by the shareholders in May 1995. At June 30, 1999 have an aggregate of 2,841,422 shares of common stock reserved for issuance under the stock option plan. Our stock option plan provides for the grant of incentive stock options, as defined under the Internal Revenue Code of 1986, to our employees or employees of our subsidiaries. The stock option plan also provides for the grant of non-statutory stock options to officers, employees, consultants and non-employee directors. The board administers the stock option plan and determines both the recipients of options and the type of options to be granted, including the exercise price, number of shares subject to the option and the exercisability thereof. The terms of options granted under the stock option plan generally may not exceed ten years. While the board determines the exercise price of options, the exercise price for an incentive stock option may not be less than 100% of the fair market value of the common stock on the date of the option grant. Options vest at the rate specified in the option agreement. No incentive stock option may be granted to any person who, at the time of the grant, owns stock possessing more than 10% of the total combined voting power of Cobalt unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and the term of the option does not exceed five years from the date of grant. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by a person holding an option during any calendar year may not exceed $100,000. If Cobalt effects a sale of all or substantially all of its assets, or any merger or consolidation, the board of directors may select one of three alternatives for treating outstanding options under the stock option plan: - the outstanding options may remain in effect in accordance with their terms; - outstanding options may be converted into options to purchase stock in the surviving or acquiring corporation in the transaction with the amount, type of securities and exercise price of converted options to be determined by the board of directors; or 51 - the board of directors may provide a 30-day period prior to the consummation of the transaction during which outstanding options may be exercised to the extent vested, and the board of directors may accelerate the exercisability of any options so they are exercisable in full during the 30-day period. After the 30-day period, all unexercised options shall immediately terminate. Generally, a person holding an option may not transfer the option other than by will or the laws of descent or distribution. A person whose service to Cobalt and its affiliates ceases for any reason other than for cause, resignation in lieu of termination, retirement, disability or death generally may exercise an option, as to vested shares, in the three-month period following such cessation. A person, or his heirs, generally may exercise an option, as to vested shares, for up to one year after the person's service to Cobalt ceases due to death or disability. Shares subject to options that have expired or otherwise terminated without having been exercised in full again become available for the grant of options under the stock option plan. As of June 30, 1999, options to purchase 2,225,281 shares of common stock were outstanding and 616,141 shares remained available for future grant. The stock option plan may be suspended, amended or terminated at any time by the board provided that shareholder approval is granted within 12 months of the adoption of any amendment to increase the number of shares of common stock reserved for issuance under the stock option plan or any other amendment that requires shareholder approval under applicable law. 401(K) PLAN. Cobalt and its PartsVoice subsidiary participate in tax-qualified employee savings and retirement plans that cover all full-time employees. Pursuant to the 401(k) plans, eligible employees may defer up to 15% of their pre-tax earnings, subject to the Internal Revenue Service's annual contribution limit and permit additional discretionary matching contributions. The 401(k) plans are intended to qualify under Section 401 of the Internal Revenue Code of 1986 so that contributions and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) plan, and so that contributions by Cobalt, if any, will be deductible by Cobalt when made. EMPLOYEE STOCK PURCHASE PLAN Cobalt adopted an employee stock purchase plan in July 1999. The stock purchase plan will be implemented on or about October 1, 1999. The stock purchase plan is intended to qualify under Section 423 of the Internal Revenue Code of 1986 and permits eligible employees to purchase common stock through payroll deductions of up to 15% of their compensation. Under the stock purchase plan, no employee may purchase more than 1,000 shares of common stock in any six-month offering period or common stock worth more than $25,000 in any calendar year, valued as of the first day of each offering period. We have authorized 300,000 shares of common stock for issuance under the stock purchase plan. The employee stock purchase plan will be implemented with six-month offering periods, except for the first such period which will commence on October 1, 1999 and end on December 31, 1999. Thereafter, offering periods will begin on each January 1 and July 1. The price of common stock purchased under the stock purchase plan will be the lesser of 85% of the fair market value on the first day of an offering period and 85% of the fair market value on the last day of an offering period. The stock purchase plan will terminate on the earlier of October 1, 2004 or when all shares available for issuance under the plan have been sold. The board of directors also has the authority to terminate the plan earlier. No shares of common stock have been issued under the employee stock purchase plan. In the event of a merger, consolidation, or acquisition by another corporation of all or substantially all of Cobalt's assets, or the liquidation or dissolution of Cobalt, the last day of an offering period on which a participant may purchase stock will be the business day immediately preceding the effective date of such event, unless the plan administrator provides for the assumption or substitution of the outstanding purchase rights. 52 Indemnification and Limitation of Director and Officer Liability Our articles of incorporation limit the liability of our directors to the maximum extent permitted by Washington law. Washington law provides that the articles of incorporation may contain provisions that eliminate or limit the personal liability of a director to the corporation or its shareholders provided that such provisions do not eliminate or limit the liability of a director for: - acts or omissions involving intentional misconduct or a knowing violation of law; - unlawful payments or distributions; or - any transaction from which the director will personally receive an improper benefit in money, property, or services. Our articles of incorporation contain such provisions. Our bylaws also provide that we shall indemnify our directors and officers and may indemnify our employees and other agents to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We intend to obtain directors' and officers' insurance providing indemnification for certain of our directors, officers, affiliates and employees for certain liabilities. We also intend to enter into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our articles of incorporation and bylaws. These agreements, among other things, will indemnify our directors and executive officers for attorneys' fees and other expenses, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Cobalt, arising out of such person's services as a director or executive officer of Cobalt, any subsidiary of Cobalt or any other company or enterprise to which the person provides services at the request of Cobalt. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of ours where indemnification is expected to be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 53 RECENT ACQUISITION On April 30, 1999, Cobalt acquired all of the equity of PartsVoice, LLC, an Oregon limited liability company, from three owners, Compu-Time, Inc., an Oregon corporation, Locators, Inc., an Oregon corporation, and Parts Finder Locating Systems, Inc., an Oregon corporation. At closing, Cobalt paid aggregate purchase consideration for the PartsVoice equity of: - $3.0 million in cash; - promissory notes in the principal amount of (a) $8.0 million, due on the earlier of completion of this offering or July 30, 1999 and (b) $15.0 million, due on the earlier of completion of this offering or January 25, 2000; - 500,000 shares of Series C Convertible Preferred Stock convertible at $8.00 per share; and - warrants to purchase 160,000 shares of Cobalt common stock at $6.00 per share. The promissory notes bear interest at the rate of 8.75% per annum. Cobalt's obligations under the promissory notes are secured by a pledge of the PartsVoice equity and a security agreement. In connection with the acquisition, Brian Allen, former Vice President of PartsVoice, entered into a three-year employment agreement with Cobalt. See "Management--Executive Agreements." CERTAIN TRANSACTIONS On April 30, 1999, Howard Tullman, Chairman of the Board of Directors of Cobalt, purchased 12,500 shares of Cobalt Series C Preferred Stock at a purchase price of $8.00 per share. The terms of Mr. Tullman's purchase were no more favorable than those offered to the PartsVoice purchasers. In October 1998, Warburg, Pincus Equity Partners, L.P. purchased 1,858,100 shares of Series B Preferred Stock and 5,118,091 shares of Series B-1 Preferred Stock at a purchase price of $4.20 per share, for an aggregate purchase price of $29.3 million. Cobalt used $19.2 million of the net proceeds from this Series B Preferred Stock financing to redeem, at a price of $4.20 per share, shares of common stock and shares of Series A Preferred Stock from certain shareholders of Cobalt. As part of this redemption, Cobalt redeemed, at $4.20 per share, 738,768 shares from Mr. Barker, 688,285 shares from Mr. Holt, 5,000 shares from Mr. Lissack, 22,255 shares from Ms. Davidson, 10,000 shares from Mr. Pfau, 6,500 shares from Mr. Tullman and 112,773 shares from Mr. Koulogeorge. See Note 10 of Notes to Cobalt Financial Statements. First Analysis Corporation and Cobalt entered into a Management Services Agreement in February 1997. The Management Services Agreement entitles First Analysis to receive a fee of $150,000 for financial and consulting services. This fee is payable upon the completion of this offering. Mr. Koulogeorge is Managing Director of First Analysis Corporation. On February 28, 1997, Mr. Barker and Mr. Holt entered into an agreement to settle amounts due for deferred compensation. The terms of the agreement required a 50% cash payment of $81,287 to Mr. Barker and $64,584 to Mr. Holt which was paid on February 28, 1997. The remainder was forgiven by Mr. Barker and Mr. Holt. In August 1996, Cobalt issued 120,000 shares of common stock to each of Mr. Barker and Mr. Holt at a purchase price of $0.60 per share. In satisfaction of the purchase price, Messrs. Barker and Holt each executed promissory notes to Cobalt due in August 2006 in the principal amount of $72,000. The promissory notes bear interest at a rate of 8% per annum. In March 1997, following the sale of Cobalt's Series A Preferred Stock at a per share price of $0.55, Cobalt issued additional shares of common stock to all shareholders who had purchased at a per share price greater than that paid by the Series A Preferred Stock investors. As a result, Mr. Barker and Mr. Holt each received 9,915 additional shares of common stock to implement this dilution protection. Each promissory note is secured by a pledge of the 129,915 total shares of common stock issued in the purchase transaction. Cobalt has entered into an employment agreement with Mr. Allen dated as of April 30, 1999, and Noncompete Agreements with each of Mr. Barker and Mr. Holt dated as of February 28, 1997. See "Management--Executive Agreements." 54 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our common stock as of June 30, 1999, and as adjusted to reflect the sale of the shares of common stock offered in this prospectus by each of Cobalt's Named Executive Officers, its directors, each beneficial holder of more than 5% of Cobalt's common stock and all current directors and executive officers as a group.
Shares Percentage of Beneficially Shares Beneficially Owned (1) Owned (1) ------------ ------------------------ Prior to Prior to After Beneficial Owners Offering Offering Offering - -------------------------------------------------------------------------------- ------------ ----------- ----------- Warburg, Pincus Equity Partners, L.P.(2)........................................ 7,764,195 78.3% 46.6% 466 Lexington Avenue New York, NY 10017 Entities affiliated with First Analysis Corporation(3).......................... 1,205,504 35.9% 7.2% The Sears Tower, Suite 9500 233 South Wacker Drive Chicago, IL 60606 Mark T. Koulogeorge(3)(4)....................................................... 1,328,278 38.2% 8.0% Geoffrey T. Barker(5)........................................................... 738,767 32.8% 4.4% John W.P. Holt(6)............................................................... 691,316 31.0% 4.1% Howard A. Tullman(7)............................................................ 40,000 1.8% * Ernest H. Pomerantz(2)(8)....................................................... 7,774,195 78.3% 46.6% Joseph P. Landy(2)(9)........................................................... 7,774,195 78.3% 46.6% J.D. Power, III(10)............................................................. 5,000 * * Kenneth D. Pfau(11)............................................................. 45,750 2.1% * All directors and executive officers as a group(12) (16 people)................. 10,876,042 92.7% 63.8%
- --------- * Represents beneficial ownership of less than 1% of the outstanding shares of Cobalt's Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants or issuable on the conversion of preferred stock which are currently exercisable or convertible or may be exercised or converted within sixty days of the date of this prospectus are deemed to be outstanding and to be beneficially owned by the person holding these options, warrants or shares of convertible preferred stock for the purpose of computing the number of shares beneficially owned and the percentage ownership of the person or entity holding these securities but are not outstanding for the purpose of computing the percentage ownership of any other person or entity. Percentage of beneficial ownership is based on 2,152,643 shares of common stock outstanding as of June 30, 1999 and 16,676,188 shares of common stock outstanding after completion of this offering. (2) Includes 7,764,195 shares issuable upon conversion of convertible preferred stock. The sole general partner of Warburg, Pincus Equity Partners, L.P., or Warburg, is Warburg, Pincus & Co., a New York general partnership. E.M. Warburg, Pincus & Co., LLC., or EMWP, manages Warburg. Mr. Landy and Mr. Pomerantz are both Managing Directors of EMWP and may be deemed to control Warburg, and thus may be deemed to have an indirect pecuniary interest in an indeterminate portion of the shares beneficially owned by Warburg. Mr. Landy and Mr. Pomerantz disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. The terms of the shares owned by Warburg preclude Warburg from exercising voting control over a majority of the outstanding voting shares. (3) Includes 507,580 shares held by The Productivity Fund III, L.P. and 697,924 shares held by Environmental Private Equity Fund II, L.P. issuable upon conversion of convertible preferred stock. Mr. Koulogeorge is a member of the limited liability company that is the general partner of The 55 Productivity Fund III, L.P. and an executive officer of First Analysis Corporation, a general partner of the limited partnership that controls Environmental Private Equity Fund II, L.P. Accordingly, Mr. Koulogeorge may be deemed to have an indirect pecuniary interest in an indeterminate portion of the shares beneficially owned by The Productivity Fund III, L.P. and Environmental Private Equity Fund II, L.P. Mr. Koulogeorge disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (4) Includes 112,774 shares held by Mr. Koulogeorge issuable upon conversion of convertible preferred stock and 5,000 shares Mr. Koulogeorge has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (5) Includes 40,000 shares held in trust for Mr. Barker's heirs and 102,360 shares Mr. Barker has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (6) Includes 62,932 shares held in trust for Mr. Holt's heirs and 75,000 shares Mr. Holt has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (7) Includes 12,500 shares held by Mr. Tullman issuable upon conversion of convertible preferred stock and 13,000 shares Mr. Tullman has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (8) Includes 10,000 shares Mr. Pomerantz has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (9) Includes 10,000 shares Mr. Landy the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (10) Includes 5,000 shares Mr. Power has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (11) Includes 22,188 shares Mr. Pfau has the right to acquire pursuant to options exercisable within 60 days of August 1, 1999. (12) Includes an aggregate of 9,219,973 shares issuable upon conversion of convertible preferred stock and 242,548 shares that the directors and officers as a group have a right to acquire pursuant to options exercisable within 60 days of August 1, 1999. 56 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock will consist of 200,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share. Common Stock As of June 30, 1999 there were 11,819,045 shares of common stock outstanding held by 77 shareholders of record, including shares of preferred stock that will be converted into common stock upon completion of this offering. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. There are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of the common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefor. In the event of a liquidation, dissolution, or winding up of Cobalt, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities. Holders of common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon the completion of this offering will be, fully paid and non-assessable. Preferred Stock Upon the closing of this offering, each outstanding share of preferred stock will be converted into shares of common stock. See Note 9 of Notes to Cobalt Financial Statements. Following the offering, the board of directors will have the authority, without further action by the shareholders, to issue up to 100,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. The board of directors, without shareholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued with terms calculated to delay or prevent a change in control of Cobalt or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock, and may adversely affect the voting and other rights of the holders of common stock. We have no current plans to issue any of the preferred stock. Warrants As of June 30, 1999, Cobalt had outstanding warrants to purchase an aggregate of 221,500 shares of common stock at exercise prices ranging from $0.30 to $6.00 per share. The warrants expire at various dates from October 31, 2003 to April 30, 2004. Generally, each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications and consolidations. All warrants are currently exercisable. Registration Rights Pursuant to agreements between Cobalt and the holders of approximately 9,850,402 shares of common stock and shares of common stock issued upon conversion of all shares of preferred stock outstanding at the completion of this offering, and warrants to purchase 184,000 shares of common stock, the holders of the shares and warrants are entitled to have shares of Cobalt's stock held by them registered under the Securities 57 Act. If Cobalt proposes to register its common stock under the Securities Act, subject to specific exceptions, the holders of these shares are entitled to notice of the registration and are entitled, at Cobalt's expense, to include their shares in the registration, provided that the managing underwriters have the right to limit the number of such shares included in the registration. In addition, holders of at least 70% of these shares may require Cobalt, at its expense and in accordance with the terms of the agreements, to file a registration statement under the Securities Act with respect to their shares of common stock. Further, the holders of these shares may require Cobalt, at Cobalt's expense, to register the shares on Form S-3 when Cobalt can use this form, subject to specified conditions and limitations. Transfer Agent and Registrar The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services. 58 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock in the public market and shares issued upon the exercise of outstanding options after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of equity securities. As described below, no shares currently outstanding will be available for sale immediately after this offering due to contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering and the direct sale, Cobalt will have outstanding 16,676,188 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, the 4,500,000 shares sold in this offering and the shares sold in the direct sale will be freely tradable without restriction under the Securities Act unless purchased by "affiliates" of Cobalt, as that term is defined in Rule 144 under the Securities Act. Of the remaining shares, 64,984 shares will be eligible for sale in the public market beginning 91 days after the date of this offering and 12,111,204 shares are subject (1) to lock-up agreements providing that, with certain limited exceptions, the shareholder will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of common stock of Cobalt or any securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days following the date of the final prospectus for this offering or (2) to holding period requirements under Rule 144 under the Securities Act. Beginning 181 days after the date of the final prospectus, 10,738,607 of these shares will be eligible for sale in the public market, although 9,660,786 shares will be subject to certain volume limitations. The majority of the remaining 1,372,597 shares will become eligible for sale, subject to certain volume limitations, in April 2000. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person, or persons whose shares are aggregated, who has beneficially owned shares that were purchased from us, or any person who is deemed to be an affiliate of us, at least one year previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (1) 1% of the number of shares of common stock then outstanding, or approximately 163,190 shares immediately after this offering or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the proposed sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about Cobalt. Under Rule 144(k), a person who is not deemed to have been an affiliate of Cobalt at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell its shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. This two year holding period also may include the holding period of any prior owner except an affiliate of Cobalt. Rule 701 permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any employee, officer or director of or consultant to Cobalt who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares. However, all shares issued pursuant to Rule 701 are subject to lock-up agreements and will only become eligible for sale upon the expiration of the 180-day lock-up agreements or upon obtaining the prior written consent of BancBoston Robertson Stephens. 59 Immediately after this offering, Cobalt intends to file a registration statement under the Securities Act covering shares of common stock subject to options outstanding and reserved for issuance under the stock option plan and authorized for issuance under the stock purchase plan. Based on the number of shares subject to outstanding options at June 30, 1999 and currently reserved for issuance under the stock option plan and stock purchase plan, the registration statement would cover approximately 3,141,422 shares. The registration statement will automatically become effective upon filing. Accordingly, shares registered under the registration statement will, subject to Rule 144 volume limitations applicable to affiliates of Cobalt, be available for sale in the open market immediately after the 180-day lock-up agreement expires. Also beginning 180 days after the date of this offering, certain holders of shares of common stock will be entitled to certain rights with respect to registration of their shares of common stock for offer and sale to the public. See "Description of Capital Stock--Registration Rights." 60 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., SG Cowen and Wit Capital Corporation, have severally agreed with us, subject to the terms and conditions set forth in the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their respective names below. The underwriters are committed to purchase and pay for all such shares if any are purchased.
Number of U.S. Underwriters Shares - ----------------------------------------------------------------------------------------------------- ---------- BancBoston Robertson Stephens Inc. .................................................................. ---------- Bear, Stearns & Co. Inc. ............................................................................ ---------- SG Cowen Securities Corporation...................................................................... ---------- Wit Capital Corporation.............................................................................. ---------- International Underwriters - ----------------------------------------------------------------------------------------------------- BancBoston Robertson Stephens International Limited.................................................. ---------- Bear, Stearns International Limited.................................................................. ---------- SG Cowen International L.P........................................................................... ---------- Total............................................................................................ 4,500,000 ---------- ----------
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at this price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. However, no reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. A prospectus in electronic format is being made available on an Internet Web site maintained by Wit Capital. In addition, pursuant to an e-Dealer Agreement, all dealers purchasing shares from Wit Capital in the offering similarly have agreed to make a prospectus in electronic format available on Web sites maintained by each of the e-Dealers. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. OVER-ALLOTMENT OPTION. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 675,000 additional shares of common stock at the same price per share as we will receive for the 4,500,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 4,500,000 shares offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the 4,500,000 shares are being sold. We will be obligated, pursuant to the option, to sell shares to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. If the option is exercised in full, the total public offering price of the 5,175,000 shares we sell to the underwriters, the underwriting discounts on such shares will be approximately $5.1 million and total proceeds to us from the sale of these shares will be approximately $67.4 million. 61 INDEMNITY. The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representation and warranties contained in the underwriting agreement. LOCK-UP AGREEMENTS. Under the terms of lock-up agreements, each of our officers and directors and certain of our shareholders have agreed with the representatives, for a period of 180 days after the date of this prospectus, subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to, any shares of common stock, or any securities convertible into or exchangeable for shares of common stock, now owned or hereafter acquired directly by these holders or with respect to which they have the power of disposition, without the prior written consent of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements. There are no agreements between the representatives and any of our shareholders providing consent by the representatives to the sale of shares prior to the expiration of the period 180 days after this prospectus. FUTURE SALES. In addition, we have agreed that during the 180 days after the date of this prospectus, we will not, subject to certain exceptions, without the prior written consent of BancBoston Robertson Stephens: - Consent to the disposition of any shares held by shareholders prior to the expiration of the period of 180 days after the date of this prospectus; or - Issue, sell, contract to sell or otherwise dispose of any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than the sale of shares in this offering, the issuance of common stock upon the exercise of outstanding options or warrants or our issuance of options or shares under our stock option plan. LISTING. We have applied for listing of our common stock for quotation on the Nasdaq National Market under the symbol "CBLT." NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public market for our common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations between Cobalt and the representatives of the underwriters. Among the factors to be considered in these negotiations are prevailing market conditions, financial information of Cobalt, market valuations of other companies that Cobalt and the representatives believe to be comparable to Cobalt, estimates of the business potential of Cobalt, the present state of Cobalt's development and other factors deemed relevant. STABILIZATION. The representatives of the underwriters have advised us that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that these types of transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 62 NEW UNDERWRITERS. Wit Capital, a member of the National Association of Securities Dealers, Inc., will participate in this offering as one of the underwriters. The National Association of Securities Dealers, Inc. approved the membership of Wit Capital on September 4, 1997. COSTS OF OFFERING. We estimate that total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $750,000. DIRECT SALE TO GE FINANCIAL ASSURANCE HOLDINGS, INC. Concurrently with the sale of the shares of common stock in this offering, GE Financial Assurance Holdings, Inc. has agreed to purchase directly from Cobalt $5.0 million in aggregate purchase price of shares of common stock at the public offering price set forth on the cover page of this prospectus. The commitment of GE Financial Assurance Holdings, Inc. to make this purchase is not binding at a per share price above $16.00. 63 LEGAL MATTERS The validity of the common stock offered in this offering will be passed upon for Cobalt by Stoel Rives LLP, Seattle, Washington. Legal matters related to the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The financial statements of The Cobalt Group, Inc. and PartsVoice as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 included in this Prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, or the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered in this offering. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to Cobalt and the common stock, reference is made to the registration statement and to the related exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of the applicable contract or other document filed as an exhibit to the registration statement, each of these statements being qualified in all respects by this reference. A copy of the registration statement may be inspected by anyone without charge at the commission's principal office in Washington, D.C., and copies of all or any part of the registration statement may be obtained from the Public Reference Section of the Commission, 450 Fifth street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as Cobalt, that file electronically with the Commission. The address of the Web site is http://www.sec.gov. 64 INDEX TO FINANCIAL STATEMENTS
Page --------- The Cobalt Group, Inc. Report of Independent Accountants.......................................................................... F-2 Balance Sheets............................................................................................. F-3 Statements of Operations................................................................................... F-4 Statements of Changes in Shareholders' Deficit............................................................. F-5 Statements of Cash Flows................................................................................... F-6 Notes to Financial Statements.............................................................................. F-7 PartsVoice, The Combined Financial Statements of PartsVoice, a General Partnership, and Compu-Time, Inc. Report of Independent Accountants.......................................................................... F-22 Combined Balance Sheets.................................................................................... F-23 Combined Statements of Operations.......................................................................... F-24 Combined Statements of Changes in Owners' Equity........................................................... F-25 Combined Statements of Comprehensive Income................................................................ F-26 Combined Statements of Cash Flows.......................................................................... F-27 Notes to Combined Financial Statements..................................................................... F-28
F-1 Report of Independent Accountants To the Board of Directors and Shareholders of The Cobalt Group, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of The Cobalt Group, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Seattle, Washington March 29, 1999 except as to Note 14, which is as of May 27, 1999 F-2 The Cobalt Group, Inc. Balance Sheets (in thousands, except share and per share amounts)
Pro forma shareholders' December 31, equity at -------------------- March 31, March 31, 1997 1998 1999 1999 --------- --------- ----------- ------------- (unaudited) (unaudited) Assets Current assets Cash and cash equivalents.................................................... $ 241 $ 5,756 $ 3,876 Short-term investments....................................................... 983 983 Accounts receivable, net of allowance for doubtful accounts of $40, $85 and $68 (unaudited)............................................................ 459 1,250 1,401 Other current assets......................................................... 21 130 1,172 --------- --------- ----------- 721 8,119 7,432 Capital assets, net............................................................ 351 1,453 2,806 Intangible assets, net of accumulated amortization of $22, $321, and $384 (unaudited), respectively.................................................... 868 479 416 Other assets................................................................... 11 11 11 --------- --------- ----------- Total assets............................................................... $ 1,951 $ 10,062 $ 10,665 --------- --------- ----------- --------- --------- ----------- Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Shareholders' Deficit Current liabilities Accounts payable............................................................. $ 197 $ 191 $ 665 Accrued liabilities.......................................................... 158 776 1,316 Deferred revenue............................................................. 897 1,290 1,505 DealerNet acquisition liability, current portion............................. 500 Note payable to bank......................................................... 200 Software financing contract, current portion................................. 257 Capital lease obligations, current portion................................... 33 328 560 --------- --------- ----------- 1,985 2,585 4,303 --------- --------- ----------- Non-current liabilities Capital lease obligations, non-current portion............................... 34 557 971 Software financing contract, non-current portion............................. 405 DealerNet acquisition liability, non-current portion......................... 390 --------- --------- ----------- 424 557 1,376 --------- --------- ----------- Commitments and contingencies (Notes 6, 12 and 14) Mandatorily redeemable convertible preferred stock Series A; $0.01 par value per share; 4,510,934, 2,106,282 and 2,106,282 (unaudited) shares issued and outstanding; redemption and liquidation value of $2,481, $1,158 and $1,158 (unaudited), respectively..................... 2,439 1,116 1,118 Series B; $0.01 par value per share; 0, 7,047,620 and 7,047,620 (unaudited) shares issued and outstanding; redemption and liquidation value of $29,600 plus unpaid dividends...................................................... 30,046 30,635 --------- --------- ----------- 2,439 31,162 31,753 $ -- --------- --------- ----------- ------------- Shareholders' deficit Preferred stock, $0.01 par value per share; 20,000,000 shares authorized in 1997, 100,000,000 shares authorized thereafter; 4,510,934, 9,153,902 and 9,153,902 (unaudited) issued and outstanding as mandatorily redeemable convertible preferred stock; no shares issued and outstanding, pro forma (unaudited)................................................................ Common stock, $0.01 par value per share; 30,000,000 shares authorized in 1997, 200,000,000 shares authorized thereafter; 3,406,597, 1,343,898 and 1,821,979 (unaudited) issued and outstanding, respectively; 10,975,881 (unaudited) shares issued and outstanding pro forma........................ 34 13 18 110 Additional paid-in capital................................................... 1,268 2,435 2,502 34,163 Deferred compensation........................................................ (147) (1,686) (1,948) (1,948) Notes receivable from shareholders........................................... (144) (144) (144) (144) Accumulated deficit.......................................................... (3,908) (24,860) (27,195) (27,195) --------- --------- ----------- ------------- (2,897) (24,242) (26,767) $ 4,986 --------- --------- ----------- ------------- ------------- Total liabilities, mandatorily redeemable convertible preferred stock and shareholders' deficit........................................................ $ 1,951 $ 10,062 $ 10,665 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of these financial statements. F-3 The Cobalt Group, Inc. Statements of Operations (in thousands, except share and per share amounts)
Three months ended Year ended December 31, March 31, ---------------------------------- ------------------------ 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ------------ (unaudited) Net revenues.................................... $ 312 $ 1,711 $ 6,245 $ 1,079 $ 2,453 Cost of revenues................................ 51 285 1,199 151 540 ---------- ---------- ---------- ---------- ------------ Gross profit................................ 261 1,426 5,046 928 1,913 ---------- ---------- ---------- ---------- ------------ Operating expenses Sales and marketing........................... 286 1,740 4,048 564 1,650 Product development........................... 125 361 961 157 401 General and administrative.................... 676 1,614 4,627 629 1,870 Amortization of deferred compensation......... 406 532 41 335 ---------- ---------- ---------- ---------- ------------ Total operating expenses.................... 1,087 4,121 10,168 1,391 4,256 ---------- ---------- ---------- ---------- ------------ Loss from operations............................ (826) (2,695) (5,122) (463) (2,343) Gain on sale of HomeScout....................... 1,626 1,626 Common and preferred stock repurchase premium... (1,658) Interest expense................................ (2) (17) (93) (7) (49) Other income, net............................... 47 142 6 57 ---------- ---------- ---------- ---------- ------------ Net (loss) income............................... $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Net (loss) income available to common shareholders.................................. $ (828) $ (2,673) $ (13,930) $ 1,160 $ (2,926) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Basic net (loss) income per share............... $ (0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Diluted net (loss) income per share............. $ (0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97) ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Weighted-average shares outstanding............. 3,491,536 3,485,563 2,938,460 3,406,597 1,488,681 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Weighted-averge shares outstanding, assuming dilution...................................... 3,491,536 3,485,563 2,938,460 9,093,629 1,488,681 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Pro forma net loss available to common shareholders (unaudited)...................... $ (13,367) $ (2,335) ---------- ------------ ---------- ------------ Pro forma basic and diluted net loss per share (unaudited)................................... $ (1.57) $ (0.22) ---------- ------------ ---------- ------------ Pro forma weighted-average shares outstanding (unaudited)................................... 8,530,634 10,642,583 ---------- ------------ ---------- ------------
The accompanying notes are an integral part of these financial statements. F-4 The Cobalt Group, Inc. Statements of Changes in Shareholders' Deficit (in thousands, except share amounts)
Common stock Additional Notes ------------------------- paid-in Deferred receivable from Shares Par value capital compensation shareholders ---------- ------------- ----------- --------------- ----------------- Balances at January 1, 1996................. 3,017,777 $ 30 $ 166 $ -- Net loss.................................... Issuance of stock options and warrants to non-employees............................. 36 Proceeds from issuance of stock............. 627,197 6 354 Proceeds from exercise of stock options..... 3,250 Issuance of stock in exchange for notes receivable................................ 240,000 3 141 (144) ---------- --- ----------- ------- ----- Balances at December 31, 1996............... 3,888,224 39 697 (144) Net loss.................................... Issuance of stock options and warrants to non-employees............................. 42 Issuance of stock options to employees...... 606 (606) Amortization of deferred compensation....... 406 Forfeitures of employee stock options....... (53) 53 Proceeds from issuance of stock............. 6,750 7 Contribution of shareholder services........ 146 Issuance of parity shares................... 119,867 1 16 Proceeds from exercise of stock options..... 4,771 1 Accretion of mandatorily redeemable convertible preferred stock............... (8) Repurchase of common stock.................. (613,015) (6) (186) ---------- --- ----------- ------- ----- Balances at December 31, 1997............... 3,406,597 34 1,268 (147) (144) Net loss.................................... Issuance of stock options to employees...... 2,244 (2,244) Amortization of deferred compensation....... 532 Forfeitures of employee stock options....... (173) 173 Proceeds from exercise of stock options..... 110,507 1 26 Accretion of mandatorily redeemable convertible preferred stock............... (14) Repurchase of mandatorily redeemable convertible preferred stock............... Repurchase of common stock.................. (2,173,206) (22) (367) Dividends on mandatorily redeemable convertible preferred stock............... (549) ---------- --- ----------- ------- ----- Balances at December 31, 1998............... 1,343,898 13 2,435 (1,686) (144) Net loss (unaudited)........................ Issuance of stock options to employees (unaudited)............................... 627 (627) Amortization of deferred compensation (unaudited)............................... 335 Forfeitures of employee stock options (unaudited)............................... (30) 30 Proceeds from exercise of stock options (unaudited)............................... 478,081 5 61 Accretion of mandatorily redeemable convertible preferred stock (unaudited)... (7) Dividends on mandatorily redeemable convertible preferred stock (unaudited)... (584) ---------- --- ----------- ------- ----- Balances at March 31, 1999 (unaudited)...... 1,821,979 $ 18 $ 2,502 $ (1,948) $ (144) ---------- --- ----------- ------- ----- ---------- --- ----------- ------- ----- Accumulated deficit Total ------------- --------- Balances at January 1, 1996................. $ (415) $ (219) Net loss.................................... (828) (828) Issuance of stock options and warrants to non-employees............................. 36 Proceeds from issuance of stock............. 360 Proceeds from exercise of stock options..... -- Issuance of stock in exchange for notes receivable................................ -- ------------- --------- Balances at December 31, 1996............... (1,243) (651) Net loss.................................... (2,665) (2,665) Issuance of stock options and warrants to non-employees............................. 42 Issuance of stock options to employees...... -- Amortization of deferred compensation....... 406 Forfeitures of employee stock options....... -- Proceeds from issuance of stock............. 7 Contribution of shareholder services........ 146 Issuance of parity shares................... 17 Proceeds from exercise of stock options..... 1 Accretion of mandatorily redeemable convertible preferred stock............... (8) Repurchase of common stock.................. (192) ------------- --------- Balances at December 31, 1997............... (3,908) (2,897) Net loss.................................... (5,105) (5,105) Issuance of stock options to employees...... -- Amortization of deferred compensation....... 532 Forfeitures of employee stock options....... -- Proceeds from exercise of stock options..... 27 Accretion of mandatorily redeemable convertible preferred stock............... (14) Repurchase of mandatorily redeemable convertible preferred stock............... (8,262) (8,262) Repurchase of common stock.................. (7,585) (7,974) Dividends on mandatorily redeemable convertible preferred stock............... (549) ------------- --------- Balances at December 31, 1998............... (24,860) (24,242) Net loss (unaudited)........................ (2,335) (2,335) Issuance of stock options to employees (unaudited)............................... -- Amortization of deferred compensation (unaudited)............................... 335 Forfeitures of employee stock options (unaudited)............................... -- Proceeds from exercise of stock options (unaudited)............................... 66 Accretion of mandatorily redeemable convertible preferred stock (unaudited)... (7) Dividends on mandatorily redeemable convertible preferred stock (unaudited)... (584) ------------- --------- Balances at March 31, 1999 (unaudited)...... $ (27,195) $ (26,767) ------------- --------- ------------- ---------
The accompanying notes are an integral part of these financial statements. F-5 The Cobalt Group, Inc. Statements of Cash Flows (in thousands)
Three months ended Year ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (unaudited) Cash flows from operations Net (loss) income............................................. $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335) Adjustments to reconcile net (loss) income to net cash used in operating activities: Common stock repurchase premium............................. 1,658 Issuance of stock options and warrants to non-employees..... 36 42 Issuance of parity shares................................... 17 Amortization of deferred compensation....................... 406 532 41 335 Depreciation and amortization............................... 12 120 614 117 250 Net (gain) loss on sale of assets........................... (1,617) (1,623) 4 Changes in: Accounts receivable....................................... (43) (411) (791) 53 (151) Other assets.............................................. (12) (16) (109) (35) (977) Accounts payable.......................................... 65 121 (6) (14) 474 Deferred revenue.......................................... 197 699 393 169 215 Accrued liabilities....................................... 199 (125) 618 31 540 --------- --------- --------- --------- --------- Total adjustments............................................. 454 853 1,292 (1,261) 690 --------- --------- --------- --------- --------- Net cash used in operating activities..................... (374) (1,812) (3,813) (99) (1,645) --------- --------- --------- --------- --------- Cash flows from investing activities Acquisition of capital assets................................. (101) (349) (472) (66) (172) Purchase of short-term investments............................ (983) Proceeds from sale of HomeScout, net of costs................. 1,626 1,016 Proceeds from disposal of capital assets...................... 1 5 --------- --------- --------- --------- --------- Net cash (used in) provided by investing activities....... (101) (348) 176 950 (172) --------- --------- --------- --------- --------- Cash flows from financing activities Proceeds from issuance of common stock, net of costs.......... 360 7 Proceeds from issuance of mandatorily redeemable convertible preferred stock, net of costs............................... 2,431 29,193 Repurchase of common stock.................................... (192) (9,127) Repurchase of mandatorily redeemable convertible preferred stock....................................................... (10,100) Proceeds from issuance of notes payable....................... 200 1,000 Payments of notes payable..................................... (1,200) Payment of DealerNet acquisition liability.................... (500) (84) Proceeds from exercise of stock options....................... 1 27 66 Proceeds from officer advances................................ 45 Repayment of officer advances................................. (45) Proceeds from lease financing transactions.................... 76 25 Payment of capital lease obligations.......................... (4) (30) (141) (8) (129) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities....... 477 2,397 9,152 (92) (63) --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............ 2 237 5,515 759 (1,880) Cash and cash equivalents, beginning of period.................. 2 4 241 241 5,756 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period........................ $ 4 $ 241 $ 5,756 $ 1,000 $ 3,876 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-6 The Cobalt Group, Inc. Notes to Financial Statements 1. Nature of the Business and Summary of Significant Accounting Policies Nature of the business The Cobalt Group, Inc. (the Company) is a provider of Internet marketing and data aggregation services to individual franchised dealerships, multi-franchise dealer groups and automobile manufacturers in the United States. The Company enables its clients to develop and implement electronic business strategies and to position themselves to capitalize on the increasing use of the Internet by consumers to research, evaluate and buy new and pre-owned vehicles, parts and accessories and automotive-related services such as financing and insurance. The Company currently offers to its clients services including comprehensive Web site design, development and maintenance; data extraction, aggregation and maintenance; Internet advertising and promotion; and Internet marketing, training and support. The Company also maintains YachtWorld, a marine Web site, which contains photo listings of yachts for sale on the Web, as well as other marine-related information. HomeScout, a real estate search service which gives users access to homes for sale on the Internet, was sold in 1998. Cash and cash equivalents The Company considers all short-term highly liquid instruments purchased within three months of their maturity date to be cash equivalents. The Company maintains its cash accounts with two financial institutions that are insured by the Federal Deposit Insurance Corporation up to $100,000. Short-term investments Short-term investments consist of highly rated commercial paper with original maturities of between three and six months. These investments are classified as available-for-sale and are carried at fair value. The fair value of these securities approximates cost, and there were no material unrealized gains or losses at December 31, 1998 or March 31, 1999 (unaudited). Fair value of financial instruments The Company's financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities, deferred revenue, capital lease obligations and mandatorily redeemable convertible preferred stock. Except for capital lease obligations and mandatorily redeemable convertible preferred stock, the carrying amounts of financial instruments approximate fair value due to their short maturities. The fair value of capital lease obligations at December 31, 1997 and 1998 is not materially different from the carrying amount, based on interest rates available to the Company for similar types of arrangements. The Company considers the fair value of the Series B mandatorily redeemable convertible preferred stock to be liquidation value, plus unpaid dividends. The Company considers the fair value of the Series A mandatorily redeemable convertible preferred stock to be liquidation value of $0.55 per share at December 31, 1997 and $3.99 per share at December 31, 1998 based on the Series A stock redemption described in Note 10. Capital assets Capital assets consist of computer equipment, furniture and other equipment, purchased software and leasehold improvements, all of which are stated at historical cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter. The useful lives of capital assets range from three to five years. Maintenance and repairs, which neither materially add to the value of the asset nor prolong its life, are charged to expense as incurred. Gains or losses on dispositions of capital assets are included in income. F-7 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) Intangible assets Intangible assets consist of purchased customer contracts and a consumer Internet site. These assets are amortized over their estimated useful lives of 36 months. Impairment of long-lived assets The Company periodically evaluates the carrying value of long-lived assets to be held and used, including but not limited to, capital assets and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. No losses from impairment have been recognized in the financial statements. Pro forma shareholders' equity (unaudited) Effective upon the closing of this offering, the outstanding shares of Series A and Series B mandatorily redeemable convertible preferred stock will automatically convert into 2,106,282 and 7,047,620 shares, respectively, of common stock. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma shareholders' equity at March 31, 1999. Revenue recognition The Company derives its revenues from fees charged to its automobile dealership, dealer group and manufacturer clients for website maintenance and data extraction services, as well as internet advertising and promotional services. Website maintenance and data extraction service revenue is recognized ratably over the service period. Revenue on initial setup fees and custom projects is recognized at the time of activation. The Company's obligations for internet advertising services typically include guarantees of minimum number of "impressions", or times that an advertisement is viewed. To the extent minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the remaining guaranteed impression levels are achieved. The majority of the Company's services are sold to clients under short-term service agreements with an initial term of six months and month-to-month thereafter. Revenues are recognized net of promotional discounts. Some or all initial services may be offered on a "free trial" basis, generally for periods of one to three months. Revenue is not recognized until the end of the free trial period and until the customer has agreed to continue service on a paying basis. Prepayments received for sites not yet activated and services not yet provided are reported as deferred revenue. Cost of revenues The Company's cost of revenues consists of the costs associated with production, maintenance and delivery of the Company's services. These costs include the costs of production and design personnel, fees payable to third parties for distribution of vehicle inventory data to other Web sites and for banner advertising, site content licensing fees and costs of Web servers used to host client data. F-8 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) Concentration of credit risk Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable, cash equivalents and short-term investments. The Company does not require collateral from its customers. Individual customer balances are small and customers are required to pay for Web site service in advance. Due to the nature of the business, no individual customer accounted for more than 10% of accounts receivable or net revenues as of and for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited). The Company maintains an allowance for doubtful accounts receivable based upon its historical experience and the expected collectibility of all accounts receivable. Credit losses to date have been within the Company's estimates. The Company has a cash investment policy which restricts investments to ensure preservation of principal and maintenance of liquidity. Advertising costs The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 1997 and 1998 were $156,000 and $276,000, respectively. Advertising costs for the three months ended March 31, 1998 and 1999 were $4,000 and $220,000 (unaudited), respectively. There were no advertising costs in 1996. Income taxes The Company provides for income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Net (loss) income per share and pro forma net loss per share Basic net (loss) income per share represents net (loss) income available to common shareholders divided by the weighted-average number of shares outstanding during the period. Diluted net (loss) income per share represents net (loss) income available to common shareholders divided by the weighted-average number of shares outstanding including the potentially dilutive impact of common stock options and warrants and Series A and B mandatorily redeemable convertible preferred stock. Common stock options and warrants are converted using the treasury stock method. Mandatorily redeemable convertible preferred stock is converted using the if-converted method. Basic and diluted net (loss) income per share are equal for the periods presented, except for the three months ended March 31, 1998, because the impact of common stock equivalents is anti-dilutive. Potentially dilutive securities totaling 433,884, 6,220,188 and 11,259,342 shares for the years ended December 31, 1996, 1997 and 1998, respectively, and 11,055,696 (unaudited) for the three months ended March 31, 1999, were excluded from diluted net loss per share due to their anti-dilutive effect. In accordance with EITF Topic D-53, the Company's 1998 net loss available to common shareholders is increased by $8,262,000 which represents the excess of the fair value over the carrying value of Series A preferred shares which were repurchased by the Company during October 1998 (Note 10). Pro forma net loss per share is computed using the weighted-average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's mandatorily redeemable convertible preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on the date the shares were originally issued. F-9 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) The following table sets forth the computation of the numerators and denominators in the basic, diluted and pro forma net (loss) income per share calculations for the periods indicated:
Three months ended Years ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (in thousands, except share and per share amounts) (unaudited) Numerator: Net (loss) income............................ $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335) Dividends on mandatorily redeemable convertible preferred stock................ (549) (584) Accretion of mandatorily redeemable convertible preferred stock................ (8) (14) (2) (7) Excess consideration for redemption of Series A mandatorily redeemable convertible preferred stock............................ (8,262) --------- --------- --------- --------- --------- Net (loss) income available to common shareholders............................... $ (828) $ (2,673) $ (13,930) $ 1,160 $ (2,926) --------- --------- --------- --------- --------- --------- Effect of pro forma conversion of securities: Dividends on mandatorily redeemable convertible preferred stock................ 549 584 Accretion of mandatorily redeemable convertible preferred stock................ 14 7 --------- --------- Pro forma net loss available to common shareholders (unaudited)................... $ (13,367) $ (2,335) --------- --------- --------- --------- Denominator: Weighted-average shares outstanding.......... 3,491,536 3,485,563 2,938,460 3,406,597 1,488,681 Dilutive effect of potential additional common shares: Stock options and warrants................. 1,176,098 Series A mandatorily redeemable convertible preferred stock........................... 4,510,934 --------- --------- --------- --------- --------- Weighted-average shares outstanding, assuming dilution................................... 3,491,536 3,485,563 2,938,460 9,093,629 1,488,681 --------- --------- --------- --------- --------- --------- Weighted-average effect of pro forma securities: Series A mandatorily redeemable convertible preferred stock........................... 3,950,947 2,106,282 Series B mandatorily redeemable convertible preferred stock........................... 1,641,227 7,047,620 --------- --------- Pro forma weighted average shares outstanding (unaudited)................................ 8,530,634 10,642,583 --------- --------- --------- ---------
Stock options The Company's stock option plan is subject to the provisions of the Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Under the provisions of this statement, employee stock-based compensation expense is measured using either the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (ABP 25), or the fair value method. The Company has elected to account for its employee F-10 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) stock-based compensation under the provisions of APB 25 and to disclose the pro forma impact of the fair value method on net (loss) income and net (loss) income per share. The Company accounts for stock-based awards issued to non-employees in accordance with the fair value method of SFAS 123. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New accounting pronouncements In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is effective beginning January 1, 1999 and establishes accounting standards for costs incurred in the acquisition or development and implementation of computer software. These new standards will require capitalization of certain software implementation costs relating to software acquired or developed and implemented for the Company's use. This statement is not expected to have a significant effect on the Company's financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement is effective beginning January 1, 1999 and requires costs of start-up activities and organization costs to be expensed as incurred. This statement is not expected to have a significant effect on the Company's financial position or results of operations. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The Company adopted SFAS 130 on January 1, 1998. To date, the Company has not had any significant transactions that are required to be reported as other comprehensive income other than its net (loss) income. The FASB recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management approach." The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The Company adopted SFAS 131 on January 1, 1998. The Company has determined that it does not have any separately reportable business or geographic segments. Unaudited interim financial statements The interim financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited; however, in the opinion of management, the interim data includes all adjustments, F-11 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies (Continued) consisting only of normal recurring adjustments necessary to present fairly the Company's financial position as of March 31, 1999 and the results of its operations and cash flows for the three months ended March 31, 1998 and 1999. Reclassifications Certain items in the 1996 and 1997 financial statements have been reclassified to conform to the 1998 presentation. 2. Sale of HomeScout On March 4, 1998 the Company sold substantially all of the assets related to its HomeScout operations to Homeshark, Inc. for $1,982,000. Cash proceeds of $500,000 were received by the Company upon closing of the sale. The remaining sale price was received in cash during 1998. The Company recorded a gain of $1,626,000. Revenues for HomeScout were $22,000, $61,000 and $19,000 for the years ended December 31, 1996, 1997 and 1998, respectively. 3. Acquisition of DealerNet Assets On December 1, 1997, the Company purchased certain assets of DealerNet, which provides Internet marketing services to auto dealers. DealerNet was previously operated as a division of The Reynolds and Reynolds Company ("Reynolds"). The purchase price was $800,000, of which $500,000 was paid in cash over the twelve months following acquisition and $300,000 was paid by issuance of Series B mandatorily redeemable convertible preferred stock in November 1998. There was additional consideration due depending on the level of revenues attributable to DealerNet clients for the twelve month period following the acquisition. At December 31, 1997, based on revenue projections, the Company expected to pay $90,000 in additional consideration. Based on actual revenues realized, no additional consideration was due to Reynolds. The purchase price and resulting intangible asset was reduced by $90,000 in 1998, and the adjusted basis will be amortized over the remaining life of the related assets. The results of operations of DealerNet are included in the financial statements from the date of acquisition. Unaudited pro forma results as if DealerNet had been included in the financial results during 1996 and 1997 are as follows:
Years ended December 31, -------------------- 1996 1997 --------- --------- (in thousands, except per share amounts) (unaudited) Net revenues............................................................... $ 2,041 $ 3,360 Net loss................................................................... (1,272) (2,704) Basic and diluted net loss per share....................................... $ (0.36) $ (0.78)
F-12 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 3. Acquisition of DealerNet Assets (Continued) The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. 4. Capital Assets A summary of capital assets follows:
December 31, -------------------- March 31, 1997 1998 1999 --------- --------- ----------- (in thousands) (unaudited) Computer equipment.................................................................. $ 361 $ 1,190 $ 1,887 Furniture and other equipment....................................................... 59 378 403 Software............................................................................ 37 161 925 Leasehold improvements.............................................................. -- 134 173 --------- --------- ----------- 457 1,863 3,388 Less: Accumulated depreciation and amortization..................................... (106) (410) (582) --------- --------- ----------- $ 351 $ 1,453 $ 2,806 --------- --------- ----------- --------- --------- -----------
Equipment held under capital leases is included in capital assets. The cost of the leased equipment is $101,000, $1,060,000 and $1,770,000 (unaudited) at December 31, 1997 and 1998 and March 31, 1999, respectively. The accumulated amortization for these items is $36,000 $173,000 and $279,000 (unaudited) at December 31, 1997 and 1998 and March 31, 1999, respectively. 5. Accrued Liabilities A summary of accrued liabilities follows:
December 31, -------------------- March 31, 1997 1998 1999 --------- --------- ----------- (in thousands) (unaudited) Accrued payroll and related benefits................................................. $ 113 $ 324 $ 442 Accrued professional fees............................................................ -- 166 170 Accrued advertising costs............................................................ -- -- 420 Other................................................................................ 45 286 284 --------- --------- ----------- $ 158 $ 776 $ 1,316 --------- --------- ----------- --------- --------- -----------
6. Capital Leases The Company leases various equipment under master lease agreements with one of its shareholders. The leases expire at various dates between October 1999 and December 2001. F-13 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 6. Capital Leases (Continued) Future minimum lease payments at December 31, 1998 for these capital leases are as follows:
Years ending December 31, (in thousands) - ------------------------------------------------------------------------------------------------- 1999........................................................................................... $ 402 2000........................................................................................... 387 2001........................................................................................... 259 ------ Total minimum lease payments..................................................................... 1,048 Less: Portion representing interest.............................................................. (163) ------ Present value of capital lease obligations....................................................... 885 Less: Current portion............................................................................ (328) ------ Capital lease obligations, non-current portion................................................... $ 557 ------ ------
Future minimum lease payments at March 31, 1999 (unaudited) for these capital leases are as follows:
Twelve months ending March 31, (in thousands) - ------------------------------------------------------------------------------------------------- 2000........................................................................................... $ 726 2001........................................................................................... 698 2002........................................................................................... 429 ------ Total minimum lease payments..................................................................... 1,853 ------ Less: Portion representing interest.............................................................. (322) ------ Present value of capital lease obligations....................................................... 1,531 Less: Current portion............................................................................ (560) ------ Capital lease obligations, non-current portion................................................... $ 971 ------ ------
7. Note Payable to Bank Note payable to bank at December 31, 1997 represents the balance due on a line of credit, which bears interest at prime plus 2% (10.5% at December 31, 1997), payable monthly. The line of credit expired November 15, 1998 and was not renewed. 8. Income Taxes From inception through February 28, 1997 the Company was organized as a S corporation for income tax reporting purposes and, as such, the tax effects were passed directly to the shareholders. Effective February 28, 1997, the Company became a C corporation. A current provision for income taxes has not been recorded for the year ended December 31, 1998 or for the period from March 1, 1997 to December 31, 1997, due to taxable losses incurred during the periods. A valuation allowance has been recorded for deferred tax assets because realization is primarily dependent on generating sufficient taxable income prior to expiration of net operating loss carry-forwards. F-14 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 8. Income Taxes (Continued) Temporary differences that give rise to the Company's deferred tax assets and liabilities comprise the following:
December 31, -------------------- 1997 1998 --------- --------- (in thousands) Net operating loss carry-forwards................................................................ $ 724 $ 1,672 Depreciation and amortization.................................................................... (5) 77 Compensation expense related to stock options.................................................... 158 336 Allowance for doubtful accounts.................................................................. 14 29 Accrued liabilities.............................................................................. 11 37 Valuation allowance.............................................................................. (902) (2,151) --------- --------- $ -- $ -- --------- --------- --------- ---------
For the periods in which the Company was a C corporation, a reconciliation of taxes on income at the federal statutory rate to actual tax expense is as follows:
Years ended December 31, -------------------- 1997 1998 --------- --------- (in thousands) Tax at statutory rate.......................................................................... $ (906) $ (1,736) Nondeductible items............................................................................ 6 564 Loss attributed to S corporation............................................................... 66 -- Change in valuation allowance.................................................................. 902 1,249 Other.......................................................................................... (68) (77) --------- --------- $ -- $ -- --------- --------- --------- ---------
At December 31, 1998, the Company had net operating loss carry-forwards of approximately $4.9 million, which will expire beginning in the year 2012, if not previously utilized. Should certain changes in the Company's ownership occur, there could be a limitation on the utilization of its net operating losses. The Company has determined that such a change occurred in October 1998 and the utilization of loss carryforwards generated through that period will be limited. 9. Mandatorily Redeemable Convertible Preferred Stock The Company's Series A and Series B mandatorily redeemable convertible preferred stock each include a provision whereby, at any time after September 30, 2003, a shareholder majority has the right to require the Company to repurchase the shares at the stated redemption price plus any declared and unpaid dividends. The redemption price is $0.55 per share and $4.20 per share plus unpaid dividends for the Series A preferred stock and the Series B preferred stock, respectively. The redemption value of the mandatorily redeemable convertible preferred stock is being accreted over the period from issuance to the earliest redemption date using the effective interest method. The Series A and Series B preferred shares have preferential liquidation and conversion rights, as well as voting and registration rights. The Series A preferred shareholders are entitled to one of the six authorized F-15 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 9. Mandatorily Redeemable Convertible Preferred Stock (Continued) representatives on the Company's Board of Directors and the Series B preferred shareholders are entitled to two of the six. The purchase agreements also contain restrictive covenants, among which are limitations as to dividends, asset sales, indebtedness, capital asset acquisitions and lease agreements. The Series A and Series B mandatorily redeemable preferred stock are both convertible, on a one-for-one basis, into common stock at any time at the option of the holders. These shares automatically convert upon an initial public offering, and the entitlement to Board representatives and restrictive covenant provisions terminate. The Series B preferred shareholders are entitled to receive cumulative dividends in the amount of $0.336 per share per annum. No dividends were declared by the Company during the year ended December 31, 1998. Accumulated unpaid dividends of $549,000 and $1,133,000 (unaudited) at December 31, 1998 and March 31, 1999, respectively, do not bear interest. These unpaid dividends have been recorded as an increase to Series B mandatorily redeemable convertible preferred stock. The Series A preferred shares do not carry a stated dividend. 10. Shareholders' Deficit Stock repurchase On October 7, 1998, the Company used a portion of the proceeds from the issuance of the Series B preferred stock to repurchase and retire 2,173,206 shares of common stock and 2,404,652 shares of Series A preferred stock at $4.20 per share. The number of shares redeemed was sufficient to provide the Series B investor with a 62% ownership position, or a fully diluted basis, as of the investment date. The repurchase price of both the Series A preferred stock and common stock was in excess of the $3.99 and $3.78, respectively, per share fair values of the stock at the date of repurchase. In accordance with EITF Topic D-53, the Company recognized expense of $505,000, which represents the excess of the repurchase price over the fair value of the repurchased preferred shares. In accordance with FASB Technical Bulletin 85-6, the Company recognized expense of $879,000, which represents the excess of the repurchase price over the fair value of all common shares repurchased, with the exception of 76,382 repurchased shares which resulted from employee stock option exercises immediately preceding the repurchase. For these shares, $274,000 in expense was recognized for the excess of the repurchase price over the employees' cost basis in the shares. Other common stock transactions On February 28, 1997, two of the Company's officers, who are also shareholders, entered into an agreement to settle the Company's liability for deferred compensation. The terms of the agreement required a cash payment of half the amount due and the remainder was forgiven by the officers. Such amount is included in shareholders' equity as a contribution of services. As of February 28, 1997, certain of the Company's shareholders had purchased shares of common stock at prices in excess of the share price paid by the Series A Preferred shareholders. To retain their basis in parity with the Series A Preferred share price, these shareholders received a total of 119,867 additional shares of common stock, which the Company accounted for as a stock dividend of $43,000 to non-employee shareholders and as compensation expense of $17,000 to employee shareholders. On February 28, 1997, the company repurchased 613,015 shares of common stock from a former officer and a former employee at $0.30 per share. On August 20, 1996, the Company issued 120,000 shares of common stock each to two shareholders that are also officers of the Company. Two non-recourse notes were accepted in exchange, each in the amount F-16 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit (Continued) of $72,000 with interest at the rate of 8% per annum, due on August 20, 2006. The notes are collateralized by stock pledge agreements for 129,915 shares each, which include the 120,000 shares and 9,915 additional shares issued to each shareholder on February 28, 1997. The notes are included in shareholders' deficit on the balance sheet. Stock warrants During October 1996, the Company issued warrants to purchase 24,000 shares of common stock with an exercise price of $0.30 per share. These warrants were issued to a third party in consideration for professional services performed. The warrants became vested ratably over 24 months and expire in October 2003. These warrants were recorded at their Black Scholes fair value of $12,000, which was recognized as general and administrative expense. The fair value was calculated using the following assumptions: fair value of common stock of $0.75 per share, expected life of 5 years, risk free interest rate of 6.27%, volatility of 90% and dividend yield of 0%. During February 1997, the Company issued warrants to purchase 37,500 shares of common stock with an exercise price of $0.55 per share. These warrants were issued to a third party in consideration for professional services performed. These warrants were fully vested upon issuance and expire in February 2004. These warrants were recorded at their Black Scholes fair value of $14,000, which was recognized as general and administrative expense. The fair value was calculated using the following assumptions: fair value of common stock of $0.50 per share, expected life of 5 years, risk free interest rate of 6.20%, volatility of 90% and dividend yield of 0%. Stock option plan The Company has a stock option plan (the Plan) for employees, directors, consultants or independent contractors under which is reserved 2,750,000 shares of common stock. In April 1999, the number of shares reserved under the plan was increased to 3,641,000. Pursuant to the Plan, the Board of Directors has granted nonqualified stock options and incentive stock options. The vesting period, exercise price and expiration period of options are established at the discretion of the Board of Directors. While some options were vested when granted, options generally vest over a four-year period and expire ten years from the date of grant. In 1996 and 1997, compensation expense of $24,000 and $28,000 was recognized under the Plan for 18,000 and 38,500 options, respectively, granted to third parties. The fair value of each option grant was estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions: exercise prices of $0.60 to $1.25 per share in 1996 and $0.30 to $1.25 per share in 1997; fair value of common stock of $0.60 to $1.25 per share in 1996 and $0.44 to $0.87 per share in 1997; expected lives of 5 years in both years; weighted average risk free interest rate of 6.32% in 1996 and 6.15% in 1997, volatility of 90% in both years and dividend yield of 0% in both years. There was no compensation expense relating to options granted to third parties in 1998. In 1997 and 1998, compensation expense of $406,000 and $532,000, respectively, was recognized under the Plan for 1,351,170 and 655,100 options that were granted to employees with exercise prices below the fair value of the underlying stock. The compensation expense represents the differential between the exercise price and the fair value. During 1997 and 1998, exercise prices ranged from $0.10 to $0.75 and $0.75 to $1.85 per share, respectively, and the fair value of the underlying stock ranged from $0.32 to $2.12 and $2.22 to $4.48, respectively. There was no compensation expense relating to option grants with exercise prices below fair value in 1996. F-17 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit (Continued) In the three months ended March 31, 1998 and 1999, compensation expense of $41,000 and $335,000 (unaudited), respectively, was recognized under the Plan for 95,900 and 299,000 (unaudited) options that were granted to employees with exercise prices below the fair value of the underlying stock. During the three months ended March 31, 1998 and 1999 exercise prices were $0.75 and $1.85 (unaudited), respectively, and the fair value of the underlying stock was $3.54 (unaudited) for the three months ended March 31, 1998 and ranged from $6.02 to $6.43 (unaudited) for the three months ended March 31, 1999. On March 24, 1997, the Board of Directors approved an option repricing. All options issued and outstanding at that date with exercise prices in excess of $0.30 were repriced at $0.30. Had the Company determined compensation expense based on the fair value of the option at the grant date for its stock options issued to employees, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
Three months ended Years ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (in thousands, except per share amounts) (unaudited) Net (loss) income As reported................................................. $ (828) $ (2,665) $ (5,105) $ 1,162 $ (2,335) Pro forma................................................... $ (855) $ (2,805) $ (5,649) $ 1,036 $ (2,833) Basic net (loss) income per share As reported................................................. $ (0.24) $ (0.77) $ (4.74) $ 0.34 $ (1.97) Pro forma................................................... $ (0.24) $ (0.81) $ (4.93) $ 0.30 $ (2.30) Diluted net (loss) income per share As reported................................................. $ (0.24) $ (0.77) $ (4.74) $ 0.13 $ (1.97) Pro forma................................................... $ (0.24) $ (0.81) $ (4.93) $ 0.11 $ (2.30)
The fair value of each option grant is estimated on the date of grant using the minimum value option-pricing model. The following weighted average assumptions were used for employee stock option grants in 1996, 1997 and 1998: risk free interest rate at grant date of 6.22%, 6.26% and 5.11%, respectively, no dividends or volatility and expected lives of five years in all three years. The following weighted average assumptions were used for employee stock option grants for the three months ended March 31, 1998 and March 31, 1999 (unaudited): risk free interest rate at grant date of 5.50% and 4.99%, respectively, no dividends or volatility and expected lives of five years in both periods. The March 24, 1997 option-repricing event is considered a modification of an existing option. For determination of the pro forma amounts, this modification is treated as if a new option had been issued and any additional incremental value recorded in the year of repricing is immediately recognized for vested options and amortized over the remaining vesting period for nonvested options. Pro forma net loss amounts reported above reflect only options granted in 1995 through March 31, 1999. The full impact of calculating compensation expense for stock options based on fair value at the grant date is not reflected in the pro forma net loss amounts because compensation expense is reflected over the options' vesting period of four years. In addition, because the determination of the fair value of all options granted after such time as the Company becomes a public entity will include an expected volatility factor in addition to the factors described in the preceding paragraph, the above results may not be representative of future periods. F-18 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 10. Shareholders' Deficit (Continued) The following summarizes the activity under the Plan:
Weighted- Number of Weighted- average shares under average fair value option exercise of options agreements price granted ------------ ----------- ----------- Balance at January 1, 1996................................................... 102,000 $ 0.20 Options granted.............................................................. 504,384 0.39 $ 0.14 Options exercised............................................................ (3,250) 0.10 Options canceled............................................................. (193,250) 0.39 ------------ Balance at December 31, 1996................................................. 409,884 0.34 Options granted.............................................................. 1,351,170 0.20 0.56 Options exercised............................................................ (4,771) 0.28 Options canceled............................................................. (108,529) 0.48 ------------ Balance at December 31, 1997................................................. 1,647,754 0.20 Options granted.............................................................. 655,100 0.80 3.02 Options exercised............................................................ (110,507) 0.27 Options canceled............................................................. (148,407) 0.37 ------------ Balance at December 31, 1998................................................. 2,043,940 0.39 Options granted (unaudited).................................................. 299,000 1.85 4.71 Options exercised (unaudited)................................................ (478,081) 0.14 Options canceled (unaudited)................................................. (36,940) 0.76 ------------ Balance at March 31, 1999 (unaudited)........................................ 1,827,919 0.69 ------------ ------------ Options exercisable at: December 31, 1996.......................................................... 133,729 $ 0.34 December 31, 1997.......................................................... 1,015,597 $ 0.14 December 31, 1998.......................................................... 1,115,651 $ 0.16
At December 31, 1998, 564,060 shares remained reserved and available for grant under the Plan. The following table summarizes information about stock options outstanding under the Plan at December 31, 1998:
Weighted- average Weighted- Weighted- remaining average average Exercise Number contractual exercise Number exercise price outstanding life price exercisable price - ------------- ----------- --------------- ----------- ---------- ----------- $0.10 812,920 8.2 $ 0.10 812,920 $ 0.10 $0.25-$0.30 522,920 8.0 $ 0.30 275,970 $ 0.30 $0.60 10,000 7.7 $ 0.60 10,000 $ 0.60 $0.75 670,100 9.4 $ 0.75 16,761 $ 0.75 $1.85 28,000 9.8 $ 1.85 ----------- ---------- 2,043,940 1,115,651 ----------- ----------
F-19 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 11. Retirement Savings Plan On August 1, 1997, the Company established a retirement savings plan that qualifies under Internal Revenue Code Section 401(k). The plan covers all qualified employees. Contributions to this plan by the Company are made at the discretion of the Board of Directors. The Company did not contribute to the plan in 1997 and 1998 or during the three months ended March 31, 1998 and 1999 (unaudited). 12. Operating Lease Commitments The Company leases office space in Seattle, Washington, under a lease that expires in October 2000. The lease includes one option to extend the lease term for five years. The Company also leases certain office equipment under various operating leases. Future minimum lease payments for the leases are as follows:
Years ending December 31, (in thousands) - --------------------------------------------------------------------------------------------------- 1999........................................................................................ $ 442 2000........................................................................................ 342 2001........................................................................................ 7 2002........................................................................................ 4 2003........................................................................................ 1 ----- $ 796 ----- -----
Operating lease expense was $31,000 $140,000 and $349,000 for the years ended December 31, 1996, 1997 and 1998, respectively, and $55,000 and $112,000 (unaudited) for the three months ended March 31, 1998 and 1999, respectively. In 1997, the building in which the Company leases its office space was purchased by one of its shareholders. 13. Supplemental Disclosures of Cash Flow Information Cash paid for interest during 1996, 1997 and 1998 was $2,000, $17,000 and $90,000, respectively. Cash paid for interest during the three months ended March 31, 1998 and 1999 was $7,000 and $49,000 (unaudited), respectively. In 1997 and 1998 the Company purchased capital assets under capital leases of $21,000 and $959,000, respectively. The Company did not purchase capital assets under capital leases during 1996. During the three months ended March 31, 1999, the Company purchased capital and other assets under the capital leases and a software financing contract of $1,437,000 (unaudited). The Company did not purchase capital assets under capital leases during the three months ended March 31, 1998. 14. Subsequent Events Advertising commitment In February 1999, the Company entered into an agreement to purchase online advertising, which the Company intends to resell to clients. Under this agreement, the Company is contractually obligated to make aggregate payments of $697,000 through December 31, 1999. Financing commitment and line of credit In April 1999, the Company received a commitment from one of its current investors to provide any financing necessary for the Company to meet its current operating and growth objectives through December 31, 1999 if alternative sources of financing are not obtained. F-20 The Cobalt Group, Inc. Notes to Financial Statements (Continued) 14. Subsequent Events (Continued) In May 1999, the Company secured a $5.0 million line of credit from an institutional lender. This line of credit bears interest at prime plus 2% and is due on the earlier of completion of this offering or December 31, 1999. The line of credit is secured by the Company's assets. Acquisition On April 30, 1999, the Company acquired all of the equity interests in PartsVoice, LLC (PartsVoice), whose principal business is vehicle parts data acquisition and management services. Immediately prior to the closing, PartsVoice distributed to its owners certain assets and liabilities. At closing, the Company paid aggregate purchase consideration for the PartsVoice equity of (i) $3.0 million in cash; (ii) promissory notes in the principal amount of (a) $8.0 million due on the earlier of completion of an initial public offering or July 30, 1999 and (b) $15.0 million due on the earlier of the completion of an initial public offering or January 25, 2000; (iii) 500,000 shares of Series C convertible preferred stock at $8.00 per share; and (iv) warrants to purchase 160,000 shares of the Company's common stock at $6.00 per share. The fair value of the warrants is $381,000 using the Black Scholes option-pricing model with the following assumptions: fair value of common stock of $7.20 per share, expected life of six months, risk free interest rate of 4.66%, volatility of 90% and dividend yield of 0%. The Company's obligations under the promissory notes are secured by a pledge of the PartsVoice equity interests and an agreement with respect to the management of the PartsVoice equity interests, pending payment in full of the promissory notes. The Company will account for the PartsVoice acquisition using the purchase method of accounting. The aggregate purchase price will be allocated to the net assets acquired, based upon their respective fair market values. The excess of the purchase price, including estimated acquisition costs, over the fair market value of the assets acquired will be allocated to intangible assets. The following summarizes the unaudited pro forma results of operations, on a combined basis, as if the Company's acquisition of PartsVoice occurred as of the beginning of each of the periods presented, after including the impact of certain adjustments such as amortization of cost in excess of net assets acquired:
Three months Year ended Ended December 31, March 31, 1998 1999 ------------ ------------- (in thousands, except per share amounts) Net revenues......................................................................... $ 15,773 $ 5,009 Net loss............................................................................. (7,592) (2,947) Basic and diluted net loss per share................................................. $ (5.67) $ (2.42)
The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. Initial public offering On April 30, 1999, the Company's Board of Directors authorized the Company to initiate a potential initial public offering of its common stock. F-21 Report of Independent Accountants To the Board of Directors and Shareholders of The Cobalt Group, Inc. In our opinion, the accompanying combined balance sheets and the related combined statements of operations, changes in owners' equity, of comprehensive income and of cash flows present fairly, in all material respects, the financial position of PartsVoice (the Company), consisting of the operations of PartsVoice, a general partnership, and Compu-Time, Inc., at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Seattle, Washington May 12, 1999 F-22 PartsVoice Combined Balance Sheets (in thousands)
December 31, March 31, -------------------- ----------- 1997 1998 1999 --------- --------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents....................................................... $ 216 $ 497 $ 461 Accounts receivable, net of allowance for doubtful accounts of $46, $41 and $41 (unaudited), respectively...................................................... 833 1,032 1,081 Other current assets............................................................ 26 3 8 --------- --------- ----------- 1,075 1,532 1,550 Marketable securities............................................................. 144 405 398 Capital assets, net............................................................... 164 123 106 Other noncurrent assets........................................................... 136 200 213 --------- --------- ----------- Total assets.................................................................. $ 1,519 $ 2,260 $ 2,267 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND OWNERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........................................ $ 81 $ 203 $ 211 Distribution payable to owners.................................................. 865 1,087 825 --------- --------- ----------- 946 1,290 1,036 --------- --------- ----------- Noncurrent portion of notes payable............................................... 12 8 87 --------- --------- ----------- Commitments and contingencies (Note 7) Owners' equity: Common stock and partners' capital.............................................. 702 1,070 1,259 Accumulated other comprehensive loss............................................ (141) (108) (115) --------- --------- ----------- 561 962 1,144 --------- --------- ----------- Total liabilities and owners' equity.......................................... $ 1,519 $ 2,260 $ 2,267 --------- --------- ----------- --------- --------- -----------
The accompanying notes are an integral part of the combined financial statements. F-23 PartsVoice Combined Statements of Operations (in thousands)
Three months ended Year ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (unaudited) Net revenues..................................................... $ 6,679 $ 7,715 $ 9,528 $ 2,144 $ 2,556 Cost of revenues................................................. 1,714 1,965 2,144 479 583 --------- --------- --------- --------- --------- Gross profit................................................. 4,965 5,750 7,384 1,665 1,973 Sales and marketing expense...................................... 1,339 1,419 1,662 431 520 General and administrative expenses.............................. 1,012 1,054 1,180 304 296 --------- --------- --------- --------- --------- Income from operations....................................... 2,614 3,277 4,542 930 1,157 Other (expense) income........................................... (1) 28 65 6 4 --------- --------- --------- --------- --------- Net income................................................... $ 2,613 $ 3,305 $ 4,607 $ 936 $ 1,161 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-24 PartsVoice Combined Statements of Changes in Owners' Equity (in thousands)
Accumulated Common Stock and Other Total Partners' Comprehensive Owners' Capital Loss Equity ---------------- --------------- --------- Balance, December 31, 1995............................................ $ 288 $ (39) $ 249 Net income............................................................ 2,613 -- 2,613 Distributions......................................................... (2,438) -- (2,438) ------- ----- --------- Balances, December 31, 1996........................................... 463 (39) 424 Net income............................................................ 3,305 -- 3,305 Distributions......................................................... (3,066) -- (3,066) Unrealized loss on securities......................................... -- (102) (102) ------- ----- --------- Balances, December 31, 1997........................................... 702 (141) 561 Net income............................................................ 4,607 -- 4,607 Distributions......................................................... (4,239) -- (4,239) Unrealized gain on securities......................................... -- 33 33 ------- ----- --------- Balances, December 31, 1998........................................... 1,070 (108) 962 Net income (unaudited)................................................ 1,161 -- 1,161 Distributions (unaudited)............................................. (972) -- (972) Unrealized loss on securities (unaudited)............................. -- (7) (7) ------- ----- --------- Balances, March 31, 1999 (unaudited).................................. $ 1,259 $ (115) $ 1,144 ------- ----- --------- ------- ----- ---------
The accompanying notes are an integral part of the combined financial statements. F-25 PartsVoice Combined Statements of Comprehensive Income (in thousands)
Three months ended Year ended December 31, March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (unaudited) Net income............................................ $ 2,613 $ 3,305 $ 4,607 $ 936 $ 1,161 Unrealized (loss) gain on securities.................. -- (102) 33 -- (7) --------- --------- --------- --------- --------- Comprehensive income.................................. $ 2,613 $ 3,203 $ 4,640 $ 936 $ 1,154 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-26 PartsVoice Combined Statements of Cash Flows (in thousands)
Three months Year ended December 31, ended March 31, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (unaudited) Cash flows from operating activities: Net income................................................. $ 2,613 $ 3,305 $ 4,607 $ 936 $ 1,161 Depreciation............................................... 50 50 80 13 20 Gain on sale of equipment.................................. (7) Net changes in: Accounts receivable...................................... (228) (105) (199) 78 (49) Other current assets..................................... (13) 19 23 (10) (5) Other noncurrent assets.................................. (17) (52) (64) (16) (13) Accounts payable and accrued liabilities................. 52 (36) 122 (1) 8 --------- --------- --------- --------- --------- Net cash provided by operating activities................ 2,457 3,181 4,569 1,000 1,115 --------- --------- --------- --------- --------- Cash flows used by investing activities: Purchases of equipment and furniture....................... (58) (108) (39) (10) (3) (Purchase) sale of marketable securities................... (22) (146) (228) (7) 7 --------- --------- --------- --------- --------- Net cash used by investing activities.................... (80) (254) (267) (17) 4 --------- --------- --------- --------- --------- Cash flows used by financing activities: Net change in notes payable................................ (61) 12 (4) (1) 79 Distributions to owners.................................... (2,456) (2,947) (4,017) (546) (1,234) --------- --------- --------- --------- --------- Net cash used by financing activities.................... (2,517) (2,935) (4,021) (547) (1,155) --------- --------- --------- --------- --------- Net (decrease) increase in cash.......................... (140) (8) 281 436 (36) Cash and cash equivalents at beginning of period......... 364 224 216 216 497 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period............... $ 224 $ 216 $ 497 $ 652 461 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the combined financial statements. F-27 PartsVoice Notes to Combined Financial Statements 1. Nature of the Business and Summary of Significant Accounting Policies: Nature of the Business and Basis of Presentation The combined business of PartsVoice, a general partnership, and Compu-Time, Inc. (CTI) (the Company) provides parts data acquisition and management services to auto manufacturers and dealers. The Partnership was founded in 1988. CTI was founded in 1978. The accompanying combined financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited combined financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the combined financial position and results of operations for the interim periods. Certain information and footnote disclosures normally involved in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Principles of Combination The accompanying combined financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Marketable Securities Marketable securities consist of certificates of deposit and equity securities. All marketable securities are classified as available-for-sale as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Investments in Certain Debt and Equity Securities" and are recorded at fair market value determined by the most recently traded price of securities held at each balance sheet date. Unrealized gains or losses on available-for-sale securities are recorded as a component of accumulated other comprehensive income in owners' equity. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the combined statement of operations. Capital Assets Capital assets consist of computer equipment, furniture and other equipment, purchased software and leasehold improvements, all of which are stated at cost. Depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over either their estimated service lives or the life of the related lease on a straight-line basis. The useful lives of the property, equipment and software range from three to five years. Maintenance and repairs, which neither materially add to the value of the property nor prolong its life, are charged to expense as incurred. Gains or losses on dispositions of capital assets are included in income. F-28 PartsVoice Notes to Combined Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies: (Continued) Capital Structure Given the Company's historical capital structure, historical shares outstanding and earnings per share amounts for Compu-Time, Inc. are not presented as they are not considered meaningful. Revenue Recognition The Company's revenues consist principally of subscription fees charged to auto manufacturers and dealers periodically throughout each year. Revenue is recognized ratably over the period during which services are rendered. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily accounts receivable, cash equivalents and certificates of deposit. The Company does not require collateral from its customers. One automobile manufacturer and its related entities accounted for 31%, 35% and 41% of the Company's revenues during the years ended December 31, 1996, 1997 and 1998, respectively. At December 31, 1997 and 1998, these entities comprised 58% and 70%, respectively of the accounts receivable balance. The Company has a cash investment policy which restricts investments to ensure preservation of principal and maintenance of liquidity. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 1996, 1997 and 1998 were $42,000, $68,000 and $123,000, respectively. Income Taxes CTI was a C corporation under the Internal Revenue Code (IRC) until May 31, 1997, at which time it elected to be taxed as a S corporation under the IRC. Income taxes on earnings through May 31, 1997 were immaterial and have not been separately presented. Subsequent to May 31, 1997 for CTI, and for all periods presented with respect to the Partnership, the combined operations have not been subject to federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying combined financial statements because the income or loss of CTI and the Partnership for those periods is included in the tax returns of the individual owners. The tax returns of CTI and the Partnership are subject to examination by federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liabilities of the owners could be adjusted accordingly. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-29 PartsVoice Notes to Combined Financial Statements (Continued) 1. Nature of the Business and Summary of Significant Accounting Policies: (Continued) Comprehensive Income In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income", which became effective in 1998. This statement establishes rules for the reporting of comprehensive income. Other comprehensive income or loss is shown in the combined statements of comprehensive income and is solely comprised of unrealized losses on available-for-sale securities. 2. Marketable Securities: Marketable securities consist of certificates of deposit maturing on March 17, 2003 and June 3, 2003 and available-for-sale equity securities. Marketable securities are summarized as follows:
December 31, -------------------------------------------------- 1997 1998 ------------------------ ------------------------ Cost Fair Value Cost Fair Value --------- ------------- --------- ------------- (in thousands) Equity Securities............................................... $ 285 $ 144 $ 494 $ 386 Certificates of Deposit......................................... -- -- 19 19 --------- ----- --------- ----- Total marketable securities................................... $ 285 $ 144 $ 513 $ 405 --------- ----- --------- ----- --------- ----- --------- -----
3. Capital Assets: Capital assets were as follows at:
December 31, -------------------- March 31, 1997 1998 1999 --------- --------- ----------- (in thousands) (unaudited) Furniture and fixtures..................................... $ 33 $ 33 $ 33 Equipment.................................................. 285 318 318 Trucks and automobiles..................................... 118 118 118 Office equipment........................................... 12 18 21 --------- --------- ----- 448 487 490 Less accumulated depreciation and amortization............. (284) (364) (384 ) --------- --------- ----- $ 164 $ 123 $ 106 --------- --------- ----- --------- --------- -----
F-30 PartsVoice Notes to Combined Financial Statements (Continued) 4. Note Payable: The note payable bears interest at a rate of 6.4%, requires payments of $4,000 per year and is due December 15, 2001. The note payable is secured by one vehicle owned by the Company. Payments are due as follows at December 31, 1998:
(in thousands) 1999........................................................................... $ 4 2000........................................................................... 4 2001........................................................................... 4 --- $ 12 --- --- Noncurrent portion............................................................. $ 8 --- ---
5. Related Parties: The Company has a profit sharing arrangement with its owners. As of December 31, 1997 and 1998, the net payables to partners as a result of this arrangement were $865,000 and $1,087,000, respectively, and at March 31, 1999 the net payable was $825,000 (unaudited). Distributions to the partners in connection with the arrangement were $2,438,000, $3,066,000 and $4,239,000 in 1996, 1997 and 1998, respectively, and distributions were $546,000 and $972,000 (unaudited) for the three months ended March 31, 1998 and 1999, respectively. 6. Employee Benefit Plans: The Company maintains retirement savings plans that qualify under Internal Revenue Code Section 401(k). The plans cover all qualified employees. Contributions to these plans may be made at the discretion of the Company. No contributions were made for the years ended December 31, 1996, 1997 and 1998. CTI also maintains an Aged Weighted Profit Sharing Plan for which all qualified CTI employees are eligible. Contributions to the Profit Sharing Plan are made at the discretion of the Company. Contributions related to this plan were $37,000 and $85,000 for the years ended December 31, 1997 and 1998. No contributions were made for the year ended December 31, 1996. 7. Operating Lease Commitments: The Company leases office space in Portland, Oregon under a lease that expires in November 1999. The Company also leases certain office equipment and vehicles under various operating leases. Future minimum lease payments for the leases are as follows:
Years ending December 31, (in thousands) - ------------------------------------------------------------------------------- 1999........................................................................... $ 137 2000........................................................................... 17 2001........................................................................... 9 ----- $ 163 ----- -----
F-31 PartsVoice Notes to Combined Financial Statements (Continued) 7. Operating Lease Commitments: (Continued) Operating lease expense was $156,000, $158,000 and $168,000 for the years ended December 31, 1996, 1997 and 1998, respectively. 8. Subsequent Event: On April 30, 1999 all assets and liabilities of the Partnership and CTI were contributed to a new Oregon limited liability company, PartsVoice, LLC. On April 30, 1999, all of the equity interests of PartsVoice, LLC were purchased by The Cobalt Group, Inc. ("Cobalt"). Immediately prior to the purchase, there was a distribution of certain assets and all liabilities to the former owners. Cobalt paid an aggregate purchase consideration of: (i) $3.0 million in cash; (ii) promissory notes in the principal amount of (a) $8.0 million due on the earlier of completion of an initial public offering or July 30, 1999 and (b) $15.0 million due on the earlier of the completion of an initial public offering or January 25, 2000; (iii) 500,000 shares of Series C convertible preferred stock at $8.00 per share; and (iv) warrants to purchase 160,000 shares of the Company's common stock at $6.00 per share. The promissory notes bear interest at the rate of 8.75% per annum and are secured by a pledge of the PartsVoice, LLC equity interests. F-32 [INSIDE BACK COVER] DESCRIPTION OF ARTWORK: [Background is a watermark image of an automobile. Foreground contains four screen shots of Web sites created by Cobalt and the heading "Cobalt." Under the heading the text reads: "driving success for our clients" followed by "Acura, Chrysler, Hyundai, Infiniti, Jaguar, Lexus, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Toyota, AutoNation, Inc., Hendrick Automotive Group, Planet Automotive, Sonic Automotive, United Auto . . . and thousands of individual auto dealers." Varnish lines connect the screen shots to the corresponding names of listed clients.] [OUTSIDE BACK COVER] DESCRIPTION OF ARTWORK: [Cobalt logo being held aloft by four people. At the bottom of the page the text reads: "group."] The Cobalt Group, Inc. Logo Until , 1999 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, to be paid in connection with the sale of the common stock being registered, all of which will be paid by the Registrant. All amounts are estimates except the SEC registration, NASD and Nasdaq filing fees. SEC Registration fee...................................................... $ 23,978 NASD filing fee........................................................... 9,125 Nasdaq National Market listing fee........................................ 95,000 Blue Sky fees and expenses................................................ 5,000 Accounting fees and expenses.............................................. 200,000 Legal fees and expenses................................................... 300,000 Transfer agent and registrar fees......................................... 10,000 Printing and engraving expenses........................................... 100,000 Miscellaneous expenses.................................................... 6,897 --------- Total..................................................................... $ 750,000 --------- ---------
ITEM 14. Indemnification of Directors and Officers Cobalt's articles of incorporation limit the liability of directors to the maximum extent permitted by Washington law. Washington law provides that the articles of incorporation may contain provisions that eliminate or limit the personal liability of a directors to the corporation or its shareholders provided that such provisions do not eliminate or limit the liability of a director for (1) acts or omissions involving intentional misconduct or a knowing violation of law, (2) unlawful payments of distributions, or (3) any transaction from which the director will personally receive an improper benefit in money, property, or services. Cobalt's bylaws provide that Cobalt shall indemnify its directors and officers and may indemnify its employees and other agents to the fullest extent permitted by law. Cobalt's bylaws also permit it to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. Cobalt will maintain officers' and directors' liability insurance which will insure against liabilities that officers and directors of Cobalt may incur in such capacities. Cobalt also intends to enter into indemnification agreements with its directors and officers. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of Cobalt and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. Recent Sales of Unregistered Securities (a) Since January 1, 1996, Cobalt has made the following sales of securities that were not registered under the Securities Act: 1. From February through August 1996, Cobalt issued 507,197 shares of common stock to six individual third party investors at purchase prices ranging from $0.44 to $0.60 per share. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. II-1 2. In August 1996, Cobalt issued 120,000 shares of common stock to each of Mr. Barker and Mr. Holt at a purchase price of $0.60 per share. In satisfaction of the purchase price, Messrs. Barker and Holt each executed promissory notes to Cobalt due in August 2006 in the principal amount of $72,000. The promissory notes bear interest at a rate of 8% per annum. Each promissory note is secured by a pledge of the common stock issued in the purchase transaction. The shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 3. From September through December 1996, Cobalt issued 120,000 shares of common stock to two individual third party investors and to Ms. Davidson, at prices ranging from $0.75 to $1.25 per share. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 4. On October 23, 1996, Cobalt issued to The Madrona Investment Group, LLC a warrant to purchase 24,000 shares of common stock at an exercise price of $1.25 per share. The Madrona warrant was later repriced at $0.30 per share. The Madrona warrant expires on October 31, 2003. The warrant was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 5. In January and February 1997, Cobalt sold 6,750 shares of common stock to two employees at $1.25 per share. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 6. On February 27, 1997, Cobalt issued to GH Investments a warrant to purchase 37,500 shares of common stock at an exercise price of $0.55 per share. The GH Investments warrant expires on February 28, 2004. The warrant was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 7. During the period from May 27, 1996 through May 27, 1999, Cobalt granted options to purchase an aggregate of 4,057,612 shares of common stock pursuant to its stock option plan. 897,495 shares of common stock have been issued on exercise of such options in reliance on Rule 701 under the Securities Act. 8. On February 28, 1997, Cobalt issued and sold 4,510,934 shares of Series A Preferred Stock to investment funds affiliated with First Analysis Corporation for an aggregate consideration of $2.5 million in cash. The sale of the Series A Preferred Stock was made in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act. Following this sale of Series A Preferred Stock, Cobalt also issued 119,867 shares of common stock to nine existing shareholders who had purchased common stock at a per share price greater than that paid by First Analysis Corporation. These dilution protection shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. 9. On October 7, 1998 and November 6, 1998, Cobalt issued and sold 7,047,620 shares of Series B and Series B-1 Preferred Stock to Warburg, Pincus Equity Partners, L.P. and The Reynolds and Reynolds Company for an aggregate consideration of $29.3 million in cash and as partial consideration for an asset purchase. Sales of the Series B and Series B-1 Preferred Stock were made in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act. 10. On April 30, 1999, Cobalt issued and sold 12,500 shares of Series C Preferred Stock to Howard Tullman, a Director of Cobalt. Also on April 30, 1999, Cobalt issued and sold 500,000 shares of Series C Preferred Stock to two entities that previously held equity in PartsVoice, LLC and warrants to purchase an additional 160,000 shares of Series C Preferred Stock at an exercise price of $6.00 per share to those same two entities and a third entity that previously held equity in PartsVoice LLC for an aggregate consideration of $4.1 million. Sales of the Series C Preferred Stock were made in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act. II-2 (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). ITEM 16. Exhibits and Financial Statement Schedules (a) Exhibits
Number Description - --------- -------------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of The Cobalt Group, Inc. 3.2 Bylaws of The Cobalt Group, Inc. 5.1 Opinion of Stoel Rives LLP 10.1* The Cobalt Group, Inc. 1995 Stock Option Plan, as amended. 10.2* Promissory Note, dated August 20, 1996, between The Cobalt Group, Inc. and John W.P. Holt (and schedule of similar Note between The Cobalt Group, Inc. and Geoffrey T. Barker). 10.3* Lease Agreement, dated September 14, 1996, between The Cobalt Group, Inc. and David and Nancy Jo Edelstein. 10.3.1* Amendment No. 1 to Lease Agreement, dated April 21, 1998, between First and Lenora, LLC and The Cobalt Group, Inc. 10.3.2* Amendment No. 2 to Lease Agreement, dated December 16, 1998, between First and Lenora, LLC and The Cobalt Group, Inc. 10.4* Purchase Warrant, dated October 23, 1996, from The Cobalt Group, Inc. to Madrona Investment Group, LLC. 10.5* Confidentiality and Noncompetition Agreement, dated February 28, 1997, between The Cobalt Group, Inc. and John W.P. Holt (and schedule of similar Agreement with Geoffrey T. Barker). 10.6* Purchase Warrant, dated February 27, 1997 from The Cobalt Group, Inc. to GH Investments. 10.7* Registration Agreement, dated February 28, 1997, between The Cobalt Group, Inc., The Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P. and Mark T. Koulogeorge. 10.7.1* First Amendment to Registration Agreement, dated October 7, 1998, between The Cobalt Group, Inc., the Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P. and Mark T. Koulogeorge. 10.7.2* Second Amendment to Registration Agreement, dated July 7, 1998, between The Cobalt Group, Inc., the Productivity Fund III, L.P., Environmental Private Equity Fund II, L.P. and Mark T. Koulogeorge. 10.8* Management Services Agreement, dated February 28, 1997, between The Cobalt Group, Inc. and First Analysis Securities Corporation. 10.8.1* First Amendment to Management Services Agreement, dated October 7, 1998, between The Cobalt Group, Inc. and First Analysis Securities Corporation. 10.9* Lease Agreement, dated October 20, 1997, between Compu-Time, Inc. and CTL Management, Inc. 10.10 Acquisition and Investment Agreement, dated November 25, 1997, between The Cobalt Group, Inc. and The Reynolds and Reynolds Company. 10.11* Asset Purchase Agreement, dated March 3, 1998, between The Cobalt Group, Inc. and Home Shark, Inc. 10.12* Lease Agreement, dated December 1, 1997, between Parts Voice and CTL Management, Inc. 10.13* Series B Stock Purchase Agreement, dated October 7, 1998, between The Cobalt Group, Inc. and E.M. Warburg, Pincus, L.P.
II-3
Number Description - --------- -------------------------------------------------------------------------------------------------------- 10.14* Information Rights Agreement, dated October 7, 1998, between The Cobalt Group, Inc. and the holders of Series A Preferred Stock. 10.15* Purchase Agreement, dated April 19, 1999, between The Cobalt Group, Inc., Locators, Inc., Parts Finder Locating Systems, Inc., Compu-Time, Inc., Brian Allen and Shirley Atherton. 10.16* Agreement for Management of Security, dated April 30, 1999, between The Cobalt Group, Inc., Compu-Time, Inc, Parts Finder Locating Systems, Inc. and Locators, Inc. 10.17* Pledge and Security Agreement, dated April 30, 1999, between The Cobalt Group, Inc., Compu-Time, Inc., Parts Finder Locating Systems, Inc. and Locators, Inc. 10.18* Warrant Shares and Series C Preferred Shares Registration Agreement, dated April 30, 1999, between The Cobalt Group, Inc., Compu-Time, Inc., Parts Finder Locating Systems, Inc. and Locators, Inc. 10.19* 90-Day Promissory Note, dated April 30, 1999, between The Cobalt Group, Inc. and Compu-Time, Inc. (and schedule of similar Notes). 10.20* 270-Day Promissory Note, dated April 30, 1999, between The Cobalt Group, Inc. and Compu-Time, Inc. (and schedule of similar Notes). 10.21* Purchase Warrant, dated April 30, 1999, from The Cobalt Group, Inc. to Parts Finder Locating Systems, Inc. (and schedule of similar Warrants). 10.22 Loan and Security Agreement, dated May 27, 1999, between The Cobalt Group, Inc. and Greyrock Capital. 10.23 The Cobalt Group, Inc. 1999 Employee Stock Purchase Plan. 10.24 Share Purchase Agreement dated July 7, 1999 between The Cobalt Group, Inc. and GE Financial Assurance Holdings, Inc. 10.25 Letter Agreement dated July 7, 1999 between The Cobalt Group, Inc. and GE Capital Management Corporation. 11.1* Statement Regarding Computation of Per Share Earnings. 21.1* Subsidiaries of the Registrant. 23.1 Consent of Stoel Rives LLP (reference is made to Exhibit 5.1). 23.2 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants. 23.3 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants. 24.1* Power of Attorney. 27.1 Financial Data Schedule.
(b) Financial Statement Schedules 16.1* Report of Independent Accountants on Financial Statement Schedule. 16.2 Schedule II: Valuation and Qualifying Accounts.
- --------- * Previously filed ITEM 17. Undertakings (a) The undersigned Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, II-4 unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus as filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective, (2) for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be an initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Seattle, State of Washington, on the 8th day of July 1999. THE COBALT GROUP, INC. By: /s/ GEOFFREY T. BARKER ----------------------------------------- Name: Geoffrey T. Barker Title: CO-CHIEF EXECUTIVE OFFICER AND DIRECTOR
Name Title Date - ------------------------------ -------------------------- ------------------- /s/ GEOFFREY T. BARKER Co-Chief Executive Officer - ------------------------------ and Director (principal July 8, 1999 Geoffrey T. Barker executive officer) /s/ JOHN W.P. HOLT * Co-Chief Executive Officer - ------------------------------ and Director (principal July 8, 1999 John W.P. Holt executive officer) /s/ DAVID M. DOUGLASS* Chief Financial Officer, - ------------------------------ Vice President, July 8, 1999 David M. Douglass Operations and Secretary /s/ HOWARD A. TULLMAN * - ------------------------------ Chairman of the Board of July 8, 1999 Howard A. Tullman Directors /s/ MARK T. KOULOGEORGE * - ------------------------------ Director July 8, 1999 Mark T. Koulogeorge /s/ JOSEPH P. LANDY * - ------------------------------ Director July 8, 1999 Joseph P. Landy /s/ ERNEST H. POMERANTZ * - ------------------------------ Director July 8, 1999 Ernest H. Pomerantz /s/ J. D. POWER, III * - ------------------------------ Director July 8, 1999 J. D. Power, III
* By /s/ GEOFFREY T. BARKER ------------------------- Geoffrey T. Barker Attorney-in-fact
II-6 ALTERNATE COVER PAGE FOR INTERNATIONAL PROSPECTUS THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 8, 1999 [LOGO] 4,500,000 SHARES COMMON STOCK The Cobalt Group, Inc. is offering 4,500,000 shares of its common stock. This is Cobalt's initial public offering. We have applied for the common stock to be quoted on the Nasdaq National Market under the symbol "CBLT." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. ------------------------ Investing in our common stock involves risks. See "Risk Factors" beginning on page 4. ---------------------
Per Share Total ----------- ------------- Public Offering Price.................................................................. $ $ Underwriting Discounts................................................................. $ $ Proceeds to Cobalt..................................................................... $ $
Concurrently with the sale of the shares of common stock in this offering, GE Financial Assurance Holdings, Inc. has agreed to purchase directly from Cobalt $5.0 million in aggregate purchase price of shares of common stock at the public offering price. The commitment of GE Financial Assurance Holdings, Inc. to make this purchase is not binding at a per share price above $16.00. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We have granted the underwriters the right to purchase up to an additional 675,000 shares of common stock to cover over-allotments. BancBoston Robertson Stephens International Limited expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED BEAR, STEARNS INTERNATIONAL LIMITED SG COWEN INTERNATIONAL L.P. The date of this prospectus is . EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 UNDERWRITING AGREEMENT __________, 1999 BancBoston Robertson Stephens Inc. Bear, Stearns & Co. Inc. SG Cowen Securities Corporation Wit Capital Corporation c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: INTRODUCTORY. The Cobalt Group, Inc., a Washington corporation (the "Company), proposes to issue and sell to the several underwriters named in SCHEDULE A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares") of its Common Stock, par value $0.01 per share (the "Common Shares"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional [___] Common Shares (the "Option Shares") as provided in Section 2. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares". BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., SG Cowen Securities Corporation and Wit Capital Corporation have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-79483), which contains a form of prospectus subject to completion used in connection with the public offering and sale of the Shares. Each such prospectus subject to completion used in connection with such public offering is called a "preliminary prospectus." Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus." All references in this -1- Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus or the Prospectus, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES A. REPRESENTATIONS AND WARRANTIES. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will 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 therein not misleading. Each preliminary prospectus as of its date and the Prospectus, as amended or supplemented, as of its date and at all subsequent times through the thirtieth day from the date hereof, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has delivered to each of the Representatives one complete conformed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in -2- such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE COMPANY. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement except for such rights as have been duly waived. (g) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers, LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) filed with the Commission as a part of the Registration Statement and included in each preliminary prospectus and the Prospectus, are independent public or certified public accountants as required by the Securities Act. -3- (i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements filed with the Commission as a part of the Registration Statement and included in each preliminary prospectus and the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Summary--Summary Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. The pro forma financial data of the Company and its subsidiaries and the related notes thereto included under the caption "Summary--Summary Financial Data", "Selected Financial Data", "Unaudited Pro forma Combined Financial Information" and elsewhere in the Prospectus and in the Registration Statement present fairly the information contained therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly presented on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. No other pro forma financial information is required to be included in the Registration Statement pursuant to Regulation S-X. (j) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its subsidiaries maintain a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) SUBSIDIARIES OF THE COMPANY. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement. (l) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS SUBSIDIARIES. Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction in which it is organized with full corporate or limited liability company power and authority to own its properties and conduct its business as described in the prospectus, and is duly qualified to do business as a foreign entity and is in good standing under the laws of each jurisdiction which requires such qualification. (m) CAPITALIZATION OF THE SUBSIDIARIES. All the outstanding shares of capital stock of each -4- subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances. (n) NO PROHIBITION ON SUBSIDIARIES FROM PAYING DIVIDENDS OR MAKING OTHER DISTRIBUTIONS. No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus. (o) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Shares (including the Shares) conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding Common Shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (p) STOCK EXCHANGE LISTING. The Shares have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (q) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the National Association of Securities Dealers, LLC and (iii) by the federal and provincial laws of Canada. (r) NON-CONTRAVENTION OF EXISTING AGREEMENTS. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, -5- (i) the articles of incorporation or by-laws or operating agreement of the Company or any of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or bound or to which its or their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its subsidiaries or any of its or their properties. (s) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any subsidiary is in violation or default of (i) any provision of its articles of incorporation or by-laws or operating agreement, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a Material Adverse Change except as otherwise disclosed in the Prospectus. (t) NO ACTIONS, SUITS OR PROCEEDINGS. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a Material Adverse Effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. (u) ALL NECESSARY PERMITS, ETC. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (v) TITLE TO PROPERTIES. The Company and each subsidiary have good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A)(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. -6- (w) TAX LAW COMPLIANCE. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A)(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined. The Company is not aware of any tax deficiency that has been or might be asserted or threatened against the Company that could result in a Material Adverse Change. (x) INTELLECTUAL PROPERTY RIGHTS. Each of the Company and its subsidiaries owns or possesses all rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus other than as described in the Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a Material Adverse Change that is not otherwise disclosed in each preliminary prospectus and in the Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights other than as described in the Prospectus; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Change other than as described in the Prospectus. There is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company and its subsidiaries do not in the conduct of their business as now or proposed to be conducted as described in each preliminary prospectus and in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its subsidiaries, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (y) YEAR 2000 PREPAREDNESS. There are no issues related to the Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act which have not been accurately described in the Registration Statement, each preliminary prospectus and the Prospectus or (ii) might reasonably be expected to result in any Material Adverse Change or that might materially affect their properties, assets or rights. Except as disclosed in the Registration Statement, each preliminary prospectus and the Prospectus, all internal computer systems and each Constituent Component (as -7- defined below) of those systems and all computer-related products and each Constituent Component (as defined below) of those products of the Company and each of its subsidiaries fully comply with Year 2000 Qualification Requirements. "Year 2000 Qualifications Requirements" means that the internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products and each Constituent Component (as defined below) of those products of the Company and each of its Subsidiaries (i) have been reviewed to confirm that they store, process (including sorting and performing mathematical operations, calculations and computations), input and output data containing date and information correctly regardless of whether the date contains dates and times before, on or after January 1, 2000, (ii) have been designated to ensure date and time entry recognition and calculations, and date data interface values that reflect the century, (iii) accurately manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and will not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates, (iv) accurately process any date rollover, and (v) accept and respond to two-digit year date input in a manner that resolves any ambiguities as to the century. "Constituent Component" means all software (including operating systems, programs, packages and utilities), firmware, hardware, networking components, and peripherals provided as part of the configuration. The Company has inquired of material vendors as to their preparedness for the Year 2000 and has disclosed in the Registration Statement, each preliminary prospectus and the Prospectus any issues that might reasonably be expected to result in any Material Adverse Change. (z) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the shares. (aa) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (ab) INSURANCE. The Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes, general liability and Directors and Officers liability. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (ac) LABOR MATTERS. To the best of Company's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, value -8- added resellers, subcontractors, original equipment manufacturers, authorized dealers or international distributors that might be expected to result in a Material Adverse Change. (ad) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (ae) LOCK-UP AGREEMENTS. Each officer and director of the company and each beneficial owner of one or more percent of the outstanding issued share capital of the Company has agreed to sign an agreement substantially in the form attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements or any similar market stand-off agreements currently existing or hereafter effected without the prior written consent of BancBoston Robertson Stephens Inc. RELATED PARTY TRANSACTIONS. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. ERISA COMPLIANCE. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, or its subsidiaries or its "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or -9- any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES (a) THE FIRM SHARES. The Company agrees to issue and sell to the several Underwriters the Firm Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on SCHEDULE A. The purchase price per Firm Share to be paid by the several Underwriters to the Company shall be $[___] per share. (b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 6:00 a.m. San Francisco time, at the offices of Stoel Rives LLP, One Union Square, 600 University Street, Suite 3600, Seattle, Washington 98101 (or at such other place as may be agreed upon among the Representatives and the Company), (i) on the third (3rd) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later that seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in its sole discretion, postpone the Closing Date until no later that two (2) full business days following delivery of copies of the Prospectus to the Representatives. (c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of [___] Option Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on -10- SCHEDULE A opposite the name of such Underwriter bears to the total number of Firm Shares and the Company agrees to sell the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be sold by the Company as set forth in the paragraph "Introductory" of this Agreement). The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) PUBLIC OFFERING OF THE SHARES. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in its sole judgment, have determined is advisable and practicable. (e) PAYMENT FOR THE SHARES. Payment for the Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer in immediately available-funds to the order of the Company. It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. BancBoston Robertson Stephens Inc., individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) DELIVERY OF THE SHARES. The Company shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company, as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered a credit representing the Option Shares the Underwriters have agreed to purchase at the First Closing Date (or the Second Closing Date, as the case may be), to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00 noon on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. -11- SECTION 3. COVENANTS OF THE COMPANY. [A. COVENANTS OF THE COMPANY. THE COMPANY FURTHER COVENANTS AND AGREES WITH EACH UNDERWRITER AS FOLLOWS: (a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its best efforts to cause a registration statement on Form 8-A (the "Form 8-A Registration Statement") as required by the Securities Exchange Act of 1934 (the "Exchange Act") to become effective simultaneously with the Registration Statement, (ii) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (iii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) SECURITIES ACT COMPLIANCE. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) BLUE SKY COMPLIANCE. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT MATTERS. The -12- Company will comply with the Securities Act and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur or fail to occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (f) INSURANCE. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby and (ii) shall cause BancBoston Robertson Stephens Inc. to be added as an additional insured to such policy in respect of the offering contemplated hereby. (g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Company Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (h) USE OF PROCEEDS. The Company shall apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) TRANSFER AGENT. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Company Shares. (j) EARNINGS STATEMENT. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending September 30, 2000 that satisfies the provisions of Section 11(a) of the Securities Act. -13- (k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company will not, without the prior written consent of BancBoston Robertson Stephens Inc., for a period of 180 days following the date of the Prospectus, offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other Common Shares or any securities convertible into, or exchangeable for, Common Shares; provided, however, that the Company may (i) issue and sell Common Shares pursuant to any director or employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus and described in the Prospectus so long as none of those shares may be transferred on during the period of 180 days from the date that the Registration Statement is declared effective (the "Lock-Up Period") and the Company shall enter stop transfer instructions with its transfer agent and registrar against the transfer of any such Common Shares and (ii) the Company may issue Common Shares issuable upon the conversion of securities or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus. (m) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of five years hereafter the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the National Association of Securities Dealers, LLC or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION FROM THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in -14- writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel; and the National Association of Securities Dealers, LLC shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) NO MATERIAL ADVERSE CHANGE. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) OPINION OF COUNSEL FOR THE COMPANY. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Stoel Rives, LLP, counsel for the Company substantially in the form of Exhibit B attached hereto, dated the First Closing Date, or the Second Closing Date, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. Counsel rendering the opinion contained in Exhibit B may rely as to questions of law not involving the laws of the United States or the State of Washington upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) OPINION OF COUNSEL FOR THE UNDERWRITERS. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Wilson Sonsini Goodrich & Rosati, substantially in the form of Exhibit D hereto. The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) ACCOUNTANTS' COMFORT LETTER. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from PricewaterhouseCoopers, LLP addressed to -15- the Board of Directors of the Company and the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than two (2) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from PricewaterhouseCoopers, LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of December 31, 1998 and related consolidated statements of operations, shareholders' equity, and cash flows for the twelve (12) months ended December 31, 1998, (iii) state that PricewaterhouseCoopers, LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of PricewaterhouseCoopers, LLP as described in SAS 71 on the financial statements for each of the quarters in the five-quarter period ended March 31, 1999 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and address other matters agreed upon by PricewaterhouseCoopers, LLP and you. In addition, you shall have received from PricewaterhouseCoopers, LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of December 31, 1998, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) OFFICERS' CERTIFICATE. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by a Co-Chief Executive Officer and the Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as -16- if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Securities Act and in all material respects conformed to the requirements of the Securities Act, the Registration Statement and the Prospectus, and any amendments or supplements thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (h) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The Company shall have obtained and delivered to you an agreement substantially in the form of Exhibit A attached hereto from each officer and director of the Company, and each beneficial owner of one or more percent of the outstanding issued share capital of the Company. (i) NASDAQ NATIONAL MARKET LISTING. The Shares shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. -17- (j) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall have complied with the provisions of Sections 2(g) and 3(e) hereof with respect to the furnishing of Prospectuses. (k) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the National Association of Securities Dealers, LLC review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with listing the Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the preparation and undertaking of "road show" preparations to be made to prospective investors, and (x) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 5, -18- Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 7, Section 8, Section 9 or Section 15, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. INDEMNIFICATION AND CONTRIBUTION. (a) INDEMNIFICATION OF THE UNDERWRITERS. (1) The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and -19- each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company may otherwise have. (b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) INFORMATION PROVIDED BY THE UNDERWRITERS. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the first paragraph and the second, third, fourth, eleventh and twelfth paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. (d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such -20- indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (e) SETTLEMENTS. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such -21- settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) CONTRIBUTION. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are -22- several in proportion to their respective underwriting obligations and not joint. (g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than thirty (30) days of invoice to the indemnifying party. (h) ACKNOWLEDGEMENTS OF PARTIES. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, and Section 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. -23- SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the National Association of Securities Dealers, LLC; (ii) a general banking moratorium shall have been declared by any of federal, New York, Washington or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 9 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. SECTION 11. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: BANCBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 -24- Facsimile: (415) 676-2696 Attention: General Counsel If to the Company: The Cobalt Group, Inc. 2030 First Avenue, Suite 300 Seattle, Washington 98121 Facsimile: (206) 269-6363 Attention: (206) 269-6350 Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 9 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, and personal representatives, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 14. GOVERNING LAW PROVISIONS. (a) GOVERNING LAW. This agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed in such state. (b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any -25- such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. [The remainder of this page has been intentionally left blank.] -26- If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, THE COBALT GROUP, INC. By: Geoffrey T. Barker Co-Chief Executive Officer WARBURG, PINCUS EQUITY PARTNERS, L.P. By: Ernest H. Pomerantz Managing Director The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. BANCBOSTON ROBERTSON STEPHENS INC. BEAR, STEARNS & CO. INC. SG COWEN SECURITIES CORPORATION WIT CAPITAL CORPORATION On their behalf and on behalf of each of the several underwriters named in Schedule A hereto. BY BANCBOSTON ROBERTSON STEPHENS INC. By:___________________________________________ Authorized Signatory -27- SCHEDULE A
Number of Firm Common Underwriters Shares To be Purchased - ------------ ---------------------- BANCBOSTON ROBERTSON STEPHENS INC................... BEAR, STEARNS & CO. INC............................. SG COWEN SECURITIES CORPORATION..................... WIT CAPITAL CORPORATION ............................ Total..........................................
A-1 EXHIBIT A LOCK-UP AGREEMENT BancBoston Robertson Stephens Inc. Bear, Stearns & Co. Inc. SG Cowen Securities Corporation Wit Capital Corporation c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock (the "Common Stock") of The Cobalt Group, Inc. (the "Company") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives (the "Representatives") of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, (iii) with respect to dispositions of Common Shares acquired on the open market, (iv) with respect to sales or purchases of Common Stock acquired on the open market or (v) with the prior written consent of BancBoston Robertson Stephens Inc., for a period commencing on the date hereof and continuing to a date 180 days after the Registration Statement is declared effective by the Securities and Exchange Commission (the "Lock-up Period"). The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited A-2 hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that included, relates to or derives any significant part of its value from Securities. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or Securities held by the undersigned except in compliance with the foregoing restrictions. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. Very truly yours, NAME: PRINTED NAME OF HOLDER BY: SIGNATURE PRINTED NAME OF PERSON SIGNING (AND INDICATE CAPACITY OF PERSON SIGNING IF SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF OF AN ENTITY) A-3 EXHIBIT B MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL (i) The Company and each Significant Subsidiary (as that term is defined in Regulation S-X of the Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company and each Significant Subsidiary has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company and each Significant Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than those subsidiaries identified on Exhibit 21 of Item 16 of the Registration Statement; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (v) All issued and outstanding shares of capital stock of each Significant Subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; (vi) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. (vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (viii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due A-4 authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (ix) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (x) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act, the Exchange Act and the applicable rules and regulations of the Commission thereunder; (xi) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (xii) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Washington law; (xiii) The description in the Registration Statement and the Prospectus of the articles of incorporation and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Securities Act; (xiv) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (xv) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such B-1 counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; (xvi) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, (iii) such as may be required by the National Association of Securities Dealers, LLC and (iv) such as may be required under the federal or provincial laws of Canada; (xvii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Securities Act, other than those described therein; (xviii) To such counsel's knowledge, neither the Company nor any of its subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; and (xix) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Company Shares or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Company Shares or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. (xx) The Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xxi) To such counsel's knowledge, the Company owns or possesses sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their business as now conducted; and the expected expiration of any such Intellectual Property Rights would not result in a Material Adverse Effect. To the knowledge of such counsel, the Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse B-2 Effect. To such counsel's knowledge, the Company's discoveries, inventions, products, or processes referred to in the Registration Statement or Prospectus do not infringe or conflict with any right or patent which is the subject of a patent application known to the Company. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-3 EXHIBIT D MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL (i) The [Firm Shares] [Option Shares] have been duly authorized and, upon issuance and delivery and payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. (ii) The Registration Statement complied as to form in all material respects with the requirements of the Act; the Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or threatened or are pending under the Act. (iii) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (iv) The Underwriting Agreement has been duly authorized, executed and delivered by the Company. Such counsel shall state that such counsel has reviewed the opinions addressed to the Representatives from Stoel Rives, LLP, dated the date hereof, and furnished to you in accordance with the provisions of the Underwriting Agreement. Such opinion appears on their face to be appropriately responsive to the requirements of the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, Company's Counsel, the Representatives and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. D-1 EX-3.1 3 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE COBALT GROUP, INC. ARTICLE I NAME The name of this Corporation is The Cobalt Group, Inc. ARTICLE II CAPITAL STOCK 2.1 AUTHORIZED CAPITAL. The total number of shares which this Corporation is authorized to issue is 300,000,000, consisting of 200,000,000 shares of Common Stock, $0.01 par value per share ("Common Stock"), and 100,000,000 shares of Preferred Stock, $0.01 par value per share ("Preferred Stock"). Subject to any rights granted to Preferred Stock in accordance with applicable Washington law, the Common Stock shall have all the rights ordinarily associated with common shares, including but not limited to general voting rights, general rights to dividends and liquidation rights. 2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, preferences, limitations and relative rights of the shares of any series that is wholly unissued or is to be established. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. In the event that there are no issued or outstanding shares of a series of Preferred Stock which this Corporation has been authorized to issue, unless otherwise specifically provided in the resolution establishing such series, the Board of Directors, without any further 1 action on the part of the holders of the outstanding shares of any class or series of stock of this Corporation, may amend these Restated Articles of Incorporation to delete all reference to such series. 2.3 SERIES A PREFERRED STOCK. An aggregate of 4,510,934 shares of Preferred Stock are hereby designated as Series A Preferred Stock, $0.01 par value (the "Series A Preferred"). The rights, preferences, privileges and limitations granted to and imposed on the Series A Preferred are as set forth below: 2.3.1 LIQUIDATION. Upon any liquidation, dissolution or winding up of the Corporation, the Corporation's assets shall be distributed as described in Section 2.7 hereof. The sale of all or substantially all of the assets of the Corporation, or the acquisition of the Corporation by another entity by means of merger, consolidation, share exchange, reorganization or otherwise pursuant to which shares of capital stock of the Corporation are converted into cash, securities or other property of the acquiring entity or any of its affiliates shall be regarded as a liquidation within the meaning of this Section 2.3 and Section 2.7 (excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); provided, however, that each holder of Series A Preferred shall have the right to elect the conversion benefits of the provisions of Section 2.3.5 or other applicable conversion provisions in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2.3 and Section 2.7; provided, further, that this provision shall not apply if the holders of voting securities of the Corporation immediately prior to such merger, consolidation, share exchange, reorganization or sale of assets beneficially own, directly or indirectly, a majority of the combined voting power of the surviving entity resulting from such merger, consolidation, share exchange, reorganization or sale of assets; provided, however, that shares of the surviving entity held by holders of the capital stock of the Corporation acquired by means other than the exchange or conversion of the capital stock of the Corporation for shares of the surviving entity shall not be used in determining if the shareholders of the Corporation own a majority of the voting power of the surviving entity (or its parent), but shall be used for determining the total outstanding voting power of such entity. The Corporation shall mail written notice of such liquidation not less than 20 days prior to the payment date stated therein, to each record holder of Series A Preferred. 2.3.2 PRIORITY OF SERIES A PREFERRED ON DIVIDENDS AND REDEMPTIONS. So long as any Series A Preferred remains outstanding, the Corporation shall not, without the consent of the Preferred Stock Voting Shares obtained in accordance with Section 2.3.8, redeem, purchase or otherwise acquire, directly or indirectly, any Junior Securities, nor shall the Corporation, directly or indirectly, pay or declare any dividend or make any distribution upon any Junior Securities. 2 2.3.3 REDEMPTIONS. (a) MANDATORY REDEMPTION. If requested in writing by a majority of the Preferred Stock Voting Shares at any time after September 30, 2003, the Corporation shall redeem all shares of Series A Preferred on such date stated in such written request (the "Redemption Date"), at a price per share equal to the Series A Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any). Notwithstanding the foregoing, if at any time prior to the Redemption Date, the holders of a majority of the Preferred Stock Voting Shares deliver written notice to the Corporation requesting a deferral of such redemption, then such redemption shall be deferred (and the shares shall remain outstanding and shall continue to retain all rights and preferences set forth herein) until the later of (i) the holders of a majority of the Preferred Stock Voting Shares deliver written notice to the Corporation terminating the request for deferral and (ii) such shares of Series A Preferred are otherwise actually redeemed or purchased by the Corporation. The Corporation shall be obligated to redeem all such shares of Series A Preferred within 30 days after receipt of the notice terminating the request for deferral. (b) REDEMPTION PAYMENT. For each share of Series A Preferred which is to be redeemed, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share) an amount in immediately available funds equal to the Series A Per Share Liquidation Value (plus all accrued and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of shares of Series A Preferred on the Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of shares ratably among the holders of the shares to be redeemed based upon the aggregate Series A Per Share Liquidation Value of such shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares, such funds shall immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. (c) DIVIDENDS AFTER REDEMPTION DATE. No share is entitled to any dividends accruing after the date on which the Series A Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any) is paid to the holder thereof. On such date all rights of the holder of such share shall cease, and such share shall not be deemed to be outstanding. (d) REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares which are redeemed or otherwise acquired by the Corporation shall be canceled and shall not be reissued, sold or transferred. 3 2.3.4 VOTING RIGHTS. The holders of the Series A Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws and shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and all other Preferred Stock Voting Shares voting together as a single class (and as a separate series or class if required by law) with each share of Common Stock entitled to one vote per share and each share of Series A Preferred entitled to one vote for each share of Common Stock into which such share of Series A Preferred is convertible on the record date for the vote taken. 2.3.5 CONVERSION. (a) CONVERSION PROCEDURE. (i) At any time and from time to time, any holder of Series A Preferred may convert all or any portion of the Series A Preferred (including any fraction of a share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of shares to be converted by $0.554209 and dividing the result by the Conversion Price then in effect. (ii) Each conversion of Series A Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series A Preferred as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Series A Preferred share shall terminate on the Redemption Date for such share unless the Corporation has failed to pay to the holder thereof the Liquidation Value thereof. (iv) Notwithstanding any other provision hereof, if a conversion of Series A Preferred is to be made in connection with a Public Offering, the conversion of any shares of Series A Preferred may, at the election of the holder of such shares, be conditioned upon the consummation of the Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Public Offering. (v) As soon as possible after a conversion has been effected (but in any event within ten business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: 4 (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all accrued and unpaid dividends, if any, with respect to each share converted, which have not been paid prior thereto, plus the amount payable under subparagraph (ix) below with respect to such conversion; and (c) a certificate representing any shares of Series A Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (vi) If the Corporation is not permitted under applicable law to pay any portion of the accrued dividends on the Series A Preferred being converted, the Corporation shall pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder. (vii) The issuance of certificates for shares of Conversion Stock upon conversion of Series A Preferred shall be made without charge to the holders of such Series A Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each share of Series A Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (viii) The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (ix) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A Preferred, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. (x) If the shares of Conversion Stock issuable by reason of such conversion of Series A Preferred are convertible into or exchangeable for any other stock or securities of the Corporation, the Corporation shall, at the converting holder's option, upon surrender of the shares to be converted by such holder as provided above together with any notice, statement or payment required to effect such conversion or exchange of Conversion Stock, deliver to such holder or as 5 otherwise specified by such holder a certificate or certificates representing the stock or securities into which the shares of Conversion Stock issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. (b) CONVERSION PRICE. (i) The initial Series A Conversion Price shall be $0.554209. In order to prevent dilution of the conversion rights granted under this Section 2.3.5, the Series A Conversion Price shall be subject to adjustment from time to time pursuant to this Section 2.3.5. (ii) Subject to Section 2.3.5(h), if and whenever on or after the original date of issuance of the Series A Preferred the Corporation issues or sells, or in accordance with Section 2.3.5(c) is deemed to have issued or sold, any share of Common Stock for a consideration per share less than the Series A Conversion Price in effect immediately prior to such time, then forthwith upon such issue or sale the Series A Conversion Price shall be reduced to the lowest price per share at which any such share of Common Stock has been issued or sold or is deemed to have been issued or sold. (c) EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Series A Conversion Price under Section 2.3.5(b) (and subject to Section 2.3.5(h)), the following shall be applicable: (i) ISSUANCE OF RIGHTS OR OPTIONS. If the Corporation in any manner grants any right or option to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the lowest price per share for which any one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security is less than the Series A Conversion Price in effect immediately prior to the time of the granting of such Option, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the granting of the Option, upon exercise of the Option and upon conversion or exchange of the Convertible Security. No further adjustment of the Series A Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Security upon the exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Security. 6 (ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Corporation in any manner issues or sells any Convertible Security and the lowest price per share for which any one share of Common Stock is issuable upon conversion or exchange thereof is less than the Series A Conversion Price in effect immediately prior to the time of such issue or sale, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the issuance of the Convertible Security and upon the conversion or exchange of such Convertible Security. No further adjustment of the Series A Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of any Convertible Security, and if any such issue or sale of such Convertible Security is made upon exercise of any Options for which adjustments of the Series A Conversion Price had been or are to be made pursuant to other provisions of this Section 2.3.5, no further adjustment of the Series A Conversion Price shall be made by reason of such issue or sale. (iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase price provided for in any Option, the additional consideration (if any) payable upon the issue, conversion or exchange of any Convertible Security, or the rate at which any Convertible Security is convertible into or exchangeable for Common Stock change at any time, the Series A Conversion Price in effect at the time of such change shall be readjusted to the Series A Conversion Price which would have been in effect at such time had such Option or Convertible Security originally provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE SECURITIES. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series A Conversion Price then in effect hereunder shall be adjusted to the Series A Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Corporation therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the 7 Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Series A Preferred. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Series A Preferred. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (vi) INTEGRATED TRANSACTIONS. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $0.01. (vii) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) RECORD DATE. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) SUBDIVISION OR COMBINATION OF COMMON STOCK. Subject to Section 2.3.5(h), if the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Series A Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Series A Conversion Price in effect immediately prior to such combination shall be proportionately increased. 8 (e) CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 2.3.5 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's board of directors shall make an appropriate adjustment in the Series A Conversion Price so as to protect the rights of the holders of Series A Preferred; provided that no such adjustment shall increase the Series A Conversion Price as otherwise determined pursuant to this Section 2.3.5 or decrease the number of shares of Conversion Stock issuable upon conversion of each share of Series A Preferred. (f) NOTICES. (i) Immediately upon any adjustment of the Series A Conversion Price, the Corporation shall give written notice thereof to all holders of Series A Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series A Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any liquidation. (g) AUTOMATIC CONVERSION. The Corporation shall convert all of the outstanding Series A Preferred if the Corporation is at such time consummating a firm commitment underwritten Public Offering of shares of its Common Stock in which (i) the Net Proceeds to the Corporation are at least $15,000,000 and (ii) the price per share paid by the public for such shares shall be at least 300% of the Series A Conversion Price in effect immediately prior to the closing of the sale of such shares pursuant to the Public Offering. Any such mandatory conversion shall only be effected at the time of and subject to the closing of the sale of such shares pursuant to such Public Offering and upon written notice of such mandatory conversion delivered to all holders of Series A Preferred at least seven days prior to such closing. The Corporation shall convert all of the outstanding shares of Series A Preferred to shares of Common Stock if the holders of a majority of the outstanding Preferred Stock Voting Shares agree to the conversion thereof. (h) CERTAIN ISSUANCES. The following actions by the Corporation will not trigger the adjustments in Sections 2.3.5(b), (c) and (d): (a) the issuance of options to purchase up to 3,641,000 shares of Common Stock pursuant to The Cobalt Group, Inc. 1995 Stock Option Plan (the "Stock Option Plan") and warrants to purchase up to 61,500 shares of Common Stock issued and outstanding prior to October 1998 and (b) the issuance of shares of Common Stock upon exercise of the options and warrants described in the immediately preceding clause (a). 9 2.3.6 [Intentionally Omitted]. 2.3.7 PURCHASE RIGHTS. If at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series A Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. 2.3.8 AMENDMENT AND WAIVER. No amendment, modification or waiver shall be binding or effective with respect to any provision of this Section 2.3 or Section 2.7 without the prior written consent of the holders of at least a majority of the Preferred Stock Voting Shares outstanding at the time such action is taken; provided that no such action shall change (a) the amount payable on redemption of the Series A Preferred or the times at which redemption of Series A Preferred is to occur, without the prior written consent of the holders of at least a majority of the Series A Preferred then outstanding, (b) the Series A Conversion Price or the number of shares or class of stock into which the Series A Preferred is convertible, without the prior written consent of the holders of at least a majority of the Series A Preferred then outstanding or (c) the percentage required to approve any change described in clauses (a) and (b) above, without the prior written consent of the holders of at least a majority of the Series A Preferred then outstanding; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of the applicable percentage of the Series A Preferred as provided herein. 2.4 SERIES B PREFERRED STOCK. An aggregate of 8,000,000 shares of Preferred Stock are hereby designated as Series B Preferred Stock, $0.01 par value (the "Series B Preferred"). The rights, preferences, privileges and limitations granted to and imposed on the Series B Preferred are as set forth below: 2.4.1 LIQUIDATION. Upon any liquidation, dissolution or winding up of the Corporation, the Corporation's assets shall be distributed as described in Section 2.7 hereof. The sale of all or substantially all of the assets of the Corporation, or the acquisition of the Corporation by another 10 entity by means of merger, consolidation, share exchange, reorganization or otherwise pursuant to which shares of capital stock of the Corporation are converted into cash, securities or other property of the acquiring entity or any of its affiliates shall be regarded as a liquidation within the meaning of this Section 2.4 and Section 2.7 (excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); provided, however, that each holder of Series B Preferred shall have the right to elect the conversion benefits of the provisions of Section 2.4.5 or other applicable conversion provisions in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2.4 and Section 2.7; provided, further, that this provision shall not apply if the holders of voting securities of the Corporation immediately prior to such merger, consolidation, share exchange, reorganization or sale of assets beneficially own, directly or indirectly, a majority of the combined voting power of the surviving entity resulting from such merger, consolidation, share exchange, reorganization or sale of assets; provided, however, that shares of the surviving entity held by holders of the capital stock of the Corporation acquired by means other than the exchange or conversion of the capital stock of the Corporation for shares of the surviving entity shall not be used in determining if the shareholders of the Corporation own a majority of the voting power of the surviving entity (or its parent), but shall be used for determining the total outstanding voting power of such entity. The Corporation shall mail written notice of such liquidation not less than 20 days prior to the payment date stated therein, to each record holder of Series B Preferred. 2.4.2 DIVIDENDS (a) CUMULATIVE DIVIDENDS. Dividends on the Series B Preferred shall be cumulative and shall cumulate and accrue on a daily basis, without interest, at the rate of $0.336 per share per annum from the date of issue of the Series B Preferred, regardless of whether or not the Corporation shall have funds legally available for such purpose. The holders of the Series B Preferred shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for such purpose, cumulative dividends at the rates specified above. (b) PRIORITY. So long as any Series B Preferred remains outstanding, the Corporation shall not, without the consent of the Preferred Stock Voting Shares obtained in accordance with Section 2.4.8, redeem, purchase or otherwise acquire, directly or indirectly, any Junior Securities. In no event, so long as any Series B Preferred shall remain outstanding, shall any dividend be declared or paid upon any Series A Preferred or Junior Securities unless simultaneously with such declaration and payment a pro rata dividend is declared and paid on all outstanding shares of Series B Preferred. 2.4.3 REDEMPTIONS. (a) MANDATORY REDEMPTION. If requested in writing by a majority of the Preferred Stock Voting Shares at any time after September 30, 2003, the Corporation shall redeem 11 all shares of Series B Preferred on the Redemption Date, at a price per share equal to the Series B Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any). Notwithstanding the foregoing, if at any time prior to the Redemption Date, the holders of a majority of the outstanding Preferred Stock Voting Shares deliver written notice to the Corporation requesting a deferral of such redemption, then such redemption shall be deferred (and the shares shall remain outstanding and shall continue to retain all rights and preferences set forth herein) until the later of (i) the holders of a majority of the outstanding Preferred Stock Voting Shares deliver written notice to the Corporation terminating the request for deferral and (ii) such shares of Series B Preferred are otherwise actually redeemed or purchased by the Corporation. The Corporation shall be obligated to redeem all such shares of Series B Preferred within 30 days after receipt of the notice terminating the request for deferral. (b) REDEMPTION PAYMENT. For each share of Series B Preferred which is to be redeemed, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share) an amount in immediately available funds equal to the Series B Per Share Liquidation Value (plus all accrued and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of shares of Series B Preferred on the Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of shares ratably among the holders of the shares to be redeemed based upon the aggregate Series B Per Share Liquidation Value of such shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares, such funds shall immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. (c) DIVIDENDS AFTER REDEMPTION DATE. No share is entitled to any dividends accruing after the date on which the Series B Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any) is paid to the holder thereof. On such date all rights of the holder of such share shall cease, and such share shall not be deemed to be outstanding. (d) REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares which are redeemed or otherwise acquired by the Corporation shall be canceled and shall not be reissued, sold or transferred. 2.4.4 VOTING RIGHTS. The holders of the Series B Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws and shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and all 12 other Preferred Stock Voting Shares voting together as a single class (and as a separate series or class if required by law) with each share of Common Stock entitled to one vote per share and each share of Series B Preferred entitled to one vote for each share of Common Stock into which such share of Series B Preferred is convertible on the record date for the vote taken. 2.4.5 CONVERSION INTO COMMON STOCK. (a) CONVERSION PROCEDURE. (i) At any time and from time to time, any holder of Series B Preferred may convert all or any portion of the Series B Preferred (including any fraction of a share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of shares to be converted by $4.20 and dividing the result by the Series B Conversion Price then in effect. (ii) Each conversion of Series B Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series B Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series B Preferred as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Series B Preferred share shall terminate on the Redemption Date for such share unless the Corporation has failed to pay to the holder thereof the Liquidation Value thereof. (iv) Notwithstanding any other provision hereof, if a conversion of Series B Preferred is to be made in connection with a Public Offering, the conversion of any shares of Series B Preferred may, at the election of the holder of such shares, be conditioned upon the consummation of the Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Public Offering. (v) As soon as possible after a conversion has been effected (but in any event within ten business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; 13 (b) payment in an amount equal to all accrued and unpaid dividends, if any, with respect to each share converted, which have not been paid prior thereto, plus the amount payable under subparagraph (ix) below with respect to such conversion; and (c) a certificate representing any shares of Series B Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (vi) If the Corporation is not permitted under applicable law to pay any portion of the accrued dividends on the Series B Preferred being converted, the Corporation shall pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder. (vii) The issuance of certificates for shares of Conversion Stock upon conversion of Series B Preferred shall be made without charge to the holders of such Series B Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each share of Series B Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (viii) The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (ix) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series B Preferred, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. (x) If the shares of Conversion Stock issuable by reason of such conversion of Series B Preferred are convertible into or exchangeable for any other stock or securities of the Corporation, the Corporation shall, at the converting holder's option, upon surrender of the shares to be converted by such holder as provided above together with any notice, statement or payment required to effect such conversion or exchange of Conversion Stock, deliver to such holder or as otherwise specified by such holder a certificate or certificates representing the stock or securities into which the shares of Conversion Stock issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. 14 (b) CONVERSION PRICE. (i) The initial Series B Conversion Price shall be $4.20. In order to prevent dilution of the conversion rights granted under this subdivision, the Series B Conversion Price shall be subject to adjustment from time to time pursuant to this Section 2.4.5(b). (ii) Subject to Section 2.4.5(h), if and whenever on or after the original date of issuance of the Series B Preferred the Corporation issues or sells, or in accordance with Section 2.4.5(c) is deemed to have issued or sold, any share of Common Stock for a consideration per share less than the Series B Conversion Price in effect immediately prior to such time, then and in such event, the Series B Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series B Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued would purchase at such Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such additional shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, as if all Preferred Stock Voting Shares and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock, if so convertible) as of such date. (c) EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Series B Conversion Price under Section 2.4.5(b) (and subject to Section 2.4.5(h) thereof), the following shall be applicable: (i) ISSUANCE OF RIGHTS OR OPTIONS. If the Corporation in any manner grants any Option or Convertible Security and the lowest price per share for which any one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security is less than the Series B Conversion Price in effect immediately prior to the time of the granting of such Option, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the granting of the Option, upon exercise of the Option and upon conversion or exchange of the Convertible Security. No further adjustment of the Series B Conversion Price shall be made 15 upon the actual issue of such Common Stock or of such Convertible Security upon the exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Security. (ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Corporation in any manner issues or sells any Convertible Security and the lowest price per share for which any one share of Common Stock is issuable upon conversion or exchange thereof is less than the Series B Conversion Price in effect immediately prior to the time of such issue or sale, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the issuance of the Convertible Security and upon the conversion or exchange of such Convertible Security. No further adjustment of the Series B Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of any Convertible Security, and if any such issue or sale of such Convertible Security is made upon exercise of any Options for which adjustments of the Series B Conversion Price had been or are to be made pursuant to other provisions of this Section 2.4.5, no further adjustment of the Series B Conversion Price shall be made by reason of such issue or sale. (iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase price provided for in any Option, the additional consideration (if any) payable upon the issue, conversion or exchange of any Convertible Security, or the rate at which any Convertible Security is convertible into or exchangeable for Common Stock change at any time, the Series B Conversion Price in effect at the time of such change shall be readjusted to the Series B Conversion Price which would have been in effect at such time had such Option or Convertible Security originally provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE SECURITIES. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series B Conversion Price then in effect hereunder shall be adjusted to the Series B Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Corporation 16 therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Series B Preferred. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Series B Preferred. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (vi) INTEGRATED TRANSACTIONS. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $0.01. (vii) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) RECORD DATE. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) SUBDIVISION OR COMBINATION OF COMMON STOCK. Subject to Section 2.4.5(h), if the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Series B Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number 17 of shares, the Series B Conversion Price in effect immediately prior to such combination shall be proportionately increased. (e) CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 2.4.5 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's board of directors shall make an appropriate adjustment in the Series B Conversion Price so as to protect the rights of the holders of Series B Preferred; provided that no such adjustment shall increase the Series B Conversion Price as otherwise determined pursuant to this Section 2.4.5 or decrease the number of shares of Conversion Stock issuable upon conversion of each share of Series B Preferred. (f) NOTICES. (i) Immediately upon any adjustment of the Series B Conversion Price, the Corporation shall give written notice thereof to all holders of Series B Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series B Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any liquidation. (g) AUTOMATIC CONVERSION. The Corporation shall convert all of the outstanding Series B Preferred if the Corporation is at such time consummating a firm commitment underwritten Public Offering of shares of its Common Stock in which (i) the Net Proceeds to the Corporation are at least $15,000,000 and (ii) the price per share paid by the public for such shares shall be at least 300% of the Series B Conversion Price in effect immediately prior to the closing of the sale of such shares pursuant to the Public Offering. Any such mandatory conversion shall only be effected at the time of and subject to the closing of the sale of such shares pursuant to such Public Offering and upon written notice of such mandatory conversion delivered to all holders of Series B Preferred at least seven days prior to such closing. The Corporation shall convert all of the outstanding shares of Series B Preferred to shares of Common Stock if the holders of a majority of the outstanding Preferred Stock Voting Shares agree to the conversion thereof. (h) CERTAIN ISSUANCES. The following actions by the Corporation will not trigger the adjustments in Sections 2.4.5(b), (c) and (d): (a) the issuance of options to purchase up to 3,641,000 shares of Common Stock pursuant to the Corporation's Stock Option Plan and warrants to purchase up to 61,500 shares of Common Stock issued and outstanding prior to October 1998 18 and (b) the issuance of shares of Common Stock upon exercise of the options and warrants described in the immediately preceding clause (a). 2.4.6 [Intentionally Omitted]. 2.4.7 PURCHASE RIGHTS. If at any time the Corporation grants, issues or sells any Options, Convertible Securities or Purchase Rights, then each holder of Series B Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series B Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. 2.4.8 AMENDMENT AND WAIVER. No amendment, modification or waiver shall be binding or effective with respect to any provision of this Section 2.4 or Section 2.6 without the prior written consent of the holders of at least a majority of the Preferred Stock Voting Shares outstanding at the time such action is taken; provided that no such action shall change (a) the amount payable on redemption of the Series B Preferred or the times at which redemption of Series B Preferred is to occur, without the prior written consent of the holders of at least a majority of the Series B Preferred then outstanding, (b) the Conversion Price of the Series B Preferred or the number of shares or class of stock into which the Series B Preferred is convertible, without the prior written consent of the holders of at least a majority of the Series B Preferred then outstanding or (c) the percentage required to approve any change described in clauses (a) and (b) above, without the prior written consent of the holders of at least a majority of the Series B Preferred then outstanding; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of the applicable percentage of the Series B Preferred as provided herein. 2.4.9 CONVERSION INTO SERIES B-1 PREFERRED. (a) At any time and from time to time, any holder of Series B Preferred may convert all or any portion of the Series B Preferred held by such holder into shares of Series B-1 Preferred. Each share of Series B Preferred so converted shall be converted in the proportion of one (1) Series B Preferred share to one (1) Series B-1 Preferred share. 19 (b) Each conversion of Series B Preferred provided for in this Section 2.4.9 shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series B Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series B Preferred as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Series B-1 Preferred are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Series B-1 Preferred represented thereby. (c) As soon as possible after a conversion provided for in this Section 2.4.9 has been effected (but in any event within ten business days in the case of subparagraph (i) below), the Corporation shall deliver to the converting holder: (i) a certificate or certificates representing the number of shares of Series B-1 Preferred issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; and (ii) a certificate representing any shares of Series B Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (d) The issuance of certificates for shares of Series B-1 Preferred upon conversion of Series B Preferred shall be made without charge to the holders of such Series B Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Series B Preferred. Upon conversion of each share of Series B Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Series B-1 Preferred issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (e) The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). 2.5 SERIES B-1 PREFERRED STOCK. An aggregate of 8,000,000 shares of Preferred Stock are hereby designated as Series B-1 Preferred Stock, $0.01 par value (the "Series B-1 Preferred"). The rights, preferences, privileges and limitations granted to and imposed on the Series B-1 Preferred are as set forth below: 20 2.5.1 LIQUIDATION. Upon any liquidation, dissolution or winding up of the Corporation, the Corporation's assets shall be distributed as described in Section 2.7 hereof. The sale of all or substantially all of the assets of the Corporation, or the acquisition of the Corporation by another entity by means of merger, consolidation, share exchange, reorganization or otherwise pursuant to which shares of capital stock of the Corporation are converted into cash, securities or other property of the acquiring entity or any of its affiliates shall be regarded as a liquidation within the meaning of this Section 2.4 and Section 2.7 (excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); provided, however, that each holder of Series B-1 Preferred shall have the right to elect the conversion benefits of the provisions of Section 2.5.5 or other applicable conversion provisions in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2.5 and Section 2.7; provided, further, that this provision shall not apply if the holders of voting securities of the Corporation immediately prior to such merger, consolidation, share exchange, reorganization or sale of assets beneficially own, directly or indirectly, a majority of the combined voting power of the surviving entity resulting from such merger, consolidation, share exchange, reorganization or sale of assets; provided, however, that shares of the surviving entity held by holders of the capital stock of the Corporation acquired by means other than the exchange or conversion of the capital stock of the Corporation for shares of the surviving entity shall not be used in determining if the shareholders of the Corporation own a majority of the voting power of the surviving entity (or its parent), but shall be used for determining the total outstanding voting power of such entity. The Corporation shall mail written notice of such Liquidation Event not less than 20 days prior to the payment date stated therein, to each record holder of Series B-1 Preferred. 2.5.2 DIVIDENDS (a) CUMULATIVE DIVIDENDS. Dividends on the Series B-1 Preferred shall be cumulative and shall cumulate and accrue on a daily basis, without interest, at the rate of $0.336 per share per annum from the date of issue of the Series B-1 Preferred, regardless of whether or not the Corporation shall have funds legally available for such purpose. The holders of the Series B-1 Preferred shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for such purpose, cumulative dividends at the rates specified above. (b) PRIORITY. So long as any Series B-1 Preferred remains outstanding, the Corporation shall not, without the consent of the Preferred Stock Voting Shares obtained in accordance with Section 2.5.8, redeem, purchase or otherwise acquire, directly or indirectly, any Junior Securities. In no event, so long as any Series B-1 Preferred shall remain outstanding, shall any dividend be declared or paid upon any Series A Preferred or Junior Securities unless simultaneously with such declaration and payment a pro rata dividend is declared and paid on all outstanding shares of Series B-1 Preferred. 21 2.5.3 REDEMPTIONS. (a) MANDATORY REDEMPTION. If requested in writing by a majority of the Preferred Stock Voting Shares at any time after September 30, 2003, the Corporation shall redeem all shares of Series B-1 Preferred on such date stated in the Redemption Date, at a price per share equal to the Series B Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any). Notwithstanding the foregoing, if at any time prior to the Redemption Date, the holders of a majority of the outstanding Preferred Stock Voting Shares deliver written notice to the Corporation requesting a deferral of such redemption, then such redemption shall be deferred (and the shares shall remain outstanding and shall continue to retain all rights and preferences set forth herein) until the later of (i) the holders of a majority of the outstanding Preferred Stock voting Shares deliver written notice to the Corporation terminating the request for deferral and (ii) such shares of Series B-1 Preferred are otherwise actually redeemed or purchased by the Corporation. The Corporation shall be obligated to redeem all such shares of Series B-1 Preferred within 30 days after receipt of the notice terminating the request for deferral. (b) REDEMPTION PAYMENT. For each share of Series B-1 Preferred which is to be redeemed, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share) an amount in immediately available funds equal to the Series B Per Share Liquidation Value (plus all accrued and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of shares of Series B-1 Preferred on the Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of shares ratably among the holders of the shares to be redeemed based upon the aggregate Series B Per Share Liquidation Value of such shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares, such funds shall immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. (c) DIVIDENDS AFTER REDEMPTION DATE. No share is entitled to any dividends accruing after the date on which the Series B Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any) is paid to the holder thereof. On such date all rights of the holder of such share shall cease, and such share shall not be deemed to be outstanding. (d) REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares which are redeemed or otherwise acquired by the Corporation shall be canceled and shall not be reissued, sold or transferred. 22 2.5.4 VOTING RIGHTS. Except as otherwise provided by law, the holders of Series B-1 Preferred shall not be entitled to vote on any matter called for a vote of the voting securities of the Corporation and shall not be entitled to notice of any stockholders meetings. 2.5.5 CONVERSION INTO COMMON STOCK. (a) CONVERSION PROCEDURE. (i) Subject to the last sentence of this Section 2.5.5(a)(i), at any time and from time to time, any holder of Series B-1 Preferred may convert all or any portion of the Series B-1 Preferred (including any fraction of a share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of shares to be converted by $4.20 and dividing the result by the Series B-1 Conversion Price then in effect. No holder of this Series B-1 Preferred shall have the right to convert all or any portion of the Series B-1 Preferred into Conversion Stock if immediately after giving effect to such conversion 50% or more (by voting power) of the outstanding voting common stock of the Corporation would be owned by such holder or any Affiliate of such holder. (ii) Each conversion of Series B-1 Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series B-1 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series B-1 Preferred as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Series B-1 Preferred share shall terminate on the Redemption Date for such share unless the Corporation has failed to pay to the holder thereof the Liquidation Value thereof. (iv) Notwithstanding any other provision hereof, if a conversion of Series B-1 Preferred is to be made in connection with a Public Offering, the conversion of any shares of Series B-1 Preferred may, at the election of the holder of such shares, be conditioned upon the consummation of the Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Public Offering. 23 (v) As soon as possible after a conversion has been effected (but in any event within ten business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all accrued and unpaid dividends, if any, with respect to each share converted, which have not been paid prior thereto, plus the amount payable under subparagraph (ix) below with respect to such conversion; and (c) a certificate representing any shares of Series B-1 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (vi) If the Corporation is not permitted under applicable law to pay any portion of the accrued dividends on the Series B-1 Preferred being converted, the Corporation shall pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder. (vii) The issuance of certificates for shares of Conversion Stock upon conversion of Series B-1 Preferred shall be made without charge to the holders of such Series B-1 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each share of Series B-1 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (viii) The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (ix) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series B-1 Preferred, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. 24 (x) If the shares of Conversion Stock issuable by reason of such conversion of Series B-1 Preferred are convertible into or exchangeable for any other stock or securities of the Corporation, the Corporation shall, at the converting holder's option, upon surrender of the shares to be converted by such holder as provided above together with any notice, statement or payment required to effect such conversion or exchange of Conversion Stock, deliver to such holder or as otherwise specified by such holder a certificate or certificates representing the stock or securities into which the shares of Conversion Stock issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. (b) CONVERSION PRICE. (i) The initial Series B-1 Conversion Price shall be $4.20. In order to prevent dilution of the conversion rights granted under this subdivision, the Series B-1 Conversion Price shall be subject to adjustment from time to time pursuant to this Section 2.5.5(b). (ii) Subject to Section 2.5.5(h), if and whenever on or after the original date of issuance of the Series B-1 Preferred the Corporation issues or sells, or in accordance with Section 2.5.5(c) is deemed to have issued or sold, any share of Common Stock for a consideration per share less than the Series B-1 Conversion Price in effect immediately prior to such time, then and in such event, the Series B-1 Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series B-1 Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued would purchase at such Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such additional shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, as if all Preferred Stock Voting Shares and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock, if so convertible) as of such date. (c) EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Series B-1 Conversion Price under Section 2.5.5(b) (and subject to Section 2.5.5(h) thereof), the following shall be applicable: 25 (i) ISSUANCE OF RIGHTS OR OPTIONS. If the Corporation in any manner grants any Option or Convertible Security and the lowest price per share for which any one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security is less than the Series B-1 Conversion Price in effect immediately prior to the time of the granting of such Option, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the granting of the Option, upon exercise of the Option and upon conversion or exchange of the Convertible Security. No further adjustment of the Series B-1 Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Security upon the exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Security. (ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Corporation in any manner issues or sells any Convertible Security and the lowest price per share for which any one share of Common Stock is issuable upon conversion or exchange thereof is less than the Series B-1 Conversion Price in effect immediately prior to the time of such issue or sale, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the issuance of the Convertible Security and upon the conversion or exchange of such Convertible Security. No further adjustment of the Series B-1 Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of any Convertible Security, and if any such issue or sale of such Convertible Security is made upon exercise of any Options for which adjustments of the Series B-1 Conversion Price had been or are to be made pursuant to other provisions of this Section 2.5.5, no further adjustment of the Series B-1 Conversion Price shall be made by reason of such issue or sale. (iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase price provided for in any Option, the additional consideration (if any) payable upon the issue, conversion or exchange of any Convertible Security, or the rate at which any Convertible Security is convertible into or exchangeable for Common Stock change at any time, the Series B-1 Conversion Price in effect at the time of such change shall be readjusted to the Series B-1 Conversion Price which would have been in effect at such time had such Option or Convertible Security originally provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. 26 (iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE SECURITIES. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series B-1 Conversion Price then in effect hereunder shall be adjusted to the Series B-1 Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Corporation therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Series B-1 Preferred. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Series B-1 Preferred. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (vi) INTEGRATED TRANSACTIONS. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $0.01. (vii) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) RECORD DATE. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common 27 Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) SUBDIVISION OR COMBINATION OF COMMON STOCK. Subject to Section 2.5.5(h), if the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Series B-1 Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Series B-1 Conversion Price in effect immediately prior to such combination shall be proportionately increased. (e) CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 2.5.5 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's board of directors shall make an appropriate adjustment in the Series B-1 Conversion Price so as to protect the rights of the holders of Series B- 1 Preferred; provided that no such adjustment shall increase the Series B-1 Conversion Price as otherwise determined pursuant to this Section 2.5.5 or decrease the number of shares of Conversion Stock issuable upon conversion of each share of Series B-1 Preferred. (f) NOTICES. (i) Immediately upon any adjustment of the Series B-1 Conversion Price, the Corporation shall give written notice thereof to all holders of Series B-1 Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series B-1 Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any liquidation. (g) AUTOMATIC CONVERSION. The Corporation shall convert all of the outstanding Series B-1 Preferred if the Corporation is at such time consummating a firm commitment underwritten Public Offering of shares of its Common Stock in which (i) the Net Proceeds to the Corporation are at least $15,000,000 and (ii) the price per share paid by the public for such shares shall be at least 300% of the Series B-1 Conversion Price in effect immediately prior to the closing of the sale of such shares pursuant to the Public Offering. Any such mandatory conversion shall 28 only be effected at the time of and subject to the closing of the sale of such shares pursuant to such Public Offering and upon written notice of such mandatory conversion delivered to all holders of Series B-1 Preferred at least seven days prior to such closing. The Corporation shall convert all of the outstanding shares of Series B-1 Preferred to shares of Common Stock if the holders of a majority of the outstanding Preferred Stock Voting Shares agree to the conversion thereof. (h) CERTAIN ISSUANCES. The following actions by the Corporation will not trigger the adjustments in Sections 2.5.5(b), (c) and (d): (a) the issuance of options to purchase up to 3,641,000 shares of Common Stock pursuant to the Corporation's Stock Option Plan and warrants to purchase up to 61,500 shares of Common Stock issued and outstanding prior to October 1998 and (b) the issuance of shares of Common Stock upon exercise of the options and warrants described in the immediately preceding clause (a). 2.5.6 [Intentionally Omitted]. 2.5.7 PURCHASE RIGHTS. If at any time the Corporation grants, issues or sells any Options, Convertible Securities or Purchase Rights, then each holder of Series B-1 Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series B-1 Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. 2.5.8 AMENDMENT AND WAIVER. No amendment, modification or waiver shall be binding or effective with respect to any provision of this Section 2.5 or Section 2.6 without the prior written consent of the holders of at least a majority of the Preferred Stock Voting Shares outstanding at the time such action is taken; provided that no such action shall change (a) the amount payable on redemption of the Series B-1 Preferred or the times at which redemption of Series B-1 Preferred is to occur, without the prior written consent of the holders of at least a majority of the Series B-1 Preferred then outstanding, (b) the Conversion Price of the Series B-1 Preferred or the number of shares or class of stock into which the Series B-1 Preferred is convertible, without the prior written consent of the holders of at least a majority of the Series B-1 Preferred then outstanding or (c) the percentage required to approve any change described in clauses (a) and (b) above, without the prior written consent of the holders of at least a majority of the Series B-1 Preferred then outstanding; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has 29 obtained the prior written consent of the holders of the applicable percentage of the Series B-1 Preferred as provided herein. 2.5.9 CONVERSION INTO SERIES B PREFERRED. (a) At any time and from time to time, any holder of Series B-1 Preferred may convert all or any portion of the Series B-1 Preferred held by such holder into shares of Series B Preferred. Each share of Series B-1 Preferred so converted shall be converted in the proportion of one (1) Series B-1 Preferred share to one (1) Series B Preferred share. (b) Each conversion of Series B-1 Preferred provided for in this Section 2.5.9 shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series B-1 Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series B-1 Preferred as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Series B Preferred are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Series B Preferred represented thereby. (c) As soon as possible after a conversion provided for in this Section 2.5.9 has been effected (but in any event within ten business days in the case of subparagraph (i) below), the Corporation shall deliver to the converting holder: (i) a certificate or certificates representing the number of shares of Series B Preferred issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; and (ii) a certificate representing any shares of Series B-1 Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (d) The issuance of certificates for shares of Series B Preferred upon conversion of Series B Preferred shall be made without charge to the holders of such Series B-1 Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Series B-1 Preferred. Upon conversion of each share of Series B-1 Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Series B Preferred issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (e) The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in 30 connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). 2.6 SERIES C PREFERRED STOCK. An aggregate of 1,250,000 shares of Preferred Stock are hereby designated as Series C Preferred Stock, $0.01 par value (the "Series C Preferred"). The rights, preferences, privileges and limitations granted to and imposed on the Series C Preferred are as set forth below: 2.6.1 LIQUIDATION. Upon any liquidation, dissolution or winding up of the Corporation, the Corporation's assets shall be distributed as described in Section 2.7 hereof. The sale of all or substantially all of the assets of the Corporation, or the acquisition of the Corporation by another entity by means of merger, consolidation, share exchange, reorganization or otherwise pursuant to which shares of capital stock of the Corporation are converted into cash, securities or other property of the acquiring entity or any of its affiliates shall be regarded as a liquidation within the meaning of this Section 2.6 and Section 2.7 (excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation); provided, however, that each holder of Series C Preferred shall have the right to elect the conversion benefits of the provisions of Section 2.6.5 or other applicable conversion provisions in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2.6 and Section 2.7; provided, further, that this provision shall not apply if the holders of voting securities of the Corporation immediately prior to such merger, consolidation, share exchange, reorganization or sale of assets beneficially own, directly or indirectly, a majority of the combined voting power of the surviving entity resulting from such merger, consolidation, share exchange, reorganization or sale of assets; provided, however, that shares of the surviving entity held by holders of the capital stock of the Corporation acquired by means other than the exchange or conversion of the capital stock of the Corporation for shares of the surviving entity shall not be used in determining if the shareholders of the Corporation own a majority of the voting power of the surviving entity (or its parent), but shall be used for determining the total outstanding voting power of such entity. The Corporation shall mail written notice of such liquidation not less than 20 days prior to the payment date stated therein, to each record holder of Series C Preferred. 2.6.2 DIVIDENDS. (a) CUMULATIVE DIVIDENDS. Dividends on the Series C Preferred shall be cumulative and shall cumulate and accrue on a daily basis, without interest, at the rate of $0.48 per share per annum from the date of issue of the Series C Preferred, regardless of whether or not the Corporation shall have funds legally available for such purpose. The holders of the Series C Preferred shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for such purpose, cumulative dividends at the rates specified above. 31 (b) PRIORITY. So long as any Series C Preferred remains outstanding, the Corporation shall not, without the consent of the Preferred Stock Voting Shares obtained in accordance with Section 2.6.8, redeem, purchase or otherwise acquire, directly or indirectly, any Junior Securities. In no event, so long as any Series C Preferred shall remain outstanding, shall any dividend be declared or paid upon the Series A Preferred, the Series B Preferred or any Junior Securities unless simultaneously with such declaration and payment a pro rata dividend is declared and paid on all outstanding shares of Series C Preferred. 2.6.3 REDEMPTIONS. (a) MANDATORY REDEMPTION. If requested in writing by a majority of the Series C Preferred at any time after April 30, 2001, the Corporation shall redeem all shares of Series C Preferred on such date stated in such written request (the "Redemption Date"), at a price per share equal to the Series C Per Share Liquidation Value (plus all accrued and unpaid dividends thereon, if any). Notwithstanding the foregoing, if at any time prior to the Redemption Date, the holders of a majority of the Series C Preferred deliver written notice to the Corporation requesting a deferral of such redemption, then such redemption shall be deferred (and the shares shall remain outstanding and shall continue to retain all rights and preferences set forth herein) until the later of (i) the holders of a majority of the Series C Preferred deliver written notice to the Corporation terminating the request for deferral and (ii) such shares of Series C Preferred are otherwise actually redeemed or purchased by the Corporation. The Corporation shall be obligated to redeem all such shares of Series C Preferred within 30 days after receipt of the notice terminating the request for deferral. (b) REDEMPTION PAYMENT. For each share of Series C Preferred which is to be redeemed, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share) an amount in immediately available funds equal to the Series C Per Share Liquidation Value (plus all accrued and unpaid dividends thereon). If the funds of the Corporation legally available for redemption of shares of Series C Preferred on the Redemption Date are insufficient to redeem the total number of shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of shares ratably among the holders of the shares to be redeemed based upon the aggregate Series C Per Share Liquidation Value of such shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares, such funds shall immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. (c) DIVIDENDS AFTER REDEMPTION DATE. No share is entitled to any dividends accruing after the date on which the Series C Per Share Liquidation Value (plus all accrued and 32 unpaid dividends thereon, if any) is paid to the holder thereof. On such date all rights of the holder of such share shall cease, and such share shall not be deemed to be outstanding. (d) REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares which are redeemed or otherwise acquired by the Corporation shall be canceled and shall not be reissued, sold or transferred. 2.6.4 VOTING RIGHTS. The holders of the Series C Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws and shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock and all other Preferred Stock Voting Shares voting together as a single class (and as a separate series or class if required by law) with each share of Common Stock entitled to one vote per share and each share of Series C Preferred entitled to one vote for each share of Common Stock into which such share of Series C Preferred is convertible on the record date for the vote taken. 2.6.5 CONVERSION. (a) CONVERSION PROCEDURE. (i) At any time and from time to time, any holder of Series C Preferred may convert all or any portion of the Series C Preferred (including any fraction of a share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of shares to be converted by $8.00 and dividing the result by the Conversion Price then in effect. (ii) Each conversion of Series C Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series C Preferred to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such Series C Preferred as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Series C Preferred share shall terminate on the Redemption Date for such share unless the Corporation has failed to pay to the holder thereof the Liquidation Value thereof. (iv) Notwithstanding any other provision hereof, if a conversion of Series C Preferred is to be made in connection with a Public Offering, the conversion of any shares of 33 Series C Preferred may, at the election of the holder of such shares, be conditioned upon the consummation of the Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Public Offering. (v) As soon as possible after a conversion has been effected (but in any event within ten business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all accrued and unpaid dividends, if any, with respect to each share converted, which have not been paid prior thereto, plus the amount payable under subparagraph (ix) below with respect to such conversion; and (c) a certificate representing any shares of Series C Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (vi) If the Corporation is not permitted under applicable law to pay any portion of the accrued dividends on the Series C Preferred being converted, the Corporation shall pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder. (vii) The issuance of certificates for shares of Conversion Stock upon conversion of Series C Preferred shall be made without charge to the holders of such Series C Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each share of Series C Preferred, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (viii) The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (ix) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series C Preferred, 34 the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. (x) If the shares of Conversion Stock issuable by reason of such conversion of Series C Preferred are convertible into or exchangeable for any other stock or securities of the Corporation, the Corporation shall, at the converting holder's option, upon surrender of the shares to be converted by such holder as provided above together with any notice, statement or payment required to effect such conversion or exchange of Conversion Stock, deliver to such holder or as otherwise specified by such holder a certificate or certificates representing the stock or securities into which the shares of Conversion Stock issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. (b) CONVERSION PRICE. (i) The initial Series C Conversion Price shall be $8.00. In order to prevent dilution of the conversion rights granted under this Section 2.6.5, the Series C Conversion Price shall be subject to adjustment from time to time pursuant to this Section 2.6.5. (ii) Subject to Section 2.6.5(h), if and whenever on or after the original date of issuance of the Series C Preferred the Corporation issues or sells, or in accordance with Section 2.6.5(c) is deemed to have issued or sold, any share of Common Stock for a consideration per share less than the Series C Conversion Price in effect immediately prior to such time, then and in such event, the Series C Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Series C Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued would purchase at such Conversion Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such additional shares of Common Stock so issued. For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, as if all Preferred Stock Voting Shares and all Convertible Securities had been fully converted into shares of Common Stock immediately prior to such issuance and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into shares of Common Stock, if so convertible) as of such date. 35 (c) EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Series C Conversion Price under Section 2.6.5(b) (and subject to Section 2.6.5(h)), the following shall be applicable: (i) ISSUANCE OF RIGHTS OR OPTIONS. If the Corporation in any manner grants any right or option to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the lowest price per share for which any one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any such Convertible Security is less than the Series C Conversion Price in effect immediately prior to the time of the granting of such Option, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the granting of such Options for such price per share. For purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the granting of the Option, upon exercise of the Option and upon conversion or exchange of the Convertible Security. No further adjustment of the Series C Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Security upon the exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Security. (ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Corporation in any manner issues or sells any Convertible Security and the lowest price per share for which any one share of Common Stock is issuable upon conversion or exchange thereof is less than the Series C Conversion Price in effect immediately prior to the time of such issue or sale, then such share of Common Stock shall be deemed to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "lowest price per share for which any one share of Common Stock is issuable" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Corporation with respect to any one share of Common Stock upon the issuance of the Convertible Security and upon the conversion or exchange of such Convertible Security. No further adjustment of the Series C Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of any Convertible Security, and if any such issue or sale of such Convertible Security is made upon exercise of any Options for which adjustments of the Series C Conversion Price had been or are to be made pursuant to other provisions of this Section 2.6.5, no further adjustment of the Series C Conversion Price shall be made by reason of such issue or sale. (iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase price provided for in any Option, the additional consideration (if any) payable upon the issue, conversion or 36 exchange of any Convertible Security, or the rate at which any Convertible Security is convertible into or exchangeable for Common Stock change at any time, the Series C Conversion Price in effect at the time of such change shall be readjusted to the Series C Conversion Price which would have been in effect at such time had such Option or Convertible Security originally provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE SECURITIES. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series C Conversion Price then in effect hereunder shall be adjusted to the Series C Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Corporation therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Series C Preferred. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Series C Preferred. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (vi) INTEGRATED TRANSACTIONS. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $0.01. 37 (vii) TREASURY SHARES. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) RECORD DATE. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) SUBDIVISION OR COMBINATION OF COMMON STOCK. Subject to Section 2.6.5(h), if the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Series C Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Series C Conversion Price in effect immediately prior to such combination shall be proportionately increased. (e) CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 2.6.5 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's board of directors shall make an appropriate adjustment in the Series C Conversion Price so as to protect the rights of the holders of Series C Preferred; provided that no such adjustment shall increase the Series C Conversion Price as otherwise determined pursuant to this Section 2.6.5 or decrease the number of shares of Conversion Stock issuable upon conversion of each share of Series C Preferred. (f) NOTICES. (i) Immediately upon any adjustment of the Series C Conversion Price, the Corporation shall give written notice thereof to all holders of Series C Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Series C Preferred at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata 38 subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any liquidation. (g) AUTOMATIC CONVERSION. The Corporation shall convert all of the outstanding Series C Preferred if the Corporation is at such time consummating a firm commitment underwritten Public Offering of shares of its Common Stock in which (i) the Net Proceeds to the Corporation are at least $15,000,000, (ii) the price per share paid by the public for such shares shall be at least 125% of the Series C Conversion Price in effect immediately prior to the closing of the sale of such shares pursuant to the Public Offering and (iii) all of the outstanding Series B Preferred and Series A Preferred also is converted. Any such mandatory conversion shall only be effected at the time of and subject to the closing of the sale of such shares pursuant to such Public Offering and upon written notice of such mandatory conversion delivered to all holders of Series C Preferred at least seven days prior to such closing. The Corporation shall convert all of the outstanding shares of Series C Preferred to shares of Common Stock in connection with a Public Offering meeting the criteria set forth in the first sentence of this Section 2.6.5(g) if the holders of a majority of the outstanding Preferred Stock Voting Shares agree to the conversion thereof and to the contemporaneous conversion of the Series A Preferred and the Series B Preferred. (h) CERTAIN ISSUANCES. The following actions by the Corporation will not trigger the adjustments in Sections 2.6.5(b), (c) and (d): (a) the issuance of options to purchase up to 3,641,000 shares of Common Stock pursuant to The Cobalt Group, Inc. 1995 Stock Option Plan (the "Stock Option Plan"), the existence of warrants to purchase up to 61,500 shares of Common Stock issued and outstanding prior to October 1998 and warrants and options to purchase up to 200,000 Shares of Common Stock issued in connection with the issuance of the Series C Preferred and (b) the issuance of shares of Common Stock upon exercise of the options and warrants described in the immediately preceding clause (a). 2.6.6 [Intentionally Omitted]. 2.6.7 PURCHASE RIGHTS. If at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Series C Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series C Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. 39 2.6.8 AMENDMENT AND WAIVER. No amendment, modification or waiver shall be binding or effective with respect to any provision of this Section 2.6 without the prior written consent of the holders of at least a majority of the Series C Preferred outstanding at the time such action is taken. No amendment, modification or waiver shall be binding or effective with respect to any provision of Section 2.7 without the prior written consent of the holders of at least a majority of the Preferred Stock Voting Shares outstanding at the time such action is taken; provided however, that no such action shall change the amounts or terms on which amounts distributable to the Series C Preferred pursuant to Section 2.7 are distributed or distributable (other than action that provides for the creation of and issuance to investors of a class or series of securities that are pari passu with or senior to the Series C Preferred, which action may be taken with the consent of the holders of at least a majority of the Perferred Stock Voting Shares) without the prior written consent of the holders of at least a majority of the Series C Preferred then outstanding; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of the applicable percentage of the Series C Preferred as provided herein. 2.7 LIQUIDATION. Upon any liquidation (as described in Sections 2.3.1, 2.4.1, 2.5.1 and 2.6.1), the Corporation's assets shall be distributed as follows: (a) If Net Proceeds are less than or equal to the Series C Liquidation Amount, plus all accrued and unpaid dividends on the Series C Preferred, then the Net Proceeds shall be distributed ratably to the holders of the Series C Preferred pursuant to the Series C Liquidation Amount. (b) If Net Proceeds are greater than the Series C Liquidation Amount, plus all accrued and unpaid dividends on the Series C Preferred, then an amount equal to the Series C Liquidation Amount, plus all accrued and unpaid dividends on the Series C Preferred, shall be distributed ratably to the holders of the Series C Preferred and the A/B Net Proceeds shall be distributed as follows: (i) If A/B Net Proceeds are less than or equal to the sum of the Series B Liquidation Amount plus the Series A Liquidation Amount, then A/B Net Proceeds shall be distributed ratably to the holders of the Series A Preferred, Series B Preferred and Series B-1 Preferred pursuant to the Series A Liquidation Amount and Series B Liquidation Amount; (ii) If A/B Net Proceeds are greater than the sum of the Series B Liquidation Amount plus the Series A Liquidation Amount but less than the sum of the Series B Liquidation 40 Amount plus the Series A Liquidation Amount plus the aggregate Series B Accrued Dividend, then the A/B Net Proceeds shall be distributed in accordance with paragraph (a) above until the holders of the Series A Preferred, Series B Preferred and Series B-1 Preferred have received 100% of the aggregate of the Series A Liquidation Amount and the Series B Liquidation Amount, and the balance shall be distributed ratably to the holders of the Series B Preferred and Series B-1 Preferred; (iii) If A/B Net Proceeds are greater than the sum of the Series B Liquidation Amount plus the Series A Liquidation Amount plus the aggregate Series B Accrued Dividend, then: (A) if Unadjusted A/B Net Proceeds Available Per Common Share are greater than or equal to 300% of the Series B Per Share Liquidation Value, then the holders of Series A Preferred, Series B Preferred and Series B-1 Preferred shall receive no preferential distribution; provided, however, that each share of Series B Preferred and Series B-1 Preferred shall be entitled to receive the Series B Accrued Dividend; (B) if Unadjusted A/B Net Proceeds Available Per Common Share are less than 300% of the Series B Per Share Liquidation Value, then: (1) if Unadjusted A/B Net Proceeds Available Per Common Share are greater than or equal to 200% of the Series B Per Share Liquidation Value, then the holders of the Series A Preferred shall receive no preferential distribution and each outstanding share of Series B Preferred and Series B-1 Preferred shall receive (i) the per share amount that results from the Calculated Series B Preference plus (ii) the Series B Accrued Dividend; (2) if Unadjusted A/B Net Proceeds Available Per Common Share are less than 200% of the Series B Per Share Liquidation Value, then each outstanding share of the Series B Preferred and Series B-1 Preferred shall receive (i) the Series B Per Share Liquidation Value (ii) plus the Series B Accrued Dividend, and each outstanding share of the Series A Preferred shall receive the per share amount that results from the Calculated Series A Preference. (iv) After the preferential distributions described in paragraphs (i), (ii) and (iii) above, if any, and the payment of the aggregate Series B Accrued Dividend, the remainder of the A/B Net Proceeds shall be distributed ratably among all holders of Common Stock, Series A Preferred, Series B Preferred and Series B-1 Preferred on an as-converted basis. 41 2.8 GENERAL PROVISIONS. 2.8.1 DEFINITIONS. For purposes of these Amended and Restated Articles of Incorporation, the following terms shall have the meanings indicated: "A/B NET PROCEEDS" means Net Proceeds less the Series C Liquidation Amount and all accrued and unpaid dividends on the Series C Preferred. "AFFILIATE" means, as to any person or entity, a person or entity that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such person or entity. "CALCULATED SERIES A PREFERENCE" means: (a) if Net Proceeds less the sum of the Series B Liquidation Amount and the aggregate Series B Accrued Dividend ("Adjusted A Net Proceeds") are less than 250% of Series A Refunded Liquidation Proceeds, then an amount equal to the Series A Liquidation Amount shall be distributed ratably among all holders of Series A Preferred; (b) if Adjusted A Net Proceeds are equal to or greater than 250% but less than 350% of Series A Refunded Liquidation Proceeds, then an amount equal to the Series A Liquidation Value multiplied by [1 - ((Adjusted A Net Proceeds / Series A Refunded Liquidation Proceeds) - 2.5)] shall be distributed ratably among all holders of Series A Preferred. "CALCULATED SERIES B PREFERENCE" means: (a) if Net Proceeds less the aggregate Series B Accrued Dividend ("Adjusted B Net Proceeds") are less than 200% of Series B Refunded Liquidation Proceeds, then an amount equal to the Series B Liquidation Amount shall be distributed ratably among all holders of Series B Preferred and Series B-1 Preferred; (b) if Adjusted B Net Proceeds are equal to or greater than 200% but less than 300% of Series B Refunded Liquidation Proceeds, then (1) an amount equal to the Series B Liquidation Amount multiplied by [1 - ((Adjusted B Net Proceeds / Series B Refunded Liquidation Proceeds) - 2.0)] shall be distributed ratably among all holders of Series B Preferred and Series B-1 Preferred. 42 "COMMON STOCK" means, collectively, the Corporation's Common Stock, par value $0.01 per share, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "CONVERSION STOCK" means the Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A Preferred, the Series B Preferred, the Series B-1 Preferred or the Series C Preferred are issued by an entity other than the Corporation or there is a change in the class of securities so issuable, then the term "Conversion Stock" shall mean the security issuable upon conversion of such Preferred Stock if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "CONVERTIBLE SECURITIES" has the meaning set forth in Section 2.3.5(c)(i). "FULLY DILUTED COMMON STOCK OUTSTANDING" means, as of the effective date of the Liquidation Event, the sum of all shares of Common Stock outstanding plus all shares of Common Stock issuable upon conversion of outstanding securities that are convertible into or exercisable or exchangeable for shares of Common Stock other than the Series C Preferred. "JUNIOR SECURITIES" means any of the Corporation's equity securities other than the Series A Preferred, the Series B Preferred, the Series B-1 Preferred and the Series C Preferred. "MARKET PRICE" of any security means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed, or, if there has been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in The Nasdaq Stock Market as of 4:00 P.M., New York time, or, if on any day such security is not quoted in The Nasdaq Stock Market, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in The Nasdaq Stock Market or the over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Corporation and the holders of a majority of the Preferred Stock Voting Shares. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an independent appraiser experienced in valuing securities jointly selected by the Corporation and the holders of a majority of the Preferred Stock 43 Voting Shares. The determination of such appraiser shall be final and binding upon the parties, and the Corporation shall pay the fees and expenses of such appraiser. "NET PROCEEDS" means gross consideration paid to the Corporation upon a Liquidation Event less any commissions or other expenses payable in connection with such Liquidation Event. "OPTIONS" has the meaning set forth in Section 2.3.5(c)(i). "PERSON" means an individual, a partnership, a corporation, limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "PREFERRED STOCK VOTING SHARES" means the aggregate of the outstanding Series A Preferred, Series B Preferred and Series C Preferred. "PUBLIC OFFERING" means any offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force; provided that for purposes of Sections 2.3.5(h), 2.4.5(h), 2.5.5(h) and 2.6.5(h) hereof, a Public Offering shall not include an offering made in connection with a business acquisition or combination or an employee benefit plan. "PURCHASE AGREEMENT" means the Purchase Agreement, dated as of October 7, 1998, by and among the Corporation and certain investors, as such agreement may from time to time be amended in accordance with its terms. "PURCHASE RIGHTS" has the meaning set forth in Section 2.3.7. "REDEMPTION DATE" has the meaning set forth in Section 2.3.3. "REGISTRATION AGREEMENT" means the Registration Agreement as defined in the Purchase Agreement. "SERIES A LIQUIDATION AMOUNT" means the Series A Per Share Liquidation Value multiplied by the number of shares of Series A Preferred outstanding on the effective date of the Liquidation Event. "SERIES A PER SHARE LIQUIDATION VALUE" means $0.554209. 44 "SERIES A REFUNDED LIQUIDATION PROCEEDS" means the amount necessary to provide holders of Series A Preferred with the aggregate Series A Per Share Liquidation Value if Adjusted A Net Proceeds were distributed ratably among all holders of Common Stock and all holders of Series A Preferred on an as-converted basis. "SERIES B ACCRUED DIVIDEND" means (.08 x Series B Per Share Liquidation Value x (Series B Holding period / 365)). "SERIES B HOLDING PERIOD" means the number of days between (i) the date of issuance of the Series B Preferred and the Series B-1 Preferred and (ii) the effective date of the Liquidation Event. "SERIES B LIQUIDATION AMOUNT" means the Series B Per Share Liquidation Value multiplied by the number of shares of Series B Preferred and Series B-1 Preferred outstanding on the effective date for the Liquidation Event. "SERIES B PER SHARE LIQUIDATION VALUE" means $4.20. "SERIES B REFUNDED LIQUIDATION PROCEEDS" means the amount necessary to provide holders of Series B Preferred and Series B-1 Preferred with the aggregate Series B Per Share Liquidation Value if Adjusted B Net Proceeds were distributed ratably among all holders of Common Stock and all holders of Series B Preferred and Series B-1 Preferred on an as-converted basis. "SERIES C LIQUIDATION AMOUNT" means the Series C Per Share Liquidation Value multiplied by the number of shares of Series C Preferred outstanding on the effective date for the Liquidation Event. "SERIES C PER SHARE LIQUIDATION VALUE" means $8.00. "UNADJUSTED A/B NET PROCEEDS AVAILABLE PER COMMON SHARE" means A/B Net Proceeds less the aggregate Series B Accrued Dividend divided by Fully Diluted Common Stock Outstanding. 2.8.2 REGISTRATION OF TRANSFER. The Corporation shall keep at its principal office a register for the registration of Series A Preferred, Series B Preferred and Series B-1 Preferred. Upon the surrender of any certificate representing Series A Preferred, Series B Preferred and Series B-1 Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor 45 representing in the aggregate the number of shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Series A Preferred, Series B Preferred and Series B-1 Preferred represented by the surrendered certificate. 2.8.3 REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of any Series A Preferred, Series B Preferred and Series B-1 Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation, or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at such stockholder's expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. 2.8.4 NOTICES. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices, attention President; and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 2.8.5 DISTRIBUTIONS TO SHAREHOLDERS. If at any time the Corporation proposes to effect any dividend, redemption, repurchase or other distribution with respect to the Corporation's capital stock, for purposes of determining the legality of such distribution under the Washington Business Corporation Act, and solely for such purpose, the Corporation shall not be required to consider the liquidation preference of the Series A Preferred, Series B Preferred and the Series B-1 Preferred as a liability of the Corporation in computing the Corporation's shareholders equity, so long as prior to the effective date of such distribution the Corporation shall have received the consent of the holders 46 of a majority of the Series A Preferred, Series B Preferred and the Series B-1 Preferred then outstanding to the proposed distribution. ARTICLE III NO PREEMPTIVE RIGHTS Except as may be otherwise agreed by this Corporation or be provided by the Board of Directors, no holder of any shares of this Corporation shall have any preemptive right to purchase, subscribe for or otherwise acquire any securities of this Corporation of any class or kind now or hereafter authorized. ARTICLE IV NO CUMULATIVE VOTING There shall be no cumulative voting of shares in this Corporation. ARTICLE V DIRECTORS 5.1 NUMBER. The Corporation shall have at least one director, the actual number to be prescribed in the Bylaws. The number of directors may be increased or decreased from time to time by amendment of the Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. 5.2 STAGGERED TERMS. Prior to the 2000 annual election of Directors, unless a director earlier dies, resigns or is removed, his term in office shall expire at the next annual meeting of shareholders. At the 2000 annual election of directors, the Board of Directors shall be divided into three classes with said classes to be as equal in number as may be possible. At the first election of directors to such classified Board of Directors, each Class 1 Director shall be elected to serve until the next ensuing annual meeting of shareholders, each Class 2 Director shall be elected to serve until the second ensuing annual meeting of shareholders and each Class 3 Director shall be elected to serve until the third ensuing annual meeting of shareholders. At each annual meeting of shareholders following the meeting at which the Board of Directors is initially classified, the number of directors equal to the number of directors in the class whose term expires at the time of such meeting shall be elected to serve until the third ensuing annual meeting of shareholders. Notwithstanding any of the foregoing provisions of this Article V, directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the number of directors; provided, however, 47 that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. 5.3 REMOVAL. The directors of this Corporation may be removed only for cause, in the manner provided by the Bylaws, by the affirmative vote of the holders of not less than a majority of the shares entitled to elect the director or directors whose removal is being sought. ARTICLE VI LIMITATION ON DIRECTOR LIABILITY To the fullest extent permitted by the Washington Business Corporation Act, as it exists on the date hereof or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its shareholders for monetary damages for his or her conduct as a director. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of this Corporation with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ARTICLE VII INDEMNIFICATION OF DIRECTORS To the fullest extent permitted by the Washington Business Corporation Act and the Bylaws of this Corporation, this Corporation is authorized to indemnify any of its directors. The Board of Directors shall be entitled to determine the terms of indemnification, including advance of expenses, and to give effect thereto through the adoption of Bylaws, approval of agreements, or by any other manner approved by the Board of Directors. Any amendment to or repeal of this Article shall not adversely affect any right of an individual with respect to any right to indemnification arising prior to such amendment or repeal. ARTICLE VIII REGISTERED AGENT AND REGISTERED OFFICE The registered agent of this Corporation in the State of Washington is JGB Service Corporation. The street address of the registered agent at the registered office of this Corporation 48 in the State of Washington is 3600 One Union Square, 600 University Street, Seattle, Washington 98101. ARTICLE IX SHAREHOLDER VOTING ON SIGNIFICANT CORPORATE ACTION Any corporate action for which the Washington Business Corporation Act, as then in effect, would otherwise require approval by a two-thirds vote of the shareholders of the Corporation shall be deemed approved by the shareholders if it is approved by the affirmative vote of the holders of a majority of shares entitled to vote. Notwithstanding this Article, effect shall be given to any other provision of these Articles that specifically requires a greater vote for approval of any particular corporate action. ARTICLE X SHAREHOLDER ACTION WITHOUT MEETING Any action that may be taken at a meeting of the shareholders may be taken without a meeting or a vote if (i) the action is taken by written consent delivered to the Corporation of all shareholders entitled to vote on the action or (ii) the action is taken by written consent delivered to the Corporation by the shareholders of the Corporation holding of record, or otherwise entitled to vote, in the aggregate not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted. A notice of the taking of action by shareholders by less than unanimous written consent shall be mailed at least one business day, or such longer period as is required by law, prior to the date the action becomes effective to those shareholders entitled to vote on the action who have not consented in writing, and, if required by law that notice of a meeting of shareholders to consider the action be given to nonvoting shareholders, to all nonvoting shareholders of the Corporation. Any such notice shall be in such form as may be required by applicable law. Any consent delivered to the Corporation pursuant to this Article shall be inserted in the minute book as if it were the minutes of a meeting of the shareholders. IN WITNESS WHEREOF, these Restated Articles of Incorporation are executed on behalf of the Corporation this ____ day of __________, 1999. THE COBALT GROUP, INC. By ----------------------------------- Geoffrey T. Barker Co-Chief Executive Officer 49 EX-3.2 4 EXHIBIT 3.2 BYLAWS OF THE COBALT GROUP, INC. SECTION 1 SHAREHOLDERS AND SHAREHOLDERS' MEETINGS 1.1 ANNUAL MEETING. The annual meeting of the shareholders of this corporation (the "Corporation") for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year at the principal office of the Corporation, or at some other place either within or without the State of Washington as designated by the Board of Directors, on such day and time as may be set by the Board of Directors. 1.2 SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive Officer, a majority of the Board of Directors, or any shareholder or shareholders holding in the aggregate one-fourth of the voting power of all shareholders. The meetings shall be held at such time and place as the Board of Directors may prescribe, or, if not held upon the request of the Board of Directors, at such time and place as may be established by the Chief Executive Officer or a Co-Chief Executive Officer or by the Secretary in such Chief Executive Officer's absence. Only business within the purpose or purposes described in the meeting notice may be conducted. 1.3 NOTICE OF MEETINGS. Written notice of the place, date and time of the annual shareholders' meeting and written notice of the place, date, time and purpose or purposes of special shareholders' meetings shall be delivered not less than 10 (or, if required by Washington law, 20) or more than 60 days before the date of the meeting, either personally, by facsimile, or by mail, or in any other manner approved by law, by or at the direction of the Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive Officer or the Secretary, to each shareholder of record entitled to notice of such meeting. Mailed notices shall be deemed to be delivered when deposited in the mail, first-class postage prepaid, correctly addressed to the shareholder's address shown in the Corporation's current record of shareholders. 1.4 WAIVER OF NOTICE. Except where expressly prohibited by law or the Articles of Incorporation, notice of the place, date, time and purpose or purposes of any shareholders' -1- meeting may be waived in a signed writing delivered to the Corporation by any shareholder at any time, either before or after the meeting. Attendance at the meeting in person or by proxy waives objection to lack of notice or defective notice of the meeting unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 1.5 SHAREHOLDERS' ACTION WITHOUT A MEETING. Any action that may be taken at a meeting of the shareholders may be taken without a meeting or a vote if (i) the action is taken by written consent delivered to the Corporation of all shareholders entitled to vote on the action or (ii) the action is taken by written consent delivered to the Corporation by the shareholders of the Corporation holding of record, or otherwise entitled to vote, in the aggregate not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted. A notice of the taking of action by shareholders by less than unanimous written consent shall be mailed at least one business day, or such longer period as is required by law, prior to the date the action becomes effective to those shareholders entitled to vote on the action who have not consented in writing, and, if required by law that notice of a meeting of shareholders to consider the action be given to nonvoting shareholders, to all nonvoting shareholders of the Corporation. Any such notice shall be in such form as may be required by applicable law. Any consent delivered to the Corporation pursuant to this Article shall be inserted in the minute book as if it were the minutes of a meeting of the shareholders. 1.6 TELEPHONE MEETINGS. Shareholders may participate in a meeting of shareholders by means of a conference telephone or any similar communications equipment that enables all persons participating in the meeting to hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 1.7 LIST OF SHAREHOLDERS. At least ten days before any shareholders' meeting, the Secretary of the Corporation or the agent having charge of the stock transfer books of the Corporation shall have compiled a complete list of the shareholders entitled to notice of a shareholders' meeting, arranged in alphabetical order and by voting group, with the address of each shareholder and the number, class, and series, if any, of shares owned by each. 1.8 QUORUM AND VOTING. The presence in person or by proxy of the holders of a majority of the votes entitled to be cast on a matter at a meeting shall constitute a quorum of shareholders for that matter. If a quorum exists, action on a matter shall be approved by a voting group if the votes cast within a voting group favoring the action exceed the votes cast within the voting group opposing the action, unless a greater number of affirmative votes is required by the Articles of Incorporation or by law. If the Articles of Incorporation or -2- Washington law provide for voting by two or more voting groups on a matter, action on a matter is taken only when voted upon by each of those voting groups counted separately. Action may be taken by one voting group on a matter even though no action is taken by another voting group. 1.9 ADJOURNED MEETINGS. If a shareholders' meeting is adjourned to a different place, date or time, whether for failure to achieve a quorum or otherwise, notice need not be given of the new place, date or time if the new place, date or time is announced at the meeting before adjournment. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in these Bylaws, that determination shall apply to any adjournment thereof, unless Washington law requires fixing a new record date. If Washington law requires that a new record date be set for the adjourned meeting, notice of the adjourned meeting must be given to shareholders as of the new record date. Any business may be transacted at an adjourned meeting that could have been transacted at the meeting as originally called. 1.10 PROXIES. 1.10.1 APPOINTMENT. Each shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such shareholder by proxy. Such authorization may be accomplished by (a) the shareholder or such shareholder's authorized officer, director, employee or agent executing a writing or causing his or her signature to be affixed to such writing by any reasonable means, including facsimile signature or (b) by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the intended holder of the proxy or to a proxy solicitation firm, proxy support service or similar agent duly authorized by the intended proxy holder to receive such transmission; provided, that any such telegram, cablegram or other electronic transmission must either set forth or be accompanied by information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the shareholder. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission by which a shareholder has authorized another person to act as proxy for such shareholder may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. 1.10.2 DELIVERY TO CORPORATION; DURATION. A proxy shall be filed with the Secretary before or at the time of the meeting or the delivery to the corporation of the consent to corporation action in writing. A proxy shall become invalid three years after the date of its execution unless otherwise provided in the proxy. A proxy with respect to a specified meeting -3- shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof. 1.11 BUSINESS FOR SHAREHOLDERS' MEETINGS. 1.11.1 BUSINESS AT ANNUAL MEETINGS. In addition to the election of directors, other proper business may be transacted at an annual meeting of shareholders, provided that such business must be properly brought before such meeting. To be properly brought before an annual meeting, business must be (a) brought by or at the direction of the Board or (b) brought before the meeting by a shareholder pursuant to written notice thereof, in accordance with section 1.3 hereof, and received by the Secretary not fewer than 60 nor more than 90 days prior to the date specified for such annual meeting (or if less than 60 days' notice or prior to public disclosure of the date of the annual meeting is given or made to the shareholders, not later than the tenth day following the day on which the notice of the date of the annual meeting was mailed or such public disclosure was made). No business shall be conducted at any annual meeting of shareholders except in accordance with this section 1.11, unless the application of this section 1.11 to a particular matter is waived in writing by the Board of Directors. If the facts warrant, the Board, or the chairman of an annual meeting of shareholders, may determine and declare that (a) a proposal does not constitute proper business to be transacted at the meeting or (b) business was not properly brought before the meeting in accordance with the provisions of this section 1.11 and, if, it is so determined in either case, any such business shall not be transacted. The procedures set forth in this section 1.11 for business to be properly brought before an annual meeting by a shareholder are in addition to, and not in lieu of, the requirements set forth in Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, as amended, or any successor provision. 1.11.2 BUSINESS AT SPECIAL MEETINGS. At any special meeting of the shareholders, only such business as is specified in the notice of such special meeting given by or at the direction of the person or persons calling such meeting, in accordance with section 1.2 hereof, shall come before such meeting. 1.11.3 NOTICE TO CORPORATION. Any written notice required to be delivered by a shareholder to the Corporation pursuant to section 1.2 or section 1.3 hereof must be given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the Corporation's executive offices. Any such shareholder notice shall set forth (i) the name and address of the shareholder proposing such business; (ii) a representation that the shareholder is entitled to vote at such meeting and a statement of the number of shares of the Corporation that are beneficially owned by the shareholder; (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to propose such business; and (iv) as to each matter the shareholder proposes to bring before the meeting, a brief -4- description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the language of the proposal (if appropriate), and any material interest of the shareholder in such business. 1.12 INSPECTORS OF ELECTION. 1.12.1 APPOINTMENT. In advance of any meeting of shareholders after this Corporation has become a public company (as defined below), the Board shall appoint one or more persons to act as inspectors of election at such meeting and to make a written report thereof. The Board may designate one or more persons to serve as alternate inspectors to serve in place of any inspector who is unable or fails to act. If no inspector or alternate is able to act at a meeting of shareholders, the chairman of such meeting shall appoint one or more persons to act as inspector of elections at such meeting. This corporation shall be a "public company" upon the earliest of (a) a vote by the Board of Directors of the corporation designating the Corporation a public company, (b) when a registration statement filed by the corporation under the Securities Act of 1933, as amended, in connection with an offering of the corporation's securities to the public first becomes effective or (c) upon the effective date of the registration of the Corporation's securities pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. 1.12.2 DUTIES. The inspectors of election shall: (a) ascertain the number of shares of the Corporation outstanding and the voting power of each such share; (b) determine the shares represented at the meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by them; and (e) certify their determination of the number of shares represented at the meeting and their count of the votes and ballots. The validity of any proxy or ballot shall be determined by the inspectors of election in accordance with the applicable provisions of these Bylaws and the Washington Business Corporation Act as then in effect. In determining the validity of any proxy transmitted by telegram, cablegram or other electronic transmission, the inspectors shall record in writing the information upon which they relied in making such determination. Each inspector of elections -5- shall, before entering upon the discharge of his or her duties, take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors of election may appoint or retain other persons or entities to assist them in the performance of their duties. SECTION 2 BOARD OF DIRECTORS 2.1 NUMBER AND QUALIFICATION. The business affairs and property of the Corporation shall be managed under the direction of a Board of Directors, the number of members of which shall be as set by resolution of the Board of Directors. The Board of Directors may increase or decrease this number by resolution. A decrease in the number of directors shall not shorten the term of an incumbent director. 2.2 ELECTION - TERM OF OFFICE. The directors shall be elected by the shareholders at each annual shareholders' meeting in accordance with the Articles of Incorporation. Despite the expiration of a director's term, the director continues to serve until his or her successor is elected and qualified or until there is a decrease in the authorized number of directors. 2.3 RESIGNATION; REMOVAL. Any Director may resign at any time by delivering written notice to the Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive Officer, President, the Secretary or the Board, or to the registered office of the corporation. Any such resignation shall take effect at the time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. One or more members of the Board (including the entire Board) may be removed, but only for cause, at a meeting of shareholders called expressly for that purpose, by the holders of not less than a majority of the shares entitled to elect the Director or Directors whose removal is sought in the manner provided by these Bylaws. 2.4 VACANCIES. Except as otherwise provided by law, vacancies in the Board of Directors, whether caused by resignation, death, retirement, disqualification, removal, increase in the number of directors, or otherwise, may be filled for the remainder of the term by the Board of Directors, by the shareholders, or, if the directors in office constitute less than a quorum of the Board of Directors, by an affirmative vote of a majority of the remaining directors. The term of a director elected to fill a vacancy expires at the next shareholders' meeting at which such director is to be elected. A vacancy that will occur at a specific later date may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. -6- 2.5 QUORUM AND VOTING. At any meeting of the Board of Directors, the presence in person (including presence by electronic means such as a telephone conference call) of a majority of all directors presently in office shall constitute a quorum for the transaction of business. If a quorum is present at the time of a vote, the affirmative vote of a majority of the directors present at the time of the vote shall be the act of the Board of Directors and of the Corporation except as may be otherwise specifically provided by the Articles of Incorporation, by these Bylaws, or by law. A director who is present at a meeting of the Board of Directors when action is taken is deemed to have assented to the action taken unless: (a) the director objects at the beginning of the meeting, or promptly upon his or her arrival, to holding it or to transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation within a reasonable time after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. 2.6 REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place, date and time as shall from time to time be fixed by resolution of the Board. 2.7 SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any place and at any time and may be called by the Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive Officer, Vice President, Secretary or Treasurer, or any two or more directors. 2.8 NOTICE OF MEETINGS. Unless the Articles of Incorporation provide otherwise, any regular meeting of the Board of Directors may be held without notice of the date, time, place, or purpose of the meeting. Any special meeting of the Board of Directors must be preceded by at least two days' notice of the date, time, and place of the meeting, but not of its purpose, unless the Articles of Incorporation or these Bylaws require otherwise. Notice may be given personally, by facsimile or other form of electronic transmission, by mail, or in any other manner allowed by law. Oral notice shall be sufficient only if a written record of such notice is included in the Corporation's minute book. Notice shall be deemed effective at the earliest of: (a) receipt; (b) delivery to the proper address or telephone number of the director as shown in the Corporation's records; or (c) five days after its deposit in the United States mail, as evidenced by the postmark, if correctly addressed and mailed with first-class postage prepaid. Notice of any meeting of the Board of Directors may be waived by any director at any time, by a signed writing, delivered to the Corporation for inclusion in the minutes, either before or after the meeting. Attendance or participation by a director at a meeting shall constitute a waiver of any required notice of the meeting unless the director promptly objects to holding the meeting or to the transaction of any business on the grounds that the meeting was not lawfully convened and the director does not thereafter vote for or assent to action taken at the meeting. -7- 2.9 DIRECTORS' ACTION WITHOUT A MEETING. The Board of Directors or a committee thereof may take any action without a meeting that it could properly take at a meeting if one or more written consents setting forth the action are signed by all of the directors, or all of the members of the committee, as the case may be, either before or after the action is taken, and if the consents are delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Such action shall be effective upon the signing of a consent by the last director to sign, unless the consent specifies a later effective date. 2.10 COMMITTEES OF THE BOARD OF DIRECTORS. 2.10.1 CREATION AND AUTHORITY. The Board of Directors, by resolutions adopted by a majority of the members of the Board of Directors in office, may create from among its members one or more committees and shall appoint the members thereof. Each such committee must have two or more members, who shall be directors and who shall serve at the pleasure of the Board of Directors. Each committee of the Board of Directors may exercise the authority of the Board of Directors to the extent provided in its enabling resolution and any pertinent subsequent resolutions adopted in like manner, provided that the authority of each such committee shall be subject to applicable law. Each committee of the Board of Directors shall keep regular minutes of its proceedings and shall report to the Board of Directors when requested to do so. 2.10.2 AUDIT COMMITTEE. In addition to any committees appointed pursuant to this section 2.10, no later than such time as this Corporation may become a public company there shall be an Audit Committee, appointed annually by the Board, consisting of at least two Directors who are not members of management and are independent members of the Board. It shall be the responsibility of the Audit Committee, if and when appointed, to review the scope and results of the annual independent audit of books and records of the corporation, to review compliance with all corporate policies which have been approved by the Board and to discharge such other responsibilities as may from time to time be assigned to it by the Board. The Audit Committee shall meet at such times and places as the members deem advisable, and shall make such recommendations to the Board as they consider appropriate. 2.10.3 COMPENSATION COMMITTEE. The Board may, in its discretion, designate a Compensation Committee consisting of one or more Directors as it may from time to time determine. The duties of the Compensation Committee shall consist of the following: (a) to establish and review periodically, but not less than annually, the compensation of the officers of the Corporation and to make recommendations concerning such compensation to the Board; (b) to consider incentive compensation plans for the employees of the Corporation; (c) to carry out the duties assigned to the Compensation Committee under any stock option plan or other plan approved by the Corporation; (d) to consult with the Chief Executive Officer or a Co-Chief Executive Officer concerning any compensation matters deemed appropriate by such -8- Chief Executive Officer or the Compensation Committee; and (e) to perform such other duties as shall be assigned to the Compensation Committee by the Board. 2.11 TELEPHONE MEETINGS. Members of the Board of Directors or of any committee appointed by the Board of Directors may participate in a meeting of the Board of Directors or committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 2.12 COMPENSATION OF DIRECTORS. The Board of Directors may fix the compensation of directors as such and may authorize the reimbursement of their expenses. SECTION 3 OFFICERS 3.1 OFFICERS ENUMERATED - ELECTION. The officers of the Corporation shall consist of such officers and assistant officers as may be designated by resolution of the Board of Directors. The officers may include a Chairman of the Board, a Chief Executive Officer or Co-Chief Executive Officers, one or more Vice Presidents, a Secretary, a Treasurer, and any assistant officers. The officers shall hold office at the pleasure of the Board of Directors. Unless otherwise restricted by the Board of Directors, a Chief Executive Officer or a Co-Chief Executive Officer, may appoint any assistant officer, the Secretary may appoint one or more Assistant Secretaries, and the Treasurer may appoint one or more Assistant Treasurers; provided that any such appointments shall be recorded in writing in the corporate records. 3.2 QUALIFICATIONS. None of the officers of the Corporation need be a director. Any two or more corporate offices may be held by the same person. 3.3 DUTIES OF THE OFFICERS. Unless otherwise prescribed by the Board of Directors, the duties of the officers shall be as follows: CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is elected, shall be a non-executive officer position. The Chairman of the Board shall preside at meetings of the Board of Directors and of the shareholders, shall be responsible for carrying out the plans and directives of the Board of Directors, shall report to and consult with the Board of Directors. The Chairman of the Board shall have such other powers and duties as the Board of Directors may from time to time prescribe. CHIEF EXECUTIVE OFFICER AND CO-CHIEF EXECUTIVE OFFICER. The Chief Executive Officer or a Co-Chief Executive Officer shall exercise the usual executive powers -9- pertaining to the office of the President and the Chief Executive Officer of the Company. In the absence of a Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive Officer shall preside at meetings of the Board of Directors and of the shareholders, perform the other duties of the Chairman of the Board prescribed in this Section, and perform such other duties as the Board of Directors may from time to time designate. In addition, if there is no Secretary in office, the Chief Executive Officer or a Co-Chief Executive Officer shall perform the duties of the Secretary. VICE PRESIDENT. Each Vice President shall perform such duties as the Board of Directors may from time to time designate. In addition, the Vice President, or if there is more than one, the most senior Vice President available, shall act as President in the absence or disability of the President. SECRETARY. The Secretary shall be responsible for and shall keep, personally or with the assistance of others, records of the proceedings of the directors and shareholders; authenticate records of the Corporation; attest all certificates of stock in the name of the Corporation; keep the corporate seal, if any, and affix the same to certificates of stock and other proper documents; keep a record of the issuance of certificates of stock and the transfers of the same; and perform such other duties as the Board of Directors may from time to time designate. TREASURER. The Treasurer shall have the care and custody of, and be responsible for, all funds and securities of the Corporation and shall cause to be kept regular books of account. The Treasurer shall cause to be deposited all funds and other valuable effects in the name of the Corporation in such depositories as may be designated by the Board of Directors. In general, the Treasurer shall perform all of the duties incident to the office of Treasurer, and such other duties as from time to time may be assigned by the Board of Directors. ASSISTANT OFFICERS. Assistant officers may consist of one or more Assistant Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. Each assistant officer shall perform those duties assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer or a Co-Chief Executive Officer, or the officer who appointed him or her. 3.4 VACANCIES. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting. 3.5 REMOVAL. Any officer or agent may be removed by action of the Board of Directors with or without cause, but any removal shall be without prejudice to the contract -10- rights, if any, of the person removed. Election or appointment of an officer or agent shall not of itself create any contract rights. 3.6 COMPENSATION. The compensation of all officers of the Corporation shall be fixed by the Board of Directors or the Compensation Committee of the Board, as determined by the Board. SECTION 4 SHARES AND CERTIFICATES OF SHARES 4.1 SHARE CERTIFICATES. Share certificates shall be issued in numerical order, and each shareholder shall be entitled to a certificate signed by a Co-Chief Executive Officer, or a Vice President, and attested by the Secretary or an Assistant Secretary. Share certificates may be sealed with the corporate seal, if any. Facsimiles of the signatures and seal may be used as permitted by law. Every share certificate shall state: (a) the name of the Corporation; (b) that the Corporation is organized under the laws of the State of Washington; (c) the name of the person to whom the share certificate is issued; (d) the number, class and series (if any) of shares that the certificate represents; and (e) if the Corporation is authorized to issue shares of more than one class or series, that upon written request and without charge, the Corporation will furnish any shareholder with a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series, and the authority of the Board of Directors to determine variations for future series. 4.2 CONSIDERATION FOR SHARES. Shares of the Corporation may be issued for such consideration as shall be determined by the Board of Directors to be adequate. The consideration for the issuance of shares may be paid in whole or in part in cash, or in any tangible or intangible property or benefit to the Corporation, including but not limited to promissory notes, services performed, contracts for services to be performed, or other securities of the Corporation. Establishment by the Board of Directors of the amount of consideration received or to be received for shares of the Corporation shall be deemed to be a determination that the consideration so established is adequate. -11- 4.3 TRANSFERS. The transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation pursuant to authorization or document of transfer made by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificates for a like number of shares shall have been surrendered and canceled. 4.4 LOSS OR DESTRUCTION OF CERTIFICATES. In the event of the loss or destruction of any certificate, a new certificate may be issued in lieu thereof upon satisfactory proof of such loss or destruction, and upon the giving of security against loss to the Corporation by bond, indemnity or otherwise, to the extent deemed necessary by the Board of Directors, the Secretary, or the Treasurer. 4.5 FIXING RECORD DATE. The Board of Directors may fix in advance a date as the record date for determining shareholders entitled: (i) to notice of or to vote at any shareholders' meeting or any adjournment thereof; (ii) to receive payment of any share dividend; or (iii) to receive payment of any distribution. The Board of Directors may in addition fix record dates with respect to any allotment of rights or conversion or exchange of any securities by their terms, or for any other proper purpose, as determined by the Board of Directors and by law. The record date shall be not more than 70 days and, in case of a meeting of shareholders, not less than 10 days (or such longer period as may be required by Washington law) prior to the date on which the particular action requiring determination of shareholders is to be taken. If no record date is fixed for determining the shareholders entitled to notice of or to vote at a meeting of shareholders, the record date shall be the date before the day on which notice of the meeting is mailed. If no record date is fixed for the determination of shareholders entitled to a distribution (other than one involving a purchase, redemption, or other acquisition of the Corporation's own shares), the record date shall be the date on which the Board adopted the resolution declaring the distribution. If no record date is fixed for determining shareholders entitled to a share dividend, the record date shall be the date on which the Board of Directors authorized the dividend. SECTION 5 BOOKS, RECORDS AND REPORTS 5.1 RECORDS OF CORPORATE MEETINGS, ACCOUNTING RECORDS AND SHARE REGISTERS. The Corporation shall keep, as permanent records, minutes of all meetings of the Board of Directors and shareholders, and all actions taken without a meeting, and all actions taken by a committee exercising the authority of the Board of Directors. The Corporation or its agent -12- shall maintain, in a form that permits preparation of a list, a list of the names and addresses of its shareholders, in alphabetical order by class of shares, and the number, class, and series, if any, of shares held by each. The Corporation shall also maintain appropriate accounting records, and at its principal place of business shall keep copies of: (a) its Articles of Incorporation or restated Articles of Incorporation and all amendments in effect; (b) its Bylaws or restated Bylaws and all amendments in effect; (c) minutes of all shareholders' meetings and records of all actions taken without meetings for the past three years; (d) the year-end balance sheets and income statements for the past three fiscal years, prepared as required by Washington law; (e) all written communications to shareholders generally in the past three years; (f) a list of the names and business addresses of its current officers and directors; and (g) its most recent annual report to the Secretary of State. 5.2 COPIES OF CORPORATE RECORDS. Any person dealing with the Corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the Chairman of the Board, the Chief Executive Officer or a Co-Chief Executive Officer, Vice President, Secretary or Assistant Secretary. 5.3 EXAMINATION OF RECORDS. A shareholder shall have the right to inspect and copy, during regular business hours at the principal office of the Corporation, in person or by his or her attorney or agent, the corporate records referred to in the last sentence of Section 5.1 of these Bylaws if the shareholder gives the Corporation written notice of the demand at least five business days before the date on which the shareholder wishes to make such inspection. In addition, if a shareholder's demand is made in good faith and for a proper purpose, a shareholder may inspect and copy, during regular business hours at a reasonable location specified by the Corporation, excerpts from minutes of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors, records of actions taken by the Board of Directors without a meeting, minutes of shareholders' meetings held or records of action taken by shareholders without a meeting not within the past three years, accounting records of the Corporation, or the record of shareholders; provided that the shareholder shall have made a demand describing with reasonable particularity the shareholder's purpose and the records the shareholder desires to inspect, and provided further that the records are directly connected to the shareholder's purpose. This section shall not affect any right of shareholders to inspect records of the Corporation that may be otherwise granted to the shareholders by law. 5.4 FINANCIAL STATEMENTS. Not later than four months after the end of each fiscal year, or in any event prior to its annual meeting of shareholders, the Corporation shall prepare a balance sheet and income statement in accordance with Washington law. The Corporation shall furnish a copy of each to any shareholder upon written request. -13- SECTION 6 FISCAL YEAR The fiscal year of the Corporation shall end on December 31. SECTION 7 CORPORATE SEAL The corporate seal of the Corporation, if any, shall be in the form approved by the Board of Directors. SECTION 8 MISCELLANEOUS PROCEDURAL PROVISIONS The Board of Directors may adopt rules of procedure to govern any meetings of shareholders or directors to the extent not inconsistent with law, the Corporation's Articles of Incorporation, or these Bylaws, as they are in effect from time to time. In the absence of any rules of procedure adopted by the Board of Directors, the chairman of the meeting shall make all decisions regarding the procedures for any meeting. SECTION 9 AMENDMENT OF BYLAWS The Board of Directors is expressly authorized to make, alter and repeal the Bylaws of the Corporation, subject to the power of the shareholders of the Corporation to change or repeal the Bylaws. SECTION 10 INDEMNIFICATION OF DIRECTORS AND OTHERS 10.1 GRANT OF INDEMNIFICATION. Subject to Section 10.2, each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending, or completed action, suit or proceeding, whether formal or informal, civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director of the Corporation or -14- who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of this or another Corporation or of a partnership, joint venture, trust, other enterprise, or employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by applicable law, as then in effect, against all expense, liability and loss (including attorneys' fees, costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director and shall inure to the benefit of his or her heirs, executors and administrators. 10.2 LIMITATIONS ON INDEMNIFICATION. Notwithstanding Section 10.1, no indemnification shall be provided hereunder to any such person to the extent that such indemnification would be prohibited by the Washington Business Corporation Act or other applicable law as then in effect, nor, except as provided in Section 10.4 with respect to proceedings seeking to enforce rights to indemnification, shall the Corporation indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person except where such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. 10.3 ADVANCEMENT OF EXPENSES. The right to indemnification conferred in this section shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, except where the Board of Directors shall have adopted a resolution expressly disapproving such advancement of expenses. 10.4 RIGHT TO ENFORCE INDEMNIFICATION. If a claim under Section 10.1 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, or if a claim for expenses incurred in defending a proceeding in advance of its final disposition authorized under Section 10.3 is not paid within 20 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification hereunder upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking has been tendered to the Corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled. It shall be a defense to any such action (other than an action with respect to expenses authorized under Section 10.3) that the claimant has not met the standards of conduct which make it permissible hereunder or under the Washington Business Corporation Act for the Corporation to indemnify -15- the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth herein or in the Washington Business Corporation Act nor (except as provided in Section 10.3) an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled. 10.5 NONEXCLUSIVITY. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this section shall be valid to the extent consistent with Washington law. 10.6 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS. The Corporation may, by action of its Board of Directors from time to time, provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers, employees and agents of the Corporation on the same terms and with the same scope and effect as the provisions of this section with respect to the indemnification and advancement of expenses of directors and officers of the Corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or on such other terms as the Board may deem proper. 10.7 INSURANCE AND OTHER SECURITY. The Corporation may maintain insurance, at its expense, to protect itself and any individual who is or was a director, officer, employee or agent of the Corporation or another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against or incurred by the individual in that capacity or arising from his or her status as an officer, director, agent, or employee, whether or not the Corporation would have the power to indemnify such person against the same liability under the Washington Business Corporation Act. The Corporation may enter into contracts with any director or officer of the Corporation in furtherance of the provisions of this section and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this section. 10.8 AMENDMENT OR MODIFICATION. This section may be altered or amended at any time as provided in these Bylaws, but no such amendment shall have the effect of diminishing the rights of any person who is or was an officer or director as to any acts or omissions taken or omitted to be taken prior to the effective date of such amendment. -16- 10.9 EFFECT OF SECTION. The rights conferred by this section shall be deemed to be contract rights between the Corporation and each person who is or was a director or officer. The Corporation expressly intends each such person to rely on the rights conferred hereby in performing his or her respective duties on behalf of the Corporation. -17- EX-5.1 5 EXHIBIT 5.1 July 7, 1999 The Cobalt Group, Inc. 2030 Fifth Avenue, Suite 300 Seattle, WA 98121 Gentlemen: We have acted as counsel to you in connection with the authorization and issuance by The Cobalt Group, Inc. (the "Company") of up to 4,500,000 shares of the Company's common stock, $0.01 par value per share (the "Common Stock"), together with an additional 675,000 shares of Common Stock if and to the extent the underwriters exercise an over-allotment option granted by the Company and the preparation and filing of a registration statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), which you are filing with the Securities and Exchange Commission with respect to the foregoing shares of Common Stock (collectively, the "Shares"). We have examined the Registration Statement and such documents and records of the Company and other documents as we have deemed necessary for the purpose of this opinion. Based upon the foregoing, we are of the opinion that upon the happening of the following events: (a) the filing and effectiveness of the Registration Statement and any amendments thereto, (b) the offering and sale of the Shares as contemplated by the Registration Statement, and (c) receipt by the Company of the consideration required for the Shares to be sold by the Company as contemplated by the Registration Statement, the Shares will be duly authorized, validly issued, fully paid and nonassessable. The Cobalt Group, Inc. July 6, 1999 Page 2 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and any amendment thereto, including any and all post-effective amendments and any registration statement relating to the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act, and to the reference to our firm under the heading "Legal Matters" in the prospectus included in the Registration Statement. In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, STOEL RIVES LLP EX-10.10 6 EXHIBIT 10.10 Exhibit 10.10 ACQUISITION AND INVESTMENT AGREEMENT BETWEEN THE REYNOLDS AND REYNOLDS COMPANY AND THE COBALT GROUP, INC. dated as of November 25, 1997 TABLE OF CONTENTS 1. ACQUIRED ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. EXCLUDED ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3. ASSUMED LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . .1 4. EXCLUDED LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . .1 5. CONSIDERATION AND DELIVERY. . . . . . . . . . . . . . . . . . . . . . . .1 5.1 CASH PORTION . . . . . . . . . . . . . . . . . . . . . . . . . . .1 5.2 SHARE PORTION. . . . . . . . . . . . . . . . . . . . . . . . . . .2 5.3 DETERMINATION OF DEALERNET REVENUES. . . . . . . . . . . . . . . .3 5.4 CERTAIN UNDERTAKINGS BY PURCHASER. . . . . . . . . . . . . . . . .3 5.5 SALES OR TRANSFER TAXES. . . . . . . . . . . . . . . . . . . . . .4 6. USE BY PURCHASER OF THE TRANSITION ASSETS . . . . . . . . . . . . . . . .4 7. LEASE OF CERTAIN ASSETS . . . . . . . . . . . . . . . . . . . . . . . . .5 8. REPRESENTATIONS AND WARRANTIES OF SELLER. . . . . . . . . . . . . . . . .5 8.1 CORPORATE ACTION; POWER AND AUTHORITY. . . . . . . . . . . . . . .5 8.2 NO CONFLICT WITH OTHER AGREEMENTS OR LAWS. . . . . . . . . . . . .5 8.3 ORGANIZATION AND QUALIFICATION . . . . . . . . . . . . . . . . . .5 8.4 PERSONAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . .6 8.5 LITIGATION; COMPLIANCE WITH LAWS, ETC. . . . . . . . . . . . . . .6 8.6 LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . .6 8.7 CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 8.8 TITLE TO PROPERTIES; ENCUMBRANCES. . . . . . . . . . . . . . . . .6 8.9 INTELLECTUAL PROPERTY INTANGIBLES. . . . . . . . . . . . . . . . .6 8.10 CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . . . . . . .7 8.11 CUSTOMERS AND SUPPLIERS. . . . . . . . . . . . . . . . . . . . . .7 8.12 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . .7 8.13 INVESTMENT INTENT. . . . . . . . . . . . . . . . . . . . . . . . .7 8.14 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .8 8.15 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 8.16 EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .8 8.17 ASSETS MATERIAL TO OPERATION OF THE ACQUIRED BUSINESS. . . . . . .9 9. REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . . . . . . .9 9.1 CORPORATE ACTION . . . . . . . . . . . . . . . . . . . . . . . . .9 9.2 NO CONFLICT WITH OTHER AGREEMENTS OR LAWS. . . . . . . . . . . . .9 9.3 ORGANIZATION AND QUALIFICATION . . . . . . . . . . . . . . . . . .9 9.4 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 10 9.5 MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . 10 9.6 LITIGATION; COMPLIANCE WITH LAWS, ETC. . . . . . . . . . . . . . 10 9.7 TITLE TO PROPERTIES; ENCUMBRANCES. . . . . . . . . . . . . . . . 10 9.8 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 10 10. COVENANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 10.1 CONDUCT OF BUSINESS PRIOR TO CLOSING . . . . . . . . . . . . . . 11 10.2 OTHER TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 11 10.3 CONSENTS, WAIVERS AND APPROVALS. . . . . . . . . . . . . . . . . 11 10.4 SUPPLEMENTAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . 11 10.5 CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . 12 10.8 DUE DILIGENCE. . . . . . . . . . . . . . . . . . . . . . . . . . 12 10.9 AUDIT MATERIALS. . . . . . . . . . . . . . . . . . . . . . . . . 12 11. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. . . . . . . . . . . . 12 11.1 REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 12 11.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11.3 NO INJUNCTION, ETC . . . . . . . . . . . . . . . . . . . . . . . 13 11.4 OPINION OF COUNSEL . . . . . . . . . . . . . . . . . . . . . . . 13 11.5 INCUMBENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 11.6 CONSENTS, WAIVERS AND APPROVALS. . . . . . . . . . . . . . . . . 13 11.7 ABSENCE OF SELLER MATERIAL ADVERSE CHANGES . . . . . . . . . . . 13 11.8 ALLOCATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 13 11.9 ASSIGNMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 13 12. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER . . . . . . . . . . . . . 13 12.1 REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 13 12.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12.3 CERTIFIED RESOLUTIONS. . . . . . . . . . . . . . . . . . . . . . 14 12.4 OPINION OF COUNSEL . . . . . . . . . . . . . . . . . . . . . . . 14 12.5 NO INJUNCTION, ETC . . . . . . . . . . . . . . . . . . . . . . . 14 12.6 CONSENTS, WAIVERS AND APPROVALS. . . . . . . . . . . . . . . . . 14 12.7 INCUMBENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12.8 ASSIGNMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 14 12.9 ALLOCATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 14 13. MUTUAL COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14.1 TIME AND PLACE . . . . . . . . . . . . . . . . . . . . . . . . . 14 14.2 TRANSACTIONS AT THE CLOSING. . . . . . . . . . . . . . . . . . . 15 14.3 CERTAIN DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . 15 15. EMPLOYEES OF THE ACQUIRED BUSINESS. . . . . . . . . . . . . . . . . . . 15 15.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15.2 TERMINATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . 16 17. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.1 GROUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.2 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . . . . . 17 18. MISCELLANEOUS SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . 17 19. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 19.1 LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 19.2 INDEMNIFICATION BY SELLERS . . . . . . . . . . . . . . . . . . . 17 19.3 INDEMNIFICATION BY PURCHASER . . . . . . . . . . . . . . . . . . 17 19.4 PROCEDURES FOR INDEMNIFICATION . . . . . . . . . . . . . . . . . 17 19.5 DEFENSE OF THIRD PARTY CLAIMS. . . . . . . . . . . . . . . . . . 18 19.6 LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20. TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . 20 20.1 BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20.2 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 21. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 21.1 ACCOUNTING RECORDS . . . . . . . . . . . . . . . . . . . . . . . 21 21.2 NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 21.3 ASSIGNMENT; BINDING EFFECT . . . . . . . . . . . . . . . . . . . 21 21.4 HEADINGS; EXHIBITS AND SCHEDULES . . . . . . . . . . . . . . . . 21 21.5 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . 21 21.6 INTEGRATION OF AGREEMENT . . . . . . . . . . . . . . . . . . . . 21 21.7 TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . . . . 22 21.8 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 22 21.9 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 21.10 PARTIAL ILLEGALITY OR UNENFORCEABILITY . . . . . . . . . . . . . 22 21.11 SINGULAR OR PLURAL . . . . . . . . . . . . . . . . . . . . . . . 22 21.12 NO THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . . . . 22 21.13 ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 21.14 "PERSON.". . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 21.15 "BEST EFFORTS.". . . . . . . . . . . . . . . . . . . . . . . . . 23 21.16 "INCLUDING." . . . . . . . . . . . . . . . . . . . . . . . . . . 23 21.17 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . 23 22. CERTAIN CONSENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
LIST OF SCHEDULES A Definitions B Acquired Assets B-1 Customers of the Acquired Business B-2 Contracts C Excluded Assets D Disclosure Schedule E Financial Statements F Addresses G Lease Assets H Purchaser's Charter Documents I Purchaser's Capitalization J Miscellaneous Transition Services K Certain Obligations of Purchaser LIST OF EXHIBITS 1 Form of Registration Agreement 2 Form of Equipment Lease 3 Opinion of Seller's Counsel 4 Form of Assignment Agreement 5 Opinion of Purchaser's Counsel 6 Form of Allocation Agreement 7 Form of Shareholders Agreement ACQUISITION AGREEMENT RECITALS: Capitalized terms used in this Agreement have the meanings set forth in the attached Schedule A. Purchaser desires to purchase and Seller desires to sell to Purchaser certain of the assets used in the Acquired Business, all on the terms and subject to the conditions set forth in this Agreement. The Parties agree as follows: AGREEMENT: 1. ACQUIRED ASSETS. Purchaser agrees to purchase and Seller agrees to sell, assign and deliver to Purchaser as of the Effective Time, all of Seller's right, title and interest in, to and under the Acquired Assets, free and clear of any Lien except the Permitted Encumbrances. 2. EXCLUDED ASSETS. Purchaser will not acquire any right, title or interest of Seller in, to or under any of the Excluded Assets. 3. ASSUMED LIABILITIES. As of the Effective Time, Purchaser will assume and become liable for the Assumed Liabilities. 4. EXCLUDED LIABILITIES. Purchaser will not assume or become liable for any Excluded Liabilities. 5. CONSIDERATION AND DELIVERY. The consideration for the Acquired Assets will be (a) assumption of the Assumed Liabilities by Purchaser, plus (b) payment by Purchaser of the Purchase Price according to this Section 5. 5.1 CASH PORTION. Purchaser will pay to Seller the sum of $500,000 as described in this Section 5.1. With respect to each calendar quarter described below, and subject to the following sentence, (a) Purchaser shall pay to Seller by wire transfer of immediately available funds on the applicable due date set forth below an amount equal to the product of (i) one and one-half (1.5), multiplied by (ii) an amount equal to twenty-five percent (25%) of DealerNet Revenues for the first two (2) months of the applicable quarter, and (b) if the payment for either of the first two (2) quarters under clause (a) exceeds an amount equal to twenty-five percent (25%) of DealerNet Revenues for the entirety of such quarter as shown in the applicable DealerNet Revenue Statement, Purchaser shall deduct such excess from the payment for the immediately succeeding quarter, and if the payment for either of the first two (2) quarters under clause (a) is less than an amount equal to twenty-five percent (25%) of DealerNet Revenues for the entirety of such quarter as shown in the applicable DealerNet Revenue Statement, Purchaser shall add the amount of the deficiency to the payment for the immediately succeeding quarter.
CALENDAR QUARTER DUE DATE ---------------- -------- 12/l/97 - 2/28/98 3/20/98 3/l/98 - 5/31/98 6/20/98 6/l/98 - 8/31/98 9/20/98 9/l/98 - 11/30/98 12/20/98
Notwithstanding anything to the contrary in this Agreement, (x) in no event shall Purchaser be required to pay more than $500,000 in the aggregate under this Section 5.1; and (y) if the aggregate of the four payments described above is less than $500,000, then Purchaser shall pay any such deficiency to Seller simultaneously with the fourth and final payment. 5.2 SHARE PORTION. Purchaser will issue Acquisition Shares to Seller (or pay cash by wire transfer of immediately available funds in lieu of Acquisition Shares) as described in this Section 5.2. (a) Within (30) days after the Triggering Event, Purchaser shall issue to Seller certificates for the Fixed Acquisition Shares. The Fixed Acquisition Shares shall be issued in accordance with Section 5.2(c). If no Triggering Event occurs prior to a Payment Event, then, in lieu of the Fixed Acquisition Shares, Purchaser shall pay to Seller the sum of $300,000 by wire transfer of immediately available funds on the effective date of the Payment Event. (b) Within thirty (30) days after the Triggering Event, Purchaser shall issue to Seller the Variable Acquisition Shares; provided, however, that if the Triggering Event occurs prior to the first anniversary of the Effective Time, Purchaser shall not be obligated to issue such Acquisition Shares to Seller until thirty (30) days after the first anniversary of the Effective Time. The Variable Acquisition Shares shall be issued in accordance with Section 5.2(c). If no Triggering Event occurs prior to a Payment Event, then, in lieu of the Variable Acquisition Shares, Purchaser shall pay to Seller an amount equal to the lesser of (but not less than $0): (i) $400,000, or (ii) the difference of (A) sixty-six percent (66%) of DealerNet Revenues for the first twelve months following the Effective Time, less (B) $800,000, by wire transfer of immediately available funds on the later of the effective date of the Payment Event or the first anniversary of the Effective Time; provided that if the Payment Event occurs prior to the first anniversary of the Effective Time, then "DealerNet Revenues for the first twelve months following the Effective Time" shall be determined by multiplying the average monthly DealerNet Revenues for that number of full calendar months completed prior to the Payment Event by twelve (12). (c) The Acquisition Shares will be duly and validly authorized and issued, fully paid and nonassessable. (d) In the event that any securities of Purchaser are at any time on or before the fifth (5th) anniversary of the Effective Time changed into or exchanged for a different number or kind of securities or other consideration by reason of any merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination or otherwise, then all provisions of this Agreement, if any, in respect to such securities shall refer to such other securities or consideration with appropriate adjustments (as determined by agreement of the Parties, or, failing agreement within thirty (30) days after the effective date of the applicable event, by arbitration pursuant to Section 21.13) to the Cobalt Share Price. (e) On the first date that Seller receives any Acquisition Shares, Seller shall, as a condition to Purchaser's obligation to issue the Acquisition Shares to Seller, execute and deliver to Purchaser endorsements to the Registration Agreement and the Shareholders Agreement which shall be in a form reasonably satisfactory to Seller and Purchaser and which shall have the effect of adding Seller as a party to each of those agreements. 5.3 DETERMINATION OF DEALERNET REVENUES. Purchaser will deliver to Seller a DealerNet Revenue Statement no later than thirty (30) days after the end of each calendar quarter identified in Section 5.1. Seller shall have the right to conduct a single audit of Purchaser's records at Purchaser's premises during normal business hours upon ten (10) days prior notice at any time after receipt of the DealerNet Revenue Statement for the final quarter identified in Section 5.1 and before the six (6)-month anniversary of receipt of that DealerNet Revenue Statement. Purchaser shall provide Seller access to all records reasonably requested by Seller to verify Purchaser's determination of the DealerNet Revenues for all quarters identified in Section 5.1. In the event Seller's audit reveals any discrepancies between the DealerNet Revenues audited and the same DealerNet Revenues as reflected in a DealerNet Revenue Statement, then Seller shall notify Purchaser of the discrepancy. The Parties will have thirty (30) days from the date of Seller's notice to resolve the discrepancy. If the Parties do not resolve the discrepancy within such time, either Seller or Purchaser may submit the dispute to the Independent Auditors for resolution, and such resolution will be final and binding on the Parties. The fees and expenses of the Independent Auditors will be borne by Seller and Purchaser in proportion to the respective differences between their positions submitted to the Independent Auditors and the final determination of the Independent Auditors. The audit shall be at Seller's cost and expense unless the amount of any discrepancy as finally determined by agreement of the Parties or by the Independent Auditors is greater than five percent (5%) of the DealerNet Revenues for the one-year period immediately following the Effective Time, in which case Purchaser shall reimburse Seller for Seller's reasonable out-of-pocket costs and expenses in connection with the audit. 5.4 CERTAIN UNDERTAKINGS BY PURCHASER. (a) Purchaser agrees that, from and after the Effective Time, Purchaser will (i) use substantially the same efforts to market and sell and/or license to DealerNet Dealers those products and services that would result in Service Revenues as Purchaser makes with respect to marketing similar products and services to its other customers and to provide substantially similar levels of service and support to DealerNet Dealers as provided to other customers, and (ii) provide to DealerNet Dealers and/or with respect to products and services that would result in Service Revenues substantially the same credit and payment terms (including Purchaser's discounting, billing and collection practices) as Purchaser provides to its other customers or follows with respect to its other products and services. Where services and/or products that would generate Service Revenues are sold at a discount to list price, such discount shall be granted only in the Ordinary Course of Business. (b) Purchaser agrees that from and after the Effective Date and continuing until the earlier of (i) the occurrence of the Triggering Event and issuance of all Acquisition Shares under Section 5.2 or (ii) the occurrence of a Payment Event and payment to Seller of all amounts due under Section 5.2, Purchaser will comply with its obligations described in Schedule K. (c) Purchaser agrees that with respect to the Fixed Acquisition Shares, Purchaser shall provide to Seller for Seller's approval (which shall not be unreasonably withheld or delayed) prior to issuance of the Fixed Acquisition Shares, all amendments to Purchaser's Articles of Incorporation and any other documents or instruments which Purchaser proposes to set forth the terms of such Acquisition Shares. Such amendment(s) and/or other documents or instruments will be provided to Seller reasonably in advance of the same becoming effective. Seller's approval shall be limited to confirming that the terms of the Fixed Acquisition Shares are as required by this Agreement. (d) Purchaser and Seller shall take all actions required to effect the issuance of the Acquisition Shares according to this Agreement in compliance with the Act and all other applicable state and federal securities laws. 5.5 SALES OR TRANSFER TAXES. Purchaser will pay (or reimburse Seller, as applicable) all sales or transfer taxes, recording fees and similar fees or charges arising out of the transfer of the Acquired Assets contemplated by this Agreement. 6. USE BY PURCHASER OF THE TRANSITION ASSETS. Seller shall permit Purchaser to use the Transition Assets during the Transition Period as described in this Section 6. The Transition Assets shall at all times remain the sole and exclusive property of Seller and shall remain on Seller's premises in the Westlake Center, except as set forth in Schedule G. Seller shall provide Purchaser access to the Transition Assets during normal business hours and in the event of emergencies and Purchaser shall not disrupt the operations of Seller at such location. Subject to the following sentence and Purchaser's obligations under Section 19.3, use of the Transition Assets shall be at no cost to Purchaser. In the event of any breakdown or failure in the Transition Assets, Seller shall arrange for repair of the Transition Assets and Purchaser shall reimburse Seller for the cost of repair. Seller expressly disclaims any representation or warranty as to the quality or condition of any of the Transition Assets and Purchaser acknowledges that its use of the Transition Assets shall be Purchaser's sole and exclusive risk. Except for the obligations expressly set forth in this Section 6, Seller shall have no liability or obligation to Purchaser in respect of the use or performance of the Transition Assets. 7. LEASE OF CERTAIN ASSETS. If Purchaser so elects (as evidenced by written notice to Seller no later than thirty (30) days prior to expiration of the Transition Period), Purchaser may lease one or more of the Lease Assets from Seller, at the rental rate in Schedule G, for a period of up to one year, terminable by Purchaser on ninety (90) days prior notice as to each Lease Asset (the lease will provide for a purchase option on termination at the prices in Schedule G). Purchaser's notice shall identify the Lease Assets Purchaser wishes to lease. All other terms of the lease will be as set forth in the Equipment Lease, which the Parties shall execute promptly upon receipt of Purchaser's election. 8. REPRESENTATIONS AND WARRANTIES OF SELLER. Except as expressly set forth to the contrary in the applicable section of the Disclosure Schedule, Seller represents and warrants to Purchaser as follows: 8.1 CORPORATE ACTION; POWER AND AUTHORITY. Seller has taken all action required by its Articles of Incorporation and Code of Regulations or otherwise to authorize the execution and consummation of the Seller Agreements. When executed by Seller, the Seller Agreements will constitute the valid and legally binding obligations of Seller, enforceable in accordance with their terms, except that enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, or similar laws affecting the enforcement of creditors rights generally. Seller has full power and authority to execute and consummate the Seller Agreements. 8.2 NO CONFLICT WITH OTHER AGREEMENTS OR LAWS. The execution and consummation by Seller of the Seller Agreements will not (a) violate the terms of Seller's Articles of Incorporation or Code of Regulations or any Order, instrument, agreement, mortgage, commitment or understanding, written or oral, to which Seller is a party, or by which Seller or any of its properties is bound, (b) conflict with, result in a breach of, constitute (with or without notice or lapse of time or both) a default under or give any person any right to terminate, modify, accelerate or otherwise change the existing obligations of Seller under any such Order, instrument, agreement, mortgage, commitment or understanding, (c) result in the creation or imposition of any Lien upon Seller or its properties or assets, (d) violate any Applicable Law, or (e) violate, contravene or conflict with or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify any Governmental Authorization. 8.3 ORGANIZATION AND QUALIFICATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of Ohio. Seller has full power and authority to carry on its businesses as they are now being conducted and to own and lease the properties and assets which it now owns or leases. Seller is duly qualified to carry on business as a foreign corporation in the State of Washington and in each other state where the failure to be so qualified could have a material adverse impact on the Acquired Assets or the financial condition of Seller. 8.4 PERSONAL PROPERTY. Section 8.4 of the Disclosure Schedule sets forth a complete and correct list of all material items of Personal Property owned or used by Seller in connection with the Acquired Business. 8.5 LITIGATION; COMPLIANCE WITH LAWS, ETC. There is no Proceeding pending, or, to Seller's Knowledge, threatened, against Seller in respect of the Acquired Business or the Acquired Assets. There is no Order outstanding against Seller with respect to the Acquired Business or any of the Acquired Assets. Seller is not aware of and Seller has not received any notice of any actual or alleged violation of any Applicable Law with respect to the Acquired Business or any of the Acquired Assets. 8.6 LICENSES AND PERMITS. Seller has obtained all Governmental Authorizations from all applicable Governmental Bodies required in connection with the conduct of the Acquired Business or the ownership or operation of any of the Acquired Assets where the failure to obtain any such Governmental Authorization could have a material adverse effect on the Acquired Business or any of the Acquired Assets. 8.7 CONTRACTS. (a) Except for those items disclosed in Section 8.7(a) of the Disclosure Schedule and the Contracts, Seller is not a party to or any written or oral contracts, commitments, agreements, leases, purchase orders, sales orders or licenses in connection with the Acquired Business or any of the Acquired Assets. Correct and complete (in all material respects) copies of all written Contracts and all other items required to be disclosed in Section 8.7(a) of the Disclosure Schedule have been delivered to Purchaser. (b) Seller is not in default under and, to Seller's Knowledge, no condition exists which, with notice or the passage of time, or both, would constitute a default by Seller under any of the Contracts. 8.8 TITLE TO PROPERTIES; ENCUMBRANCES. Seller has good and marketable title to all of the Acquired Assets, and at the Effective Time shall convey such title to Purchaser, free and clear of any Liens except the Permitted Encumbrances. The Acquired Assets are located only at those locations described in Section 8.8 of the Disclosure Schedule. 8.9 INTELLECTUAL PROPERTY INTANGIBLES. (a) Section 8.9(a) of the Disclosure Schedule contains a complete and accurate list of all contracts, agreements, licenses or commitments, written or oral, relating to the Intellectual Property Intangibles used in the Acquired Business to which Seller is a party, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $2,500 under which Seller is the licensee. There are no outstanding and, to Seller's Knowledge, no threatened disputes or disagreements with respect to any such contract, agreement, license or commitment. (b) The Intellectual Property Intangibles included in the Acquired Assets are all Intellectual Property Intangibles material to the operation of Acquired Business as currently conducted. (c) All Marks included in the Acquired Assets have been registered with the United States Patent and Trademark Office are currently in compliance with all formal legal requirements, are valid and enforceable, and are not subject to any maintenance fees or Taxes or actions falling due within ninety days after the Effective Time. No such Mark has been or is now involved in any opposition, invalidation, or cancellation or Proceeding and, to Seller's Knowledge, no such Proceedings are threatened with the respect to any of such Marks. To Seller's Knowledge, there is no potentially interfering trademark or trademark application of any third party in connection with any such Mark, and no such Mark is infringed or, to Seller's Knowledge, has been challenged or threatened in any way. (d) None of the Intellectual Property Intangibles included in the Acquired Assets infringes the Proprietary Rights of others. 8.10 CONSENTS AND APPROVALS. No Governmental Authorization, filing with any Governmental Body or waiver, consent or approval from or filing with any other person is required for Seller to consummate the Seller Agreements without creating a default (or event which with notice, lapse of time or both would constitute a default) or liability. 8.11 CUSTOMERS AND SUPPLIERS. (a) Schedule B-1 contains a list of the customers of the Acquired Business. Seller has delivered (or, with respect to customer contracts, as of the Effective Time will have delivered) to Purchaser complete copies of all agreements, contracts or commitments with such customers which relate to the Acquired Business, all of which are included in the Contracts. (b) Seller has delivered to Purchaser a list of the suppliers of the Acquired Business. Seller has delivered to Purchaser complete copies of all agreements, contracts or commitments with such suppliers which relate to the Acquired Business. 8.12 BOOKS AND RECORDS. The books and records included in the Acquired Assets and all books and records of the Subsidiaries are correct in all material respects. 8.13 INVESTMENT INTENT. Seller acknowledges that the Acquisition Shares to be issued according to Section 5 will be issued in transactions exempt from registration under Act and applicable state securities laws, and that Purchaser is relying on the representations, warranties and covenants of Seller in this Section as the basis for Purchaser's determination that such exemptions are available. Accordingly, Seller represents, warrants and covenants that: (a) Seller is acquiring the Acquisition Shares for investment purposes only and without a view to the resale thereof until such time as such resale has been registered (or exemptions from registration perfected) under the Act and all applicable state securities laws. Seller will not sell, encumber, dispose or otherwise transfer (collectively, "TRANSFER") any right or interest in the Acquisition Shares, whether voluntarily, by gift, operation of law, testamentary disposition or otherwise, unless such Transfer has been registered (or an exemption from registration has been perfected) under the Act and applicable state securities laws. (b) Seller is an accredited investor as that term is defined in the rules and regulations promulgated under the Act. Seller is aware of the risks inherent in an investment in the Acquisition Shares. (c) Seller has had access to such information about Purchaser and its operations and prospects as Seller deems necessary to evaluate fully an investment in the Acquisition Shares. 8.14 FINANCIAL STATEMENTS. The DealerNet Financial Statements and the Pro Forma are attached to Section 8.14 of the Disclosure Schedule. The DealerNet Financial Statements were prepared consistent with other product line financial statements of Seller and were derived from internal financial statements prepared in accordance with GAAP, including allocations of various items. The Pro Forma was derived from the DealerNet Financial Statements. Section 8.14 contains a list of all Services Revenues for any period after the Effective Time which have been prepaid. Except for (a) the liabilities disclosed or reserved against in DealerNet Financial Statements, and (b) current liabilities incurred by Seller in the Ordinary Course of Business since September 30, 1997, Seller does not have any material liability or obligation, whether known or unknown, accrued, absolute, contingent or otherwise, arising out of the Acquired Business. 8.15 TAXES. Seller has filed all tax returns that it has been required to file and all such tax returns are true and correct in all material respects. As to those taxes imposed for which Seller is or could be liable in respect of the Acquired Business or any of the Acquired Assets: (a) Seller has complied with all Applicable Laws related to such taxes and applicable agreements; and (b) all such taxes required to be paid by Seller prior to the date of this Agreement have been timely paid (and those required to be paid after the date of this Agreement but prior to the Effective Time will have been timely paid). Seller has withheld and paid all taxes required to be withheld and paid in connection with amounts paid or owing to any employee. 8.16 EMPLOYEE MATTERS. Section 8.16 of the Disclosure Schedule sets forth a correct list of all employees of Seller who are employed solely in connection with the Acquired Business. All such employees are employees at will. With respect to all such employees, Seller has been conducting the Acquired Business in compliance with all Applicable Laws relating to employment and employment practices, wages and hours, and non-discrimination in employment. Except for payments of wages, commissions, benefits and employment-related taxes (including withholding) in the Ordinary Course of Business and the payment of severance to DealerNet Employees upon termination as contemplated by Section 15, Seller is not liable for any wages, commissions or benefits or employment-related taxes (including withholding) or any penalties for failure to timely pay any of the foregoing or otherwise failing to comply with Applicable Laws related to occupational health and safety, labor relations or other employment-related matters. To Seller's Knowledge, no current employee of the Acquired Business is subject to any valid and enforceable agreement that would prohibit that employee from performing substantially similar services for Purchaser after the Effective Time. 8.17 ASSETS MATERIAL TO OPERATION OF THE ACQUIRED BUSINESS. Except for the lease of Seller's Westlake Center facility, cash, receivables and the Transition Assets, the Acquired Assets constitute all assets of Seller which are necessary for the operation of the Acquired Business in the Ordinary Course of Business. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES IN THIS SECTION 8, SELLER DOES NOT MAKE AND HEREBY DISCLAIMS ANY AND ALL OTHER EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACQUIRED ASSETS, THE ASSUMED LIABILITIES OR THE ACQUIRED BUSINESS, INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 9. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Seller as follows (Purchaser shall be deemed to have repeated the representations and warranties in Sections 9.1, 9.2 and 9.3, and only those representations and warranties, simultaneously with each issuance of Acquisition Shares under Section 5.2): 9.1 CORPORATE ACTION. Purchaser has taken all action required by its Articles of Incorporation and Bylaws or otherwise to authorize the execution and consummation of the Purchaser Agreements. When executed by Purchaser, the Purchaser Agreements will constitute the valid and legally binding obligations of Purchaser enforceable in accordance with their terms, except that enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, or similar laws affecting the enforcement of creditors rights generally. 9.2 NO CONFLICT WITH OTHER AGREEMENTS OR LAWS. The execution and consummation by Purchaser of the Purchaser Agreements will not (a) violate the terms of Purchaser' Articles of Incorporation or Bylaws or any instrument, agreement, judgment or decree to which Purchaser is a party, or by which Purchaser or any of its properties is bound, (b) be in conflict with, result in a breach of or constitute (with giving of notice or lapse of time or both) a default under any such instrument, agreement, judgment or decree, (c) result in the creation or imposition of any Lien upon Purchaser or its properties or assets, or (d) violate any Applicable Law. 9.3 ORGANIZATION AND QUALIFICATION. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Purchaser has full power and authority to execute and consummate the Purchaser Agreements. Complete and correct copies of Purchaser's Articles of Incorporation and Bylaws, as amended, are attached as Schedule H. No event has occurred or fact exists which (with or without notice, lapse of time or both) would constitute a violation of any of the provisions of Purchaser's Articles of Incorporation or Bylaws. 9.4 FINANCIAL STATEMENTS. (a) Attached as Schedule E are copies of the Purchaser Financial Statements. The Purchaser Financial Statements: (i) are correct and complete in all material respects, (ii) fairly present the financial condition of Purchaser as of the respective dates thereof and the results of operations, changes in stockholders equity and cash flow of Purchaser for the applicable periods, and (iii) were prepared in accordance with GAAP consistently applied. Except as may be reflected in the notes to the Purchaser Financial Statements, the Purchaser Financial Statements do not contain any items of nonrecurring income or loss or other income or loss not earned or incurred in the Ordinary Course of Business. (b) Except for (i) the liabilities of Purchaser disclosed or reserved against in the 6/30/97 Balance Sheet, and (ii) current liabilities incurred by Purchaser in the Ordinary Course of Business since June 30, 1997, Purchaser does not have any material liability or obligation, whether known or unknown, accrued, absolute, contingent or otherwise. (c) No default exists and, to Purchaser's Knowledge, no event has occurred or fact exists that (with or without notice, lapse of time or both) would constitute a default as to any of the material liabilities of Purchaser. 9.5 MATERIAL ADVERSE CHANGE. Since June 30, 1997 no event has occurred which has had (or is reasonably likely to have) a material adverse effect on Purchaser's financial condition or business prospects. 9.6 LITIGATION; COMPLIANCE WITH LAWS, ETC. There is no Proceeding pending, or, to Purchaser's Knowledge, threatened, against Purchaser. There is no Order outstanding against Purchaser. Purchaser is not aware of and Purchaser has not received any notice of any actual or alleged violation of any Applicable Law. 9.7 TITLE TO PROPERTIES; ENCUMBRANCES. Except for assets disposed of in the Ordinary Course of Business since the date of the respective Purchaser Financial Statements, Purchaser has good and marketable title to all of the assets reflected in the Financial Statements, free and clear of any Liens except the Permitted Encumbrances. 9.8 CAPITALIZATION. The authorized equity and other securities of Purchaser are described in Schedule I. The outstanding equity or other securities of Purchaser are held as described in Schedule I. Except as set forth in Schedule I, Purchaser is not a party to, and, to Purchaser's Knowledge, there are no contracts, agreements or commitments relating to the issuance, voting, redemption, registration, or after of any equity or other securities of Purchaser (complete copies of all such contracts, agreements and commitments have been delivered to Seller). The documents and instruments containing the terms of all equity or other securities of Purchaser are identified in Schedule I and complete copies of those documents and instruments have been delivered to Seller. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES IN THIS SECTION 9, PURCHASER DOES NOT MAKE AND HEREBY DISCLAIMS ANY AND ALL OTHER EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES WITH RESPECT TO PURCHASER OR ITS ASSETS, LIABILITIES OR BUSINESS. 10. COVENANTS. The Parties covenant and agree as follows: 10.1 CONDUCT OF BUSINESS PRIOR TO CLOSING. Until the Effective Time, and unless the other Party otherwise consents in writing, Seller will operate the Acquired Business and Purchaser will operate its business, each substantially as previously operated, as contemplated by this Agreement and only in the Ordinary Course of Business (provided that Seller shall not be required to add 1998 model year information to the DealerNet site and Purchaser acknowledges that the current employees of the Acquired Business have been informed of the potential sale or discontinuation of the Acquired Business). 10.2 OTHER TRANSACTIONS. Seller will deal exclusively and in good faith with Purchaser regarding a Sale Transaction and will not, and will direct Seller's officers, directors, financial advisors, accountants, agents and counsel not to, (i) solicit submission of offers from any person relating to a Sale Transaction, (ii) participate in any discussions or negotiations regarding, or furnish any nonpublic information to any person regarding any Sale Transaction by any person other than Purchaser, or (iii) enter into any agreement or understanding, whether oral or written, that would have the effect of preventing consummation of this Agreement. If Seller and its representatives or agents should receive any proposal for a Sale Transaction or any inquiry regarding such proposal from a third party, Seller will promptly so inform Purchaser. 10.3 CONSENTS, WAIVERS AND APPROVALS. The Parties will use their respective best efforts to obtain prior to the Closing all consents, waivers, approvals, and releases, and will duly and timely make all filings (including Governmental Authorizations and filings with Governmental Bodies), in each case as necessary to effect the transactions contemplated hereby. All such consents, waivers, releases, approvals and filings will be in writing and in form and substance reasonably satisfactory to the other Party. 10.4 SUPPLEMENTAL DISCLOSURE. Seller will have the continuing obligation up to and including the Closing Date to supplement promptly or amend the Disclosure Schedule with respect to any matter subsequently arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or listed in the Disclosure Schedule. Any such supplemental disclosure will be deemed to have been disclosed as of the date of this Agreement if Purchaser proceeds with the Closing following receipt of such supplemental disclosure. 10.5 CONDITIONS PRECEDENT. The Parties will use their best efforts in good faith to satisfy the conditions set forth in Sections 11 and 12 hereof. 10.8 DUE DILIGENCE. Seller will give Purchaser and its counsel, accountants and other representatives full access during normal business hours to such books, records, and assets of Seller used in the Acquired Business, and Seller will furnish Purchaser with such information concerning the affairs of the Acquired Business, in each case as Purchaser may reasonably request to verify the representations and warranties contained in this Agreement. Such examinations will be conducted in such a manner so as not to unreasonably disrupt the normal business operations of Seller. Seller will deliver to Purchaser correct and complete copies of all documents referred to in the Disclosure Schedule. Purchaser will give Seller and its counsel, accountants and other representatives full access during normal business hours to such books, records, and assets of Purchaser, and Purchaser will furnish Seller with such information concerning the affairs of Purchaser, in each case as Seller may reasonably request to verify the representations and warranties contained in this Agreement. Such examinations will be conducted in such a manner so as not to unreasonably disrupt the normal business operations of Purchaser. Purchaser will deliver to Seller correct and complete copies of all documents reasonably requested by Seller in the course of such examinations. 10.9 AUDIT MATERIALS. Seller will provide Purchaser and its accountants, counsel and other representatives full access to such books, records, files and other information of Seller as may be required by Seller to conduct and complete a full financial audit of the Acquired Business for the period from acquisition of the Acquired Business by Seller until the Effective Time. Such audit shall be conducted on Seller's premises and during normal business hours. Purchaser shall bear all costs associated with such audit. Seller will within 120 days after the Effective Time prepare and deliver to Seller unaudited financial statements for the Acquired Business which shall be derived from Seller's internal financial statements for its "DealerNet" business unit and modified to eliminate Excluded Assets, Excluded Liabilities and those business operations which are not part of the Acquired Business. 11. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. The obligation of Purchaser to consummate this Agreement will be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived by Purchaser in writing. 11.1 REPRESENTATIONS. The representations and warranties made by Seller in Section 8 will be true and correct in all material respects on the Closing Date as though such representations and warranties had been made on such date (without giving any effect to any subsequent disclosure pursuant to Section 10.5) and Seller will deliver to Purchaser a certificate dated as of the Closing Date to the foregoing effect. 11.2 COVENANTS. Seller will have performed in all material respects all of the covenants, acts and undertakings to be performed by it on or prior to the Closing Date, and Seller will deliver to Purchaser a certificate dated as of the Closing Date to the foregoing effect. 11.3 NO INJUNCTION, ETC. No Proceeding or legislation will have been instituted, threatened or proposed to enjoin, prohibit, or obtain substantial damages in respect of this Agreement, or which is related to the Acquired Assets, the Assumed Liabilities, or the Acquired Business. 11.4 OPINION OF COUNSEL. An opinion of counsel for Seller will have been delivered to Purchaser, dated as of the Closing Date, in form and substance reasonably satisfactory to Purchaser and its counsel and containing the opinions identified in Exhibit 3. 11.5 INCUMBENCY. Seller will have delivered a certificate of incumbency executed by the president and secretary of Seller confirming the authority of each officer of Seller who executes any of the Seller Agreements and any documents or instruments delivered at the Closing. 11.6 CONSENTS, WAIVERS AND APPROVALS. Purchaser will have received a true and correct copy of each consent, waiver, approval, release or filing required to be obtained or made under Section 10.3, and each such consent, waiver, approval, release or filing shall be in full force and effect. 11.7 ABSENCE OF SELLER MATERIAL ADVERSE CHANGES. Since September 30, 1997, Seller shall not have suffered or incurred any circumstance or event which has had or may have a material adverse effect on the Acquired Business or any of the material Acquired Assets (provided that changes resulting from general economic conditions, Seller's prior announcement to employees of Seller's intention to sell or discontinue the Acquired Business or Seller's communication to customers of the transactions contemplated by this Agreement shall not constitute failure of the condition set forth in this Section 11.7). 11.8 ALLOCATION AGREEMENT. Seller shall have executed the Allocation Agreement. 11.9 ASSIGNMENT AGREEMENT. Seller will have executed the Assignment Agreement. 12. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligation of Seller to consummate this Agreement will be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived by Seller in writing. 12.1 REPRESENTATIONS. The representations and warranties made by Purchaser in Section 9 will be true and correct in all material respects on the Closing Date with the same force and effect as though such representations and warranties had been made on and as of such date and Purchaser will deliver to Seller a certificate dated as of the Closing Date to the foregoing effect for Purchaser. 12.2 COVENANTS. Purchaser will have performed in all material respects all of the covenants, acts or undertakings to be performed by it on or before the Closing Date, and Purchaser will deliver to Seller a certificate dated as of the Closing Date to the foregoing effect. 12.3 CERTIFIED RESOLUTIONS. Purchaser will have delivered to Seller a certificate executed by duly authorized officers and containing true and correct copy of resolutions duly adopted by Purchaser's Board of Directors approving and authorizing the Purchaser Agreements and their consummation. Such officers will also certify that such resolutions have not been revoked or modified and remain in full force and effect. 12.4 OPINION OF COUNSEL. An opinion of counsel for Purchaser will have been delivered to Seller, dated as of the Closing Date, in form and substance reasonably satisfactory to Seller and its counsel, and containing the opinions identified in Exhibit 5. 12.5 NO INJUNCTION, ETC. No Proceeding or legislation will have been instituted, threatened or proposed to enjoin, or prohibit, or to obtain substantial damages in respect of this Agreement. 12.6 CONSENTS, WAIVERS AND APPROVALS. Seller will have received a true and correct copy of each consent, waiver, release or approval obtained by Purchaser and required for its execution and consummation of this Agreement and each such consent, waiver, release or approval shall be in full force and effect. 12.7 INCUMBENCY. Purchaser will have delivered a certificate of incumbency executed by the president and secretary of Purchaser confirming the authority of each officer of Purchaser who executes any of the Purchaser Agreements and any documents or instruments delivered at the Closing. 12.8 ASSIGNMENT AGREEMENT. Purchaser will have executed the Assignment Agreement. 12.9 ALLOCATION AGREEMENT. Purchaser shall have executed the Allocation Agreement. 13. MUTUAL COVENANTS. Each of the parties hereto will refrain from taking any action which would render any representation or warranty contained in this Agreement inaccurate as of the Effective Time. Each party will promptly notify the other of any action or proceeding that is instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement. 14. CLOSING. 14.1 TIME AND PLACE. The Closing will be held by fax (with originals exchanged by overnight mail) at 9:00 a.m. (Seattle time) on the Closing Date, or at such other time or on such other date as the parties hereto may mutually agree. Notwithstanding anything in this Agreement or any agreement, document or instrument delivered by either Party at the Closing, the Closing shall be deemed to have been completed and shall become effective as of the Effective Time. 14.2 TRANSACTIONS AT THE CLOSING. At the Closing, each of the following transactions will occur: (a) Seller will deliver to Purchaser the following: (i) such bills of sale, endorsements, assignments and other instruments of transfer as are necessary to vest in Purchaser all of Seller's right, title and interest in, to and under the Acquired Assets, free and clear of all Liens (except the Permitted Encumbrances); and (ii) the certificates, opinion, agreements, instruments, documents, consents, waivers, releases, approvals and other documents required of Seller as described in Section 11. (b) Purchaser will deliver to Seller the certificates, opinion, agreements, consents, waivers, releases and approvals required of Purchaser as described in Section 12. 14.3 CERTAIN DEFAULTS. If either Party fails or refuses to consummate the transactions set forth in this Agreement on or prior to the Closing Date, and if the non-defaulting Party is not then in material breach under terms of this Agreement, all other conditions to the non-defaulting Party's performance have been satisfied and the non-defaulting Party stands ready, willing and able to make tender of its deliveries required under Section 14.2, then, in addition to any other remedies available to the non-defaulting Party, the non-defaulting Party may invoke any equitable remedies to cause the consummation of the transactions set forth in this Agreement, including, without limitation, an action or suit for specific performance. If the Closing occurs and Purchaser fails or refuses to issue the Acquisition Shares (or pay cash in lieu thereof as required by Section 5.2) in accordance with Section 5 then, in addition to any other remedies available to Seller, Seller may invoke any equitable remedies to cause the consummation of such transactions, including, without limitation, an action or suit for specific performance. 15. EMPLOYEES OF THE ACQUIRED BUSINESS. 15.1 GENERAL. From the date hereof to the Effective Time, Seller will use reasonable efforts to maintain existing relations with the employees of the Acquired Business and, except as contemplated by this Agreement, Seller will not alter current personnel policies and practices applicable to such employees (Purchaser acknowledges that Seller previously communicated to employees Seller's intention to sell or discontinue the Acquired Business and offered termination-related packages to the current employees of the Acquired Business). 15.2 TERMINATIONS. Seller has previously consented to Purchaser offering employment to the Designated Employees. With respect to those Designated Employees who accept Purchaser's offer to become employees of Purchaser as of December 1, 1997, Seller will terminate the employment of those Designated Employees at the Effective Time. With respect to those Designated Employees who do not accept Purchaser's offer of employment commencing December 1, 1997 and those employees to whom no offer was extended, Seller will endeavor to retain such employees until December 31, 1997 (or such sooner time as such employees may become employees of Purchaser), and such employees shall be assigned to the transition of the Acquired Business to Purchaser at Purchaser's reasonable direction; provided, however, that nothing in this Agreement shall be deemed to be an obligation of Seller to retain any such employee in the event the employee terminates employment with Seller, and Purchaser shall reimburse Seller no later than January 31, 1998 for the aggregate wages, salary and benefit costs (including employer's share of related taxes) paid or payable by Seller to or on behalf of such Designated Employees and Wendy Colgan for the period from December 1, 1997 through the earlier of their date of termination or December 31, 1997; provided, however, that Purchaser shall have no obligation to reimburse Seller or compensate any employee for any severance benefits or bonuses payable to such employee. 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as provided in the following sentence, all representations and warranties made by Seller in Section 8 of this Agreement or by Purchaser in Section 9 of this Agreement, as applicable, will survive until the first (1st) anniversary of the Effective Time (or, in the case of deemed representations and warranties by Purchaser upon the issuance of Acquisition Shares, the first anniversary of the issuance of the applicable Acquisition Shares). The representations and warranties in Sections 8.1, 8.2, 8.3, 8.8, 8.9, 8.15, 8.16, 9.1, 9.2 and 9.3 shall survive indefinitely. No Indemnification Claim for breach of a representation or warranty in this Agreement may be brought by any person unless written notice of such claim is given on or prior to the expiration date for such representation or warranty pursuant to this Section (in which event each representation or warranty which is the subject of an Indemnification Claim will survive until such Indemnification Claim is finally resolved and all obligations with respect thereto are fully satisfied). 17. TERMINATION. 17.1 GROUNDS. This Agreement may, by notice given prior to or at the Closing, be terminated: (a) by either Seller or Purchaser if a material breach of any provision of this Agreement has been committed by the other Party and such breach has not been waived; (b) (i) by Purchaser if any of the conditions in Section 11 has not been satisfied as of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of Purchaser to comply with its obligations under this Agreement) and Purchaser has not waived such condition on or before the Closing Date; or (ii) by Seller, if any of the conditions in Section 12 has not been satisfied of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of Seller to comply with its obligations under this Agreement) and Seller has not waived such condition on or before the Closing Date; (c) by mutual consent of Purchaser and Seller; or (d) by either Purchaser or Seller if the Closing has not occurred (other than through the failure of any Party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before November 30, 1997, or such later date as the Parties may agree upon. 17.2 EFFECT OF TERMINATION. Each Party's right of termination under Section 17.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 17.1, all further obligations of the Parties under this Agreement will terminate, except that the obligations in Sections 20 and 21.6 will survive; provided, however, that if this Agreement is terminated by a Party because of the breach of the Agreement by the other Party or because one or more of the conditions to the terminating Party's obligations under this Agreement is not satisfied as a result of the other Party's failure to comply with its obligations under this Agreement, the terminating Party's right to pursue all legal remedies will survive such termination unimpaired. 18. MISCELLANEOUS SERVICES. The Parties agree to take the actions described in Schedule J from and after the Effective Time. 19. INDEMNIFICATION. 19.1 LOSSES. For purposes of this Section 19, "LOSSES" will mean all damages, losses, costs, expenses (including legal, accounting, investigation and other fees and expenses), interest, penalties, charges and liabilities. 19.2 INDEMNIFICATION BY SELLERS. Seller shall indemnify, defend and hold harmless Purchaser from and against any Loss incurred by Purchaser related to or arising out of (a) the breach of any of the warranties, representations, covenants or agreements of Seller in the Seller Agreements, or (b) any Excluded Asset, or (c) any Excluded Liability, including without limitation (i) any liability arising out of the employment of the DealerNet Employees by Seller (including any benefits or compensation due or coming due to such employees) or the termination of the DealerNet Employees as contemplated by Section 15.2 (including pursuant to the termination-related packages previously offered by Seller), or (ii) any Proceeding by or on behalf of Martin S. Rood or Dealer Internet Services Corporation or one or more of its shareholders or other successors in respect of this Agreement or the transactions contemplated by this Agreement or the DealerNet Acquisition Agreement or the transactions contemplated by that agreement or the Rood Employment Agreement. 19.3 INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify, defend and hold harmless Seller from and against any Loss incurred by Seller related to or arising out of (a) the breach of any of the warranties, representations, covenants or agreements of Purchaser in the Purchaser Agreements, or (b) Purchaser's ownership or use of any Acquired Asset or responsibility for any Assumed Liability on and after the Effective Time, or (c) Purchaser's use of the Transition Assets during the Transition Period or Purchaser's access to Seller's facility in which the Transition Assets are located during the Transition Period. 19.4 PROCEDURES FOR INDEMNIFICATION. An Indemnification Claim may be made by Indemnitee by delivery of a written declaration to Indemnitor requesting indemnification and specifying the basis on which indemnification is sought and the amount of asserted Losses and, in the case of a Third Party Claim, containing such other information as Indemnitee will have concerning such Third Party Claim. (b) If the Indemnification Claim involves a Third Party Claim the procedures set forth in Section 19.5 hereof will be observed by Indemnitee and Indemnitor. (c) If the Indemnification Claim involves a matter other than a Third Party Claim, the Indemnitor will have ten (10) days to object to such Indemnification Claim by delivery of a written notice of such objection to Indemnitee specifying in reasonable detail the basis for such objection. Failure to timely so object will constitute acceptance of the Indemnification Claim by the Indemnitor and the Indemnification Claim will be paid in accordance with Section 19.4(d). If any objection is timely interposed by the Indemnitor and the dispute is not resolved within fifteen (15) days from the date Indemnitee receives such objection, such dispute will be resolved as provided in Section 21.13 of this Agreement. (d) Upon determination of the amount of an Indemnification Claim (including a Third Party Claim), whether by agreement between Indemnitor and Indemnitee, by an arbitration award or otherwise, Indemnitor will pay the amount of such Indemnification Claim within ten (10) days of the date such amount is determined. 19.5 DEFENSE OF THIRD PARTY CLAIMS. (a) Should any Third Party Claim be made the obligations and liabilities of the parties with respect to such Third Party Claim will be subject to this Section 19.5. (b) Within a reasonable time (i.e., such time as will not prejudice the contest, defense, litigation, or settlement of a Third Party Claim) following the receipt of notice of a Third Party Claim, the party receiving the notice of the Third Party Claim will (i) notify the other party of its existence setting forth in writing and with reasonable specificity the facts and circumstances of which such party has received notice, and (ii) if the party giving such notice is an Indemnitee, specify in writing the basis hereunder upon which the Indemnitee's claim for indemnification is asserted and tendering defense of the Third Party Claim to Indemnitor. (c) If the defense of a Third Party Claim is so tendered and within ten (10) days thereafter such tender is accepted without qualification by the Indemnitor as evidenced by written notice to Indemnitee, then, except as provided below, the Indemnitee will not, and the Indemnitor will, have the right to contest, defend, litigate and settle such Third Party Claim. The Indemnitee will have the right to be represented by counsel of its own choice and at Indemnitee's expense to participate in any contest, defense, litigation or settlement conducted by the Indemnitor; provided that the Indemnitee will be entitled to reimbursement therefor if the Indemnitor loses its right to contest, defend, litigation and settle the Third Party Claim as provided below. Notwithstanding the preceding provisions of this Section 19.5, if the Third Party Claim is asserted against both of Indemnitor and Indemnitee and representation of both of them by the same counsel would be inappropriate due to actual or potentially differing interests between them, Indemnitee shall be entitled to retain the right to contest, defend or litigate such Third Party Claim as it relates to Indemnitee and will have the exclusive right, in its discretion exercised in good faith, and with the advice of counsel, to settle any such matter, either before or after the initiation of litigation, at such time and upon such terms as it deems fair and reasonable, provided that at least ten (10) days prior to any such settlement, written notice of its intention to settle will be given to the Indemnitee. If, pursuant to the preceding sentence, the Indemnitee so contests, defends, litigates or settles a Third Party Claim, the Indemnitee will be reimbursed by the Indemnitor for the reasonable attorneys' fees and other expenses of defending, contesting, litigating and/or settling the Third Party Claim which are incurred from time to time, promptly following the presentation to the Indemnitor of itemized bills for such attorneys' fees and other expenses. (d) The Indemnitor will lose its right to contest, defend, litigate and settle the Third Party Claim if it fails to diligently contest the Third Party Claim (except in connection with a settlement thereof in accordance with the terms hereof). So long as the Indemnitor has not lost its right to defend, contest, litigate and settle as herein provided, the Indemnitor will have the exclusive right to contest, defend and litigate the Third Party Claim and will have the exclusive right, in its discretion exercised in good faith, and with the advice of counsel, to settle any such matter, either before or after the initiation of litigation, at such time and upon such terms as it deems fair and reasonable, provided that at least ten (10) days prior to any such settlement, written notice of its intention to settle will be given to the Indemnitee. (e) All expenses (including without limitation attorneys' fees and expenses) incurred by the Indemnitor in connection with the foregoing will be paid by the Indemnitor. (f) No failure by an Indemnitor to acknowledge in writing its indemnification obligations under this Section 19 will relieve it of such obligations to the extent they exist. If an Indemnitee is entitled to indemnification against a Third Party Claim, and the Indemnitor fails to accept or assume the defense of a Third Party Claim pursuant to Section 19.5(c), or if, in accordance with the foregoing, the Indemnitor loses its right to contest, defend, litigate and settle such a Third Party Claim, the Indemnitee will have the right, without prejudice to its right of indemnification hereunder, in its discretion exercised in good faith, and upon the advice of counsel, to contest, defend and litigate such Third Party Claim, and may, in its discretion exercised in good faith, and with the advice of counsel, settle such Third Party Claim, either before or after the initiation of litigation, at such time and upon such terms as it deems fair and reasonable, provided that at least ten (10) days prior to any such settlement, written notice of its intention to settle is given to the Indemnitor. If, pursuant to this Section 19.5(f), the Indemnitee so contests, defends, litigates or settles a Third Party Claim for which it is entitled to indemnification hereunder, the Indemnitee will be reimbursed by the Indemnitor for the reasonable attorneys' fees and other expenses of defending, contesting, litigating and/or settling the Third Party Claim which are incurred from time to time, promptly following the presentation to the Indemnitor of itemized bills for such attorneys' fees and other expenses. 19.6 LIMITATIONS. (a) All notices of Loss must be delivered to the Indemnitor prior to expiration of the applicable periods for the warranties and representations as set forth in Section 16 hereof. (b) Notwithstanding anything to the contrary herein, neither Seller nor Purchaser, as Indemnitor, will have any obligation until the aggregate of all Losses payable by the Indemnitor to the Indemnitee exceeds the Floor. Upon the aggregate of all Losses payable by the Indemnitor exceeding the Floor, Seller or Purchaser, as applicable, will be liable to the Indemnitee on a dollar-for-dollar basis from the first dollar. (c) The payment of any Loss hereunder will constitute an additional adjustment to the Purchase Price under Section 5. (d) An objection to a DeaterNet Revenue Statement will not be an Indemnification Claim and will not be subject to the Floor or the procedures set forth in this Section 19. (e) In no event will the aggregate amount payable by Seller or Purchaser, as applicable, under this Section 19 exceed the amount of the Purchase Price actually received by Seller (with any Acquisition Shares valued at the Cobalt Share Price). (f) The sole and exclusive remedy of Seller or Purchaser for any matter related to or arising out of this Agreement, the transactions contemplated by this Agreement, or the negotiation, performance or breach of this Agreement (or any of the representations, warranties, covenants or agreements of the parties contained in this Agreement) shall be a claim for Indemnification pursuant to this Section 19. (g) In the event Seller becomes obligated to pay any amounts under this Section 19, then such amounts shall be paid in cash up to the full amount of the Cash Portion actually received by Seller and all amounts thereafter shall be paid in Acquisition Shares valued at the Cobalt Share Price. 20. TRANSACTION EXPENSES. 20.1 BROKERS. Seller and Purchaser each represent and warrant to the other that no broker or finder has acted for it in connection with this Agreement. 20.2 EXPENSES. All expenses incurred by the parties in connection with or related to the authorization, preparation, negotiation and consummation of this Agreement and the agreements, documents or instruments contemplated hereby will be borne solely by the Party which has incurred the same. 21. MISCELLANEOUS. 21.1 ACCOUNTING RECORDS. From and after the Effective Time, Seller and its representatives will have reasonable access to all of the books and records included in the Acquired Assets, but only to the extent that such access may reasonably be required by such persons in connection with matters relating to or affected by the operations of the Acquired Business prior to the Effective Time. Such access will be afforded by Purchaser upon receipt of reasonable advance notice and during normal business hours. From and after the Effective Time, Purchaser and its representatives will have reasonable access to all of the books and records of the Acquired Business for the period prior to the Effective Time which are Excluded Assets, but only to the extent that such access may reasonably be required by such persons in connection with matters relating to or affected by the operations of the Acquired Business prior to the Effective Time (including in relation to any IPO). Such access will be afforded by Seller upon receipt of reasonable advance notice and during normal business hours. 21.2 NOTICE. All notices, requests, demands and other communications hereunder will be in writing and will be deemed given and received (a) on the date of delivery when delivered by hand or when transmitted by confirmed simultaneous telecopy, (b) on the following business day when sent by receipted overnight courier, or (c) five (5) business days after deposit in the United States Mail when mailed by registered or certified mail, return receipt requested, first class postage prepaid, when addressed as set forth in Schedule F. Any party may change the address to which notices are to be sent to it by giving written notice of such change of address to the other parties in the manner above provided for giving notice. 21.3 ASSIGNMENT; BINDING EFFECT. This Agreement may not be assigned by any of the parties hereto without the prior written consent of the other parties hereto. This Agreement will be binding upon the parties hereto and their respective heirs, successors and permitted assigns. 21.4 HEADINGS; EXHIBITS AND SCHEDULES. The Section, Subsection and other headings in this Agreement are inserted solely as a matter of convenience and for reference, and are not a part of this Agreement. The Exhibits and Schedules attached hereto are a material part of this Agreement and are incorporated herein by this reference. 21.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement and will become effective when one counterpart has been signed by each party and delivered to the other party hereto. 21.6 INTEGRATION OF AGREEMENT. This Agreement supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereunder; provided, however, that if the Closing does not occur for any reason, the Confidentiality Letter among the Parties dated October 6, 1997 shall survive according to its terms]. Neither this Agreement, nor any provision hereof, may be changed, waived, discharged, supplemented or terminated orally, but only by an agreement in writing signed by the party against which the enforcement of such change, waiver, discharge or termination is sought. 21.7 TIME OF ESSENCE. Time is of the essence in this Agreement. 21.8 GOVERNING LAW. This Agreement will be governed by and construed and enforced in accordance with the laws of the State of Washington as applied to contracts executed and performed wholly within that state. 21.9 DISCLOSURE. Purchaser and Seller each agree not to issue any press release or make any public announcement or other disclosure to competitors, customers, employees or any other person (except to employees and agents on a need-to-know basis in order to complete the transactions contemplated by this Agreement and who agree to maintain the confidentiality of the disclosed information) concerning this Agreement except as required by law or with the advance written approval of the other party, which approval will not be unreasonably withheld. 21.10 PARTIAL ILLEGALITY OR UNENFORCEABILITY. Wherever possible, each provision hereof will be interpreted in such manner as to be effective under applicable law, but in case any one or more of the provisions contained herein will, for any reason, be held to be illegal or unenforceable in any respect, such illegality or unenforceability will not affect any other provisions of this Agreement, and this Agreement will be construed as if such illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. 21.11 SINGULAR OR PLURAL. All defined terms used herein will have the same meaning, whether used in the singular or plural form, unless the context clearly requires otherwise. 21.12 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall confer any rights upon any person other than the Parties and their respective heirs, successors and permitted assigns. 21.13 ARBITRATION. (a) Any controversy, dispute or claim arising out of or relating to this Agreement (except an objection to a DealerNet Revenue Statement) will be submitted to arbitration in accordance with the commercial rules of the AAA, by which each party will be bound. (b) If the parties have not agreed during their negotiations on a single arbitrator to whom the controversy, dispute or claim will be submitted, either party may select an arbitrator and send written notice to the other party of the selection. The party receiving such notice will have 10 days from the date such party receives such notice of such selection to select a second arbitrator and send notice of such to the party who selected the first arbitrator. Failure to select the second arbitrator and to send timely notice, as provided above, empowers the arbitrator first selected to resolve the controversy. If both arbitrators have been duly named, they will as soon as is reasonably practicable (but within 30 days from the date the latter of the two arbitrators is named) name a third arbitrator who will not be from the Dayton, Ohio or Seattle, Washington metropolitan areas. The provisions of the Federal Rules of Civil Procedure which provide for discovery will be applicable to any such arbitration. The parties agree that such discovery must be completed within six (6) months after the claim has been filed with the AAA and service on the other party effected. (c) Any arbitration proceedings will be conducted in Denver, Colorado unless the parties otherwise agree. (d) The parties agree to be bound by the decision of the arbitrator and the decision thereof to be entered into any appropriate court or other jurisdiction. The prevailing party in the arbitration will be promptly reimbursed for its reasonable costs and fees (including attorneys' fees) incurred in connection with the arbitration and will not be responsible for the costs of arbitration. 21.14 "PERSON." The term "person" will be broadly interpreted to include, without limitation, any corporation, partnership, association, limited liability company, other association, trust or individual. 21.15 "BEST EFFORTS." The use of the term "best efforts" herein will in no event require any party to (a) expend funds which are not commercially reasonable in relation to the transactions contemplated hereby or (b) take, or cause to be taken, any action which would have a material adverse effect with respect to it. 21.16 "INCLUDING." Whenever the term "including" is used in this Agreement, it will mean "including, without limitation," (whether or not such language is specifically set forth) and will not be deemed to limit the range of possibilities of those items specifically enumerated. 21.17 FURTHER ASSURANCES. From and after the Closing, the parties agree, without further consideration, to execute and deliver promptly such further assignments, endorsements and other documents, and to take all such further actions, as either may from time to time reasonably request with respect to the transactions contemplated by this Agreement, and the fulfillment of any condition precedent to the obligations of either party waived by that party in order to consummate the Agreement. The parties also agree to promptly deliver to each other any assets they receive which properly are the property of the other party or an Affiliate. 22. CERTAIN CONSENTS. In the event any of the Contracts requires consent to assignment and such consent is not obtained prior to the Closing, then until such consent has been obtained or the applicable Contract terminates, the Contract shall not be deemed assigned to Purchaser but instead Purchaser shall be deemed to be Seller's subcontractor or the Parties shall make such other arrangements as necessary to assure Purchaser the benefits of the underlying Contract. In that event, Purchaser shall perform all obligations of Seller under the applicable Contract (except any arising out of a default or event on or prior to the Effective Time which with notice, lapse of time or both would constitute a default) and shall be entitled to all benefits from such Contract. The obligations to be performed by Purchaser shall be Assumed Liabilities for purposes of this Agreement and the benefits to inure to Purchaser shall be Acquired Assets for purposes of this Agreement. [SIGNATURES CONTAINED ON FOLLOWING PAGE] The parties have executed this Agreement as of this ____ day of November, 1997. THE COBALT GROUP, INC. By: Title: THE REYNOLDS AND REYNOLDS COMPANY By: Title: SCHEDULE A DEFINITIONS "6/30/97 Balance Sheet" means the unaudited balance sheet of Purchaser as of the close of business on June 30, 1997. "Acquired Assets" has the meaning set forth in Schedule B. "Acquired Business" means the business operations of Seller's "DealerNet" business unit, exclusive of Seller's used vehicles listings service. Purchaser acknowledges that, without limiting the operations that are not included within the Acquired Business, Seller's new car buying service, the services offered by Seller pursuant to the Used Vehicle Listings Agreement (as amended) between Seller and Microsoft Corporation, the CarPoint Virtual Retail Agreement between Seller and Microsoft Corporation, and the data extraction and related services performed by Seller are not included within the Acquired Business. "Acquisition Shares" means the Fixed Acquisition Shares and the Variable Acquisition Shares. "Act" means the Securities Act of 1933, as amended. "Affiliate" of a person means any other person who is controls, is controlled by or is under common control with the subject person. "Agreement" means this Acquisition and Investment Agreement. "Allocation Agreement" means an agreement in the form of Exhibit 6. "Annual Financial Statements" means the unaudited financial statements of Purchaser for the fiscal years ended December 31 of each of 1995 and 1996. "Applicable Laws" means all laws, rules, regulations, Orders, decrees, judgments, awards, covenants, restrictions and ordinances applicable to Seller or the Acquired Assets, the Assumed Liabilities, or the Acquired Business, or to Purchaser or its assets, liabilities or business, as applicable. "Approved Credit" has the meaning given such term in Schedule J. "Assignment Agreement" shall mean an agreement in the form of Exhibit 4. "Assumed Liabilities" means the executory obligations of Seller under the Contracts, excluding any obligations or liabilities arising from any breach or default thereunder by Seller. "Closing" means the closing of the transactions contemplated by Section 14.1. "Cash Portion" means the sum of $500,000. "Closing Date" means November 25, 1997 or such other date as the Parties may agree. "Cobalt Shares" means shares of Purchaser's $.01 par value common stock. "Cobalt Share Price" means (a) if the Triggering Event is the Private Financing, the price per Cobalt Share issued in the Private Financing (or, if other securities convertible into or exchangeable for Cobalt Shares are issued in the Private Financing, then the price per Cobalt Share at which such securities are convertible or exchangeable); or (b) if the Triggering Event is an IPO, a number equal to thirty-three percent (33%) of the per share price to the public of the Cobalt Shares offered in the IPO (or, if other securities convertible into or exchangeable for Cobalt Shares are issued in the IPO, then an amount equal to thirty-three percent (33%) of the price per Cobalt Share at which such securities are convertible or exchangeable). "Contracts" has the meaning set forth in the attached Schedule B. "Copyrights" means all copyrights in both published works and unpublished works. "DealerNet Acquisition Agreement" means that Acquisition Agreement dated as of June 15, 1995 among Dealer Internet Services Corporation, Crown Motors, Inc., Rood Motors, Inc., Peter M. Wilson, Martin S. Rood and Seller. "DealerNet Dealers" means those customers of the Acquired Business as of the Effective Time. The customers of the Acquired Business as of the date of this Agreement are identified in Schedule B-1. Seller will deliver at the Closing an amended Schedule B-1 to reflect the customers of the Acquired Business as of the Closing Date, and, in the event of any changes in the customers of the Acquired Business between the Closing Date and the Effective Time, Seller will deliver to Purchaser a further amended Schedule B-1 within ten (10) days after the Effective Time. "DealerNet Employees" means those employees of Seller employed solely in connection with the Acquired Business as of the Effective Time. "DealerNet Financial Statements" means the unaudited product line financial statements of Seller's "DealerNet" business unit as of September 30, 1997. "DealerNet Revenues" means the sum of (a) 100% of all Service Revenues actually billed or becoming billable by or on behalf of Purchaser during the applicable period for services rendered or products provided during the applicable period from or on behalf of Other DealerNet Dealers; (b) 50% of all Service Revenues actually billed or becoming billable by or on behalf of Purchaser during the applicable period for services rendered or products provided during the applicable period from or on behalf of SET Dealers and GST Dealers; and (c) 100% of all net revenues actually billed or becoming billable during the applicable period with respect to banner advertisements appearing on the "DealerNet" site or the site of any DealerNet Dealers during the applicable period. For this purpose, "actually billed or becoming billable by or on behalf of Purchaser" shall include Service Revenues actually billed or becoming billable by any Affiliate, agent, assignee or contractor of Purchaser. Nothing in this Agreement shall require Purchaser to pursue or support any potential banner advertising opportunities. With respect to any DealerNet Dealers who have prepaid any Service Revenues with respect to any period after the Effective Time as set forth in Section 8.14 of the Disclosure Schedule, the Parties shall account for such Service Revenues as if they were billed during the period to which they apply rather than pre-billed. "DealerNet Revenue Statement" means a written statement showing the DealerNet Revenues by customer for the applicable quarter and on a cumulative basis for all quarters identified in Section 5.1. Each DealerNet Revenue Statement shall contain such supporting information as Seller may reasonably require to verify Purchaser's determination of the applicable DealerNet Revenues. "Designated Employees" means those employees of the Acquired Business selected by Purchaser at its discretion to whom Purchaser has, as of the date of this Agreement, offered employment after the Effective Time. "Disclosure Schedule" means the attached Schedule D. "Documentation" means all user documentation, programming and technical documentation and manuals prepared by or on behalf of Seller and currently in use, whether in hard copy or written form or in machine-readable only format, which relate in any way to the Seller Software or the Source Code. "Effective Time" means 12:01 a.m. on December 1, 1997. "Equipment Lease" means an agreement in the form of Exhibit 2. "Excluded Assets" has the meaning set forth in Schedule C. "Excluded Liabilities" means all liabilities or obligations of Seller of any kind or character, whether known or unknown, absolute, contingent or otherwise, other than the Assumed Liabilities. "Exempt Indemnification Obligations" has the meaning set forth in Section 19.6. "Fixed Acquisition Shares" means that number of Acquisition Shares determined by dividing (a) $300,000 by (b) the Cobalt Share Price. The Fixed Acquisition Shares shall be a series of preferred stock that shall have the following characteristics: (x) the shares shall be a series of preferred stock with the same rights as Cobalt Shares except as described in the following clauses (y) and (z); (y) the shares shall have the same conversion rights as the preferred stock issued in the Private Financing (including price), or, if the Triggering Event is an IPO, the same conversion rights (including price) as in effect on the date of this Agreement with respect to Purchaser's Series A preferred stock; and (z) the shares shall have the same liquidation and redemption rights, if any, as the preferred stock issued in the Private Financing except that the shares shall rank in order of priority behind such preferred shares issued in the Private Financing, or, if the Triggering Event is an IPO, the same liquidation and redemption rights, if any, in effect as of the date of this Agreement with respect to Purchaser's Series A preferred stock, except that the shares shall rank in order of priority behind such Series A preferred stock. "Floor" means the sum of $50,000. "GAAP" means generally accepted accounting principles, consistently applied. "Governmental Authorization" means any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Applicable Law. "Governmental Body" means any: (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "GST Dealers" means those DealerNet Dealers who are part of Gulf States Toyota. The GST Dealers are identified in Schedule B-1. "Indemnification Claim" means a claim for indemnification under Section 19.2 or Section 19.3. "Indemnitee" means a person seeking indemnification under Section 19.2 or Section 19.3. "Indemnitor" means a person against whom indemnification is sought under Section 19.2 or Section 19.3. "Independent Auditors" means the certified public accounting firm of Ernst & Young. "Intellectual Property Intangibles" means Marks, Patents, Copyrights, Rights in Mask Works and Trade Secrets, including, without limitation, in each case the right to infringement and other claims related thereto and, where applicable, all registrations and related goodwill. "IPO" means a public offering of Cobalt Shares (or other securities convertible into or exchangeable for Cobalt Shares) by Purchaser for cash after which Cobalt Shares (or other securities convertible into or exchangeable for Cobalt Shares) are traded on a national securities exchange or in the over-the-counter market or by other public means. "Lease Assets" means those assets identified in Schedule G. "Lien" means any mortgage, pledge, hypothecation, claim, security interest, encumbrance, right or interest of others, lease, license, easement, encroachment, covenant, title defect, lien, option or right of first refusal. "Loss" has the meaning set forth in Section 19.1. "Marks" means all fictional business names, trading names, registered and unregistered trademarks, service marks, and applications. "Most Recent Financial Statements" means the 6/30/97 Balance Sheet and an unaudited income statement for Purchaser from January 1, 1997 to June 30, 1997. "Order" means any award, decision, injunction, judgment, order, ruling subpoena or verdict entered, issued, made or rendered by any court, administrative agency or other governmental authority or agency or any arbitrator. "Other DealerNet Dealers" means those DealerNet Dealers who are neither GST Dealers nor SET Dealers. The Other DealerNet Dealers are identified in Schedule B-1. "Ordinary Course of Business" means consistent with past custom and practice (including with respect to nature, quantity and frequency) in the normal day-to-day business operations of the applicable Party. Without limiting the scope of actions which are not in the Ordinary Course of Business, actions requiring approval of a Party's board of directors or any parent company shall not be in the Ordinary Course of Business. "Patents" means all patents, patent applications, and inventions and discoveries that may be patentable. "Parties" means Purchaser and Seller. "Payment Event" means the earliest to occur of the following: (a) the fifth (5th) anniversary of the Effective Time; or (b) any of the following (any of which may be waived in writing by Seller in its discretion): (i) a sale of substantially all of the assets of Purchaser; (ii) the transfer (whether by sale of stock, merger or original issuance of securities or a combination of such transactions) in one or a series of related transactions, of securities representing more than 50 percent (50%) of the voting power of Purchaser outstanding after such transactions; (iii) approval, authorization or payment of any distribution to shareholders (other than a dividend of Cobalt Shares); (iv) approval or consummation of any redemption of outstanding securities of Purchaser other than as permitted by the Shareholders Agreement or the mandatory redemption of Purchaser's Series A preferred shares pursuant to Purchaser's Articles of Incorporation; or (v) commencement (whether voluntary or involuntary) of a proceeding under any law relating to bankruptcy, insolvency, reorganization or relief from creditors, a general assignment for the benefit of creditors, appointment of a receiver, trustee, custodian, liquidator or similar official in respect of Purchaser or a substantial portion of its assets, or if Purchaser shall become unable to or shall admit its inability to pay its debts as they become due. "Permitted Encumbrances" means Liens for taxes not yet due and payable or which are being contested in good faith and by appropriate proceedings and purchase money security interests. "Personal Property" means furniture, fixtures, machinery, equipment, leasehold improvements and other tangible personal property and all related warranties. "Private Financing" means a private offering of at least $1,000,000 in equity securities of Cobalt (it is currently expected that such securities will be preferred stock convertible into Cobalt Shares). "Proceeding" means an action, audit, claim, demand, suit, arbitration, grievance, or investigation (whether civil, criminal, administrative, informal or otherwise) commenced, conducted, heard by or otherwise involving any governmental authority or agency or arbitrator. "Pro Forma" means an income statement for the DealerNet business unit for the 1997 fiscal year which has been revised to eliminate certain one-time charges and certain other expenses that would not be charged to a stand-alone business. "Proprietary Rights" means any and all Copyrights, Patents, Trade Secrets, and confidential and proprietary information rights. "Purchase Price" means the Cash Portion and the Share Portion. "Purchaser" means The Cobalt Group, Inc., a Washington corporation. "Purchaser Financial Statements" means the Audited Financial Statements and the Most Recent Financial Statements. "Purchaser Agreements" means this Agreement and the other agreements, documents, certificates and instruments executed by Purchaser pursuant to, or in connection with, this Agreement. "Purchaser's Knowledge" means the actual knowledge of Purchaser's officers and directors. "Registration Agreement" means the Registration Agreement among Purchaser and certain shareholders dated as of February 28, 1997 (a copy of which is attached as Exhibit 1). "Rights in Mask Works" means all rights in mask works. "Rood Employment Agreement" means that Employment Agreement dated as of June 15, 1995 between Martin S. Rood and Seller. "Sale Transaction" means a sale of all or a material portion of the Acquired Assets. "Seller" means The Reynolds and Reynolds Company, an Ohio corporation. "Seller Agreements" means this Agreement and other agreements, documents, certificates and instruments executed by Seller pursuant to, or in connection with, this Agreement. "Seller's Knowledge" means the actual knowledge of Peter M. Wilson, Kevin M. Distelhorst or Daniel W. Dittman. "Seller Software" means all computer software and databases at any time created by or for the Acquired Business (including the software and databases created by or for the predecessor owner of the Acquired Business that were acquired by Seller), in all languages and versions, including all Source Code and object code, enhancements, modifications, revisions, upgrades and releases thereto created by or for the Acquired Business. "Service Revenues" means all web site service revenues. "Web site service revenues" includes, without limitation, revenues arising from (a) the design, construction, modification, hosting, support, maintenance or customization of dealer web sites (whether or not such sites are linked to or otherwise part of the "DealerNet" service) or links thereto (to the extent such links exist as of the Effective Time), (b) products or services provided to dealers for inclusion in their web sites, (c) products or services which allow or assist dealers to design, construct, modify, host, support, maintain or customize their web sites, and (d) subscription-type fees to participate in "DealerNet" or any other site hosted by Seller or any Affiliate, whether one-time or recurring, including revenues arising from products or services provided by Purchaser that were not provided by Seller prior to the Effective Time. Notwithstanding the foregoing, Service Revenues will not include dealer used vehicle listings service fees, inventory data collection fees or fees associated with the re-sale of services provided by persons other than Seller or an Affiliate. Where services and/or products that would result in Service Revenues if sold on a stand-alone basis are packaged with other products and/or services, the revenues received shall be allocated among the various products and services based on their respective list prices. If Purchaser grants discounts outside of the Ordinary Course of Business or otherwise violates clause (ii) of Section 5.4(a) with respect to any products or services that would result in Service Revenues, the Service Revenues shall be adjusted to reflect the amount that would have been received had discounts in the Ordinary Course of Business been granted. "SET Dealers" means those DealerNet Dealers who are part of Southeast Toyota. The SET Dealers are identified in Schedule B-1. "Share Portion" means that number of Acquisition Shares (or cash in lieu thereof) payable to Seller pursuant to Section 5.2. "Shareholders Agreement" means the Amended and Restated Shareholders Agreement for Purchaser dated as of May 18, 1995 and amended as of February 28, 1997, a copy of which is attached as Exhibit 7. "Source Code" means the source code, human-readable version of the Seller Software. "Technology" means any and all internally prepared flow charts and technical designs and documents created by or for Seller (or its predecessors in interest) in the process of creating the Seller Software and the Source Code. "Third Party Claim" means a claim, suit or proceeding, including binding arbitration or audit by a taxing authority, instituted against an Indemnitee which, if prosecuted successfully, would be a matter for which the Indemnitee would be entitled to indemnification under Section 19.2 or 19.3. "Third Party Software" means computer software and databases currently used and/or distributed by Seller in connection with the Acquired Business under license from third parties. "Trade Secrets" means all know-how, trade secrets, confidential information, customer lists, software, technical information, documentation, technology, data, process technology, plans, drawings, and blue prints. "Transition Assets" means those assets identified in Section 8.4 of the Disclosure Schedule. "Transition Period" means the period beginning as of the Effective Time and ending ninety (90) days after the Effective Time. "Triggering Event" means the first to occur of the Private Financing or an IPO that in either case closes on or before the fifth anniversary of the Effective Time. If neither the Private Financing nor an IPO closes on or before the fifth (5th) anniversary of the Effective Time, then there shall be no "Triggering Event". "Variable Acquisition Shares" means that number of Cobalt Shares determined by dividing (a) the difference of (i) sixty-six percent (66%) of DealerNet Revenues during the first twelve months following the Effective Time, less (ii) $800,000, by (b) the Cobalt Share Price; provided, however, that in no event shall the number of Variable Acquisition Shares be less than 0 or greater than the quotient of (x) $400,000, divided by (y) the Cobalt Share Price. SCHEDULE B Acquired Assets "Acquired Assets" means the following assets of Seller (as the same may change in the Ordinary Course of Business through the Effective Time): CONTRACTS. Those contracts, agreements, leases, licenses, and commitments which are identified on the attached Schedule B-2 (the "CONTRACTS"). BOOKS AND RECORDS, ETC. All customer files and records, and all videos, catalogues, and other sales materials, in each case only to the extent related solely to the Acquired Business. INTELLECTUAL PROPERTY INTANGIBLES. The following Intellectual Property Intangibles: 1. Marks - (a) "DealerNet.com" domain name (b) "DEALERNET" Trademark (U.S. Regis. No. 1,915,360) (c) "DEALERNET" Trademark (Canadian Application Serial No. 819,353) (d) "DEALERNET" Trademark (U.K. Application Serial No. 2,107,667) 2. Patents - None 3. Copyrights - All copyrights in the Seller Software 4. Rights in Mask Works - None 5. Trade Secrets - All know-how, trade secrets, and technical information solely used in or related to the Acquired Business, the customer list for the Acquired Business (as set forth in Schedule B-1), the Seller Software, the Documentation, the Technology, and the rights of Seller under those Contracts identified in Section 8.9(a) of the Disclosure Schedule. Trade Secrets include without limitation the following: (a) Fax Merge Application (Annex 1) (b) Perl Libraries (Annex 2) (c) Cgi Scripts (Annex 3) (d) TexPress Databases (Annex 4) (e) Texhtml Applications (Annex 5) (f) Archived Web Content (Annex 6) (g) Web Content Directories (Annex 7) EX-10.22 7 EXHIBIT 10.22 LOAN AND SECURITY AGREEMENT BORROWER: THE COBALT GROUP, INC. ADDRESS: 2030 FIRST AVENUE, SUITE 300 SEATTLE, WA 98121 DATE: MAY 27, 1999 This Loan and Security Agreement is entered into on the above date between GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation (GREYROCK), whose address is 10880 Wilshire Blvd. Suite 1850, Los Angeles, CA 90024 and the borrower named above (BORROWER), whose chief executive office is located at the above address (BORROWER'S ADDRESS). The Schedule to this Agreement (the SCHEDULE) being signed concurrently is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. Greyrock will make loans to Borrower (the LOANS), in amounts determined by Greyrock in its good faith business judgment, up to the amounts (the CREDIT LIMIT) shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount of the excess to Greyrock, on demand. 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement or in another written agreement signed by Greyrock and Borrower. Interest shall be payable monthly, on the last day of the month. Interest may, in Greyrock's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. 1.3 FEES. Borrower shall pay Greyrock the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Greyrock and are not refundable. 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Greyrock a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located (collectively, the COLLATERAL): All Receivables, Inventory, Equipment, Investment Property and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, all money, all collateral in which Greyrock is granted a security interest pursuant to any other present or future agreement, all property now or at any time in the future in Greyrock's possession, and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products of the foregoing, and all books and records related to any of the foregoing. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce Greyrock to enter into this Agreement and to make Loans, Borrower represents and warrants to Greyrock as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), (iii) do not violate Borrower's articles or -1- certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Greyrock 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Greyrock at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule, except (i) in connection with sales or other dispositions of Inventory in the ordinary course of business and (ii) the movement of Inventory to any additional location reported to Greyrock if the location is within a jurisdiction in which Greyrock has taken all necessary action in order to protect and perfect its security interest therein. Borrower will be permitted to provide Greyrock notice within 30 days following the opening of new locations, provided that the Collateral at any such new location shall not exceed $100,000 until such notice has been given to Greyrock and Greyrock has taken all necessary action in order to protect and perfect its security interest in any Inventory at such location. 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Greyrock now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Greyrock and the Collateral against all claims of others. So long as any Loan is outstanding which is a term loan, none of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower will keep in full force and effect, and will comply in all material respects with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain its tangible personal property in good working condition, ordinary wear and tear excepted, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Greyrock in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system sufficient to prepare financial statements in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Greyrock have been, and will be, prepared in conformity with generally accepted accounting principles (except for the absence of footnotes and subject to normal year-end adjustments with respect to unaudited financial statements, and except in the case of projections or forecasts for the understanding that although Borrower has prepared the same in good faith utilizing assumptions it believes to be reasonable, Greyrock recognizes that forecasts and assumptions by their nature involve approximations and uncertainties). All financial statements now or in the future delivered to Greyrock will fairly reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Greyrock and the date hereof, there has been no material adverse change in the financial condition or business of Borrower. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by applicable law, and Borrower has timely paid, and will timely pay, all applicable taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Greyrock in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from -2- participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any material liability to the Pension Benefit Guarantee Corporation or any other governmental agency. 3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all applicable laws and regulations, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or materially affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which is reasonably likely to result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform Greyrock in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower which can reasonably be expected to result in liability with respect to any single claim of $50,000 or more, or $100,000 or more in the aggregate. 3.11 USE OF PROCEEDS. * ALL PROCEEDS OF ALL LOANS SHALL BE USED SOLELY FOR AGRICULTURAL, COMMERCIAL, INVESTMENT OR BUSINESS PURPOSES, AND NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES. 3.12 YEAR 2000 COMPLIANCE. The Borrower has (i) initiated a review and assessment of all areas within its and each of its subsidiaries' business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Borrower or any of its subsidiaries (or its suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Borrower reasonably believes that all computer applications (including those of its suppliers and vendors) that are material to its or any of its subsidiaries' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure to do so could not reasonably be expected to have material adverse effect. The Borrower will promptly notify Greyrock in the event the Borrower discovers or determines that any computer application (including those of its suppliers and vendors) that is material to its or any of its subsidiaries' business and operations will not be Year 2000 compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a material adverse effect. 4. RECEIVABLES. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. [Omitted]. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. [Omitted]. 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. [Omitted]. 4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until a Default or an Event of Default has occurred. * Borrower shall hold all payments on, and proceeds of, Receivables in trust for Greyrock, and Borrower shall deliver all such payments and proceeds to Greyrock, within one business day after receipt of the same, in their original form, duly endorsed, to be applied to the Obligations in such order as Greyrock shall determine. *AFTER THE OCCURRENCE AND DURING THE CONTINUANCE OF A DEFAULT OR EVENT OF DEFAULT 4.5 DISPUTES. [Omitted]. 4.6 VERIFICATION. [Omitted]. 4.9 NO LIABILITY. Greyrock shall not under any circumstances be responsible or liable for any transaction giving rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Greyrock be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Greyrock from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF THE BORROWER. 5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Greyrock, in such form and amounts as Greyrock may reasonably require, and Borrower shall provide evidence of such insurance to Greyrock, so that Greyrock is reasonably satisfied that such insurance is, at all times, in full force and effect. All liability insurance policies of Borrower shall name Greyrock as an -3- additional insured, and all property casualty and related insurance policies of Borrower shall name Greyrock as a loss payee thereon and Borrower shall cause a lenders loss payee endorsement in form reasonably accepted to Greyrock to be delivered to Greyrock. Upon receipt of the proceeds of any such insurance, Greyrock shall apply such proceeds in reduction of the Obligations as Greyrock shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Greyrock shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Greyrock may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Greyrock may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Greyrock copies of all reports made to insurance companies. 5.2 REPORTS. Borrower, at its expense, shall provide Greyrock with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Greyrock shall from time to time reasonably specify. 5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one business day's notice, Greyrock, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records (but excluding communications to or by Borrower's attorneys). Greyrock shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Greyrock shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $600 per person per day (or such higher amount as shall represent Greyrock's then current standard charge for the same), plus reasonable out-of-pockets expenses. Borrower shall not be charged more than $3,000 per audit (plus reasonable out-of-pockets expenses), nor shall audits be done more frequently than four times per calendar year, provided that the foregoing limits shall not apply after the occurrence of a Default or Event of Default, nor shall they restrict Greyrock's right to conduct audits at its own expense (whether or not a Default or Event of Default has occurred). Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining Greyrock's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Greyrock the same rights with respect to access to books and records and related rights as Greyrock has under this Agreement. 5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other disposition of any Collateral shall be delivered, in kind, by Borrower to Greyrock in the original form in which received by Borrower not later than the following business day after receipt by Borrower, to be applied to the Obligations in such order as Greyrock shall determine; provided that, if no Default or Event of Default has occurred and is continuing, and if no term loan is outstanding hereunder, then Borrower shall not be obligated to remit to Greyrock the proceeds of the sale of Equipment which is sold in the ordinary course of business, in a good-faith arm's length transaction. Except for the proceeds of the sale of Equipment as set forth above, Borrower shall not commingle proceeds of Collateral with any of Borrower's other funds or property, and shall hold such proceeds separate and apart from such other funds and property and in an express trust for Greyrock. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without Greyrock's prior written consent, do any of the following: (a) merge or consolidate with another corporation or entity except in a transaction in which (1) the shareholders of the Borrower hold 50% of the common stock and all other capital stock of the surviving corporation immediately after such merger or consolidation, (2) the Borrower is the surviving corporation and (3) no Default or Event of Default shall exist either immediately prior to or after giving effect to the transaction; (b) acquire any assets, except (1) in the ordinary course of business or (2) in a transaction or a series of transactions involving the payment of an aggregate amount of $500,000 or less, provided that no Default or Event of Default shall exist either immediately prior to or after giving effect to the transaction; (c) enter into any other transaction outside the ordinary course of business; (d) sell or transfer any Collateral, except that, provided no Default or Event of Default has occurred and is continuing, Borrower may (1) sell finished Inventory in the ordinary course of Borrower's business, and (2) sell Equipment in the ordinary course of business, in good-faith arm's length transactions, and (3) enter into non-exclusive licenses in the ordinary course of business; (e) make any loans of any money or other assets, except for (A) advances to customers or suppliers, in each case, if created, acquired or made in the ordinary course of business, (B) travel advances, employee relocation loans and other employee loans and advances -4- in the ordinary course of business, (C) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower, (D) other loans to officers and employees approved by the Board of Directors of the Borrower, and (E) other loans or extensions of credit not otherwise permitted hereunder, provided that the aggregate amount of all the foregoing items set forth in (A), (B), (C), (D) and E shall not exceed $500,000 at any one time outstanding, and, provided further that no Default or Event of Default shall exist either immediately prior to or after giving effect to the making of the foregoing advances, loans or other extensions of credit (f) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on Borrower or on the prospect of repayment of the Obligations; (g) guarantee or otherwise become liable with respect to the obligations of another party or entity, except for guarantees and other similar third party credit support relating to obligations of vendors and suppliers of Borrower in respect of transactions entered into in the normal course of business, provided that the aggregate amount of any such guarantees and other similar third party credit support shall not exceed $500,000 at any time outstanding, and provided that no Default or Event of Default shall exist either immediately prior to or after giving effect to the making of the foregoing guarantees or the entering into any third party credit support transactions; (h) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (i) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock, except that Borrower may repurchase stock owned by employees, directors and consultants of Borrower pursuant to terms of employment, consulting or other stock restriction agreements at such time as any such employee, director or consultant terminates his or her affiliation with the Borrower, in a total amount not to exceed $100,000 in any fiscal year, provided that no Default or Event of Default shall exist either immediately prior to or after giving effect to such repurchase; * (j) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; * (k) dissolve or elect to dissolve; or (l) agree to do any of the foregoing. *REDEMPTIONS AND CHANGES IN CAPITAL STRUCTURE IN CONNECTION WITH A SUBSTANTIALLY CONTEMPORANEOUS INITIAL PUBLIC OFFERING OF EQUITY SECURITIES OF THE BORROWER SHALL NOT BE DEEMED TO VIOLATE SECTIONS 5.5(i) OR (j) ABOVE. 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Greyrock with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to Greyrock, make available Borrower and its officers, employees and agents, and Borrower's books and records (subject to preservation of Borrower's attorney-client privilege), without charge, to the extent that Greyrock may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify Greyrock in writing of any change in its executive officers or directors, the opening of any new bank account or other deposit account, and any material adverse change in the business or financial affairs of Borrower. 5.8 INVESTMENT PROPERTY. Upon the request of Greyrock, Borrower shall deliver to Greyrock all certificated securities included in Investment Property*, with all necessary indorsements, and obtain such account control agreements with securities intermediaries and take such other action with respect to any Investment Property, as Greyrock shall request, in form and substance satisfactory to Greyrock. Borrower shall have the right to retain all Investment Property payments and distributions, unless and until a Default or an Event of Default has occurred. If a Default or an Event of Default exists, **Borrower shall hold all payments on, and proceeds of, and distributions with respect to, Investment Property in trust for Greyrock, and Borrower shall deliver all such payments, proceeds and distributions to Greyrock, immediately upon receipt, in their original form, duly endorsed, to be applied to the Obligations in such order as Greyrock shall determine. Upon the request of Greyrock, any such distributions and payments with respect to any Investment Property held in any securities account shall be held and retained in such securities account as part of the Collateral. *OTHER THAN CERTIFICATES EVIDENCING BORROWER'S MEMBERSHIP INTEREST IN PARTSVOICE LLC **SUBJECT TO PRIOR PERMITTED LIENS 5.9 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Greyrock, to execute all documents and take all actions, as Greyrock may deem reasonably necessary or useful in order to perfect and maintain Greyrock's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 5.10 INDEMNITY. Borrower hereby agrees to indemnify Greyrock and hold Greyrock harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, and reasonable costs and expenses (including reasonable attorneys' fees), of every nature, character and description, which Greyrock may sustain or incur based -5- upon or arising out of any of the Obligations, any actual or alleged failure to collect and pay over any withholding or other tax relating to Borrower or its employees, any relationship or agreement between Greyrock and Borrower, any actual or alleged failure of Greyrock to comply with any writ of attachment or other legal process relating to Borrower or any of its property, or any other matter, cause or thing whatsoever occurred, done, omitted or suffered to be done by Greyrock relating to Borrower or the Obligations (except any such amounts sustained or incurred as the result of the gross negligence or willful misconduct of Greyrock or any of its directors, officers, employees, agents, attorneys, or any other person affiliated with or representing Greyrock). Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the MATURITY DATE). 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three business days after written notice of termination is given to Greyrock; or (ii) by Greyrock at any time after the occurrence of an Event of Default, effective immediately (with only reasonably prompt, subsequent notice). 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding letters of credit issued based upon an application, guarantee, indemnity or similar agreement on the part of Greyrock, then on such date Borrower shall provide to Greyrock cash collateral in an amount equal to 100% of the face amount of all such letters of credit plus all interest, fees and costs due or (in Greyrock's estimation) likely to become due in connection therewith, to secure all of the Obligations relating to said letters of credit, pursuant to Greyrock's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Greyrock's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Greyrock, Greyrock may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Greyrock, nor shall any such termination relieve Borrower of any Obligation to Greyrock, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Greyrock shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be reasonably required to terminate Greyrock's security interests. Greyrock shall not fail to deliver to Borrower termination statements and other such documents as may be reasonably required to terminate Greyrock's security interest solely by virtue of Borrower's ongoing liability under Section 5.9 hereof relating to claims that have not been asserted and are not otherwise known to Greyrock or the Borrower at such time. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an EVENT OF DEFAULT under this Agreement, and Borrower shall give Greyrock immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Greyrock by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect as of the date given or made; or (b) Borrower shall fail to pay any Loan or any interest thereon or any other monetary Obligation, within three (3) days of the due date; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit and Borrower shall fail to pay any such excess within one (1) day of demand; or (d) Borrower shall fail to perform any non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within 5 business days after the date performance is due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien (provided that if the amount involved is less than $100,000 then the same shall not be an Event of Default unless and until the holder of the Permitted Lien commences any action to enforce its lien against any Collateral); or (h) Borrower breaches any material contract or obligation, which * has or may reasonably be expected to have a material adverse effect on Borrower's business or financial condition; or (i) dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any Guarantor under any reorganization, bankruptcy, -6- insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 45 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits or terminates its subordination agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than 25% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of Greyrock; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which is reasonably likely to be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a material adverse change in Borrower's business or financial condition. Greyrock may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred and is continuing. *BREACH 7.2 REMEDIES. Upon the occurrence and during the continuance of any Event of Default, Greyrock, at its option, may do any one or more of the following, without notice or demand of any kind (all of which are hereby expressly waived by Borrower), except that Greyrock shall give Borrower one general notice, concurrently with or prior to exercising any of the following remedies, which notice may be given via facsimile (which will be deemed to have been given the day of electronic confirmation of delivery via facsimile (or if that day is not a Business Day, then the next Business Day after electronic confirmation of delivery via facsimile)), stating, in general terms, that "Greyrock is proceeding to exercise its rights and remedies" or words of similar effect (but no such notice shall be required if exigent circumstances make it unduly difficult or impractical to give any such notice): (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Greyrock without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge by Borrower for so long as Greyrock reasonably deems it necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Greyrock seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Greyrock retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Greyrock at places designated by Greyrock which are reasonably convenient to Greyrock and Borrower, and to remove the Collateral to such locations as Greyrock may reasonably deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Greyrock shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge by Borrower; (f) Collect, receive, dispose of and realize upon any Investment Property, including withdrawal of any and all funds from any securities accounts; (g) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Greyrock obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Greyrock shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Greyrock deems reasonable, or on Greyrock's premises, or elsewhere and the Collateral need not be located at the place of disposition. Greyrock may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if -7- permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Greyrock to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Greyrock's good faith business judgment, to grant extensions of time to pay, compromise claims and settle Receivables, General Intangibles and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. Borrower recognizes that Greyrock may be unable to make a public sale of any or all of the Investment Property, by reasons of prohibitions contained in applicable securities laws or otherwise, and expressly agrees that a private sale to a restricted group of purchasers for investment and not with a view to any distribution thereof shall be considered a commercially reasonable sale. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Greyrock with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Greyrock agree that a sale or other disposition (collectively, SALE) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Greyrock, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Greyrock may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Greyrock shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of any Event of Default, without limiting Greyrock's other rights and remedies, Borrower grants to Greyrock an irrevocable power of attorney coupled with an interest, authorizing and permitting Greyrock (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Greyrock agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Greyrock may, in its sole discretion, deem advisable in order to perfect and maintain Greyrock's security interest in the Collateral, or in order to exercise a right of Borrower or Greyrock, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Greyrock's Collateral or in which Greyrock has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Greyrock's possession; (e) Endorse all checks and other forms of remittances received by Greyrock; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Greyrock the same rights of access and other rights with respect thereto as Greyrock has under this Agreement; (k) Execute and deliver to any securities intermediary or other Person any entitlement order, account control agreement or other notice, document or instrument with respect to any Investment Property, and (l) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and reasonable attorneys' fees incurred by Greyrock with -8- respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Greyrock's rights under the foregoing power of attorney or any of Greyrock's other rights under this Agreement be deemed to indicate that Greyrock is in control of the business, management or properties of Borrower. 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale or other disposition of the Collateral shall be applied by Greyrock first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Greyrock in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Greyrock shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Greyrock for any deficiency. If Greyrock, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Greyrock shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Greyrock of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Greyrock shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Greyrock and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Greyrock of one or more of its rights or remedies shall not be deemed an election, nor bar Greyrock from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Greyrock to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS: ACCOUNT DEBTOR means the obligor on a Receivable. AFFILIATE means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. AGREEMENT and THIS AGREEMENT means this Loan and Security Agreement and all modifications and amendments thereto, extensions thereof, and replacements therefor. BUSINESS DAY means a day on which Greyrock is open for business. CODE means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. COLLATERAL has the meaning set forth in Section 2.1 above. DEFAULT means any event which with notice or passage of time or both, would constitute an Event of Default. DEPOSIT ACCOUNT has the meaning set forth in Section 9105 of the Code. EQUIPMENT means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. EVENT OF DEFAULT means any of the events set forth in Section 7.1 of this Agreement. GENERAL INTANGIBLES means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Greyrock, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). GUARANTOR means any Person who has guaranteed any of the Obligations. INVENTORY means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal -9- property, wherever located, to be furnished under any contract of service or held for sale or lease (including all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. INVESTMENT PROPERTY means any and all investment property of Borrower, including all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, and whether now existing or hereafter acquired or arising. OBLIGATIONS means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Greyrock, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Greyrock in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, loan fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Greyrock. PERMITTED LIENS means the following: (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Greyrock's security interests; (iv) additional security interests and liens which are subordinate to the security interest in favor of Greyrock and are consented to in writing by Greyrock (which consent shall not be unreasonably withheld); (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent more than 45 days or are being contested in good faith by appropriate proceedings, (vii) any judgment, attachment or similar lien, unless the judgment it secures is not fully covered by insurance and has not been discharged or execution thereof effectively stayed and bonded against pending appeal within 30 days of the entry thereof, provided that, if the judgment is not fully covered by insurance or execution thereof has not been so stayed or bonded, Greyrock shall not be required to make any Loans or otherwise extend credit to, or for the benefit of Borrower; (viii) Liens (1) upon or in any equipment acquired or to be acquired, held or leased by the Borrower to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment or (2) existing on such equipment at the time of its acquisition or lease, provided that the Lien is confined solely to the equipment so acquired and improvements thereon; (ix) Liens which constitute banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with any bank or other financial institution, whether arising by operation of law or pursuant to contract; provided that such deposit account (a) is not a dedicated cash collateral account, and (b) is not intended by the Borrower to provide collateral to the depository institution; (x) Liens in existence on the date hereof and listed on Exhibit B hereto; (xi) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) through (vi) and (viii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (x) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods *. Greyrock will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement satisfactory to Greyrock in its reasonable discretion, acknowledge that the security interest is subordinate to the security interest in favor of Greyrock, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest, which is not cured within any applicable cure period, shall also constitute an Event of Default under this Agreement. *(xi) A SECURITY INTEREST GRANTED IN THE MEMBERSHIP INTEREST OF BORROWER IN PARTSVOICE LLC TO THE SELLERS THEREOF PERSON means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. RECEIVABLES means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel -10- paper, instruments, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. OTHER TERMS. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Greyrock (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Greyrock on account of the Obligations __ Business Days after receipt by Greyrock of immediately available funds. Greyrock shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Greyrock in its discretion, and Greyrock may charge Borrower's Loan account for the amount of any item of payment which is returned to Greyrock unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in Greyrock's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Greyrock shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNT. Greyrock may, in its discretion, require that Borrower pay monetary Obligations in cash to Greyrock, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. 9.4 MONTHLY ACCOUNTINGS. Greyrock shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Greyrock), unless Borrower notifies Greyrock in writing to the contrary within sixty days after each account is rendered, describing the nature of any alleged errors or admissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either (i) personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Greyrock or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party, or (ii) by fax to the fax numbers provided by each party to the other. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one business day following delivery to the private delivery service, or two business days following the deposit thereof in the United States mail, with postage prepaid, or on receipt during business hours in the case or the first Business Day after receipt during non-business hours in the case of notices given by fax. 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Greyrock and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE PARTIES IN CONNECTION HEREWITH. 9.8 WAIVERS. The failure of Greyrock at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Greyrock shall not waive or diminish any right of Greyrock later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Greyrock shall be deemed to have been waived by any act or knowledge of Greyrock or its agents or employees, but only by a specific written waiver signed by an authorized officer of Greyrock and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Greyrock on which Borrower is or may in any way be liable, and notice of any action taken by Greyrock, unless expressly required by this Agreement. 9.9 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Greyrock. -11- 9.10 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.11 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Greyrock for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Greyrock, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Greyrock incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Greyrock's security interest in, the Collateral; and otherwise represent Greyrock in any litigation relating to Borrower. If either Greyrock or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Greyrock may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Greyrock; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Greyrock, and any prohibited assignment shall be void. No consent by Greyrock to any assignment shall release Borrower from its liability for the Obligations. 9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.14 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Greyrock acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Greyrock or Borrower under any rule of construction or otherwise. 9.15 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Greyrock and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to Greyrock to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Greyrock's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.16 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GREYROCK EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GREYROCK AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF GREYROCK OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GREYROCK OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: THE COBALT GROUP, INC. BY ------------------------------------ PRESIDENT OR VICE PRESIDENT BY ------------------------------------ SECRETARY OR ASS'T SECRETARY -12- GREYROCK: GREYROCK CAPITAL, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION BY -------------------------------- TITLE -------------------------------- Version -1 -13- SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: THE COBALT GROUP, INC. ADDRESS: 2030 FIRST AVENUE, SUITE 300 SEATTLE, WA 98121 DATE: MAY 27, 1999 This Schedule is an integral part of the Loan and Security Agreement between GREYROCK CAPITAL, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION (GREYROCK) and the above-borrower (BORROWER) of even date. - ------------------------------------------------------------------------------- 1. CREDIT LIMIT (Section 1.1): An amount not to exceed $5,000,000 at any one time outstanding. - ------------------------------------------------------------------------------- 2. INTEREST. INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" plus 2% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed, provided that the interest rate in effect in each month shall not be less than 8% per annum. The interest rate applicable to all Loans shall be adjusted monthly as of the first day of each month, and the interest to be charged for each month shall be based on the highest "Prime Rate" in effect during said month. "Prime Rate" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA (or its successor) whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the month, as the base rate on corporate loans at large U.S. money center commercial banks. -1- - ------------------------------------------------------------------------------- 3. FEES (Section 1.3/Section 6.2): Loan Fee: $100,000, payable concurrently herewith. NSF Check Charge: $15.00 per item. Wire Transfers: $15.00 per transfer. - ------------------------------------------------------------------------------- 4. MATURITY DATE (Section 6.1): The earlier of (i) DECEMBER 31, 1999 or (ii) three days after the date Borrower issues any of its stock in a public offering of its stock, or (iii) the date Borrower receives proceeds for the issuance of its stock or debt or other securities in an amount in excess of $10,000,000 in one transaction or a series of transactions after the date hereof (other than stock issued in a public offering). - ------------------------------------------------------------------------------- 5. REPORTING. (Section 5.2): Borrower shall provide Greyrock with the following: 1. Annual financial statements, as soon as available, and in any event within 90 days following the end of Borrower's fiscal year, certified by independent certified public accountants acceptable to Greyrock. 2. Quarterly unaudited financial statements, as soon as available, and in any event within 30 days after the end of each fiscal quarter of Borrower. 3. Monthly unaudited financial statements, as soon as available, and in any event within 30 days after the end of each month. - ------------------------------------------------------------------------------- 6. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): None PRIOR TRADE NAMES OF BORROWER (Section 3.2): None EXISTING TRADE NAMES OF BORROWER (Section 3.2): None -2- OTHER LOCATIONS AND ADDRESSES (Section 3.3): See Exhibit A hereto MATERIAL ADVERSE LITIGATION (Section 3.10): None - ------------------------------------------------------------------------------- 7. OTHER PROVISIONS: (1) PARTSVOICE. Borrower represents and warrants to Greyrock that, under the agreements executed in connection with its acquisition of its membership interest in Partsvoice LLC ("Partsvoice"), it is not permitted to have Partsvoice guarantee Borrower's obligations or grant security interests in Partsvoice's assets to secure Borrower's obligations. (2) LEGAL OPINION. Borrower is concurrently providing to Greyrock the opinion of its counsel covering the due organization and good standing of Borrower and the due authorization, execution and delivery of this Agreement and the documents relating thereto. Within 20 days after the date hereof Borrower shall provide to Greyrock the opinion of its counsel covering such other matters as Greyrock shall specify (which shall be customary in loan transactions and shall include customary exceptions and disclaimers). Borrower: Greyrock: THE COBALT GROUP, INC. GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation By By ------------------------------------ ----------------------------------- President or Vice President Title -------------------------------- By ---------------------------------- Secretary or Ass't Secretary Version -1 -3- EXHIBIT A TO SCHEDULE TO LOAN AND SECURITY AGREEMENT Additional Locations: 2030 First Avenue Suite 300 Seattle, Washington 98121 515 Capital of Texas Highway Austin, Texas 78746 8305 SE Monterey Avenue Suite 104 Portland, Oregon 97266 EX-10.23 8 EXHIBIT 10.23 THE COBALT GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSES. The Cobalt Group, Inc. 1999 Employee Stock Purchase Plan (the "Plan") is intended to provide additional incentives to employees and a convenient means by which eligible employees of the Company and its Corporate Affiliates may purchase the Company's shares of Common Stock and a method by which the Company may assist and encourage such employees to become shareholders of the Company. 2. DEFINITIONS. As used herein, the following definitions apply: a. "BASE SALARY" means the regular cash compensation paid to a Participant by one or more Participating Companies, including incentive bonuses, overtime, commissions and any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program, but excluding any severance pay, hiring or relocation bonuses and pay in lieu of vacations and sick leave. b. "BOARD" means the Company's Board of Directors. c. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. d. "COMPANY" means The Cobalt Group, Inc., a Washington corporation, and any corporate successor to all or substantially all of the assets or voting stock of The Cobalt Group, Inc. which shall by appropriate action adopt the Plan. e. "COMMON STOCK" means the Company's common stock. f. "CORPORATE AFFILIATE" means any company which is a parent or subsidiary corporation of the Company (as determined in accordance with Code Section 424), including any parent or subsidiary corporation which becomes such after the Effective Date. g. "EFFECTIVE DATE" means the first day of the first month of each offering period which shall commence as determined by the Plan Administrator. For any Corporate Affiliate which becomes a Participating Company in the Plan after the first day of an offering period has commenced, a subsequent Effective Date shall be designated with respect to participation by its Eligible Employees. h. "ELIGIBLE EMPLOYEE" means any person who is engaged, on a regularly-scheduled basis of more than twenty (20) hours per week and more than five (5) months per calendar year, in the rendition of personal services to the Company or any other Participating Company for earnings considered wages under Section 3121(a) of the Code. i. "ENTRY DATE" means the date an Eligible Employee first joins the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Date. j. "PARTICIPANT" means any Eligible Employee of a Participating Company who is actively participating in the Plan. k. "PARTICIPATING COMPANY" means the Company and such Corporate Affiliate or Affiliates as may be designated from time to time by the Board. l. "PERIOD OF PARTICIPATION" means each six-month period for which the Participant actually participates in an offering period in effect under the Plan. m. "PLAN ADMINISTRATOR" means the plan administrator appointed by the Board pursuant to Section 3.a. n. "PURCHASE DATE" means the last business day of each Period of Participation on which day shares of Common Stock are automatically purchased for Participants under the Plan. 3. ADMINISTRATION. (a) POWERS. The Plan shall be administered by the Compensation Committee ("Plan Administrator") appointed from time to time by the Board. The Plan Administrator shall have full authority to administer the Plan, including, without limitation, authority to interpret and construe any provision of the Plan; to determine the offering periods and the maximum number of shares of Common Stock which may be purchased in any one offering period; to determine, in accordance with Section 7(c), the fair market value of the Common Stock on any date; to prescribe, amend and rescind rules and regulations relating to this Plan; within law, to waive or modify any term or provision contained in this Plan or in any right to purchase shares of Common Stock under this Plan; to authorize any person to execute on behalf of the Company any instrument required to effectuate this Plan; and to make all other determinations deemed necessary or advisable for the administration for this Plan. The interpretation and construction by the Plan Administrator of any terms or provisions of this Plan, any right issued hereunder or of any rule or regulation promulgated in connection herewith and all actions taken by the Plan Administrator shall be conclusive and binding on all interested parties. The Plan Administrator may delegate administrative functions to individuals who are officers or employees of the Company or a Corporate Affiliate. (b) LIMITED LIABILITY. No member of the Board of Directors or the Plan Administrator or officer of the Company or any Corporate Affiliate shall be liable for any action or inaction of the entity or body, or another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with explicit provisions hereof, the Board of Directors and Plan Administrator may act in their absolute discretion in all matters related to this Plan. 4. OFFERING PERIODS. a. DETERMINATION. Shares of Common Stock shall be offered for purchase under the Plan through a series of offering periods, each to be of a duration of six (6) months, all as selected by the Plan Administrator, until such time as the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or the Plan shall have been sooner terminated in accordance with Section 10. b. SEPARATE PURCHASE RIGHTS. The Participant shall be granted a separate purchase right for each offering period in which he/she participates. The purchase right shall be granted on the Entry Date on which such individual first joins the offering period in effect under the Plan and shall be automatically exercised on the Purchase Date. c. INDEPENDENT. The acquisition of Common Stock through participation in the Plan for any offering period shall neither limit nor require the acquisition of Common Stock by the Participant in any subsequent offering period. 5. ELIGIBILITY AND PARTICIPATION. a. ENTRY DATES. Each Eligible Employee of a Participating Company shall be eligible to participate in the Plan in accordance with the provisions of this paragraph 5.2. An individual who is an Eligible Employee on the start date of the offering period may enter that offering period on such start date, provided he/she enrolls in the offering period before such date in accordance with Section 5(b) below. That start date shall then become such individual's Entry Date for the offering period, and on that date such individual shall be granted his/her purchase right for the offering period. Should such Eligible Employee not enter the offering period on the start date, then he/she may not subsequently join that particular offering period on any later date. b. ENROLLMENT FORMS. To participate for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed in the Plan Administrator (including the payroll deduction authorization) and file such forms with the Plan Administrator at least ten (10) business days before his/her scheduled Entry Date. c. PAYROLL DEDUCTIONS. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock under the Plan shall be at a rate of not less than two percent (2%) nor more than fifteen percent (15%) of the Base Salary paid to the Participant during the Period of Participation, unless the Plan Administrator consents to a lower or higher rate. The deduction rate so authorized shall continue in effect for the remainder of the offering period, except to the extent such rate is changed in accordance with the following guidelines: (1) The Participant may, at any time during the Semi-Annual Period of Participation, reduce his/her rate of payroll deduction but not less than, without the consent of the Plan Administrator, two percent (2%) of Base Salary. Such reduction shall become effective as soon as possible after filing of the requisite reduction form with the Plan Administrator (or its designate), but the Participant may not effect more than one such reduction during the same Semi-Annual Period of Participation. (2) The Participant may, prior to the commencement of any new offering period, increase or decrease the rate of his/her payroll deduction by filing the appropriate form with the Plan Administrator (or its designate). The new rate (which may not be less than, without the consent of the Plan Administrator, the two (2%) minimum and not exceed the 15 percent (15%) maximum) shall become effective as of the first date of the Period of Participation following the filing of such form. (3) For purposes of this Section 5(3), an amended payroll deduction authorization form shall be effective for a specific pay period when filed ten (10) business days prior to the last day of such period. Payroll deductions will automatically cease upon the termination of the Participant's purchase right in accordance with the applicable provisions of Section 7 below. d. RULE 16b-3. Employees who are also directors or officers of the Company may participate only in accordance with Rule 16b-3 under the Securities Exchange Act of 1934, as in effect from time to time. e. PARTICIPATION VOLUNTARY. Participation in the Plan shall be voluntary. 6. STOCK SUBJECT TO PLAN a. TOTAL NUMBER. The total number of shares of Common Stock which may be issued under the Plan shall not exceed 300,000 shares (subject to adjustment under Section 6(b) below). b. CHANGES TO CAPITALIZATION. In the event any change is made to the Company's outstanding Common Stock by reason of any stock dividend, stock split, combination of shares or other change affecting such outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made by the Plan Administrator to (1) the class and maximum number of shares issuable over the term of the Plan, (2) the class and maximum number of shares purchasable per Participant during each Semi-Annual Period of Participation, (3) the class and maximum number of shares purchasable in the aggregate by all Participants on any one purchase date under the Plan, and (4) the class and number of shares and the price per share of the Common Stock subject to each purchase right at the time outstanding under the Plan. Such adjustments shall be designed to preclude the dilution or enlargement of rights and benefits under the Plan. 7. PURCHASE RIGHTS. a. TERMS AND CONDITIONS. An Employee who participates in the Plan for a particular offering period shall have the right to purchase shares of Common Stock, at the end of the Participation Period, upon the terms and conditions set forth below and shall execute a purchase agreement embodying such terms and conditions and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. b. PURCHASE PRICE. Common Stock shall be issuable at the end of the Period of Participation at a purchase price equal to the lower of eighty-five percent (85%) of (1) the fair market value per share on the Participant's Entry Date into the offering period, or (2) the fair market value per share on the Purchase Date on which the Period of Participation ends. c. VALUATION. For purposes of determining the fair market value per share of Common Stock on any relevant date, the following procedures shall be in effect: (i) The fair market value on any date shall be equal to the closing price of the Common Stock on such date, as reported on the NASDAQ National Market System or such other quotation system that supersedes it. If there is no quoted price for such date, then the closing price on the next preceding day for which there does exist such a quotation shall be determinative of fair market value. (ii) If Section 7(c)(1) is not applicable, the fair market value shall be determined by the Plan Administrator in good faith. Such determination shall be conclusive and binding on all persons. d. NUMBER OF PURCHASABLE SHARES. The number of shares purchasable per Participant for each Period of Participation shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during such Period of Participation by the purchase price in effect for the Purchase Date on which such Semi-Annual Period of Participation ends. No Participant, however, may purchase during any one Purchase Period more than 1,000 shares of Common Stock (subject to periodic adjustment under Section 6(b)). Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Corporate Affiliates. e. PAYMENT. Payment for the Common Stock purchased under the Plan shall be effected by means of the Participant's authorized payroll deductions. Such deductions shall begin on the first day coincident with or immediately following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of the offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from a Participant may be commingled with the general assets of the Company and may be used for general corporate purposes. f. TERMINATION OF PURCHASE RIGHT. The following provisions shall govern the termination of outstanding purchase rights: (1) A Participant may, at any time prior to the last thirty (30) business days of the Semi-Annual Period of Participation, terminate his/her outstanding purchase right under the Plan by filing the prescribed notification form with the Plan Administrator (or its designate), unless the Participant has delivered to the Plan Administrator a written waiver of his or her rights to terminate such purchase rights. No further payroll deductions shall be collected from the Participant with respect to the terminated purchase right, and any payroll deductions collected for the Period of Participation in which such termination occurs shall be refunded to the Participant. (2) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which such terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of a new payroll deduction authorization) on or before the date he/she is first eligible to join any new offering period. (3) If the Participant ceases to remain an Eligible Employee while his/her purchase right remains outstanding, then such individual (or the personal representative of the estate of a deceased Participant) shall have the following election, exercisable up until the end of the Semi-Annual Period of Participation in which the Participant ceases Eligible Employee status: i) to withdraw all of the Participant's payroll deductions for such Period of Participation, or ii) to have such funds held for the purchase of shares on the Purchase Date immediately following such cessation of Eligible Employee status. If no such election is made, then such funds shall be refunded as soon as possible after the close of such Period of Participation. In no event, however, may any payroll deductions be made on the Participant's behalf following his/her cessation of Eligible Employee status. g. STOCK PURCHASE. Shares of Common Stock shall automatically be purchased on behalf of each Participant (other than Participants whose payroll deductions have previously been refunded in accordance with the Termination of Purchase Right provisions above) on the Purchase Date. The purchase shall be effected by applying such Participant's payroll deductions for the Period of Participation ending on such Purchase Date to the purchase of shares of Common Stock (subject to the limitation on the maximum number of purchasable shares set forth above) at the purchase price in effect for such Period of Participation. Any payroll deductions not applied to the purchase of Common Stock at the end of an offering period or by reason of the limitation on the maximum number of shares purchasable by the Participant for that Period of Participation shall be refunded to the Participant. h. PRORATION OF PURCHASE RIGHTS. Subject to the limitations set forth in Section 6(a), the Plan Administrator shall determine the number of shares of Common Stock, subject to periodic adjustment under Section 6(b), which may be purchased in the aggregate by all Participants in any one offering period under the Plan. Should the total number of shares of Common Stock which are to be purchased pursuant to outstanding purchase rights on any particular date exceed either (1) the maximum limitation on the number of shares purchasable in the aggregate on such date or (2) the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro rated to such individual, shall be refunded to such Participant. i. RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a shareholder with respect to the shares subject to his/her outstanding purchase right until the shares are actually purchased on the Participant's behalf in accordance with the applicable provisions of the Plan. No adjustments shall be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. A Participant shall be entitled to receive, as soon as practicable after each Purchase Date, a stock certificate for the number of shares purchased on the Participant's behalf. Such certificate may, upon the Participant's request, be issued in the names of the Participant and his/her spouse as community property or as joint tenants with right of survivorship. j. ASSIGNABILITY. Purchase rights granted under the Plan shall not be assignable or transferable by the Participant other than by will or by the laws of descent and distribution following the Participant's death, shall not be subject to execution, attachment or similar process, and shall be exercised during the Participant's lifetime only by the Participant. k. CHANGE IN OWNERSHIP. Should the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or outstanding capital stock of the Company by means of: (1) a sale, merger or other reorganization in which the Company will not be the surviving corporation (other than a reorganization effected primarily to change the state in which the Company is incorporated), or (2) a reverse merger in which the Company is the surviving corporation but in which more than 50% of the Company's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to the reverse merger, then, unless the successor shall continue this Plan and assume all the obligations evidenced by the outstanding rights to purchase shares of Common Stock or shall provide equivalent rights with respect to the successor's securities, all to the reasonable satisfaction of the Board, all outstanding purchase rights under the Plan shall automatically be exercised immediately prior to the consummation of such sale, merger, reorganization or reverse merger by applying the payroll deductions of each Participant for the Period of participation in which such transaction occurs to the purchase of whole shares of Common Stock at the lower of eighty-five percent (85%) of (i) the fair market value of the Common Stock on the Participant's Entry Date into the offering period in which such transaction occurs, or (ii) the fair market value of the Common Stock immediately prior to the consummation of such transaction. However, the applicable share limitations of Sections 7 and 8 shall continue to apply to any such purchase. The Company shall use its best efforts to provide at least ten (10) days' advance written notice of the occurrence of any such sale, merger, reorganization or reverse merger, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights in accordance with the applicable provisions of this Sections 7. 8. ACCRUAL LIMITATIONS. a. DOLLAR LIMIT. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with rights to purchase Common Stock accrued under any other purchase right outstanding under this Plan and similar rights accrued under other employee stock purchase plans (within the meaning of Section 423 of the Code) of the Company or its Corporate Affiliates, would otherwise permit such Participant to purchase more than $25,000 worth of stock of the Company or any Corporate Affiliate (determined on the basis of the fair market value of such stock on the date or dates such rights are granted to the Participant) for each calendar year such rights are at any time outstanding. b. APPLICATION. For purposes of applying such accrual limitations, the right to acquire Common Stock pursuant to each purchase right outstanding under the Plan shall accrue as follows: (1) the right to acquire Common Stock under each such purchase right shall accrue as and when the purchase right first becomes exercisable for each the last business day of each Period of Participation. (2) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire $25,000 worth of Common Stock (determined on the basis of the fair market value on the date or dates of grant) pursuant to one or more purchase rights held by the Participant during such calendar year. (3) If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Period of Participation, then the payroll deductions which the Participant made during that Period of Participation with respect to such purchase right shall be refunded. c. CONTROLLING PROVISION. In the event there is any conflict between the provisions of this Section 8 and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Section 8 shall be controlling. 9. STATUS OF PLAN UNDER FEDERAL TAX LAWS. The Plan is designed to qualify as an employee stock purchase plan under Code Section 423, and shall be governed and construed accordingly. 10. AMENDMENT AND TERMINATION. a. AMENDMENTS, SUSPENSION, DISCONTINUATION. The Board may alter, amend, suspend or discontinue the Plan immediately following the close of any Period of Participation. However, the Board may not, without the approval of the Company's shareholders: (1) materially increase the number of shares issuable under the Plan or the maximum number of shares which may be purchased per Participant or in the aggregate during any one Period of Participation under the Plan, except that the Plan Administrator shall have the authority, exercisable without such shareholder approval, to effect adjustments to the extent necessary to effect changes in the Company's capital structure pursuant to Section 6(b); (2) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock issuable under the Plan; (3) materially increase the benefits accruing to Participants under the Plan or materially modify the requirements for eligibility to participate in the Plan; or (4) adopt amendments which require shareholder approval under applicable law, including Section 16(b) of the Securities Exchange Act of 1934. b. TERMINATION OF PURCHASE RIGHTS. The Company shall have the right, exercisable in the sole discretion of the Plan Administrator, to terminate all outstanding purchase rights under the Plan immediately following the close of any Period of Participation. Should the Company elect to exercise such right, then the Plan shall terminate in its entirety. No further purchase rights shall thereafter be granted or exercised, and no further payroll deductions shall thereafter be collected, under the Plan. 11. GENERAL PROVISIONS. a. REQUIREMENTS. No offering period shall commence, and no shares of Common Stock shall be issued hereunder, until (1) the Plan shall have been approved by the Company's shareholders and (2) the Company shall have complied with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, applicable laws of foreign countries and other jurisdictions, the requirements of any quotation service or stock exchange upon which the shares may then be listed, and all other applicable requirements established by law or regulation. In the event such shareholder approval is not obtained, or such Company compliance is not effected, within twelve (12) months after the date on which the Plan is adopted by the Board, the Plan shall terminate and have no further force or effect. b. PLAN TERMINATION. The Plan shall terminate upon the earlier of (1) June 30, 2004, or (2) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan. c. COSTS. All costs and expenses incurred in the administration of the Plan shall be paid by the Company. d. NO STATUS AS EMPLOYEE. Neither the action of the Company in establishing the Plan, or any action taken under the Plan by the Board or the Plan Administrator, nor any provision of the Plan itself shall be construed so as to grant any person the right to remain in the employ of the Company or any of its Corporate Affiliates for any period of specific duration, and such person's employment may be terminated at any time, with or without cause. e. NO SEGREGATION OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purposes and the Company shall not be obligated to segregate the payroll deductions. f. NO INTEREST. No Participant shall be entitled, at any time, to any payment or credit for interest with respect to or on the payroll deductions contemplated herein, or on any other assets held hereunder for the Participant's account. g. GOVERNING LAW. The provisions of the Plan shall be governed by the laws of the State of Washington. EX-10.24 9 EXHIBIT 10.24 SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT ("Agreement"), made and entered into as of the 7th day of July, 1999, by and between THE COBALT GROUP, INC., a Washington corporation ("the Company") and GE Financial Assurance Holdings, Inc., a Delaware corporation ("Purchaser"); WHEREAS, pursuant to the terms of the underwriting agreement of even date herewith (the "Underwriting Agreement") between and among the Company and BancBoston Robertson Stephens, Bear, Stearns & Co. Inc., SG Cowen and Wit Capital Corporation (the "Underwriters"), the Company has agreed to issue, sell and deliver to the Underwriters, and the Underwriters have agreed to purchase and receive from the Company, in connection with a firm commitment underwritten public offering of the common stock of the Company (the "Common Stock") 4,500,000 shares of Common Stock (plus up to 675,000 shares of Common Stock subject to an over-allotment option granted to the Underwriters with respect to the offering (the "Over-allotment Shares")) (such Shares, including the Over- allotment Shares, are hereinafter referred to as the "Public Offering Shares"); and WHEREAS, the Company desires to issue, sell and deliver to Purchaser, and Purchaser desires to purchase and receive directly from the Company concurrently with consummation of the purchase by the Underwriters of the Public Offering Shares (excluding the Over-allotment Shares), $5,000,000 in aggregate amount of Common Stock to be purchased at the Purchase Price (as defined in Article 1 below), upon the terms, provisions and conditions contained herein (such shares purchased by the Purchaser are hereinafter referred to as the "Purchased Shares"); NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the Company and Purchaser hereby agree as follows: ARTICLE 1. SALE AND PURCHASE OF SHARES The Company hereby agrees to issue, sell and deliver to Purchaser, and Purchaser hereby agrees to purchase and receive from the Company, at Closing (as defined in Section 6.1 below), the Purchased Shares. The aggregate purchase price for the Purchased Shares shall be $5,000,000. The per share purchase price for the Purchased 2 Shares shall be the per share price at which the Public Offering Shares are initially offered to the public by the Underwriters, as set forth in the Prospectus included in the Registration Statement described in Section 4.2 below (the "Purchase Price"); provided, however, that if the per share price of the Public Offering Shares as initially offered to the public by the Underwriters is above $16, Purchaser shall have the option, but not the obligation, to purchase the Purchased Shares. If the per share price is above $16, Purchaser shall have the option to terminate this Agreement. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Purchaser that: 2.1 CORPORATE STATUS. The Company has been duly incorporated and is an existing corporation under Washington law, has paid all fees and filed all documents required under Washington law to maintain its corporate existence, has full corporate power and authority to conduct its business as the same is now being conducted and to own its properties as the same are now owned. 2.2 CAPITAL STOCK; PURCHASED SHARES. The capital stock of the Company is as set forth in the Prospectus. Upon the purchase by Purchaser of the Purchased Shares in accordance with the terms of this Agreement, the Purchased Shares will be validly issued, fully paid and nonassessable. 2.3 AUTHORITY. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. The execution and delivery of this Agreement and the Underwriting Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Company, and the Company has full corporate power and authority to execute and deliver this Agreement and the Underwriting Agreement and to perform its obligations hereunder and thereunder. 2.4 BROKERS. The Company has not retained or employed any broker, agent or finder or paid or agreed to pay any brokerage fee, finder's fee, commission or other similar payment to any broker, agent, or finder on account of this Agreement or any matters contemplated hereby; except that the Underwriters have been engaged by the Company in 3 connection with the offering of the Public Offering Shares. The Company shall indemnify and hold Purchaser harmless from any and all fees, discounts, commissions and expenses of the Underwriters in connection with the offering of the Public Offering Shares and these Purchased Shares. 2.5 NO CONFLICT. The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement and the Underwriting Agreement will not contravene any provision of applicable law or the Articles of Incorporation or Bylaws of the Company, or any agreement or other instrument binding upon the Company, and no consent, approval or authorization of any governmental body or agency is required for the performance by the Company of its obligations under this Agreement or the Underwriting Agreement, except such as are specified herein and therein and have been obtained and such as may be required by the 1933 Act and the securities or Blue Sky laws of the various states in connection with the purchase and distribution by the Underwriters of the Public Offering Shares. 2.6 COMPLIANCE WITH SECURITIES LAWS. The Registration Statement and Prospectus comply in all material respects with the 1933 Act and the rules and regulations of the Commission thereunder and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER 3.1 CORPORATE STATUS. Purchaser has been duly organized and is validly existing as a corporation in good standing under the laws of Delaware, with full corporate power to conduct its business as the same is now being conducted and to own its properties as the same are now owned. 3.2 AUTHORITY. This Agreement has been duly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Purchaser, and Purchaser has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 4 3.3 BROKERS. Purchaser has not retained or employed any broker, agent or finder or paid or agreed to pay any brokerage fee, finder's fee, commission or other similar payment to any broker, agent or finder on account of this Agreement or any matters contemplated hereby. ARTICLE 4. COVENANTS 4.1 DISPOSITION OF THE PURCHASED SHARES. Purchaser further agrees that for a period of 180 days from the Closing Date set forth in Section 6.1 below, it will not directly or indirectly offer, sell, contract to sell, grant any option to purchase, pledge, hypothecate or otherwise transfer or dispose of any of the Purchased Shares other than to its affiliates or other intra-organization transferees who also agree to be bound by such lock-up agreement, without the prior written consent of BancBoston Robertson Stephens. 4.2 REGISTRATION OF COMMON STOCK. The Company covenants and agrees to use its best efforts to register the Public Offering Shares and the Purchased Shares under the Securities Act of 1933, as amended (the "1933 Act"), pursuant to a Registration Statement on Form S-1 (No. 333-79483) filed with the Securities and Exchange Commission (the "Commission") on May 27, 1999, as amended. The Company shall provide Purchaser with a copy of the final prospectus included as a part of the Registration Statement at the time such Registration Statement is declared effective ("Prospectus"). ARTICLE 5. CONDITIONS 5.1 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligation of the Company to consummate the transaction contemplated by Article 1 is subject to the satisfaction and fulfillment, prior to or at Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Purchaser set forth herein shall be true and correct in all material respects on the Closing Date as though such representation and warranties were made on such date. (b) PERFORMANCE OF OBLIGATIONS. Purchaser shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at Closing. 5 (c) PURCHASE AND SALE OF PUBLIC OFFERING SHARES. The Underwriters and the Company shall have executed and delivered the Underwriting Agreement and the Underwriters shall have purchased the Public Offering Shares, pursuant to and in accordance with the terms of the Underwriting Agreement. (d) PURCHASE PRICE. The Company shall have received from Purchaser, in payment for the Purchased Shares, $5,000,000 in immediately available funds. (e) NO TERMINATION. This Agreement shall not have been terminated in accordance with its terms. (f) REGISTRATION OF COMMON STOCK. The Public Offering Shares and the Purchased Shares shall have been registered under the 1933 Act pursuant to a Registration Statement on Form S-1 (No. 333-79483) filed with the Commission on May 27, 1999, as amended. No stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the Commission, and there shall have been no material adverse change in the condition of the Company from that set forth in the Registration Statement. 5.2 CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligation of Purchaser to consummate the transaction contemplated by Article 1 is subject to the satisfaction and fulfillment, prior to or at Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company set forth herein shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made on such date. (b) PERFORMANCE OF OBLIGATIONS. The Company shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at Closing. (c) PURCHASE AND SALE OF PUBLIC OFFERING SHARES. The Underwriters and the Company shall have executed and delivered the Underwriting Agreement and the Underwriters shall have purchased the Public Offering Shares, pursuant to and in accordance with the terms of the Underwriting Agreement. (d) PURCHASED SHARES. Purchaser shall have received a certificate or certificates representing the Purchased Shares duly and validly issued in the name of Purchaser or its designee. 6 (e) NO TERMINATION. This Agreement shall not have been terminated in accordance with its terms. (f) REGISTRATION OF COMMON STOCK. The Public Offering Shares and the Purchased Shares shall have been registered under the 1933 Act, pursuant to a Registration Statement on Form S-1 (No. 333-79483) filed with the Commission on May 27, 1999, as amended. No stop order suspending the effectiveness of the Registration Statement shall be in effect, and no proceedings for such purpose shall be pending before or threatened by the Commission, and there shall have been no material adverse change in the condition of the Company from that set forth in the Registration Statement. ARTICLE 6. THE CLOSING; TERMINATION 6.1 CLOSING. Unless this Agreement has been terminated in accordance with its terms, the closing of the transaction contemplated by Article 1 (the "Closing") shall take place at the offices of Stoel Rives LLP, Seattle, Washington, on the closing date for the sale of the Public Offering Shares, as provided in the Underwriting Agreement, or at such other place or on such other date as the parties hereto shall mutually agree in writing (the date of the Closing is herein referred to as the "Closing Date"). 6.2 ACTIONS TO BE TAKEN AT CLOSING. At Closing, the Company shall deliver to Purchaser the certificate or certificates representing the Purchased Shares, duly and validly issued in the name of Purchaser or its designee, and Purchaser shall deliver to the Company, in payment for the Purchased Shares, $5,000,000 in immediately available funds. In addition, the parties hereto shall execute and cause to be delivered all other documents and items required to be delivered at Closing or necessary to perform or satisfy any covenant, condition or agreement contained herein which is required to be performed or satisfied at or prior to Closing. 6.3 TERMINATION. This Agreement may be terminated by the Purchaser in accordance with Article 1 or at any time by mutual agreement of the parties. This Agreement will terminate if the Closing does not occur within 180 days of the date hereof. 7 ARTICLE 7. MISCELLANEOUS 7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The respective representations, warranties, agreements, covenants and obligations of the parties hereunder shall survive the consummation of the transaction contemplated by Article 1. 7.2 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof and supersedes all prior agreements and understandings, whether oral or written, between the parties with respect to the same. No modification, alteration, amendment or rescission of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the parties. 7.3 SEVERABILITY. The invalidity of any portion of this Agreement under the applicable laws of the State of Washington or any other jurisdiction, federal or state, shall not affect the force and effect of the remaining valid portions hereof. 7.4 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and assigns. 7.5 HEADINGS. Articles and section headings used herein have been inserted for convenience only and shall not affect the express provisions of this Agreement or the construction hereof. Whenever reference is made herein to a particular article, section or paragraph, such reference shall refer to the designated article, section or paragraph of this Agreement. 7.6 NOTICES. Any notice required to be sent hereunder by either party shall in every case mean written notice, which shall be delivered in person or by registered or certified first class mail, return receipt requested, or by prepaid telegram or telex, to the address of the other party hereto as set forth below, and the same shall be effective as of the date such notice is received by the party to whom it is sent: If to the Company, to: The Cobalt Group, Inc. 2030 First Avenue Suite 300 Seattle, WA 98121 Attn: Geoffrey T. Barker With a copy to: 8 Stoel Rives LLP 3600 One Union Square 600 University Street Seattle, WA 98101 Attn: Ronald J. Lone, Esq. If to Purchaser, to: GE Financial Assurance Holdings, Inc. __________________________ __________________________ __________________________ With a copy to: A. Peter Parsons Davis Wright Tremaine 1501 Fourth Avenue, #2600 Seattle, WA 98101-1688 Either party hereto may change the address to which any notice hereunder is to be sent by giving notice of such change of address in accordance with the provisions of this Section 7.6. 7.7 GOVERNING LAW. This Agreement and the rights and the duties of the parties hereunder shall be governed by and construed and enforced in accordance with the laws of the State of Washington. 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. GE FINANCIAL ASSURANCE THE COBALT GROUP, INC. HOLDINGS, INC. By_____________________________ By_________________________________ Name:__________________________ Name: _____________________________ Title: _________________________ Title: ______________________________ 10 EX-10.25 10 EXHIBIT 10.25 July 6, 1999 Mr. Stephen Tubbs Vice President Business Development GE Financial Assurance 7125 W. Jefferson Ave., Suite 200 Lakewood, CO 80235 Re: Agreement between GE Capital Management Corporation and The Cobalt Group, Inc. Dear Stephen: This letter ("Letter Agreement") sets forth the principal terms and conditions of a proposed binding agreement ("Definitive Contemplated Agreement") between GE Capital Management Corporation ("GE") and The Cobalt Group, Inc. ("Cobalt"). I. Terms of the Definitive Contemplated Agreement 1. OBLIGATIONS OF COBALT A. Cobalt will develop, with the cooperation of GE, on a schedule to be reasonably agreed by the parties, the following Web-based automobile extended warranty origination modules: i) A dealer module ("Dealer Direct"). Cobalt will prepare a Dealer Direct functional specification ("Specification"). Upon acceptance of the Specification by GE, Cobalt will develop, according to the Specification: (a) an Internet dealer user interface; (b) underlying software code; (c) integration of Cobalt's Web-based inventory management system with Dealer Direct; (d) the ability for dealers to manage retail pricing; and (e) a direct data feed to GE. Cobalt will work with its automotive dealer customers ("Cobalt Clients") to run tests of Dealer Direct and make modifications, as mutually agreed with GE; and ii) A consumer module ("Consumer Direct"), based substantially on GE's existing consumer extended warranty origination system. According to a mutually agreed specification, Cobalt will modify the existing Internet user interface, integrate it with Cobalt automotive inventory management system as well as in Cobalt's automotive portal, DEALERNET-TM-, provide availability in dealer Web sites and configure a direct data feed to GE. Cobalt will work with the Cobalt Clients and the DEALERNET user base to run tests of Consumer Direct and make modifications, as mutually agreed with GE. B. Cobalt intends to develop automotive customer "Personal Pages" in the future which will allow customers of Cobalt Clients to review their automobile's service histories, receive service reminders, purchase various products and services, all of which will be sponsored by the Cobalt Client from whom they purchased their car. Cobalt and GE agree to negotiate in good faith for the specification and development of extended warranty product related enhancements to Cobalt's Personal Pages products. C. During the term of the Definitive Contemplated Agreement, Cobalt shall have the right to distribute Dealer Direct as a standard component of Cobalt's service offerings to Cobalt Clients and to offer a Consumer Direct extended warranty origination link on Cobalt Client Web sites at such client's option. Cobalt sales consultants will provide basic training on the use of Dealer Direct. Cobalt shall also have the right to distribute Consumer Direct as part of DEALERNET, both at the Dealernet.com primary address and as a content component for other Web portal businesses ("Cobalt Affiliates"). Cobalt Clients and Cobalt Affiliates shall be subject to GE's standard qualification criteria for originators of its extended warranty products. Cobalt Clients and Cobalt Affiliates will have the right to decline these services. Cobalt shall have the right to modify Dealer Direct and Consumer Direct to remain consistent with its other Web-based products from time to time, provided that such modifications shall not materially affect the suitability of Dealer Direct and Consumer Direct as extended warranty origination systems. D. GE shall be the exclusive non-automotive manufacturer extended warranty provider for Dealer Direct and DEALERNET and shall be the exclusive endorsed non-automotive manufacturer provider of extended warranty services included in Cobalt's Web Edge Dealer Website Management interface to Cobalt Clients for a period of one year. Exclusivity will be guaranteed for a period of one year from product launch. Renewal of exclusivity will be subject to mutually agreed performance standards regarding extended warranty originations. Cobalt Clients and Cobalt Affiliates will have the right to remove the feature at their discretion and nothing in this agreement shall be construed to prevent Cobalt from installing alternative extended warranty service products at the direction of Cobalt clients. Notwithstanding any of the foregoing, at all times Cobalt shall have complete control over Cobalt Client Web sites. 2. OBLIGATIONS OF GE A. GE will provide Cobalt with direction on the automobile extended warranty business necessary to develop the Specifications and for Cobalt to perform its development obligations. GE will provide Cobalt with the software code and interface components of its Consumer Direct extended warranty origination system and with algorithms for extended warranty pricing to be incorporated into Dealer Direct. GE will cooperate with Cobalt to enable direct feeds of extended warranty and other data from Cobalt systems to GE and to facilitate reporting, as the parties shall reasonably agree. GE will pay to Cobalt, a one time fee for deployment of Dealer Direct, according to a Statement of Work, which the parties shall cooperate in preparing. B. GE will provide Cobalt's sales force with training on Dealer Direct and Consumer Direct, all necessary sales collateral, and telephone support to Cobalt Clients through a toll-free number support line. GE will support Dealer Direct and Consumer Direct customers at a service standard consistent with its existing customers and in a manner that is consistent with that advertised in GE sales collateral. C. GE will pay Cobalt extended warranty origination fees for each extended warranty sold through Dealer Direct or Consumer Direct, unless otherwise prohibited by law. Both parties recognize that payments to Cobalt Clients and Cobalt Affiliates may also be necessary from time-to-time in the course of business and that such payments will be negotiated in good faith. Cobalt may, at its discretion, rout Consumer Direct extended warranty leads to Dealer Web sites from DEALERNET. To the extent that sales channel conflicts arise over pricing, both parties agree to negotiate in good faith to resolve such issues. Fees payable to Cobalt shall be:
Cobalt Dealer Affiliate ------ ------ --------- Dealer Direct electronic origination TBD TBD N/A Dealer site consumer direct origination TBD TBD N/A DEALERNET consumer direct origination TBD N/A N/A Private label DEALERNET consumer direct origination TBD N/A TBD
D. Except for GE and its agents, Cobalt shall be the exclusive distributor for Dealer Direct. 3. TERM. The term of the Definative Agreement shall be three years from the date of signing. 4. ISSUANCE OF WARRANT. Upon execution of the Definitive Contemplated Agreement, Cobalt will issue to GE, or its designated affiliate, warrants to purchase up to 100,000 shares of Cobalt common stock at a price equal to the offering price at Cobalt's initial public offering. The warrants shall be exercisable for a period of 30 days from the date of Cobalt's final prospectus. II. Cooperation. GE and Cobalt agree to use their best efforts to take, or cause to be taken, such action to execute and deliver the Definitive Contemplated Agreement and such additional documents and instruments, and to do, or cause to be done, all things necessary to consummate and make effective the transactions contemplated by this Letter Agreement within 30 days of the date of this Letter Agreement. The Definitive Contemplated Agreement shall contain definitive terms consistent with the terms of this Letter Agreement, and shall contain such additional terms and conditions as are customarily found in agreements of this nature and complexity. GE and Cobalt agree to use good faith efforts to explore further strategic opportunities such as potential cooperative training programs. III. Binding Effect This Letter Agreement shall be non-binding, other than the obligation of each party to use its best efforts to negotiate and execute the Definitive Contemplated Agreement. IV. Miscellaneous This Letter Agreement (1) may not be assigned, in whole or in part, by either party without the prior written consent of the other party, provided that GE may assign this Letter Agreement to one or more of its affiliated corporations; (2) constitutes the entire agreement of the parties and supersedes all prior understandings, whether written or oral, between the parties thereto; (3) may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement; and (4) will be interpreted and construed in accordance with, and will be governed by, the laws of the State of California. Please indicate your agreement to the terms of this Letter Agreement by signing below and returning a copy of the signed Letter Agreement to the attention of the undersigned. Sincerely, The Cobalt Group, Inc. By: -------------------------------------- David Douglass Chief Financial Officer and Vice President of Operations GE Capital Management Corporation By: ---------------------------------- Daniel C. Munson President Date: ------------------------- EX-23.2 11 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1/A of our report dated May 12, 1999, relating to the financial statements of PartsVoice, which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP Seattle, Washington July 6, 1999 EX-23.3 12 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1/A of our reports dated March 29, 1999, except as to Note 14, which is as of May 27, 1999, relating to the financial statements and financial statement schedule of The Cobalt Group, Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP Seattle, Washington July 6, 1999 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMARY FINANCIAL INFORMATION EXTRACTED FROM THE COBALT GROUP, INC. DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,756 983 1,250 (85) 0 8,119 1,453 (410) 10,062 2,585 0 31,162 0 13 (144) 10,062 0 6,245 0 1,199 10,168 185 93 (8,117) 0 (8,117) 0 0 0 (8,117) (4.74) (4.74) Notes receivable from shareholders Operating expenses
EX-16.2 14 EXHIBIT 16.2 Exhibit 16.2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BALANCE AT ADDITIONS BEGINNING CHARGED TO BALANCE AT OF YEAR EXPENSE DEDUCTIONS* END OF YEAR ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE 1998 40,000 185,000 140,000 85,000 1997 - 54,000 14,000 40,000 1996 - VALUATION ALLOWANCE ON DEFERRED TAX ASSETS 1998 812,000 1,067,000 - 1,879,000 1997 - 812,000 - 812,000 1996 - - - -
*Deductions represent amounts written off against the allowance, net of recoveries. -----END PRIVACY-ENHANCED MESSAGE-----