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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 30, 1997
Commission File Number 0-22047
GO2NET, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 91-1710182
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
999 THIRD AVENUE, SUITE 4700, SEATTLE, WASHINGTON 98104
(Address of principal executive offices, including zip code)
(206) 447-1595
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 15, 1997 was $19,088,002 (based on the last
reported sale price on the Nasdaq SmallCap Market on that date).
The number of shares outstanding of the registrant's Common Stock as of
December 15, 1997 was 4,506,217.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified information in the definitive Proxy Statement for
the 1998 Annual Meeting of Shareholders to be held on March 12, 1998, is
incorporated by reference into Part III herein.
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GO2NET, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 12
Item 3. Legal Proceedings.................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................. 12
Item 4A. Executive Officers of the Registrant................................................. 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 13
Item 6. Selected Financial Data.............................................................. 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................................. 16
Item 8. Financial Statements and Supplementary Data.......................................... 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 40
PART III
Item 10. Executive Officers of the Registrant................................................. 40
Item 11. Executive Compensation............................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 40
Item 13. Certain Relationships and Related Transactions....................................... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 40
Signatures......................................................................................... 42
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This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
"Factors Affecting the Company's Business, Operating Results and Financial
Condition" section herein. Such forward-looking statements speak only as of the
date on which they are made, and the Company cautions readers not to place undue
reliance on such statements.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
go2net, Inc. (the "Company") <URL: http://www.go2net.com/> is an
interactive technology company that operates a group of Web sites and develops
software. MetaCrawler <URL: http://www.metacrawler.com/> is a search/index guide
that combines various existing search/index guides into one guide (a "metasearch
engine"); PlaySite <URL: http://www.playsite.com/> is a Java-based multi-user
games network; and StockSite <URL: http://www.stocksite.com/> offers proprietary
articles, portfolio tracking tools, company research and news relating to
business and finance. The Company focuses on utilizing innovative technologies
to deliver its content and to enhance the attractiveness and utility of its
product offerings.
Traffic on the Company's Internet sites has increased significantly
since the commercial launch of the Company's first Web site on November 7, 1996
to over thirty million page views and five million visits during the month of
September 1997.
The Company's Internet sites seek to attract what the Company believes
is the typical Internet user of today (18 to 39 years old, middle- to
upper-middle class and college-educated) and the advertisers wishing to reach
this target market. Since the Company's inception, substantially all of the
Company's revenue have been derived from advertising sales.
On January 31, 1997, the Company sublicensed from Netbot, Inc.
("Netbot") on an exclusive basis (with certain limited exceptions) MetaCrawler
<URL: http://www.metacrawler.com/>, a metasearch engine developed by the
University of Washington and Netbot, and associated intellectual property rights
(the "MetaCrawler Service"). The MetaCrawler Service is a free World Wide Web
search service which sends search queries to several Web search engines. The
Company integrated the MetaCrawler Service into the Company's product offerings
in March 1997.
On July 22, 1997, the Company announced that it had formed a multi-user
gaming network through its July 15, 1997 acquisition of PlaySite <URL:
http://www.playsite.com>, a Java-based multi-user games site, and certain gaming
infrastructure technology from Internet Games Corporation. PlaySite is based on
a proprietary, 100% Java, multi-user communication system and game-building
toolkit. Through PlaySite, the Company is focused on developing latency-tolerant
multi-user board, card, trivia, party, adventure and simulation games, as well
as chat, messaging and bulletin boards. The Company also plans to develop
certain proprietary, original games based on the PlaySite technology.
INDUSTRY BACKGROUND
Growth of the Internet and the World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information, and conduct business. Much of the growth to date in the use
of the Internet by businesses and individuals is due to the emergence of the
World Wide Web. The World Wide Web is a network medium that includes a wide
range of content and activities. Within the World Wide Web there can be found
content such as magazines, news and sports information, radio broadcasts, and
corporate, product, educational, research and political information, as well as
activities such as customer service, electronic commerce, hotel and airline
reservations, banking, games and discussion groups. Electronic documents or "Web
pages," which may contain textual, audio and video information, are published on
the World Wide Web on what is referred to as a "Web site" in a common format.
Users can view and move among these Web pages by using software called "Web
browsers" such as Netscape Navigator or Microsoft Internet Explorer. Users
specify which electronic documents they wish to view with their Web browser by
entering a document's unique electronic Web address, or Universal Resource
Locator ("URL").
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Jupiter Communications estimated that in 1995 there were approximately
15 million Internet users. International Data Corporation estimates that the
number of Internet users is projected to reach 199 million users in 1999, of
which 125 million users are estimated to be accessing the World Wide Web.
Net.Genesis estimates that there were approximately 90,000 Web sites in January
1996 compared to approximately 2,700 Web sites in June 1994. The Company
believes that the growth in the number of Internet users and Web sites has been
fueled principally by significant investments by leading technology and computer
software companies, public interest and the potential pervasive effect of the
Internet on virtually every industry. In particular, the existing and increasing
number of personal computers in the workplace and at home, improvements in the
performance and speed of personal computers and modems, the development of
easy-to-use graphical user interfaces, improvements in the network
infrastructure, the enhanced ease of access to the Internet by Internet service
providers, consumer-oriented Internet services and long-distance telephone
companies, the emergence of standards for Internet navigation and information
access and the declining costs of Internet service have all been contributing
factors to the current growth in the use of the Internet and the World Wide Web
by businesses and individuals.
The Internet and Traditional Media
The World Wide Web provides the opportunity for Internet technology
application and content providers to create products and services that are
timely, interactive, and offer information in a manner not typically produced by
traditional forms of media. While the print media can be comprehensive with
respect to its subject matter and the television broadcast media is well-suited
to conveying content with a high degree of audio and visual information, each
generally lacks interactivity, and the information provided thereby cannot be
personalized or customized. In addition, the print media lacks the ability to
provide real-time information and the television broadcast media typically
offers only a broad coverage of the subject matter. Web sites can offer the user
archives, related stories and other tools to enhance the attractiveness and
utility of the information received. The World Wide Web also makes it possible
to deliver personalized, real-time information to the user through software
applications that allow the user to customize and manipulate the information
accessed. The delivery of Internet content may be used not only to address a
user's preferences, but also to optimize, among other things, the utility
thereof based on the user's computer hardware, software and bandwidth. The
Company believes that many of the more prominent Web sites have been successful
in creating "virtual communities" by offering the user opportunities to, among
other things, congregate, trade information, make purchases and interact with
the content and/or programs. The Company believes that Web sites that have been
successful in building a "virtual community" among its users have been able to
significantly increase the number of users accessing their particular Web site.
The Company believes that new technologies developed specifically for
use on the Internet, such as the "Java" programming language developed by Sun
MicroSystems, Inc., will help to fuel continued growth in the use of the
Internet. The Java programming language represents an evolution of languages
such as "C" and "C++." It combines the simplicity of "C" with object oriented
principles found in "C++" and adds, among other things, platform independence
and what the Company believes is an effective security model. In theory, a
computer program written in Java may be run on any operating system, eliminating
the expense and work involved in porting computer code between platforms. Java
also offers security features that enable the safe execution of downloaded
computer code, which has accelerated a shift in distribution models from
shrink-wrapped software to direct electronic delivery via the Internet. Two of
the most widely used Web browsers, Netscape Navigator and Microsoft Internet
Explorer, both employ the use of Java.
Business Opportunities on the Internet
The Company believes that the leading Internet technology application
and content providers will benefit from the increasing number of Internet users
since advertisers will more likely advertise on Web sites that demonstrate a
high volume of user traffic and provide advertising programs designed for
specific demographic groups. As a result, the Company believes that a
significant opportunity exists for companies providing unique, niche
technologies, products and services on the Internet. The Company believes that a
significant opportunity exists to exploit certain niches of the Internet user
community by providing search technologies, Java-based games and gaming
technologies, and business and finance content and technology tools, and
commerce opportunities. The Company believes that the Internet market for
advertising will continue to grow in the foreseeable future. According to
Jupiter Communications, the market for Internet-
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based advertising and sponsorships amounted to approximately $55 million in
1995, and is forecast to grow to approximately $4 billion by the year 2000.
The Company believes that an important factor in the recognition of the
World Wide Web as a legitimate advertising medium is the ability to direct
advertising to specific user groups, directly distribute targeted information to
users on an individualized basis and receive timely feedback from users. Current
technology allows Web sites to monitor the demographics of their users and
deliver specific information to the advertisers and advertising agencies. The
Company believes that continued improvements in the tools and technologies used
to measure user response to advertisements on the Internet and to track
purchasing decisions should increase the effectiveness and attractiveness of
Internet-based advertising. The emerging model for advertising rates is that
advertisers pay a premium for a targeted audience. The Internet can also provide
the user with direct access to the advertiser with "click-through"
advertisements, where an electronic transaction is capable of occurring
immediately if the advertiser has a Web site capable of conducting sales and
purchases via the Internet. Another perceived advantage of Internet-based
advertising is that such advertising can be evaluated and monitored daily, and
in the future should be capable of being monitored in real-time. If an
Internet-based advertisement is not delivering the anticipated results, an
advertiser can remove the advertisement within a short period of time and
replace it with an advertisement that may be more likely to deliver the desired
results.
In light of increased growth in the number of Internet users, certain
Internet sites charge a subscription fee for users to access certain of their
products and/or services as an additional revenue source. These subscription
fees are charged to either supplement advertising revenues or as an entirely
separate revenue model. Additionally, the Company believes that the growth of
the Internet and its adaptation to commercial use presents a significant new
opportunity for merchants to reach a wider customer base. However, before
Internet commerce can experience significant growth, consumers, merchants and
financial institutions must be satisfied that the electronic manifestations of
existing payment methods are as safe, convenient and as secure as their current
counterparts. No assurance can be given that such safe, convenient and secure
Internet payments can be developed or, if developed, can be effectively used by,
or be cost efficient for, most Internet users.
STRATEGY
The inability of the Company to achieve any portion of its strategic
goals may have a material adverse effect on its business, financial condition
and operating results. There can be no assurances that the Company will be able
to achieve any of such goals and, if not so achieved, that it will be able to
develop and implement alternative strategic goals. Key elements in the Company's
strategy include:
Generate and Sustain a High Volume of Usage. The Company seeks to draw
a large number of users to the Company's Internet sites by generally providing
its products and services to users free of charge and making them as widely
accessible as possible. The Company is also focused on building its brands and
believes its brand building will be a significant contributor to usage growth in
the future.
Create Innovative Advertising Solutions. The Company believes that the
traffic flow generated on its Web sites provides an attractive platform for
measurable, targeted, cost-effective and interactive advertising on the
Internet. The Company seeks to provide differentiated solutions to advertisers,
helping them exploit the capabilities of the Internet as an advertising medium.
The Company is actively and continually seeking to develop innovative ways for
advertisers to reach their target audiences through the Internet. The Company
designs and offers customized packages that include the ability to change
advertisements quickly and frequently, to target certain demographic groups or
user profiles, to link a specific search term to an advertisement, to sponsor
specific areas, to conduct advertising campaigns with rapid result delivery and
to track daily usage statistics.
Enhance and Expand the Company's Product Offerings. The Company intends
to enhance its product offerings with additional content, features and
functionality to build and enhance its market position. The Company also plans
to incorporate into its product offerings new technologies developed internally
or licensed from other companies that it believes will further differentiate its
product offerings and provide users with a unique, value-added experience. The
Company plans to pursue integration of subscription and other commerce areas in
its existing and new Web sites.
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Provide Original, Compelling and Targeted Sites. The Company's Web
sites focus on what the Company believes are areas that are currently among the
most popular areas of interest on the Internet: search, games, and business and
finance. In addition, the Company believes that the building of a virtual
community for the products and services found on its Internet sites is an
important component in determining who chooses to access its sites.
Establish Market Awareness and Brand Recognition. The Company believes
that establishing and maintaining the go2net brand is a critical element of its
strategy. In this regard, the Company has placed significant emphasis on
establishing brand identity for its Internet sites and product offerings. The
Company's brand and corporate identity seeks to reflect an Internet company that
provides a unique, well-balanced array of Internet sites and technology
applications. The Company seeks to build and reinforce its brand through
advertising on the Internet; in trade magazines and in other traditional forms
of media; editorial coverage; and a public relations strategy that includes
frequent press releases. The Company believes that by successfully building its
brands, there will be opportunities to expand into new offerings.
Leverage Strategic Relationships. The Company seeks to leverage its
current resources and infrastructure by entering into strategic relationships
with third party developers of technologies and content. The Company believes
that these relationships will enhance the Company's product offerings while
leveraging the Company's development, sales and marketing resources. The Company
has established relationships with a number of leading information providers and
technology companies with respect to a significant portion of the information
included on the Company's Internet sites. These relationships enable the Company
to complement its proprietary offerings with information developed or compiled
by third parties.
PRODUCTS
The Company offers various Internet sites, products and services.
Internet users access these sites, products and services directly through the
go2net home page or through the individual homepages of the Company's Internet
sites.
MetaCrawler. Rated by InfoWorld magazine as the premier search service
on the World Wide Web, MetaCrawler <URL: http://www.metacrawler.com/> continues
to garner popularity and acclaim. In response to every user query, MetaCrawler
incorporates results from the top search engines on the Web. It collates
results, eliminates duplication, scores the results and provides the user with a
single, comprehensive list of sites. MetaCrawler offers a low-bandwidth version,
power-search options, and other customizable features. Additional value-added
features include the MetaCrawler Marketplace, an online shopping center; The
Ultimate Directory, a directory service; MiniCrawler, a small desktop version of
MetaCrawler; and the unique MetaSpy feature, which allows users to view other
users' queries-in-progress. In a December 1997 PC Magazine search engine review,
MetaCrawler received Editor's Choice and Readers' Picks awards.
PlaySite. PlaySite <URL: http://www.playsite.com/> offers 100% Java,
latency-tolerant, multi-user games that incorporate chat, messaging, tournaments
and player ratings. Currently in development are card games and other multi-user
games to add to PlaySite, which has been recognized as one of the premier Java
gaming sites on the World Wide Web. PlaySite has won editorial awards, and its
technical advances have been recognized by the multi-user gaming industry and
various media outlets, including CNBC, The Web magazine, Yahoo! Internet Life
magazine, P.O.V. magazine, and PC Games magazine.
StockSite. StockSite <URL: http://www.stocksite.com/> provides
investors with the tools to track their assets - and offers insights into the
financial markets. The Stock Picks area of StockSite focuses on investment
opportunities in small-cap and mid-cap companies. In addition to full research
reports and the Stock Picks virtual portfolio, StockSite features regular
commentary from industry professionals, such as The New York Observer's
Christopher Byron and William Fleckenstein, a nationally-recognized money
manager and frequent CNBC guest. StockSite also offers a customizable Java stock
ticker and research tools: quotes, interactive Java graphs, historical data,
portfolio creation, company news, company profiles, company-earnings estimates
and company filings. StockSite has been the recipient of editorial awards. The
Net magazine in October 1997 awarded StockSite the highest available marks in
all of its review categories.
Other. The Company also offers go2vision <URL:
http://www.go2net.com/vision/>, which is a Netcaster/Castanet channel (push
technology), and The Useless WWW Pages Web site <URL:
http://www.go2net.com/internet/useless>.
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STRATEGIC RELATIONSHIPS
The Company intends to leverage its current development resources and
infrastructure by entering into strategic and licensing relationships with third
party developers of content and technologies. The Company has established
relationships with a number of leading information providers. The Company has
agreements with information providers including S&P Comstock, Dow Jones &
Company, Inc., New York Stock Exchange, Inc., The Nasdaq Stock Market, Inc.,
News Alert, SportsTicker, Edgar Online, Reuters, and Market Guide Inc. The
Company has also established a relationship with InterNAP Network Services,
L.L.C., a Seattle-based private NAP (network access point). The InterNAP
headquarters, where the Company's servers are located, maintains multiple DS-3
circuits with some of the largest Internet service providers. This relationship
helps to maximize the speed and accessibility of the Company's Web sites for
users.
In January 1997, the Company licensed the MetaCrawler Service from
Netbot. See "- Metacrawler License Agreement."
The Company also has ongoing advertising barter relationships with
various Internet companies and Web sites, which the Company believes help it
enhance its brand recognition and potentially expand its user base.
REVENUE SOURCES
Advertisers -- As of December 15, 1997, the Company had relationships
with over 70 cash-paying advertisers, including Microsoft, Hewlett Packard,
AT&T, GTE, QVC, Merrill Lynch, and Charles Schwab. In addition, the Company had
barter arrangement with 4 other advertisers with respect to the trading of
advertisement impressions on each other's Internet site. The typical advertiser
being sought by the Company for its Internet sites is a large corporation or
organization that currently advertises nationally in print, radio, television or
electronic media, in addition to other types of corporations or organizations
that currently advertise in electronic media. The Company seeks to establish
advertising relationships with potential advertisers through its own advertising
sales department and to supplement these efforts from time to time through
national advertising agencies and independent advertising sales agencies. The
pricing strategy is generally based on the number of impressions delivered or
sponsorship of certain areas, with the goal of incentivizing advertisers to sign
long-term agreements. No assurance, however, can be given that such strategy
will result in significant advertising revenues to the Company.
Subscriptions, Memberships, Licensing, Commerce, and Other
Transactions: The Company believes that there may be possibilities to segment
certain areas on the Company's Internet sites as subscription areas. The Company
is considering plans to offer subscription services in 1998, although there can
be no assurance that the Company will be able to initiate or successfully
operate any subscription areas. The Company also offers for sale products and
services from certain of its advertisers, for which it, in certain cases, gets a
percentage of any revenues generated. There can be no assurance that the Company
will be able to maintain or successfully operate electronic commerce, for itself
or its advertisers, through its Web sites. The Company also seeks to license
certain internally developed technologies in use on the companies Internet sites
to third parties. There can be no assurance that the Company will be able to
successfully license any of such technologies to third parties.
ADVERTISING SALES
As of December 15, 1997, the Company's advertising sales staff and
advertising sales support staff consisted of twelve full-time employees located
at the Company's executive offices in Seattle, Washington. In addition, the
Company has relationships with two independent advertising sales agencies. The
Company expects that its Internet-based advertising revenues will be derived
from the sale of advertising and sponsorships by the Company's direct sales
department supplemented by independent advertising sales agencies. As of
December 15, 1997, the Company had relationships with over 70 cash-paying
advertisers. While the Company has developed and is implementing the advertising
sales strategy described in this Report, there can be no assurance that such
strategy will be successful in achieving its objectives.
The Company believes that the sponsorship of Internet-based products
and services will play an increasingly important role in generating advertising
revenues. The World Wide Web is relatively new to
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sponsorships, but this concept has been around for almost 50 years in
traditional forms of media, originating back in the days of Kraft Television
Theater (1947) and the Texaco Star Theater (1948) and continuing today through
corporate sponsorship of various forms of entertainment, such as sporting events
and concerts. The Company believes that tasteful, authentic sponsorships will
lead the user to believe that the sponsor is not being forced upon them, but
rather is presenting a value-added product and/or service.
The Company offers each of its advertisers the opportunity to access
the number of times their advertisements are viewed on a daily basis through a
private, dedicated URL located on the Company's Web servers. The Company
believes that this process makes it easier for the advertiser to monitor the
success of a particular advertisement on a daily basis, and gives the advertiser
more confidence in the accuracy of the number of advertisement impressions
delivered on the Company's Web site. In order to further serve the advertiser,
the Company has from time to time established a page on its Web sites where
users are asked to respond to a short survey in return for the opportunity to
win prizes. The Company believes that the demographic information derived from
such surveys may result in generating more interest in specific sites and
attracting advertiser interest. No assurance, however, can be given that
advertisers will find such surveys of use or value to them.
Use of the Internet by consumers is at a very early stage of
development, and market acceptance of the Internet as a medium for information,
entertainment, commerce and advertising is subject to a high level of
uncertainty. The Company believes that its success depends upon its ability to
obtain significant revenues from its Internet operations, which will require the
development and acceptance of the Internet as an advertising medium. The Company
believes that most advertisers and advertising agencies have limited experience
with the Internet as an advertising medium and neither advertisers nor
advertising agencies have devoted a significant portion of their advertising
budgets to Internet-related advertising to date. In order for the Company to
generate advertising revenues, advertisers and advertising agencies must direct
a portion of their budgets to the Internet as a whole, and specifically to the
Company's Internet sites. There can be no assurance that advertisers or
advertising agencies will be persuaded, or able, to allocate or continue to
allocate portions of their budgets to Internet-based advertising, or if so
persuaded or able, that they will find Internet-based advertising to be more
effective than advertising in traditional media such as television, print or
radio, or in any event decide to advertise on the Company's Internet sites.
Moreover, there can be no assurance that the Internet advertising market will
develop as an attractive and sustainable medium, that the Company will achieve
market acceptance of its products and services or that the Company will be able
to execute its business strategy successfully. Acceptance of the Internet among
advertisers and advertising agencies will also depend on the level of use of the
Internet by consumers, which is highly uncertain, and on the acceptance of the
alternative new model of conducting business and exchanging information
presented by the Internet. Advertisers and advertising agencies that have
invested resources in traditional methods of advertising may be reluctant to
modify their media buying behavior or their systems and infrastructure to use
Internet-based advertising. Furthermore, no standards to measure the
effectiveness of Internet-based advertising have yet gained widespread
acceptance, and there can be no assurance that such standards will be adopted or
adopted broadly enough to support widespread acceptance of Internet-based
advertising. If Internet-based advertising is not widely accepted by advertisers
and advertising agencies, the Company's business, financial condition and
operating results will be materially adversely affected and the Company may
cease to be a commercially viable enterprise.
MARKETING
The Company's marketing strategy is to enhance, promote and support a
perception that the Company's Internet sites and product offerings are both
original and compelling. The Company believes that it is necessary to provide
Internet users with products and services that allow them a unique, value-added
experience. To that end, the Company has focused on developing and offering
Internet sites and technologies in areas where it believes it is positioned to
offer unique, value-added products and services. This enhances the ability of
the Company to provide Internet sites that it believes to be both original and
compelling, as well as unique to the Internet medium.
The Company currently is focusing on a marketing strategy to establish
and maintain the go2net brand that includes informing search/index guides and
information Web sites about the Company's Internet sites; periodic press
releases promoting the Company's Internet sites and new products, services and
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technologies; important hires and other strategic relationships; and advertising
on Web sites and in trade magazines. In addition, the Company's public relations
strategy includes the development of relationships with various media to
encourage editorial and press coverage.
The Company believes that having a combination of a strong brand
identity and unique product offerings is an approach that has been successful to
date for certain of the prominent Internet sites. In order to implement its
marketing plan and enhance its development efforts, the Company intends to
routinely gather information regarding the types of products and services that
Internet users seek. The Company intends to monitor users' needs and preferences
primarily by periodically conducting focus groups and encouraging users to
provide input in the form of electronic mail, or soliciting such opinions
through surveys completed in conjunction with contests conducted by the Company.
Each of these elements of the Company's marketing plan will depend upon
the Company's ability to provide original and compelling products and services,
which cannot be assured. If Internet users do not perceive the Company's
Internet sites to be such, or if the Company introduces new products, services
or Web sites, or enters into new business relationships or strategies that are
not favorably received, the Company would likely be unsuccessful in promoting
and implementing its marketing plan. Furthermore, in order to attract and retain
users and to promote and implement its marketing plan, particularly in response
to competitive pressures, the Company may find it necessary to commit greater
financial and personnel resources to providing its Internet sites or creating or
maintaining its brand recognition. If the Company is unable to provide the
contemplated products and services or otherwise fail to establish and maintain
brand recognition, or if the Company incurs excessive expenses in an attempt to
improve its products and services or implement its marketing plan, the Company's
business, financial condition and operating results would be materially
adversely affected.
RESEARCH AND DEVELOPMENT
A focus of the Company's research and development efforts is the
enhancement of its technology applications and content through the use of
Java-based software applications. The Company's programming staff devotes a
portion of its time and efforts to the development of Java and other software
applications, which are primarily used in connection with existing Company
Internet sites and offerings. No assurance can be given that the Company will be
able to develop enhancements to its product offerings or develop any new
Java-based software applications, or if so developed, that such enhancements or
applications will be commercially viable. Product development expenses for the
year ended September 30, 1997 and the period from inception through the
Company's year ended on September 30, 1996 were $548,706 and $137,159,
respectively.
COMPETITION
The market for Internet products and services is highly competitive.
Furthermore, the Company expects the market for Internet advertising to become
intensely competitive as there are no substantial barriers to entry. The Company
believes the principal competitive factors in this market are name recognition,
performance, ease of use, variety of value-added products and services, features
and quality of support.
The Company competes with other Internet sites for the time and
attention of consumers and for advertising and subscription revenues.
Competition among Internet sites is intense and is expected to increase
significantly in the future. The Company's Internet sites compete against a
variety of companies that provide similar offerings through one or more media,
such as print, radio, television and the Internet. To compete successfully, the
Company must develop and deliver popular, original, entertaining, informative
and compelling product offerings to attract Internet users and to support
advertising and, in the future, subscription fees. In the Company's areas of
focus of search, games, and business and finance, in addition to competing with
numerous newspapers, magazines, television programs and radio broadcasts that
cover the same material, the Company competes with various companies and
Internet sites, such as Starwave Corporation, Microsoft Corporation, c/net,
Inc., America OnLine, Inc., MGM Interactive, Inc., CompuServe, Inc., Prodigy
Services Co., Excite, Inc., Infoseek Corporation, Lycos, Inc., Netscape
Communications Corporation, Time Warner, Inc., PointCast Incorporated, SOFTBANK
Corporation, Yahoo! Inc., SportsLine USA, Inc. and Wired Ventures, Inc. Many, if
not all, of these competitors also offer a wider range of products and services
than does the Company, which products and services may be sufficiently
attractive to Internet users to attract users to their services and,
consequently, dissuade them
9
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from accessing the Company's Internet sites. If the Company is unable to
continue to attract a significant number of Internet users to its Internet
sites, the Company's business, financial condition and operating results will be
materially adversely affected and the Company may cease to be a commercially
viable enterprise.
The market for Internet-based products and services is relatively new,
intensely competitive and rapidly evolving. There are minimal barriers to entry,
and current and new competitors can launch new Internet sites at relatively low
cost within relatively short time periods. In addition, the Company competes for
the time and attention of Internet users with thousands of non-profit Internet
sites operated by, among other persons, individuals, government and educational
institutions. Existing and potential competitors also include magazine and
newspaper publishers, cable television companies and start-up ventures attracted
to the Internet market. Accordingly, the Company expects competition to persist
and intensify and the number of competitors to increase significantly in the
future. Should the Company seek in the future to attempt to expand the scope of
its product offerings, it will compete with a greater number of Internet sites
and other companies. Because the operations and strategic plans of existing and
future competitors are undergoing rapid change, it is extremely difficult for
the Company to anticipate which companies are likely to offer competitive
products and services in the future. There can be no assurance that the
Company's Internet sites and product offerings will compete successfully.
The Company believes that the competitive factors attracting Internet
users include the quality of presentation and the relevance, timeliness, depth
and breadth of information and services offered by the Company. With respect to
attracting advertisers and advertising agencies, the Company believes that the
competitive factors include, among others, the number of users accessing the
Company's Internet sites, the demographics of such user base, the Company's
ability to deliver focused and compelling advertising and interactivity through
its Internet sites, and the overall cost-effectiveness and value of advertising
offered by the Company. In addition, the success of the Company's business
strategy depends on the sale of future Internet advertising at premium prices,
based in part on the demographic characteristics of the Company's Internet
users. With respect to attracting subscription-based users in the future, the
Company believes that the competitive factors include, among others, the
quality, uniqueness and usefulness of the product or service provided, the price
charged for such product or service and the cost and accessibility of similar
products and services through the Internet or competing media. Given the intense
competition among Internet sites and other media, there can be no assurance that
the Company will be able to compete successfully with respect to any of these
factors.
Many, if not all, of the Company's current and potential competitors
have significantly greater financial, editorial, technical and marketing
resources, longer operating histories, greater name recognition, and greater
experience than the Company; and also have established relationships with more
advertisers and advertising agencies. Many, if not all, of such competitors may
be able to undertake more extensive marketing campaigns, adopt more aggressive
advertising and subscription price policies and devote substantially more
resources to developing Internet-based products and services than the Company.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect the Company's business, financial
condition and operating results. In addition, in response to competitive
pressures, the Company may make certain pricing, business development and/or
marketing decisions, or enter into acquisitions or new ventures that could have
a material adverse effect on the Company's business, financial condition and
operating results.
EMPLOYEES
As of September 30, 1997, the Company had a total of 23 employees all
of whom were based at the Company's executive offices in Seattle, Washington. Of
the total of 23 employees, 6 were in sales and marketing, 2 were in providing
and editing content for the Internet sites, 6 were in programming, 4 in design,
quality assurance, technical support, documentation and product development, and
5 were in administrative and finance functions. In addition, as of September 30,
1997, the Company had agreements with 7 independent contractors to provide
various services. None of the Company's employees are represented by a labor
union and the Company considers its employee relations to be good.
INTELLECTUAL PROPERTY
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The Company is dependent upon obtaining existing technology related to
its operations. To the extent new technological developments are unavailable to
the Company on terms acceptable to it or if at all, the Company may be unable to
continue to implement its business plan and its business, financial condition
and operating results would be materially adversely affected.
The success of the Company is dependent upon its ability to protect and
leverage the value, if any, of its original Internet technologies, software,
content and its trademarks, trade names, service marks, domain names and other
proprietary rights it either currently has or may have in the future. The
Company has filed service marks for its logo and name, as well as for the names
of each of its Internet sites. In addition, given the uncertain application of
existing copyright and trademark laws to the Internet, there can be no assurance
that existing laws will provide adequate protection for the Company's
technologies, Internet sites or domain names. Policing unauthorized use of the
Company's technologies, content and other intellectual property rights entails
significant expenses and could otherwise be difficult or impossible to do given,
among other things, the global nature of the Internet.
METACRAWLER LICENSE AGREEMENT
On January 31, 1997, The Company and Netbot entered into the
MetaCrawler License Agreement pursuant to which Netbot granted the Company an
exclusive (subject to certain limited exceptions), worldwide license to provide
the MetaCrawler Service. As part of the MetaCrawler License Agreement, the
Company has the exclusive right to operate, modify and reproduce the MetaCrawler
Service (including, without limitation, the exclusive right to use, modify and
reproduce the name "MetaCrawler" and the MetaCrawler URL in connection with the
operation of the MetaCrawler Service). Netbot licensed the MetaCrawler Service
and the other intellectual property rights associated therewith from the
University of Washington ("UW") on an exclusive basis. The license has been
granted to the Company by Netbot on an exclusive basis, but Netbot has reserved
the right to use, modify, reproduce and license the MetaCrawler search engine
for any purpose other than the provision of the MetaCrawler Service and the
license is subject to the rights of UW to use, modify and reproduce the
MetaCrawler search engine and derivatives of the MetaCrawler site to operate
Internet sites for internal purposes within the UW domain and to use, modify and
reproduce any of the licensed technologies for research, instructional and
academic purposes. The search technology underlying the MetaCrawler Service and
the MetaCrawler trademark is licensed to or owned by Netbot and sublicensed to
the Company pursuant to the MetaCrawler License Agreement. A substantial portion
of the traffic to the Company's Internet sites is currently derived from users
of the MetaCrawler Service. Although the MetaCrawler License Agreement may be
terminated by Netbot only upon a material default by the Company thereunder, the
termination of the MetaCrawler License Agreement could have a material adverse
effect on the Company's business, financial condition and operating results.
Moreover, the termination of the License Agreement between UW and Netbot
relating to Netbot's license of the MetaCrawler Service would result in the
inability of the Company to continue to provide the MetaCrawler Service under
the MetaCrawler License Agreement, which could have a material adverse effect on
the Company's business, financial condition and operating results. In addition,
any failure by the Company to continue the MetaCrawler Service for any reason
could have a material adverse effect on the Company's business, financial
condition and operating results.
The MetaCrawler License Agreement provided for an initial license fee
of $100,000 to be paid by the Company to Netbot. The Company is also required to
pay Netbot up to $20,000 on a quarterly basis in 1997 if the average daily
queries made through the MetaCrawler Service exceed certain targets. As of
September 30, 1997, all such targets have been exceeded and all such payments
have been made. In the event certain specified search engines remain available
through the MetaCrawler Service after the first anniversary of the date of the
MetaCrawler License Agreement, the Company is required to pay Netbot an
additional fee of $50,000. In addition, commencing on January 1, 1999, the
Company is required to pay to Netbot an annual fee of $25,000. The Company has
agreed to pay Netbot annual royalties based on the Company's gross revenues
received from the MetaCrawler Service, which royalties will be reduced by the
$25,000 minimum annual payment.
PLAYSITE ACQUISITION
On July 22, 1997, the Company announced that it had formed a multi-user
gaming network through its July 15, 1997 acquisition of PlaySite <URL:
http://www.playsite.com>, a Java-based multi-user games site, and certain gaming
infrastructure technology from Internet Games Corporation for $500,000 in cash
and 16,667 shares of the Company's common stock. PlaySite is based on a
proprietary, 100% Java,
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multi-user communication system and game-building toolkit. Through PlaySite, the
Company is focused on developing latency-tolerant multi-user board, card,
trivia, party, adventure and simulation games, as well as chat, messaging and
bulletin boards. The Company also plans to develop certain proprietary, original
games based on the PlaySite technology.
GOVERNMENT REGULATIONS
As a publisher and a distributor of content over the Internet, the
Company faces potential liability for defamation, negligence, copyright, patent
or trademark infringement and other claims based on the nature and content of
the materials that it publishes or distributes. Such claims have been brought,
and sometimes successfully pressed, against Internet services. In addition, the
Company could be exposed to liability with respect to the content or
unauthorized duplication of material indexed in its search services. Although
the Company carries general liability insurance, the Company's insurance may not
cover potential claims of this type or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability that
is not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on the Company's business, financial condition and
operating results.
As a provider of Internet content, the Company is subject to the
provisions of existing and future United States federal legislation that can be
applied to the Company's undertakings. Although there are currently few laws and
regulations directly applicable to the Internet, it is possible that new laws
and regulations will be adopted covering issues such as, among other things,
privacy, copyrights, obscene or indecent communications and the pricing,
characteristics and quality of Internet-based products and services. The
adoption of restrictive laws and regulations could decrease the growth of the
use of the Internet or expose the Company to significant liabilities associated
with content available on or through the Company's Internet sites or otherwise
cause a material adverse effect on the Company's business, financial condition
and operating results. Application to the Internet of existing laws and
regulations governing issues such as, among other things, property ownership,
libel and personal privacy is also subject to substantial uncertainty.
The adoption of such laws and regulations and the potential adoption of
new and more restrictive laws and regulations may decrease the growth of the
Internet, which in turn could decrease the attractiveness of the Company's
Internet sites and reduce the demand for advertising thereon. In addition, the
need to monitor and comply with existing and future laws and regulations will
increase the Company's cost of doing business. Moreover, the applicability to
the Internet of existing laws governing issues such as property ownership, libel
and personal privacy is uncertain.
ITEM 2. PROPERTIES
The Company's executive offices are located in downtown Seattle,
Washington in an office building in which the Company leases 13,481 square feet
under a sublease that expires in September 2003. The Company believes its office
space will be adequate for its needs for the present and the immediate future.
The Company's operations are dependent in part upon its ability to
protect against physical damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events. The Company does not
have a disaster recovery plan or sufficient business interruption insurance to
compensate it for losses that may occur as a result of any of these events. The
occurrence of any of these events could result in interruptions, delays or
cessation in service to users of the Company's Internet sites, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings that it
believes could have, either individually or in the aggregate, a material adverse
effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended September 30, 1997.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10-K with respect to executive
officers of the Company is set forth below. Executive officers of the Company
are elected by the Board of Directors on an annual basis and serve until their
successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.
The executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------------------------------------------
<S> <C> <C>
Russell C. Horowitz....................................... 31 President, Chief Executive Officer,
Chief Financial Officer, and
Chairman of the Board
John Keister.............................................. 31 Chief Operating Officer, Director
Paul S. Phillips.......................................... 25 Chief Technology Officer
</TABLE>
RUSSELL C. HOROWITZ IS a founder of the Company and has served as its
President, Chief Executive Officer, Chief Financial Officer and a director since
its inception in February 1996. In March 1996, Mr. Horowitz founded Xanthus
Capital, L.P., a Seattle, Washington-based merchant bank that focuses primarily
on developing companies in emerging growth industries or special situations. Mr.
Horowitz serves as the Chief Executive Officer and a director of Xanthus
Management, L.L.C., the general partner of Xanthus Capital, L.P., and of DMR
Investments, L.L.C., the investment advisor to Xanthus Capital, L.P. In July
1992, Mr. Horowitz was a founder of Active Apparel Group, Inc., a New York, New
York-based apparel supplier. From 1992 until April 1994, Mr. Horowitz served as
its Chief Financial Officer; and from May 1994 until May 1997, Mr. Horowitz
served as its Director of Corporate Development and Investor Relations. Prior to
July 1992, Mr. Horowitz served as a financial advisor to start-up and developing
companies. Mr. Horowitz received a B.A. in Economics from Columbia College of
Columbia University in 1988.
JOHN KEISTER is a founder of the Company and has served as the
Company's Chief Operating Officer since its inception in February 1996 and since
September 1997 as a director. From 1994 to February 1996, Mr. Keister served as
the President, Chief Operating Officer and a director of ViewCom Technology
International, Inc., a Seattle, Washington-based computer software developer.
From 1992 to 1994, Mr. Keister managed European marketing operations for Dorian
International, Inc., a White Plains, New York-based export management company.
Mr. Keister received a B.A. in International Affairs and Philosophy from
Occidental College in 1989.
PAUL S. PHILLIPS has served as the Company's Vice President -
Technology since July 1996 and since July 1997 as Chief Technology Officer. Mr.
Phillips is a contributing author of the Internet Security Professional
Reference. In addition, Mr. Phillips has written for Internet Advisor magazine
and is a frequent contributor in numerous technical forums. From September 1990
to May 1996, Mr. Phillips was a student at the University of California at San
Diego. While at the University of California at San Diego, Mr. Phillips served
as lead Web developer and Internet security consultant at Primus Consulting from
July 1994 to August 1995 and as systems administrator of CERFNet and systems
administrator and Webmaster of InterNIC from October 1993 to October 1994. Mr.
Phillips received a B.S. in Computer Science from the University of California
at San Diego in 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of the Company has traded on the NASDAQ SmallCap
Market under the symbol "GNET" and The Boston Stock Exchange under the symbol
"GO" since the Company's initial public offering on April 23, 1997. Prior to
that time, there was no public market for the Company's Common Stock. The
following table sets forth the high and low last reported sales prices for the
Company's Common Stock for the period indicated as reported by the NASDAQ
SmallCap Market.
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<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
-----------------------------------------------------------------------------
<S> <C> <C>
June 30, 1997 (commencing April 23, 1997) 11 5 1/4
September 30, 1997 9 13/16 5 5/8
December 31, 1997 (through December 15, 1997) 10 1/4 7 1/16
</TABLE>
As of December 15, 1997, the Company had 4,506,217 shares of Common
Stock outstanding held by approximately 68 shareholders of record. This does not
reflect persons or entities who hold their stock in nominee or "street" name
through various brokerage firms.
The Company has not paid dividends on its Common Stock. The Company
anticipates it will continue to reinvest earnings to finance future growth, and
therefore does not intend to pay dividends in the foreseeable future.
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ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth financial data and other operating
information of the Company. The selected financial data presented in the table
is derived from the financial statements of the Company, which have been audited
by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Report.
<TABLE>
<CAPTION>
- ------------------------------------------------------ -------------------------- -------------------------
PERIOD
FROM INCEPTION
YEAR ENDED (FEBRUARY 12, 1996)
SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996
- ------------------------------------------------------ -------------------------- -------------------------
STATEMENT OF OPERATIONS DATA:
- ------------------------------------------------------ -------------------------- -------------------------
<S> <C> <C>
Revenues $254,389 $ 0
- ------------------------------------------------------ -------------------------- -------------------------
Cost of revenues 180,253 0
- ------------------------------------------------------ -------------------------- -------------------------
Operating expenses:
Advertising and marketing 77,958 10,150
Product development 548,706 137,159
General and administrative 1,436,224 283,832
----------- ---------
Total operating expenses 2,062,888 431,141
----------- ---------
- ------------------------------------------------------ -------------------------- -------------------------
Loss from operations (1,988,752) (431,141)
- ------------------------------------------------------ -------------------------- -------------------------
Interest income 270,072 13,383
----------- ---------
- ------------------------------------------------------ -------------------------- -------------------------
Net loss $(1,718,480) $(417,757)
=========== =========
- ------------------------------------------------------ -------------------------- -------------------------
Net loss per share $ (0.50) $ (0.16)
- ------------------------------------------------------ -------------------------- -------------------------
Shares used in computing net loss per share (1) 3,464,489 2,548,680
- ------------------------------------------------------ -------------------------- -------------------------
- ------------------------------------------------------ -------------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------ -------------------------- -------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
---- ----
- ------------------------------------------------------ -------------------------- -------------------------
BALANCE SHEET DATA:
- ------------------------------------------------------ -------------------------- -------------------------
<S> <C> <C>
Cash and cash equivalents $ 10,891,801 $ 865,742
- ------------------------------------------------------ -------------------------- -------------------------
Working capital 10,910,894 828,860
- ------------------------------------------------------ -------------------------- -------------------------
Total assets 12,619,714 1,066,241
- ------------------------------------------------------ -------------------------- -------------------------
Total liabilities 185,393 45,098
- ------------------------------------------------------ -------------------------- -------------------------
Stockholders' equity 12,434,321 1,021,143
- ------------------------------------------------------ -------------------------- -------------------------
- ------------------------------------------------------ -------------------------- -------------------------
</TABLE>
(1) Net loss per share is calculated using the weighted average number of
shares of Common Stock outstanding during such period. See Note 1 to
Financial Statements.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE MATTERS DISCUSSED IN THIS REPORT CONTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS
AFFECTING THE COMPANY'S BUSINESS OPERATING RESULTS AND FINANCIAL CONDITION" AS
WELL AS THOSE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company was incorporated on February 12, 1996 and is an interactive
technology company that operates a group of Web sites and develops software.
MetaCrawler <URL: http://www.metacrawler.com/> is a search/index guide that
combines various existing search/index guides into one guide (a "metasearch
engine"); PlaySite <URL: http://www.playsite.com/> is a Java-based multi-user
games network; and StockSite <URL: http://www.stocksite.com/> offers proprietary
articles, portfolio tracking tools, company research and news relating to
business and finance. The Company focuses on utilizing innovative technologies
to deliver its content and to enhance the attractiveness and utility of its
product offerings. For the fiscal year ended September 30, 1997, approximately
64% of the Company's revenues were generated from non-cash barter transactions.
The Company has an extremely limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company
anticipates that advertising revenues from the Company's Internet sites will
constitute substantially all of the Company's revenues during the foreseeable
future. Because the Company anticipates that its operations will incur
significant operating losses for the foreseeable future, the Company believes
that its success will depend upon its ability to obtain revenues from
advertising on its Internet sites, which cannot be assured. The Company's
ability to generate revenues is subject to substantial uncertainty. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by start-up companies in general, and
specifically with respect to the new and rapidly evolving market for
Internet-based products and services. To address these risks, the Company must,
among other things, effectively establish, develop and maintain relationships
with advertising customers, advertising agencies and other third parties,
provide original and compelling products and services to Internet users, develop
and upgrade its technology, respond to competitive developments, attract new
qualified personnel and retain existing qualified personnel. There can be no
assurance that the Company will succeed in addressing such risks and the failure
to do so would have a material adverse effect on the Company's business,
financial condition and operating results. Additionally, the Company's lack of
an extensive operating history makes prediction of future operating results
difficult. Accordingly, there can be no assurance that the Company will be able
to generate significant revenues or that the Company will achieve, or maintain,
profitability or generate revenues from operations in the future. Since
inception, the Company has incurred significant losses and, as of September 30,
1997, had an accumulated deficit of $2,136,327. The Company currently intends to
increase substantially its operating expenses in order to, among other things,
expand and improve its Internet operations, fund increased advertising and
marketing efforts, expand and improve its Internet user support capabilities and
develop new Internet technologies, applications and other products and services.
The Company expects to continue to incur significant losses on a quarterly and
annual basis for the foreseeable future. To the extent such increases in
operating expenses are not offset by revenues, the Company will incur greater
losses than anticipated.
The Company's quarterly operating results may fluctuate significantly
as a result of a variety of factors, many of which are outside of the Company's
control. Factors that may adversely affect the Company's quarterly operating
results include the level of use of the Internet, demand for advertising,
seasonal trends in both Internet use and advertising placements, the addition or
loss of advertisers, advertising budgeting cycles of individual advertisers, the
level of use of the Company's Internet sites, the amount and timing of capital
expenditures and other costs relating to the development, operation and
expansion of the Company's Internet operations, the introduction of new sites
and services by the Company or its competitors, price competition or pricing
changes in the industry, technical difficulties or system failures, general
economic conditions and economic conditions specific to the Internet and
Internet media. In seeking to effectively execute its operating strategy, the
Company may elect from time to time to make certain advertising and marketing or
acquisition decisions that could have a material adverse effect on the Company's
business, financial condition and operating results. The Company believes that
period to period
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<PAGE> 17
comparisons of its operating results are not meaningful and should not be relied
upon for an indication of future performance. Due to all of the foregoing
factors, it is likely that in some future quarters, the Company's operating
results may be below the expectations of public market analysts and
stockholders. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
RESULTS OF OPERATIONS
REVENUES
For the year ended September 30, 1997, the Company generated revenues
of $254,389, of which $90,999 represented cash revenues from advertising sales
and $163,390 represented barter transaction revenues. The Company did not launch
its initial Internet site until November 7, 1996 at which time it was still in
the process of evaluating the technical features of the site.
COST OF REVENUES
For the year ended September 30, 1997, the Company incurred $180,253 in
costs associated with barter transactions, commissions and royalties, of which
$163,390 represented barter transaction expenses. There can be no assurance that
the Company will be able to generate sufficient revenues, advertising or
otherwise, to cover its costs of revenues. The failure to generate sufficient
revenues in order to cover its costs of revenues will result in continued losses
and will have a material adverse effect on the Company's business, financial
condition and operating results.
OPERATING EXPENSES
Advertising and Marketing. Advertising and marketing expenses consist
primarily of public relations, travel and costs of marketing literature.
Advertising and marketing expenses incurred by the Company for the year ended
September 30, 1997 and the period from inception through the Company's year
ended September 30, 1996 were $77,958 and $10,150, respectively. The Company
intends to significantly increase its advertising and marketing expenses in
future periods.
Product Development. Product development expenses consist of expenses
incurred by the Company in the development and creation of its Internet sites
and product offerings. Product development expenses include compensation and
related expenses, costs of computer hardware and software, and the cost of
acquiring, designing, and developing Internet technologies, products and
services. All of the costs incurred to date in connection with the development
of the Company's Internet sites have been expensed. Product development expenses
incurred by the Company for the year ended September 30, 1997 and the period
from inception through the Company's year ended September 30, 1996 were $548,706
and $137,159, respectively. The Company believes that significant investments in
enhancing its Internet sites and product offerings will be necessary to be
competitive. As a result, the Company may continue to incur, or increase the
level of, product development expenses.
General and Administrative. General and administrative expenses consist
primarily of compensation not otherwise attributable to development expenses,
rent expense, fees for professional services and other general expenses. General
and administrative expenses incurred by the Company for the year ended September
30, 1997 and the period from inception through the Company's year ended
September 30, 1996 were $1,436,224 and $283,832, respectively. The Company
expects general and administrative expenses to significantly increase in future
periods as a result of, among other things, the additional costs of being a
public company.
Interest Income. The increase in interest income is due to the funds
available for investment as a result of the Company's initial public offering.
Interest income for the year ended September 30, 1997 and the period of
inception through the Company's year ended September 30, 1996 was $270,272 and
$13,383, respectively.
Income Taxes. The Company has not recorded an income tax benefit
because it has incurred net operating losses since its inception. As of
September 30, 1997, the Company had Federal net operating loss carry forwards of
approximately $2,130,000. The Federal net operating loss carry forwards will
expire beginning in 2011 if not utilized. Utilization of the net operating
losses and credits may be subject to a
17
<PAGE> 18
substantial annual limitation due to the ownership change limitations provided
in the Internal Revenue Code of 1986, as amended, and similar state provisions.
See Note 3 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's principal source of liquidity was
$10,891,801 in cash and cash equivalents derived primarily from the Company's
initial public offering in April and May 1997, in which it issued 1,840,000
shares of its Common Stock to the public at a price of $8.00 per share. The
Company received approximately $12.8 million in cash, net of underwriting
discounts, commissions and other offering costs. As of September 30, 1997, the
Company also had a $750,000 revolving line of credit with a commercial bank,
which on December 13, 1997 was amended to a $1,000,000 revolving line of credit
that expires on December 13, 1998. All borrowings under such line of credit
accrue interest at such bank's prime annual lending rate plus 1%. As of
September 30, 1997, no borrowings were outstanding under this line of credit.
The Company has primarily financed its operations through the sale of equity
securities.
Capital expenditures were $448,318 and $197,202 for the year ended
September 30, 1997 and the period from inception through the Company's year
ended September 30, 1996, respectively. The Company has no material commitments
for capital expenditures other than approximately $100,000 relating to the
purchase of computer hardware and software. The Company anticipates a
substantial increase in its capital expenditures in 1998 consistent with its
anticipated growth.
The Company currently believes that available funds, cash flows
expected to be generated from operations, if any, and the existing line of
credit will be sufficient to fund its working capital and capital expenditures
requirements for at least the next twelve months. Thereafter, the Company may
need to raise additional funds. The Company's ability to grow will depend in
part on the Company's ability to expand and improve its Internet operations,
expand its advertising and marketing efforts, expand and improve its Internet
user support capabilities and develop new Internet-based products and services.
In connection therewith, the Company may need to raise additional capital in the
foreseeable future from public or private equity or debt sources in order to
finance such possible growth. In addition, the Company may need to raise
additional funds in order to avail itself to unanticipated opportunities (such
as more rapid expansion, acquisitions of complementary businesses or the
development of new products or services), to react to unforeseen difficulties
(such as the loss of key personnel or the rejection by Internet users or
potential advertisers of the Company's Internet products and services) or to
otherwise respond to unanticipated competitive pressures. If additional funds
are raised through the issuance of equity securities, then the percentage
ownership of the Company's then existing stockholders will be reduced,
stockholders may experience additional and significant dilution and such equity
securities may have rights, preferences or privileges senior to those of the
Company's Common Stock. There can be no assurance that additional financing will
be available on terms acceptable to the Company or at all. If adequate funds are
not available or are not available on terms acceptable to the Company, the
Company may be unable to implement its business, sales or marketing plan,
respond to competitive forces or take advantage of perceived business
opportunities, which could have a material adverse effect on the Company's
business, financial condition and operating results.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
Extremely Limited Operating History; Accumulated Deficit; Anticipated
Losses. The Company was incorporated in February 1996 and as of September 30,
1997 had generated only $90,999 in cash revenues from advertising sales. The
Company has an extremely limited operating history upon which an evaluation of
the Company and its prospects can be based. The Company anticipates that
advertising revenues from the Company's Internet sites will constitute
substantially all of the Company's revenues, if any, during the foreseeable
future. Since the Company anticipates that its operations will incur significant
operating losses for the foreseeable future, the Company believes that its
success will depend upon its ability to obtain revenues from advertising on its
Internet sites, which cannot be assured. The Company's ability to generate
revenues is subject to substantial uncertainty. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by start-up companies in general, and specifically with respect to
the new and rapidly evolving market for Internet-based products and services. To
address these risks, the Company must, among other things, effectively
establish, develop and maintain relationships with advertising customers,
advertising agencies and other third parties, provide original and compelling
products and services to Internet users, develop and upgrade its technology,
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effectively respond to competitive developments, attract new qualified personnel
and retain existing qualified personnel. There can be no assurance that the
Company will succeed in addressing such risks and the failure to do so would
have a material adverse effect on the Company's business, financial condition
and operating results. Additionally, the Company's lack of an extensive
operating history makes prediction of future operating results difficult.
Accordingly, there can be no assurance that the Company will be able to generate
significant revenues or that the Company will achieve, or maintain,
profitability or generate revenues from operations in the future. Since
inception, the Company has incurred significant losses and, as of September 30,
1997, had an accumulated deficit of $2,136,327. The Company currently intends to
increase substantially its operating expenses in order to, among other things,
expand and improve its Internet operations, fund increased advertising and
marketing efforts, expand and improve its Internet user support capabilities and
develop new Internet technologies, products and services. The Company expects to
continue to incur significant losses on a quarterly and annual basis for the
foreseeable future.
Unpredictability of Future Revenues; Potential Fluctuations in
Quarterly Operating Results. As a result of the Company's extremely limited
operating history and the emerging nature of the Internet, including
Internet-based advertising, subscription services and electronic commerce, the
Company is unable to forecast its expenses and revenues accurately. The Company
believes that due primarily to the relatively brief time the Internet has been
available to the general public, there has not yet been developed, implemented
and demonstrated a commercially viable business model from which to successfully
operate any form of Internet-based product and/or service business. The
Company's current and future estimated expense levels are based largely on its
estimates of future revenues and may increase because many of its significant
operating expenses are either fixed, such as rent for office space, or subject
to likely increases. Few, if any, of the Company's operating expenses can be
quickly or easily reduced, such as the laying off of personnel, in a manner
which would not cause a material adverse effect to the Company's business,
financial condition and operating results. In addition, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
expenditures; and a shortfall in actual revenues as compared to estimated
revenues would have an immediate material adverse effect on the Company's
business, financial condition and operating results.
The Company's quarterly operating results may fluctuate significantly
as a result of a variety of factors, many of which are outside of the Company's
control. For example, the Company believes that advertising sales in traditional
media are generally lower in the first and third calendar quarters of each year
than in the second and fourth quarters and that advertising expenditures
fluctuate significantly with economic cycles. Depending on the extent to which
the Internet is accepted as an advertising medium, seasonality and cyclicality
in the level of advertising expenditures generally could become more pronounced
for Internet-based advertising. Seasonality and cyclicality in advertising
expenditures generally, or with respect to Internet-based advertising
specifically, could have a material adverse effect on the Company's business,
financial condition and operating results. Other factors that may adversely
affect the Company's quarterly operating results include the level of use of the
Internet, demand for advertising, seasonal trends in both Internet use and
advertising placements, the addition or loss of advertisers, advertising
budgeting cycles of individual advertisers, the level of use of the Company's
Internet sites, the amount and timing of capital expenditures and other costs
relating to the development, operation and expansion of the Company's Internet
operations, the introduction of new Internet sites, products and services by the
Company or its competitors, price competition or pricing changes in the
industry, technical difficulties or system failures, general economic conditions
and economic conditions specific to the Internet and Internet media. In seeking
to effectively execute its operating strategy, the Company may elect from time
to time to make certain advertising and marketing or acquisition decisions that
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company believes that period to period
comparisons of its operating results are not meaningful and should not be relied
upon for an indication of future performance. Due to all of the foregoing
factors, it is likely that in some future quarters, the Company's operating
results may be below the expectations of public market analysts and
stockholders. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
Dependence on Advertising Revenues. The Company expects to derive
substantially all of its revenues in the foreseeable future from the sale of
advertising on its Internet sites. As of September 30, 1997, the Company had
generated only $90,999 in cash revenues from advertising sales. Many of the
Company's relationships with advertisers are terminable within a short period of
time. Consequently, the Company's advertising customers may move their
advertising to competing Internet sites, or from the Internet to traditional
media, quickly and at relatively low costs, thereby increasing the Company's
exposure
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to competing pressures and fluctuations in revenues and operating results. In
selling Internet-based advertising, the Company will likely depend on
advertising agencies, which exercise substantial control over the placement of
advertising for their clients. The Company's success will depend on its ability
to convince advertisers and advertising agencies of the benefits of advertising
on the Company's Internet sites, and on its ability to retain, broaden and
diversify its future base of advertising customers. In order to generate
significant advertising revenues, the Company will depend on the development of
a larger base of users of the Company's Internet sites possessing demographic
characteristics attractive to advertisers. If the Company is unable to attract
and retain paying advertising customers or is forced to offer lower than
anticipated advertising rates in order to attract and/or retain advertising
customers, the Company's business, financial condition and operating results
will be materially adversely affected and the Company may cease to be a
commercially viable enterprise.
Uncertain Acceptance of the Internet as an Advertising Medium; Lack of
Measurement Standards. Use of the Internet by consumers is at a very early stage
of development and market acceptance of the Internet as a medium for
information, entertainment, commerce and advertising is subject to a high level
of uncertainty. The Company believes that its success depends upon its ability
to obtain significant revenues from its Internet operations, which will require
the development and acceptance of the Internet as an advertising medium. The
Company believes that most advertisers and advertising agencies have limited
experience with the Internet as an advertising medium and neither advertisers
nor advertising agencies have devoted a significant portion of their advertising
budgets to Internet-related advertising to date. In order for the Company to
generate advertising revenues, advertisers and advertising agencies must direct
a portion of their budgets to the Internet as a whole, and specifically to the
Company's Internet sites. There can be no assurance that advertisers or
advertising agencies will be persuaded, or able, to allocate or continue to
allocate portions of their budgets to Internet-based advertising, or if so
persuaded or able, that they will find Internet-based advertising to be more
effective than advertising in traditional media such as television, print or
radio, or in any event decide to advertise on the Company's Internet sites.
Moreover, there can be no assurance that the Internet advertising market will
develop as an attractive and sustainable medium, that the Company will achieve
market acceptance of its products or that the Company will be able to execute
its business strategy successfully.
Acceptance of the Internet among advertisers and advertising agencies
will also depend on the level of use of the Internet by consumers, which is
highly uncertain, and on the acceptance of the alternative new model of
conducting business and exchanging information presented by the Internet.
Advertisers and advertising agencies that have invested resources in traditional
methods of advertising may be reluctant to modify their media buying behavior or
their systems and infrastructure to use Internet-based advertising. Furthermore,
no standards to measure the effectiveness of Internet-based advertising have yet
gained widespread acceptance, and there can be no assurance that such standards
will be adopted or adopted broadly enough to support widespread acceptance of
Internet-based advertising. If Internet-based advertising is not widely accepted
by advertisers and advertising agencies, the Company's business, financial
condition and operating results will be materially adversely affected and the
Company may cease to be a commercially viable enterprise.
Uncertain Acceptance of the Company's Internet Products and Services.
The Company's commercial viability depends in large part upon its ability to
develop and provide on the Internet original and compelling products and
services that will successfully attract and retain users with demographic
characteristics valuable to the various advertisers and advertising agencies the
Company is targeting and, in the future, to charge users a subscription fee for
access to certain portions of such products and services. There can be no
assurance that the Company's products and services will be attractive enough to
a sufficient number of Internet users to generate advertising revenues or to
allow the charging of a subscription fee for certain portions thereof. There
also can be no assurance that the Company will be able to anticipate, monitor
and successfully respond to rapidly changing consumer tastes and preferences so
as to attract a sufficient number of users to its Internet sites within the
demographics desirable to advertisers and advertising agencies or those users
who are otherwise willing to pay to access certain portions of the Company's
products and services. Internet users can freely navigate and instantly switch
among a large number of Internet sites, many of which offer competitive products
and services, making it difficult for the Company to distinguish its product
offerings and attract users. In addition, many other Internet sites offer very
specific, highly targeted products and services that may have greater appeal
than the products and services offered on the Company's Internet sites. In
addition, users of the Internet who do not use the most recent browser or
operating platform software will have greater difficulty in accessing and
navigating the Company's Internet sites than would users who use the most recent
versions of such software. Such
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difficulty could cause Internet users to cease using the Company's Internet
sites. If the Company is unable to develop original and compelling
Internet-based products and services in a manner that allows it to attract,
retain and expand a loyal user base desirable to advertisers and advertising
agencies or Internet users who are willing to pay to access certain portions of
such Internet-based products and services, then the Company will be unable to
generate sufficient advertising or subscription revenues, and its business,
financial condition and operating results will be materially adversely affected
and the Company may cease to be a commercially viable enterprise.
Competition. The Company competes with other Internet sites for the
time and attention of consumers and for advertising and subscription revenues.
Competition among Internet sites is intense and is expected to increase
significantly in the future. The Company's Internet sites compete against a
variety of companies that provide similar offerings through one or more media,
such as print, radio, television and the Internet. To compete successfully, the
Company must develop and deliver popular, original, entertaining, informative
and compelling product offerings to attract Internet users and to support
advertising and, in the future, subscription fees. In the Company's areas of
focus of search, games, and business and finance, in addition to competing with
numerous newspapers, magazines, television programs and radio broadcasts that
cover the same material, the Company competes with various companies and
Internet sites, such as Starwave Corporation, Microsoft Corporation, c/net,
Inc., America OnLine, Inc., MGM Interactive, Inc., CompuServe, Inc., Prodigy
Services Co., Excite, Inc., Infoseek Corporation, Lycos, Inc., Netscape
Communications Corporation, Time Warner, Inc., PointCast Incorporated, SOFTBANK
Corporation, Yahoo! Inc., SportsLine USA, Inc. and Wired Ventures, Inc. Many, if
not all, of these competitors also offer a wider range of products and services
than does the Company, which products and services may be sufficiently
attractive to Internet users to attract users to their services and,
consequently, dissuade them from accessing the Company's Internet sites. If the
Company is unable to continue to attract a significant number of Internet users
to its Internet sites, the Company's business, financial condition and operating
results will be materially adversely affected and the Company may cease to be a
commercially viable enterprise.
Low Barriers to Entry. The market for Internet-based products and
services is relatively new, intensely competitive and rapidly evolving. There
are minimal barriers to entry, and current and new competitors can launch new
Internet sites at a relatively low cost within relatively short time periods. In
addition, the Company competes for the time and attention of Internet users with
thousands of non-profit Internet sites operated by, among other persons,
individuals, government and educational institutions. Existing and potential
competitors also include magazine and newspaper publishers, cable television
companies and start-up ventures attracted to the Internet market. Accordingly,
the Company expects competition to persist and intensify and the number of
competitors to increase significantly in the future. Should the Company seek in
the future to attempt to expand the scope of its Internet sites and product
offerings, it will compete with a greater number of Internet sites and other
companies. Because the operations and strategic plans of existing and future
competitors are undergoing rapid change, it is extremely difficult for the
Company to anticipate which companies are likely to offer competitive products
and services in the future. There can be no assurance that the Company's
Internet sites will compete successfully.
Competitive Factors. The Company believes that the competitive factors
attracting Internet users include, among others, the quality of presentation and
the relevance, timeliness, depth and breadth of information and services offered
by the Company. With respect to attracting advertisers and advertising agencies,
the Company believes that the competitive factors include, among others, the
number of users accessing the Company's Internet sites, the demographics of such
user base, the Company's ability to deliver focused and compelling advertising
and interactivity through its Internet sites and the overall cost-effectiveness
and value of advertising offered by the Company. In addition, the success of the
Company's business strategy depends on the sale of future Internet advertising
at premium prices, based in part on the demographic characteristics of the
Company's Internet users. With respect to attracting subscription-based users in
the future, the Company believes that the competitive factors include, among
others, the quality, uniqueness and usefulness of the products and services
provided, the price charged for such products and services and the cost and
accessibility of similar products and services through the Internet or competing
media. Given the intense competition among Internet sites and other media, there
can be no assurance that the Company will be able to compete successfully with
respect to any of these factors.
Strength of Competitors. Many, if not all, of the Company's current and
potential competitors have significantly greater financial, editorial, technical
and marketing resources, longer operating histories,
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greater name recognition, and greater experience than the Company; and also have
established relationships with more advertisers and advertising agencies. Many,
if not all, of such competitors may be able to undertake more extensive
marketing campaigns, adopt more aggressive advertising and subscription price
policies and devote substantially more resources to developing Internet-based
products and services than the Company. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, financial condition and
operating results. In addition, in response to competitive pressures, the
Company may make certain pricing, business development and/or marketing
decisions, or enter into acquisitions or new ventures that could have a material
adverse effect on the Company's business, financial condition and operating
results.
Uncertain Acceptance and Maintenance of the go2net Brand. The Company
believes that establishing and maintaining the go2net brand is a critical aspect
of its efforts to attract an Internet audience and that the importance of brand
recognition will increase due to the anticipated increase in the number of
Internet sites and the relatively low barriers to entry to providing
Internet-based products and services. Promoting the go2net brand name will
depend on the Company's ability to develop and deliver original and compelling
Internet-based products and services, which it cannot assure. If Internet users
do not perceive the Company's Internet sites to be of sufficient interest and
usefulness, the Company will be unsuccessful in promoting and maintaining its
brand. To the extent the Company chooses in the future to seek to expand the
focus of its operations beyond providing its current Internet sites, the Company
risks diluting its brand, confusing users and advertisers, and decreasing the
attractiveness of its audience to advertisers. In order to attract and retain
Internet users and to promote and maintain the go2net brand in response to
competitive pressures, the Company may find it necessary to increase its budget
for developing its products and services or otherwise to increase substantially
its financial commitment to creating and maintaining a distinct brand loyalty
among users. If the Company is unable to provide Internet-based products and
services as described herein or otherwise fails to promote and maintain the
go2net brand, or the Company incurs significant expenses in an attempt to
improve its products and services or promote and maintain its brand, the
Company's business, financial condition and operating results will be materially
adversely affected and the Company may cease to be a commercially viable
enterprise.
Expansion of 0perations and Managing Potential Growth. Since its
inception, the Company has grown rapidly and as of September 30, 1997 had 23
full-time employees and 7 independent contractors. This growth has placed, and
is expected to continue to place, a significant strain on the Company's
management, physical and capital resources. It is expected that the Company will
need to hire additional key personnel in order to fully implement its business
strategy. No assurance can be given as to whether, when, if ever, and under what
terms the Company will be able to attract such new personnel. In order to manage
such growth successfully, the Company will be required to, among other things,
implement and manage its operational and financial systems on a timely basis and
to train, manage and expand its growing employee base. Further, the Company's
management will be required to successfully maintain relationships with various
advertising customers, advertising agencies, other Internet sites and services,
Internet service providers and other third parties and to maintain control over
the strategic direction of the Company in a rapidly changing marketplace. There
can be no assurance that the Company's current personnel, systems, procedures
and quality and accounting controls will be adequate to support the Company's
future operations, that management will be able to identify, hire, train,
motivate or manage needed and qualified personnel, or that management will be
able to identify and exploit existing and potential opportunities. If the
Company is unable to effectively manage growth, the Company's business,
financial condition and operating results will be materially adversely affected.
Need for Additional Capital to Finance Growth and Capital Requirements.
The Company expects to seek to enhance and expand its Internet sites in order to
improve its competitive position and meet the increasing demands for quality
Internet-based products and services and competitive advertising and
subscription pricing. The Company's ability to grow will depend in part on the
Company's ability to expand and improve its Internet operations, expand its
advertising and marketing efforts, expand and improve its Internet user support
capabilities and develop new Internet technologies, products and services. In
connection therewith, the Company may need to raise additional capital in the
foreseeable future from public or private equity or debt sources in order to
finance such possible growth. In addition, the Company may need to raise
additional funds in order to avail itself to unanticipated opportunities (such
as more rapid expansion, acquisitions of complementary businesses or the
development of new products or services), to react to unforeseen difficulties
(such as the loss of key personnel or the rejection by Internet users or
potential advertisers of the Company's Internet-based products and services) or
to otherwise respond to
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unanticipated competitive pressures. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's then
existing stockholders would be reduced, stockholders may experience additional
and significant dilution and such equity securities may have rights, preferences
or privileges senior to those of the holders of Common Stock. There can be no
assurance that additional financing will be available on terms acceptable to the
Company or at all. If adequate funds are not available or are not available on
terms acceptable to the Company, the Company may be unable to implement its
business, sales or marketing plan, respond to competitive forces or take
advantage of perceived business opportunities, which could have a material
adverse effect in the Company's business, financial condition and operating
results.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services of Russell C. Horowitz, John Keister, Paul
S. Phillips and the other members of its management team, as well as on the
Company's ability to retain and motivate its officers and key employees. Each of
Messrs. Horowitz, Keister and Phillips has entered into employment agreements
with the Company. The Company maintains a $2,000,000 "key man" life insurance
policy on the lives of each of Messrs. Keister and Phillips and a $5,000,000
"key man" life insurance policy on the life of Mr. Horowitz. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical and managerial personnel. The development of
technologies, products and services for the Company's Internet sites requires
the services of highly skilled employees and independent contractors. The number
of such personnel available is extremely limited and competition for such
personnel among Internet and other companies is intense. There can be no
assurance that the Company will be able to retain its existing employees and
independent contractors or that it will be able to attract, assimilate or retain
sufficiently qualified personnel in the future. The inability to attract and
retain the necessary technical, managerial, design, editorial, sales and
marketing personnel could have a material adverse effect on the Company's
business, financial condition and operating results.
Limited Experience in Sales and Marketing of Advertising. None of the
Company's senior management team has any significant experience in selling
advertising on the Internet or any other medium, and few members of the
Company's senior management team have any significant experience in the Internet
industry. Achieving acceptance by potential advertisers and advertising agencies
of the Company's Internet sites as a viable marketing forum will require the
Company to develop and maintain relationships with key advertisers and
advertising agencies, and there can be no assurance that any such relationships
will be developed, on a timely basis or at all.
Dependence on Third Parties for Internet Operations and Content
Development. The Company believes that the ability to advertise its Internet
sites on other Internet sites and the willingness of the owners and operators of
such sites to direct users to the Company's Internet sites through hypertext
links are critical to the success of the Company's Internet operations. Other
Internet sites, particularly search/index guides and other companies with
strategic ability to direct user traffic, significantly affect traffic to the
Company's Internet sites. The Company does not currently have any significant
arrangements with these types of companies from which it expects to generate
user visits to its Internet sites. There can be no assurance that the Company
will establish or maintain such arrangements in the future. In addition, the
Company relies on the cooperation of owners and operators of Internet sites and
search/index guides in connection with the operation of the MetaCrawler Service.
There can be no assurance that such cooperation will continue to be available on
terms acceptable to the Company or at all. The inability of the Company to
include third-party search/index guides in the MetaCrawler Service could result
in the decrease in use of the MetaCrawler Service, which would have a material,
adverse effect on the Company's business, financial condition and operating
results. The Company's ability to develop original and compelling Internet-based
products and services is also dependent on maintaining relationships with and
using products provided by third party vendors. Developing and maintaining
satisfactory relationships with third parties could become more difficult and
more expensive as competition increases among Internet sites. If the Company is
unable to develop and maintain satisfactory relationships with such third
parties on terms acceptable to the Company, or if the Company's competitors are
better able to leverage such relationships, the Company's business, financial
condition and operating results will be materially adversely affected. In these
efforts, the Company has relied, and will continue to rely substantially, on the
product and service development efforts of third parties. For example, the
Company relies on S&P Comstock, Dow Jones & Company. Inc., New York Stock
Exchange, Inc., The Nasdaq Stock Market, Inc., News Alert, SportsTicker, Edgar
Online, Reuters and Market Guide, Inc. to provide a significant portion of the
information included on the Company's Internet sites. There can be no assurance
the Company will maintain these relationships in the
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future. Any failure of these third parties to provide this information to the
Company could have a material adverse effect on the Company's business,
financial condition and operating results.
Dependence on Continued Growth in the Use of the Internet. Rapid growth
in the use of and interest in the Internet is a recent phenomenon, and there can
be no assurance that acceptance and use of the Internet will continue to develop
or that a sufficient base of users will emerge to support the Company's
business. Revenues from the Company's Internet operations will depend largely on
the widespread acceptance and use of the Internet as a source of information and
entertainment and as a vehicle for commerce in goods and services. The Internet
may not be accepted as a viable commercial medium for a number of reasons,
including potentially inadequate development of the necessary infrastructure,
lack of timely development of enabling technologies or lack of commercial
support for Internet-based advertising. To the extent that the Internet
continues to experience an increase in users, an increase in frequency of use or
an increase in the bandwidth requirements of users, there can be no assurance
that the Internet infrastructure will be able to support the demands placed upon
it. In addition, the Internet could lose its viability as a commercial medium
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or due to increased
government regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and could adversely affect use of the Internet generally and of
the Company's Internet sites in particular. If use of the Internet does not
continue to grow or grows more slowly than expected, or if the Internet
infrastructure does not effectively support growth that may occur, the Company's
business, financial condition and operating results would be materially
adversely affected.
Dependence on the MetaCrawler License. The Company and Netbot entered
into a License Agreement (the "MetaCrawler License Agreement") pursuant to which
Netbot has granted the Company an exclusive (subject to certain limited
exceptions), worldwide license to provide the MetaCrawler Service. As part of
the MetaCrawler License Agreement, the Company has the exclusive right to
operate, modify and reproduce the MetaCrawler Service (including, without
limitation, the exclusive right to use, modify and reproduce the name
"MetaCrawler" and the MetaCrawler URL in connection with the operation of the
MetaCrawler Service). Netbot has licensed the MetaCrawler Service and the other
intellectual property rights associated therewith from UW on an exclusive basis.
The license has been granted to the Company by Netbot on an exclusive basis, but
Netbot has reserved the right to use, modify, reproduce and license the
MetaCrawler search engine for any purpose other than the provision of the
MetaCrawler Service and the license is subject to the rights of UW to use,
modify and reproduce the MetaCrawler search engine and derivatives of the
MetaCrawler site to operate Internet sites for internal purposes within the UW
domain and to use, modify and reproduce any of the licensed technologies for
research, instructional and academic purposes. The search technology underlying
the MetaCrawler Service and the MetaCrawler trademark is licensed to or owned by
Netbot and sublicensed to the Company pursuant to the MetaCrawler License
Agreement. A substantial portion of the traffic to the Company's Internet sites
is currently derived from users of the MetaCrawler Service. Although the
MetaCrawler License Agreement may be terminated by Netbot only upon a material
default by the Company thereunder, the termination of the MetaCrawler License
Agreement could have a material adverse effect on the Company's business,
financial condition and operating results. Moreover, the termination of the
License Agreement between UW and Netbot relating to Netbot's license of the
MetaCrawler Service would result in the inability of the Company to continue to
provide the MetaCrawler Service under the MetaCrawler License Agreement, which
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, any failure by the Company to
continue to provide the MetaCrawler Service for any reason could have a material
adverse effect on the Company's business, financial condition and operating
results.
Risks of New Business Areas. The long-term success of the Company's
business strategy will depend to a significant extent on the Company's ability
to expand operations beyond solely relying on Internet-based advertising
revenues into areas such as subscription-based products and services and
electronic commerce, in addition to successfully developing new Internet sites
and enhancing existing ones. There can be no assurance that the Company will be
able to expand into such areas, develop and launch any new Internet sites or
enhance existing ones. In addition, expansion into new business areas and new
Internet sites may bring the Company into direct competition with new
competitors. Any expansion of product offerings or operations, or new Internet
sites developed and launched by the Company that are not favorably received by
Internet users could damage the Company's reputation or the go2net brand.
Expansion into new business areas or the development and launching of new
Internet sites will also require significant additional expenses and programming
and other resources and will strain the Company's management, financial and
operational resources. Furthermore, any expansion of business areas and the
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developing and launching of new Internet sites, as well as the enhancement of
the Company's existing Internet sites, will necessarily rely on untested
business models. To date, the Company has generated limited revenues from
Internet-based advertising, and there can be no assurance that the Company will
be able to generate revenues from these sources in the future. The Company's
failure to expand its business operations or develop and launch new Internet
sites in a cost effective and timely manner could have a material adverse effect
on the Company's business, financial condition and operating results.
From time to time, the Company may entertain new business opportunities
and ventures in a broad range of areas. Although the Company has made no
specific arrangements with respect to any such opportunities, it may in the
future elect to pursue one or more such opportunities. Typically, such
opportunities require extended negotiations, the outcome of which cannot be
predicted. If the Company were to enter into such a venture, the Company could
be required to invest a substantial amount of capital, which could have a
material adverse effect on the Company's financial condition and its ability to
implement its existing business strategy. Such an investment could also result
in large and prolonged operating losses for the Company. Further, such
negotiations or ventures could place additional, substantial burdens on the
Company's management personnel and its financial and operational systems. There
can be no assurance that such a venture would ever achieve profitability, and a
failure by the Company to recover the substantial investment required to launch
and operate such a venture would have a material adverse effect on the Company's
business, financial condition and operating results.
Risks of Technological Change. The market for Internet-based products
and services is characterized by rapid technological developments, frequent new
product introductions and evolving industry standards. The emerging character of
these products and services and their rapid evolution will require that the
Company continually improve the performance, features and reliability of its
Internet-based products and services, particularly in response to competitive
offerings. There can be no assurance that the Company will be successful in
responding quickly, cost effectively and sufficiently to these developments. In
addition, the widespread adoption of new Internet technologies or standards
could require substantial expenditures by the Company to modify or adapt its
Internet sites and services and could fundamentally affect the character,
viability and frequency of Internet-based advertising, either of which could
have a material adverse effect on the Company's business, financial condition
and operating results. In addition, new Internet-based products, services or
enhancements offered by the Company may contain design flaws or other defects
that could require costly modifications or result in a loss of consumer
confidence, either of which could have a material adverse effect on the
Company's business, financial condition and operating results
Capacity Constraints and System Disruptions. The satisfactory
performance, reliability and availability of the Company's Internet sites and
its computer network infrastructure are critical to attracting Internet users
and maintaining relationships with advertising customers. The Company's
Internet-based advertising revenues will be directly related to the number of
advertisement impressions delivered by the Company. System interruptions that
result in the unavailability of the Company's Internet sites or slower response
times for users would reduce the number of advertisements delivered and reduce
the attractiveness of the Company's Internet sites to users and advertisers. The
Company may experience periodic systems interruptions from time to time in the
future. Additionally, any substantial increase in traffic on the Company's
Internet sites may require the Company to expand and adapt its computer network
infrastructure. The Company's inability to add additional computer software,
hardware and bandwidth to accommodate increased use of its Internet sites may
cause unanticipated system disruptions and result in slower response times.
There can be no assurance that the Company will be able to expand its computer
network infrastructure on a timely basis to meet increased use. Any system
interruptions or slower response times resulting from the foregoing factors
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company is dependent on third parties for
uninterrupted Internet access. In addition, the Company is dependent on various
third parties for substantially all of its news and information. Loss of such
services from any one or more of such third parties may have a material adverse
effect on the Company's business, financial condition and operating results. No
assurance can be given as to whether, or on what terms, the Company would be
able to obtain such services from other third parties in the event of the loss
of any of such services.
The Company's Internet operations are vulnerable to interruption by
fire, earthquake, power loss, telecommunications failure and other events beyond
the Company's control. There can be no assurance that interruptions in service
will not materially adversely affect the Company's operations in the future.
While the Company carries business interruption insurance to compensate the
Company for losses that may occur,
25
<PAGE> 26
there can be no assurance that such insurance will be sufficient to provide for
all losses or damages incurred by the Company.
Liability for Internet Content; Government Regulations. As a publisher
and a distributor of content over the Internet, the Company faces potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that it publishes or distributes. In addition, the Company could be exposed to
liability with respect to the content or unauthorized duplication of material
indexed in its search services. Although the Company carries liability
insurance, the Company's insurance may not cover potential claims of this type
or may not be adequate to indemnify the Company for all liability that may be
imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on the
Company's business, financial condition and operating results.
Although there are currently few laws and regulations directly
applicable to the Internet, it is possible that new laws and regulations will be
adopted covering issues such as, among other things, access, obscene or indecent
communications and the pricing, characteristics and quality of Internet products
and services. As a provider of Internet-based products and services, the Company
is subject to the provisions of existing and future federal and local
legislation that could be applied to the Company's operation. Such legislation
could also dampen the growth of the Internet generally and decrease the
acceptance of the Internet as an advertising medium, and could, thereby, have a
material adverse effect on the Company's business, financial condition and
operating results.
Liability for Information Retrieved From the Internet. Materials may be
printed from or downloaded into users' computers from the Internet-based
services provided by the Company or from the Internet access or information
providers with which the Company has a relationship. Given that materials may be
subsequently distributed to third parties, without the Company's knowledge or
consent, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement or other theories
based on the nature and content of such materials. Such claims have been
brought, and successfully pressed, against Internet-based services in the past.
Although the Company carries liability insurance, the Company's insurance may
not cover potential claims of this type, or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability that
is not covered by insurance or is in excess of insurance coverage would have a
material adverse effect on the Company's business, financial condition and
operating results.
Security Risks. The Company has instituted certain security measures
designed to protect its Internet sites and other operations from unauthorized
use and access. Such measures cannot guarantee complete security, however, and a
party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
Internet operations. The Company may be required to expend significant capital
and resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company or any third party
contractors involve the storage and transmission of proprietary information,
such as computer software or credit card numbers, security breaches could expose
the Company to a risk of loss or litigation and possible liability. There can be
no assurance that contractual provisions attempting to limit the Company's
liability in such areas will be successful or enforceable, or that parties will
accept such contractual provisions as part of the Company's agreements.
Dependence on Licensed Technology; Protection of Intellectual Property.
The Company is dependent upon obtaining existing technology related to its
operations. To the extent new technological developments are unavailable to the
Company on terms acceptable to it or if at all, the Company may be unable to
continue to execute its business plan and its business, financial condition and
operating results would be materially adversely affected.
The success of the Company is dependent upon its ability to protect and
leverage the value, if any, of its original Internet technologies, software,
content and its trademarks, trade names, service marks, domain names and other
proprietary rights it either currently has or may have in the future. The
Company has filed service marks for its logo and name, as well as for the names
of each of its sites. In addition, given the uncertain application of existing
copyright and trademark laws to the Internet, there can be no assurance that
existing laws will provide adequate protection for the Company's technologies,
sites or domain names.
26
<PAGE> 27
Policing unauthorized use of the Company's technologies, content and other
intellectual property rights entails significant expenses and could otherwise be
difficult or impossible to do given, among other things, the global nature of
the Internet.
From time to time, the Company may be subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of the trademarks and other intellectual property of third parties
by the Company or its licensees. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources. The
Company is not currently aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
effect on the Company's business, financial condition and operating results.
Risks Associated with Potential Acquisitions. The Company may in the
future pursue acquisitions of companies, technologies or other assets. Future
acquisitions may result in the potentially dilutive issuance of equity
securities, the incurrence of debt, the write-off of in-process research and
development or software acquisition and development costs, and the amortization
of expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flow. Future acquisitions would involve numerous
additional risks, including difficulties in the assimilation of the operations,
services, products and personnel of the acquired company, the diversion of
management's attention from other business concerns along with the risks
involved in entering markets in which the Company has little or no experience.
As of the date of this Report, the Company does not have any commitments,
agreements or understandings with regard to any material acquisition.
Susceptibility to General Economic Conditions. The Company's business,
financial condition and operating results will be subject to fluctuations based
upon general economic conditions. If there were to be a general economic
downturn or a recession, however slight, then the Company expects that business
entities, including the Company's advertisers and potential advertisers, could
substantially and immediately reduce their advertising and marketing budgets. In
addition, the Company's ability to charge subscription fees for access to
certain portions of its Internet sites or to engage in commerce via the Internet
would be adversely affected, thereby resulting in a material adverse effect on
the Company's business, financial condition and operating results.
27
<PAGE> 28
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Consolidated Financial Statements:
Independent Auditors' Report.............................................. 29
Balance Sheets September 30, 1997
and September 30, 1996................................................ 30
Statements of Operations Year ended September 30, 1997
and the period from inception
(February 12, 1996) to September 30, 1996............................. 31
Statements of Stockholders' Equity........................................ 32
Statements of Cash Flows Year ended September 30, 1997
and the period from inception (February 12, 1996)
to September 30, 1996................................................ 33
Notes to Consolidated Financial Statements................................ 34
</TABLE>
PART II. FINANCIAL STATEMENTS SCHEDULE
All schedules have been omitted since they are either not applicable,
not required or the information is included elsewhere herein.
28
<PAGE> 29
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
go2net, Inc.
We have audited the accompanying balance sheets of go2net, Inc. as of September
30, 1997 and 1996, and the related statements of operations and cash flows for
the year ended September 30, 1997 and for the period from inception (February
12, 1996) through September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of go2net, Inc. at September 30,
1997 and 1996, and the results of its operations and its cash flows for the year
ended September 30, 1997 and for the period from inception (February 12, 1996)
through September 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Seattle, Washington
October 23, 1997
29
<PAGE> 30
GO2NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 10,891,801 $ 865,742
Receivables ......................................... 59,462 --
Prepaid expenses and other assets ................... 145,114 8,216
------------ -----------
Total current assets ........................ 11,096,377 873,958
Property and equipment, net ........................... 509,004 179,328
Intangibles ........................................... 688,107 --
Deposits .............................................. 307,365 --
Other assets .......................................... 18,861 12,955
------------ -----------
Total assets ................................ $ 12,619,714 $ 1,066,241
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............. $ 134,890 $ 45,098
Short term debt .................................... 34,580 --
Deferred revenue ................................... 15,923 --
------------ -----------
Total current liabilities ................... 185,393 45,098
Stockholders' equity:
9% Cumulative Redeemable Convertible Preferred Stock,
$1.00 par value, authorized 1,000,000 shares; no
shares at September 30, 1997 and 927,500 shares at
September 30, 1996 outstanding .................. -- 1,505,000
Common stock, $0.01 par value, authorized 9,000,000
shares; 4,505,217 shares at September 30, 1997 and
1,619,100 shares at September 30, 1996 outstanding 14,570,558 13,900
Less 9% Cumulative Redeemable Convertible Preferred
Stock ............................................ -- (80,000)
Subscriptions receivable
Accumulated deficit ................................. (2,136,237) (417,757)
------------ -----------
Total stockholders' equity .................. 12,434,321 1,021,143
------------ -----------
Total liabilities and stockholders' equity .. $ 12,619,714 $ 1,066,241
============ ===========
</TABLE>
See accompanying notes.
30
<PAGE> 31
GO2NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Inception
Year Ended (February 12, 1996)
September 30, 1997 through September 30, 1996
------------------ --------------------------
<S> <C> <C>
Revenue .......................... $ 254,389 $ --
Cost of revenue .................. 180,253 --
----------- -----------
Gross profit ........... 74,136 --
Operating expenses:
Advertising and marketing ...... $ 77,958 $ 10,150
Product development ............ 548,706 137,159
General and administrative ..... 1,436,224 283,832
----------- -----------
Total operating expenses 2,062,888 431,141
----------- -----------
Loss from operations ............. (1,988,752) (431,141)
Interest income, net ............. 270,272 13,383
----------- -----------
Net loss ......................... $(1,718,480) $ (417,758)
=========== ===========
Net loss per share ............... $ (0.50) $ (0.16)
Shares used in computing
net loss per share ............. 3,464,489 2,548,680
</TABLE>
See accompanying notes.
31
<PAGE> 32
GO2NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (FEBRUARY 12, 1996) THROUGH SEPTEMBER 30, 1996
AND YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
CUMULATIVE REDEEMABLE SUBSCRIPTION
CONVERTIBLE PREFERRED COMMON STOCK NOTES
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Cash received for common
stock sold to founders ............ - - 1,390,000 $ 13,900 -
Issuance of common stock
at no cost ........................ - - 229,100 - -
Sale of preferred stock ........... 927,500 $ 1,505,000 - - $(80,000)
Net loss for period from
Inception (February 12,
1996) through
September 30, 1996 .............. - - - - -
--------- ----------- --------- ----------- --------
Balance at September 30, 1996 ..... 927,500 1,505,000 1,619,100 13,900 (80,000)
Payment of note receivable ........ - - - - 80,000
Issuance of common stock
at no cost ........................ - - 35,500 - -
Conversion of preferred stock ..... (927,500) (1,505,000) 927,500 1,505,000 -
Sale of common stock .............. - - 75,000 150,000 -
Repurchase of common
stock_ ............................ - - (13,550) (556) -
Issuance of common stock
for services rendered ............. - - 5,000 28,000 -
Issuance of common
stock, net of related expenses
of $1,930,788 ..................... - - 1,840,000 12,789,212 -
Common stock issued in
connection with acquisition
of license ........................ - - 16,667 85,002 -
Net Loss for the year
ended September 30,
1997 .............................. - - - - -
--------- ----------- --------- ----------- --------
Balance at September 30,
1997 .............................. - - 4,505,217 $14,570,558 -
========= =========== ========= =========== ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------- ------
<S> <C> <C>
Cash received for common
stock sold to founders ............ - $ 13,900
Issuance of common stock
at no cost ........................ -
Sale of preferred stock ........... - 1,425,000
Net loss for period from
Inception (February 12,
1996) through
September 30, 1996 .............. $(417,757) (417,757)
--------- ---------
Balance at September 30, 1996 ..... (417,757) 1,021,143
Payment of note receivable ........ - 80,000
Issuance of common stock
at no cost ........................ - -
Conversion of preferred stock ..... - -
Sale of common stock .............. - 150,000
Repurchase of common
stock ............................ - (556)
Issuance of common stock
for services rendered ............. - 28,000
Issuance of common
stock, net of related expenses
of $1,930,788 ..................... - 12,789,212
Common stock issued in
connection with acquisition
of license ........................ - 85,002
Net Loss for the year
ended September 30,
1997 .............................. (1,718,480) (1,718,480)
------------ ------------
Balance at September 30,
1997 .............................. (2,136,237) $12,434,321
============ ===========
</TABLE>
See accompanying notes.
32
<PAGE> 33
GO2NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(FEBRUARY 12, 1996)
YEAR ENDED THROUGH
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Operating activities:
Net loss ...................................... $ (1,718,480) $ (417,757)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............. 171,042 19,278
Stock compensation ........................ 28,000 --
Loss on sale of equipment ................. 5,080 --
------------ -----------
Changes in assets and liabilities:
Prepaid expenses and other assets ......... (136,898) (8,216)
Receivables ............................... (59,462) --
Other assets .............................. (10,781) (14,359)
Deposits .................................. (307,365) --
Deferred revenue .......................... 15,923 --
Accounts payable and accrued expenses ..... 89,792 45,098
------------ -----------
Net cash used in operating activities ........... (1,923,149) (375,956)
Investing activities:
Acquisition of property and equipment ..... (448,318) (197,202)
Proceeds from sale of property and
equipment ................................. 5,494 --
Acquisition of Intangibles ................ (661,204) --
------------ -----------
Net cash used in investing activities ........... (1,104,028) (197,202)
Financing activities:
Proceeds from issuance of common stock, net 12,939,212 13,900
Repurchase of common stock ................ (556) --
Borrowing on line of credit ............... 500,000 --
Payment on line of credit ................. (500,000) --
Short term borrowing ...................... 76,354 --
Payment on short term borrowing ........... (41,774) --
Proceeds from issuance of preferred
stock ..................................... -- 1,425,000
Proceeds from note receivable ............. 80,000 --
------------ -----------
Net cash provided by financing activities ....... 13,053,236 1,438,900
------------ -----------
Net increase in cash and cash equivalents ....... 10,026,059 865,742
Net cash and cash equivalents at beginning of
period ........................................ 865,742 --
------------ -----------
Cash and cash equivalents at end of period ...... $ 10,891,801 $ 865,742
============ ===========
Supplemental cashflow disclosure: Cash paid
for interest: ................................... $ 10,957 $ --
</TABLE>
See accompanying notes.
33
<PAGE> 34
go2net, Inc.
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
go2net, Inc. (the "Company") was incorporated in the State of Delaware on
February 12, 1996 (operations began in March 1996). The Company is an
interactive technology company that operates a group of Web sites. MetaCrawler
<URL: http://www.metacrawler.com/> is a search/index guide that combines various
existing search/index guides into one guide (a "metasearch engine"); PlaySite
<URL: http://www.playsite.com/> is a Java-based multi-user games network;
StockSite <URL: http://www.stocksite.com/> offers proprietary articles,
portfolio tracking tools, company research and news relating to business and
finance; and go2vision <URL: http://www.go2net.com/vision/> is a
Netcaster/Castanet channel (push technology). The Company focuses on utilizing
innovative technologies to deliver its content and to enhance the attractiveness
and utility of its product offerings.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
INTANGIBLE ASSETS
Intangible assets represent license fees associated with technology sublicenses
and acquisitions and are recorded at cost. Amortization of intangibles is
recorded using the straight-line method over the useful lives of 5 years. The
recoverability of carrying values of intangible assets is evaluated on a
recurring basis. For the period ended September 30, 1997, there were no
adjustments to the carrying values of intangible assets resulting from these
evaluations.
CONCENTRATION OF CREDIT RISK
Financial instruments potentially subjecting the Company to concentration of
credit risk consist primarily of cash equivalents with one financial
institution. Management believes the financial risks associated with such
deposits are minimal.
USE OF ESTIMATES
The Company's management has made a number of estimates and assumptions relating
to the reporting of assets, liabilities, and expenses to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company derives its revenue from the sale of advertisements on short-term
contracts and barter transactions. Advertising revenues are recognized ratably
over the period in which the advertisements are displayed. Deferred revenues
result from billings in excess of recognized revenue relating to contracts.
Barter transactions are recorded at the lower of the estimated fair value of
advertisements received or the estimated fair value of the advertisements given.
Barter revenue and the related advertising is recorded based on impressions
delivered and received with the difference recorded as an advance or prepaid. As
of September 30, 1997 and 1996, respectively, the Company did not have any
advances or prepaids related to
34
<PAGE> 35
go2net, Inc.
Notes to Financial Statements (continued)
barter agreements. For the year ended September 30, 1997, the Company recognized
revenues of $163,390 from barter transactions.
ADVERTISING AND MARKETING EXPENSE
The Company expenses costs associated with advertising and marketing as they are
incurred.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, redeemable convertible preferred stock, common stock and
common equivalent shares (options and warrants) issued by the Company at prices
below the initial public offering price during the twelve-month period prior to
the offering have been included in the calculation as if they were outstanding
for all periods prior to the completion of the offering regardless of whether
they are antidilutive.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company has elected the disclosure only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", and accordingly accounts for stock options grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly,
the Company recognizes no compensation expense for its stock option grants.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share", which becomes effective for the Company's 1997 financial
statements beginning in the first quarter of the fiscal year ending September
30, 1998. SFAS No. 128 will require the reporting of "basic" earnings per share,
which will exclude the impact of common stock equivalents. Additionally, SFAS
No. 128 changes the methodology for fully diluted earnings per share. The
adoption of this new accounting standard is not expected to have a material
effect on the reported net loss per share of the Company.
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to the current
year presentation.
2. BALANCE SHEET COMPONENTS
Cash and Cash Equivalents
The carrying value of cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Cash .................................... $ 85,935 $ 25,354
Money market and time deposit balances... 10,805,866 840,388
Cash and cash equivalents ............... $10,891,801 $ 865,742
=========== ===========
</TABLE>
The carrying value of the Company's cash equivalents approximate their fair
values based on quoted market prices.
35
<PAGE> 36
go2net, Inc.
Notes to Financial Statements (continued)
Property and Equipment
A summary of property and equipment follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Computer equipment ........................... $ 578,837 $ 160,756
Office equipment ............................. 22,041 27,425
Leasehold improvements ....................... 27,540 7,221
Other ........................................ -- 1,800
--------- ---------
628,418 197,202
Less accumulated depreciation and amortization (119,414) (17,874)
--------- ---------
$ 509,004 $ 179,328
========= =========
</TABLE>
Intangibles
Capitalized license fees were $746,206 and $0 at September 30, 1997 and 1996,
respectively. Amortization of intangibles amounted to $58,099 and $0 for 1997
and 1996. Accumulated amortization at September 30, 1997 and 1996 was $58,099
and $0, respectively.
Other Assets
Trademarks and other intangibles are included with "Other Assets" and are being
amortized over a useful life of three years. Trademarks and other intangibles
were $25,140 and $12,601 as of September 30, 1997 and 1996, respectively.
Amortization of trademarks and other intangibles amounted to $4,875 and $1,404
for 1997 and 1996. Accumulated amortization at September 30, 1997 and 1996 was
$6,280 and $1,404, respectively.
3. INCOME TAXES
As of September 30, 1997 and September 30, 1996, the Company had approximately
$2,130,000 and $394,000, respectively, of net operating loss carryforwards for
federal income tax purposes, which expire beginning in 2011. Utilization of the
Company's net operating loss carry forwards may be subject to annual limitations
if there is deemed to be a change in control (Section 382).
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are presented below:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Depreciation and amortization........................ $ (1,342) $ (6,304)
Net operating losses................................. 724,312 133,953
Accruals, reserves and other......................... - 12,540
722,970 140,189
Less valuation allowance............................. (722,970) (140,189)
-------- ---------
$ -- $ --
======== =========
</TABLE>
4. STOCKHOLDERS' EQUITY
9% Cumulative Convertible Redeemable Preferred Stock
In November 1996, the holders of all outstanding shares of Preferred Stock
converted into 927,500 shares of common stock.
36
<PAGE> 37
go2net, Inc.
Notes to Financial Statements (continued)
Common Stock
From Inception (February 12, 1996) through September 30, 1996, the Company sold
1,390,000 shares to its founders at par value and during the year ended
September 30, 1997, sold 75,000 shares of common stock for $2.00 per share to a
member of its Board of Directors. The Company also issued 35,500 and 229,100
shares to employees and independent contractors in 1997 and 1996, respectively.
The Company has the right, at any time after termination of such employees' and
independent contractors' employment or service, to repurchase certain common
shares at the price per share paid by the employee or independent contractor.
The Company's right to repurchase lapses with respect to the shares held by the
employees and independent contractors over varying periods of time but generally
within three years of the purchase or issuance date. There were 108,875 shares
of common stock subject to repurchase by the Company at September 30, 1997.
In 1997, the Company issued 5,000 shares to an employee with a fair market value
of $5.60 per share. Compensation expense of $28,000 was recorded during the year
ended September 30, 1997 associated with this issuance.
In April 1997, the Company completed its initial public offering and issued
1,600,000 shares of its common stock to the public at a price of $8.00 per
share. In May 1997, pursuant to the exercise of an over-allotment option granted
to the underwriters of the Company's initial public offering, the Company issued
an additional 240,000 shares of its common stock at a price of $8.00 per share.
The Company received approximately $12.8 million of cash, net of underwriting
discounts, commissions and other offering costs.
On July 15, 1997, the Company acquired PlaySite, a Java-based multi-user games
site, and certain gaming infrastructure technology from Internet Games
Corporation for $500,000 in cash and 16,667 shares of the Company's common
stock, with a value of $85,002.
5. LEASES
The Company has a noncancelable lease for its facilities. Rental expense from
this and a previous lease that expired in July 1997 amounted to approximately
$141,346 for the year ended September 30, 1997 and $34,600 for the period from
inception (February 12, 1996) through September 30, 1996.
Future minimum payments under noncancelable operating leases with an initial
term of one year or more were as follows at September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998................................................. $ 275,714
1999................................................. 283,101
2000................................................. 283,101
2001................................................. 283,101
2002................................................. 283,101
Thereafter 259,509
----------
Total Minimum Lease Payments......................... $1,667,627
==========
</TABLE>
6. STOCK OPTION PLAN
In 1996, the Board of Directors adopted a Stock Option Plan under which an
aggregate of 750,000 shares of common stock were reserved for grants to
employees and members of the Board of Directors and independent contractors.
Options granted under this plan may be designated as incentive or nonqualified
at the discretion of the Plan Administrator.
37
<PAGE> 38
go2net, Inc.
Notes to Financial Statements (continued)
The Compensation Committee of the Board of Directors determines the option price
for stock options granted under the Stock Option Plan. Incentive stock options
may be granted at not less than 100% of the fair market value per share at the
date of grant as determined by the Board of Directors or committee thereof,
except for incentive options granted to a person owning greater than 10% of the
total combined voting power of all classes of the Company's stock, for which the
exercise price of the options must be not less than 110% of the fair market
value. Stock options exercised, granted and canceled during periods ended
September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
UNDER AVERAGE
OUTSTANDING EXERCISE
OPTIONS PRICE
------- -----
<S> <C> <C>
Options Granted...................................... 79,500 $8.00
Options Exercised.................................... - -
Options Cancelled.................................... - -
-------
Balance at September 30,1996........................ 79,500 $8.00
Options Granted...................................... 568,500 $7.97
Options Exercised.................................... - -
Options Cancelled.................................... (53,334) $8.00
-------
Balance at September 30,1997........................ 594,666 $7.97
=======
</TABLE>
Options considered exercisable as of September 30, 1997 and 1996 were 409,834
and 10,000 at weighted average exercise prices of $8.00 per share. The weighted
average remaining contractual life of the outstanding options at September 30,
1997 and 1996 was 5.756 years and 5.133 years, respectively. At September 30,
1997 and 1996, options for 155,334 and 670,500, respectively, remain available
for grant.
Pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions on the
option grant date: risk-free interest rates of 4.92% to 6.39%, expected
volatility of .548, expected option life of 1 to 5 years, and a dividend yield
of 0.0%.
Under 123, if the Company had elected to recognize the compensation cost based
upon the fair value of the options granted at the grant date, net loss would
have been increased as follows (the estimated fair value of the options is
amortized to expense over the options' vesting period.)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Net loss:
As reported......................... $ (1,718,480) $(417,758)
Pro forma........................... $ (2,103,405) $(445,202)
Net loss per share:
As reported......................... $(.50) $(.16)
Pro forma........................... $(.61) $(.17)
</TABLE>
The Statement 123 pro forma disclosures above are not necessarily indicative of
future pro forma disclosures because of the manner in which Statement 123
calculations are phased in over time.
7. REVOLVING CREDIT AGREEMENT
On November 20, 1996, the Company entered into a revolving credit agreement with
a bank that provides for the Company to borrow up to $750,000 at the bank's
prime lending rate (8.5% per annum as of September 30, 1997) plus 1% and all
amounts outstanding under the agreement are due by November 15, 1997. No amounts
were outstanding under the line of credit at September 30, 1997.
38
<PAGE> 39
go2net, Inc.
Notes to Financial Statements (continued)
8. SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Board of Directors approved an amendment
to the Company's 1996 Stock Option Plan to increase the number of shares
available for the grant of options thereunder from 750,000 to 1,500,000, which
is subject to shareholder approval, and the Company granted options to acquire
an additional 218,000 shares of the Company's common stock. Those options
generally vest over periods ranging from one to four years. The weighted average
exercise price for all such option grants was $7.90 per share.
39
<PAGE> 40
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
In accordance with General Instruction G(3) to Form 10-K, except as
indicated in the following sentence, the information called for by Items 10, 11,
12 and 13 is incorporated by reference from the registrant's definitive proxy
statement pursuant to Regulation 14A for the Annual Meeting of Shareholders to
be held on March 12, 1998. As permitted by General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, the information on executive
officers called for by Item 10 is included in Part I of this Annual Report on
Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS
ON FORM 8-K
(a) Financial Statements and Schedules
The Financial Statements and Schedules filed as part of this Annual
Report on Form 10-K are listed in index under Item 8.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1997
(c) List of Exhibits
40
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
3.1* Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated Bylaws of the Company.
4.1* Specimen stock certificate representing the shares of Common Stock.
10.1* Form of Preferred Stock Subscription Agreement.
10.2* Employment Agreement, dated March 1, 1996, between the Company and
Russell C. Horowitz.
10.3* Employment Agreement, dated March 1, 1996, between the Company and John
Keister.
10.4* Promissory Note, dated November 20, 1996, in the aggregate principal
amount of $500,000 made by the Company and payable to US Bank of
Washington.
10.5* Commercial Guaranty of Russell C. Horowitz, dated November 20, 1996,
guaranteeing all amounts due under the $500,000 Line of Credit between
the Company and US Bank of Washington.
10.6 Sublease Agreement, dated March 18, 1997, between the Company and Wells
Fargo Bank, N.A.
10.8* go2net, Inc. 1996 Stock Option Plan.
10.9* License Agreement dated as of January 31, 1997 between Netbot, Inc. and
the Company.
10.10* Subscription Agreement dated as of August 7, 1996 between Sports Ticker
Enterprises, L.P. and the Company.
10.11* S&P Comstock Information Distribution License Agreement dated as of
August 16, 1996 between S&P Comstock, Inc. and the Company.
10.12* Distributor Agreement dated as of September 6, 1996 between Comtex
Scientific Corporation and the Company.
11.1 Computation of Net Loss Per Share.
27 Financial Data Schedule
</TABLE>
- ---------------------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-19051).
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
go2net, Inc.
By: /s/ Russell C. Horowitz
----------------------------------------------
Name: Russell C. Horowitz
Title: President and Chief Executive Officer
Date: December 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Russell C. Horowitz President, Chief Executive December 23, 1997
- ----------------------------- Officer, Chief Financial
Russell C. Horowitz Officer and Director
(principal executive,
financial and accounting
officer)
/s/ John Keister Chief Operating Officer December 23, 1997
- ----------------------------- and Director
John Keister
/s/ Dennis Cline Director December 23, 1997
- -----------------------------
Dennis Cline
/s/ Michael J. Riccio Jr. Director December 23, 1997
- -----------------------------
Michael J. Riccio, Jr.
/s/ Martin L. Schoffstall Director December 23, 1997
- -----------------------------
Martin L. Schoffstall
</TABLE>
42
<PAGE> 1
Exhibit 10.6
SUBLEASE
Sublessor: WELLS FARGO BANK, N.A.,
a national banking association
Sublessee: go2net, Inc., a Delaware corporation
Premises
Located at: First Interstate Center
999 Third Avenue
Seattle, Washington
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. Basic Sublease Information..................................................................................... 1
2. Sublease....................................................................................................... 4
3. Condition of Premises.......................................................................................... 6
4. Term and Surrender............................................................................................. 7
5. Rent; Security Deposit......................................................................................... 7
6. Utilities and Services......................................................................................... 9
7. Operating Expenses; Personal Property Taxes.................................................................... 10
8. Use; Compliance with Laws; Permits............................................................................. 11
9. Assignment and Subletting...................................................................................... 11
10. Alterations.................................................................................................... 12
11. Repairs and Maintenance........................................................................................ 13
12. Insurance...................................................................................................... 13
13. Damage and Destruction......................................................................................... 15
14. Eminent Domain................................................................................................. 15
15. Default........................................................................................................ 16
16. Indemnification................................................................................................ 19
17. Brokerage Commission........................................................................................... 20
18. General Provisions............................................................................................. 21
</TABLE>
Exhibits: Exhibit A - Description of Premises
Exhibit B - Master Lessor's Consent Letter
Exhibit C - Furniture Being Sold to Sublessee
Exhibit D - Bill of Sale
1
<PAGE> 3
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT ("Sublease") is entered into effective as of
this 18th day of March, 1997, by and between WELLS FARGO BANK, N.A., a national
banking association ("Sublessor"), successor in interest to First Interstate
Bank of Washington, N.A., and go2net, Inc., a Delaware corporation
("Sublessee").
RECITALS
A. Sublessor is presently the lessee of the Master Premises pursuant to
the Master Lease. Sublessee has received a copy of the Master Lease.
B. Sublessor desires to sublease a portion of the Master Premises to
Sublessee and Sublessee desires to sublease such portion of the Master Premises
from Sublessor pursuant to the terms, covenants and conditions set forth below.
C. Except as expressly set forth below, all capitalized terms used
below without definition shall be as defined in the Basic Sublease Information
section.
AGREEMENT
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. BASIC SUBLEASE INFORMATION. The information set forth in this
Section (the "Basic Sublease Information") is intended to supplement and/or
summarize the provisions set forth in the balance of this Sublease. Each
reference in this Sublease to any of the terms set forth below shall mean the
respective information set forth next to such term as amplified, construed or
supplemented by the particular section(s) of the Sublease pertaining to such
information. In the event of a conflict between the provisions of this Section
and the balance of the Sublease, the balance of the Sublease shall control.
Sublessor: WELLS FARGO BANK, N.A., a national banking
association
Sublessee: go2net, Inc., a Delaware corporation
Sublessor's Wells Fargo Bank, N.A.
Address: 111 Sutter Street, 22nd Floor
San Francisco, California 94163
Attn: Lease Administration
Tel: (415) 396-3115
Fax: (415) 396-7659
1
<PAGE> 4
Sublessee's 1301 Fifth Avenue, Suite 3330
Address: Seattle, Washington 98101
Master Lease: Office Lease Agreement dated as of January 27,
1982 by and between 999 Third Avenue, Ltd., a
Washington limited partnership, predecessor in
interest to Master Lessor, and First Interstate
Bank of Washington, N.A., predecessor in interest
to Sublessor, as amended by the First Amendment to
Lease Agreement dated July 15, 1988 between 999
Third Avenue, Ltd., predecessor in interest to
Master Lessor and First Interstate Bank of
Washington, N.A., ("First Amendment") and by the
Second Amendment to Office Lease dated
____________, 1994 between Wright-Carlyle Seattle,
predecessor in interest to Master Lessor and First
Interstate Bank of Washington, N.A. ("Second
Amendment").
Master Lessor: Wright Runstad Properties L.P., a Delaware limited
partnership
Master
Premises: The premises leased by Sublessor under the Master
Lease, as more particularly described in Section 1.02
of the Office Lease, the First Amendment and Section
1 of the Second Amendment, together with all
appurtenances thereto.
Premises: 12,271 usable square feet; 13,481 rentable square
feet of floor 47 (load factor 1.0986) (the
"Premises"), as more particularly identified on
Exhibit A attached hereto, together with such
appurtenances thereto as are expressly described
herein. The terms of this Sublease shall be
adjusted to the extent that final measurements
vary from this square footage.
Building: That certain building commonly known as the First
Interstate Center, located at 999 Third Avenue,
Seattle, Washington, together with all landscaping,
common areas, parking areas, and other appurtenant
improvements and rights.
Permitted
Uses: Subject to the provisions of Section 13.01 of the
Master Lease, Sublessee shall use the Premises only
for executive office suites, computer programming
and related administrative uses. As Sublessor's
willingness to enter into this Sublease with
Sublessee was predicated, in part, on the nature of
Sublessee's business, and the compatibility of
2
<PAGE> 5
such business with other tenants in the Building,
Sublessee shall not use or permit the use of the
Premises for any other business, or purpose, or under
any other name, without Sublessor's prior written
consent, which may be withheld in Sublessor's sole
discretion. Sublessee shall promptly comply, at its
sole cost and expense, with regulations relating to
the use of the Premises, Building and Common Areas as
Sublessor may from time to time promulgate. Sublessee
shall maintain the Premises in a clean, orderly and
neat fashion to conform with the high standards of
the Building, permitting no odors to be emitted from
the Premises and shall neither commit waste nor
permit any waste to be committed thereon. Sublessee
shall not permit any accumulation of trash on or
about the Premises. Sublessee shall not create or
contribute to the creation of a nuisance in either
the Premises or the Building, and Sublessee shall not
engage in or permit any action that will disturb the
quiet enjoyment of any other tenant in the Building.
Parking
Spaces: Sublessee shall be entitled to six (6) covered
spaces pursuant to Section 1.03 of the Master
Lease, subject to the rates, restrictions and
limitations set forth in the Master Lease.
Base Rent: Annual base rent is $21.00 per rentable square
foot. Monthly Base Rent for the period June 1, 1997
through December 31, 1997 is $21,129.50; provided,
that Monthly Base Rent for June and July 1997 shall
be reduced by $7,166.00 to $13,963.50. Monthly
Base Rent for the balance of the Term is
$23,591.75.
Security
Deposit: Sublessee shall pledge to Sublessor during the
Term hereof a certificate of deposit in the amount
of $300,000.00.
3
<PAGE> 6
Sublessee's
Share; Base
Services
Year: 1.4759% (based on an agreed 13,481 rentable square
feet in the Premises and an agreed 913,400
rentable square feet in the Building). 1997 Base
Year
Term: Term Commencement Date to Expiration Date.
Term
Commencement
Date: June 1, 1997
Rent
Commencement
Date: June 1, 1997
Expiration
Date: September 18, 2003, not to go past the last day of
the Initial Term for the Master Premises set forth
in the Master Lease in any event.
Brokers: Flinn Ferguson
2. SUBLEASE.
2.1 Premises. Sublessor hereby subleases to Sublessee, and
Sublessee hereby subleases from Sublessor, the Premises, upon all of the terms,
covenants and conditions in this Sublease. The Premises shall be delivered to
Sublessee in "as is" condition.
2.1.1 Delivery Date. The Premises shall be delivered
to Sublessee on the Term Commencement Date.
2.1.2 Tenant Improvement Allowance; Sublessee's Work
Letter. Sublessor shall provide an allowance of $4.00 per rentable square foot
("Allowance") for Sublessee's tenant improvements and/or cabling in the
Premises. The Allowance represents Sublessor's total contribution for work
applicable to the Premises, and to the extent such costs exceed the Allowance,
Sublessee shall be solely responsible for all additional costs. All of
Sublessee's alterations of the Premises, and disbursement of the Allowance,
shall be governed by the terms of Sublessee's Work Letter attached as Exhibit C.
2.1.3 Build-Out. Sublessee acknowledges and agrees
that Sublessor has no construction obligations whatsoever with respect to the
improvement of the Premises for Sublessee's use and occupancy. In connection
with any improvement or alteration of the Premises proposed or undertaken by
Sublessee, Sublessee agrees
4
<PAGE> 7
that it shall construct its improvements or alterations in accordance with the
further terms of this Sublease and Sublessee's Work Letter and with strict
adherence to the plans and specifications therefor, which plans and
specifications shall be prepared by Sublessee at its sole cost and expense and
shall, together with Sublessee's architect and contractor, be subject to
Sublessor's and Master Lessor's prior written approval, which approval may be
withheld or conditioned as provided in the Master Lease. Sublessee shall provide
to Sublessor copies of all plans, drawings and specifications for any proposed
tenant improvements prior to the commencement of any work. All structural and
mechanical Alterations shall require Sublessor's and Master Lessor's express
prior written approval.
2.1.4 Furniture. Sublessor will sell to Sublessee, for
$77,000.00, payable $1,000.00 per month with Monthly Base Rent, the furniture
listed on Exhibit D attached, located in the Premises on the Term Commencement
Date. The purchase price for the furniture may be prepaid in full at any time.
The sale of the furniture shall be as is/where is, without warranty of any kind
and shall be evidenced by Sublessor's Bill of Sale to Sublessee in the form
attached as Exhibit E delivered on payment in full of the purchase price for the
furniture. Prior to payment in full of the purchase price for the furniture, if
Sublessee is in default of this Sublease, it shall not have the right to
possession of such furniture during the continuance of the default, and all such
furniture shall remain the property of Sublessor, to be surrendered in good
condition at the expiration or earlier termination of this Sublease.
2.2 Common Area. Sublessee shall have, as appurtenant to the
Premises and subject to limitations set forth in the Master Lease and in all
rules and regulations from time to time made by Master Lessor, the non-exclusive
right to use all "Common Areas," as defined in the Master Lease and the means of
ingress and egress provided to the Premises under the Master Lease, all subject
to the limitations thereon as provided in the Master Lease.
2.3 Sublease Subject to Master Lease. This Sublease is and shall be
at all times subject and subordinate to all of the terms, covenants and
conditions of the Master Lease and shall in all respects be limited and
construed in a fashion consistent with the estate granted to Sublessor by Master
Lessor pursuant to the Master Lease. Except as may be inconsistent with the
terms hereof, and except with respect to the following provisions of the Master
Lease, which are specifically excluded as provisions of this Sublease:
Section 1.03.1
Section 1.03.2
Section 1.03.4
Section 2.01
Section 2.02
Article III
5
<PAGE> 8
Article IV
Article V
Article VII
Article XIV
Section 19.03
Section 21.04
Section 21.05
Section 27.01
Section 27.03
Article XXVIII
Article XXIX
Section 33.03
First Amendment
Second Amendment
all the terms, covenants and conditions contained in the Master Lease shall be
applicable to this Sublease with the same force and effect as if Sublessor were
the Master Lessor and Sublessee were the tenant thereunder; provided, that
Sublessor shall have all rights against Sublessee as would be available to the
Master Lessor against the tenant under the Master Lease if such breach were by
the tenant thereunder; and provided, that incorporating such provisions herein
shall not obligate Sublessor or be construed as causing Sublessor to assume or
agree to perform any obligations assumed by Master Lessor under the Master
Lease. Notwithstanding anything contained herein, the only services or rights to
which Sublessee is entitled hereunder are those to which Sublessor is entitled
under the Master Lease, and Sublessor shall exercise all commercially reasonable
measures to assist Sublessee in obtaining such services and rights. Sublessee
shall not commit or permit to be committed any act or omission which shall
violate any terms, covenants or conditions of the Master Lease. Sublessee agrees
that it shall promptly forward to Sublessor any and all notices or other
communications received with regard to the Premises by Sublessee from the Master
Lessor under the Master Lease. In the event that the Master Lease shall
terminate for any reason other than (a) a breach of the Master Lease by
Sublessor or (b) mutual agreement of Master Lessor and Sublessor, this Sublease
shall also terminate and the parties hereunder shall have no further obligations
or liabilities to each other; provided that any such termination shall not
impair the rights of Sublessor under Section 0 hereof. Where any approval or
consent of Master Lessor under the Master Lease shall be required for any act of
Sublessee hereunder, obtaining the approval or consent of the Master Lessor
shall be a condition to the right of Sublessee to undertake such act under this
Sublease.
6
<PAGE> 9
3. CONDITION OF PREMISES.
3.1 Due Diligence Investigation. As of the date of this Sublease,
Sublessee acknowledges that Sublessee has conducted or has had the opportunity
to conduct a comprehensive investigation ("Due Diligence Investigation") of the
Premises and all other matters which in Sublessee's judgment may affect the
value or suitability of the Premises for Sublessee's purposes or which may
influence Sublessee's willingness to enter this Sublease, including, without
limitation, an inspection or examination of (i) the physical condition, size and
configuration of the Premises, including access, parking, location or
accessibility of utilities, the condition of the improvements, the existence of
any hazardous materials, soil or topographical conditions and earthquake
preparedness; (ii) the Master Lease; (iii) title; (iv) taxes; (v) income and
expense data; (vi) insurance costs; (vii) permissible uses and zoning or
development entitlement; (viii) any applicable covenants, conditions and
restrictions; and (ix) compliance with any federal, state or local law, statute,
rule or regulation now or hereafter in effect (including without limitation the
Americans With Disabilities Act of 1990, 42 U.S.C. Sections 12101 et
seq.).
3.2 No Representations and Warranties. Sublessee acknowledges that
Sublessor would not sublease the Premises except on an "as is" basis, and agrees
that (i) Sublessee accepts the Premises "as is"; (ii) neither Sublessor nor any
of its officers, agents, employees or representatives has made any
representations or warranties of any kind or nature, whether express or implied,
with respect to the Premises or any of the matters relating thereto (including
without limitation the matters referred to in Section 0 above); (iii) Sublessee
is relying solely on Sublessee's own Due Diligence Investigation; and (iv)
neither Sublessor nor Master Lessor (except as expressly provided in the Master
Lease) shall be required to perform any work of construction, alteration, repair
or maintenance of or to the Premises. If Sublessor obtains or has obtained or
provides to Sublessee any services, opinions, or work product of surveyors,
architects, soil engineers, environmental auditors, engineers, title insurance
companies, governmental authorities or any other person or entity with respect
to the Premises, Sublessee and Sublessor agree that Sublessor does so only for
the convenience of the parties, Sublessor does not vouch for the accuracy or
completeness of any such items and the reliance of Sublessee upon any such items
shall not create or give rise to any liability of or against Sublessor.
3.3 Release. Sublessee hereby fully releases and discharges
Sublessor, and its officers, directors, employees and agents, from and
relinquishes all rights, claims and actions that Sublessee may have against
Sublessor, or its officers, directors, employees or agents, which arise out of
or are in any way connected with the Premises or any matters related thereto,
including but not limited to the matters referred to in Section 0
7
<PAGE> 10
above. This release applies to all described rights, claims, and actions,
whether known or unknown, foreseen or unforeseen, present or future, except for
future conduct of Sublessor; provided, that Sublessor will make commercially
reasonable efforts to cooperate with Sublessee to cause Master Lessor to resolve
any issues that arise with respect to the Premises during the term of this
Sublease.
4. TERM AND SURRENDER.
4.1 Term. The Term of this Sublease shall commence upon the Term
Commencement Date specified in the Basic Sublease Information and shall expire
on the Expiration Date specified in the Basic Sublease Information. All
obligations of Sublessee hereunder shall commence on the Term Commencement Date.
4.2 Surrender. Upon the expiration or earlier termination of the
Term of this Sublease, Sublessee shall surrender the Premises, together with any
personal property therein belonging to Sublessor, and any Alterations (as
defined in Section 0 hereof) made thereto (other than any such Alterations which
Sublessee is required to remove as set forth in Section 0 hereof), broom clean
and free of debris, and in good working order, repair and condition, except for
reasonable wear and tear, and in such a condition that Sublessor can tender the
Premises to Master Lessor on September 18, 2003 in full compliance with the
Master Lease. All furniture, trade fixtures and other personal property
belonging to Sublessee shall be removed from the Premises on or before such
expiration or earlier termination, if such removal can be undertaken without
material damage to the Premises, and Sublessee shall immediately repair any
damage resulting from such removal. In no event shall HVAC equipment, plumbing
or sprinkler system components, air lines, power panels, electrical distribution
systems, lighting fixtures or any other component from any building system be
removed from the Premises unless such removal is required under the Master
Lease.
4.3 Holding Over Prohibited. Sublessee shall not remain in
possession of the Premises or any part thereof after the expiration of the Term
hereof. Any such occupancy shall constitute a trespass, and Sublessee shall be
liable to Sublessor for any and all claims, damages, liabilities, costs and
expenses (including attorneys' fees and expenses) incurred by Sublessor and
arising out of Sublessee's failure to timely surrender the Premises in
accordance with the requirements of this Sublease (including all liability
Sublessor may have over to Master Lessor).
5. RENT; SECURITY DEPOSIT.
5.1 Definition. As used in this Sublease, the term "Rent" shall
include: (i) the Monthly Base Rent; and (ii) all other amounts which Sublessee
is obligated to pay under the terms of this Sublease.
8
<PAGE> 11
5.2 Payment. Commencing on the Rent Commencement Date and continuing
on the first day of each month thereafter during the Term hereof, Sublessee
shall pay to Sublessor the Monthly Base Rent in advance. Rent for any portion of
a month shall be prorated on the basis of a thirty (30) day month. It is the
intention of the parties hereto that, except as expressly provided herein, this
Sublease shall not be terminable for any reason by Sublessee, and, except as
expressly provided in this Sublease or in the Master Lease, Sublessee shall in
no event be entitled to any abatement of or reduction in rent payable under this
Sublease. All Rent payable hereunder shall be paid in lawful money of the United
States and without prior notice or demand, deduction or offset for any cause
whatsoever. Sublessee's obligation to pay Rent is independent of the status of
completion of tenant improvements, for which Sublessor has no responsibility.
5.3 Late Charge and Interest. Sublessee acknowledges that its late
payment of Rent will cause Sublessor to incur certain costs and expenses not
contemplated by this Sublease, including without limitation administrative and
collection costs and processing and accounting expenses, the exact amount of
which is extremely difficult or impractical to fix. Accordingly, if any
installment of Rent is not paid within ten (10) days after the date such Rent is
due, Sublessee shall pay to Sublessor, in addition to the installment of Rent
then owing, a late payment charge equal to five percent (5%) of the amount of
the delinquent installment, regardless of whether a notice of default or notice
of termination has been given by Sublessor. The parties agree that this late
charge represents a reasonable estimate of the costs and expenses incurred by
Sublessor from, and is fair compensation to Sublessor for its loss suffered by,
such nonpayment by Sublessee. In addition to the five (5%) late charge, any Rent
or other amounts owing under this Sublease which are not paid within ten (10)
days after the date they are due shall thereafter bear interest at the rate
which is the lesser of eighteen percent (18%) per annum or the maximum rate
permitted by law ("Interest Rate"). Nothing in this Section shall relieve
Sublessee of its obligation to pay any Rent at the time and in the manner
provided by this Sublease or constitute a waiver of any default of Sublessee
with regard to any nonpayment of Rent.
5.4 Security Deposit. Sublessee has pledged to and deposited with
Sublessor a certificate of deposit in the amount of Three Hundred Thousand
Dollars ($300,000.00) as security for the full and faithful performance of every
provision of this Sublease to be performed by Sublessee. If Sublessee defaults
with respect to any monetary or any material nonmonetary provision of this
Sublease, including, without limitation, the provisions relating to the payment
of rent, the repair of damage to the Premises and/or cleaning the Premises upon
termination of this Sublease, Sublessor may use, apply or retain the security
deposit to cover (i) any rent or other sum in default, (ii) the cost of repair
of any damage to the Premises beyond normal wear and tear, (iii) the
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cost of any cleaning beyond normal wear and tear or (iv) any other amount which
Sublessor may spend or become obligated to spend by reason of Sublessee's
default or to compensate Sublessor for any other loss or damage which Sublessor
may suffer by reason of Sublessee's default to the full extent permitted by law;
provided, that the amount of this security deposit does not limit or cap
Sublessee's liability in the event of default. If any portion of this deposit is
so used, applied or retained, Sublessee shall, within ten (10) days after
written demand, deposit cash with Sublessor in an amount sufficient to restore
the security deposit and Sublessee's failure to do so shall be a material
default and breach of this Sublease. So long as Sublessee is not in default
hereunder, Sublessor shall be required to keep any security deposit separate
from its general funds, and Sublessee shall be entitled to interest on the
security deposit. If Sublessee shall fully and faithfully perform every
provision of this Sublease to be performed by it, the security deposit shall be
reduced as follows:
After 18 months $250,000.00
36 months $200,000.00
54 months $150,000.00
92 months $100,000.00
and balance thereof shall be returned to Sublessee or to the last assignee of
Sublessee's interest hereunder at the expiration of the Sublease Term. Following
a default by Sublessee that does not result in termination of this Sublease,
Sublessee shall restore the security deposit to $300,000.00 for the balance of
the Term hereof.
6. UTILITIES AND SERVICES.
6.1 Master Lessor to Provide Utilities and Services. Pursuant to the
Master Lease, Master Lessor is required to provide standard office building
utilities and services to the Premises, during normal business hours (as
detailed in the Master Lease). As to services and utilities not Master Lessor's
responsibility under the Master Lease, Sublessee shall arrange for, and procure
all facilities necessary for the provision to the Premises of, all other
services and utilities desired by Sublessee, including without limitation,
telephone services for the Premises. Sublessee shall make payment for any
utilities and services obtained by it directly to the person or entity supplying
such services.
6.2 Special or Excess Usage. Pursuant to the Master Lease, the
tenant may request services and utilities in excess of those that are the Master
Lessor's responsibility thereunder. If Sublessee orders any such excess services
or utilities from Master Lessor, Sublessee shall advise Sublessor of the amount
and times of such additional services and utilities so that Sublessor may
apportion to Sublessee invoiced amounts periodically received from Master Lessor
relating to the Master Premises, or alternatively,
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Sublessee shall arrange with Master Lessor for the directly billing to Sublessee
of the charges relating to Sublessee's excess usage.
6.3 Nonliability. Unless caused by Sublessor, Sublessor shall not be
liable for any damages directly or indirectly resulting from, nor shall the
rental herein reserved be abated (except as provided below) by reason of, the
interruption of use of the Premises as a result of any failure to furnish or
delay in furnishing any utilities or services or the failure of the Master
Lessor to properly maintain the Premises, Master Premises, Building or any
Common Areas under the Master Lease, as provided in Section 0 below. To the
extent that the Master Lessor is required to provide services and utilities to
the Master Premises, Building or to properly maintain the Premises, Master
Premises, Building or Common Areas, under the terms of the Master Lease,
Sublessee acknowledges that Sublessor shall be under no obligation to provide
any such services and utilities or maintenance. Sublessor, upon written notice
by Sublessee, shall diligently attempt to enforce all obligations of Master
Lessor under the Master Lease, provided that Sublessor shall not be required to
initiate or otherwise participate in any legal action in connection with such
enforcement. If Sublessor is prevented from performing any of its obligations
under this Sublease by a breach by Master Lessor of the Master Lease, then
Sublessor's sole obligation under this Sublease shall be to cooperate with
Sublessee, at Sublessee's sole cost and expense, in pursuing the correction or
cure of Master Lessor's default and in enforcing the terms of the Master Lease;
provided, that neither Sublessor nor Sublessee shall be obligated to pursue
legal action against Master Lessor. Except for claims, costs or damages for
which Sublessor is responsible pursuant to Section 16.2, Sublessor shall not be
liable for any claims, costs or damages, including without limitation, loss or
injury to person or property, and Sublessee shall not be entitled to any
reduction or abatement of rent or other charges hereunder, on account of any
failure of Master Lessor to perform its obligations under the Master Lease,
except that Rent payable hereunder shall be abated in an amount equal to
Sublessee's pro rata share of any actual abatement of rent or other charges
payable under the Master Lease as a result of Master Lessor's failure to so
perform.
In the event that Master Lessor breaches its obligations under the Master lease
as made applicable to this Sublease pursuant to Section 2.3, and Master Lessor
fails to cure said breach within the time provided by the Master Lease, then,
unless the breach is caused or instigated by Sublessor, Sublessee's sole remedy
shall be to enforce the rights that would be available to the Sublessor as
tenant under the Master Lease against Master Lessor as derived under this
Sublease.
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7. OPERATING EXPENSES; PERSONAL PROPERTY TAXES.
7.1 Sublessee to Pay Operating Expenses. Commencing on January 1,
1998, Sublessee hereby agrees to reimburse Sublessor for Sublessee's Share (as
defined in the Basic Sublease Information) of the cost of services and utilities
(as set forth in Article IX of the Master Lease)("Operating Expenses") incurred
after 1997 that are in excess of such expenses in the 1997 Base Services Year.
To give effect to this Section 0, the parties agree that Sublessor shall collect
payments from Sublessee for Sublessee's Share of all increases in Operating
Expenses in the same manner as Master Lessor collects the Estimated Costs
Allocable to the Premises from Sublessor pursuant to Article IX of the Master
Lease, except that (i) Sublessee acknowledges that Master Lessor, and not
Sublessor, shall have control over all books and records relating to Operating
Expenses, and (ii) Sublessor shall promptly forward statements received by
Sublessor from Master Lessor relating to Operating Expenses, and Sublessee shall
pay all amounts due from it within ten (10) days after receipt of Sublessor's
invoiced amount.
7.2 Personal Property Taxes. Sublessee shall pay prior to
delinquency any and all taxes and assessments against and levied upon trade
fixtures, furnishings, equipment, and personal property contained in the
Premises. Whenever possible, Sublessee shall cause such items to be assessed and
billed separately from the real property portion of the Premises. Sublessee
shall be responsible for any taxes and assessments attributable to any such
items assessed against the real property portion of the Premises.
8. USE; COMPLIANCE WITH LAWS; PERMITS.
8.1 Use. The Premises are to be used for the Permitted Use specified
in the Basic Sublease Information, and for no other purpose or business.
8.2 Compliance with Law; Prohibited Activities. Sublessee shall
observe and comply with the requirements of all covenants, conditions and
restrictions of record regarding the Premises and all federal, state and local
laws, statutes, rule and regulations now or hereafter in effect ("Laws"),
including but not limited to the Americans with Disabilities Act of 1990, 42
U.S.C. Sections 12101 et seq., which apply to the Premises or the use or
occupancy thereof by Sublessee, including but not limited to the obligation to
alter, maintain, repair, improve or restore the Premises, and all parts thereof
structural and otherwise, in compliance and conformity with all such Laws.
Sublessee shall not (i) commit, or suffer to be committed or exist, on the
Premises any waste, or any nuisance, or other act or thing which may disturb the
quiet enjoyment of any other tenant in the Building or Master Premises; or (ii)
do or permit to be done in or about the Premises, or bring or keep anything
therein, which will in any way increase the existing rate, or cause the
cancellation, of the all risk fire insurance on the Master Premises or the
Building.
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8.3 Permits and Licenses. Sublessee shall apply for and obtain, at
its sole expense, all permits, licenses, consents, permissions or other
approvals of any governmental or quasi-governmental authorities which may be
required in order that Sublessee may do any of the things that Sublessee is
required or permitted to do under the provisions of this Sublease. Sublessor
agrees that in all such cases, whenever reasonably requested by Sublessee,
Sublessor shall cooperate with Sublessee in obtaining such permits, licenses,
consents, permissions and other approvals, provided that Sublessor shall not be
required to incur any cost or expense as a result of such cooperation.
9. ASSIGNMENT AND SUBLETTING.
9.1 Sublessor's and Master Lessor's Consent to Assignment and
Subletting Required. Sublessee shall not assign or sublease any portion of the
Premises without the prior written consent of Sublessor and Master Lessor, which
shall not be unreasonably withheld or delayed, and subject to the provisions of
Article V of the Master Lease. If Sublessee should attempt to make any
assignment or subletting of this Sublease other than in compliance with this
section, then Sublessor may, in its sole discretion, terminate this Sublease in
its entirety upon written notice thereof to Sublessee.
9.2 Consideration to Sublessor. In the event of any subsequent
assignment or sublease, Sublessor shall be entitled to receive, as additional
rent, one-half (1/2) of any consideration, paid by the assignee or subtenant for
the assignment or sublease and one-half (1/2) of the excess of the amount of
rent paid for the sublet or assigned space by the subtenant or assignee over the
applicable amount of Monthly Base Rent, net of transaction costs, which are the
cost of usual and customary tenant improvements, brokerage commissions and down
time to secure a new tenant. Upon Sublessor's request, Sublessee shall assign to
Sublessor all amounts to be paid to Sublessee by the assignee or subtenant and
shall direct such assignee or subtenant to pay the same directly to Sublessor.
If there is more than one subsequent sublease under this Sublease, the amounts
(if any) to be paid by Sublessee to Sublessor pursuant to the preceding sentence
shall be separately calculated for each sublease and amounts due Sublessor with
regard to any one subsequent sublease may not be offset against rental and other
consideration pertaining due under any other subsequent sublease.
With regard to an approved assignment or subletting, Sublessee acknowledges that
Sublessor's agreement to deal directly with the assignee or subtenant with
regard to such party's occupancy of the Premises and the administration of the
Sublease, without requiring Sublessee to monitor or become directly involved in
such matters, constitutes appropriate and acceptable consideration for the
capture by Sublessor of any rent or consideration paid by the assignee or
subtenant in excess of that required to be paid by
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Sublessor under the Sublease.
10. ALTERATIONS. The initial alterations to the Premises shall be
undertaken pursuant to Section 2.1.2 hereof. Sublessee shall not make or suffer
to be made any subsequent alterations, additions or improvements (collectively
"Alterations") in, on, or to the Premises without the prior written consent of
Sublessor, which consent shall not be unreasonably withheld, nor without the
prior written consent of Master Lessor, if and to the extent required by the
Master Lease. Construction of all permitted Alterations must be in compliance
with the provisions of the Master Lease applicable thereto, including but not
limited to the procurement of insurance and bonds. Any Alterations in, on or to
the Premises that Sublessee desires to undertake shall be presented to Sublessor
in written form, with proposed detailed plans. Sublessor shall have thirty (30)
days after receipt of Sublessee's plans, to notify Sublessee in writing whether
it approves or disapproves said plans. If Sublessor disapproves Sublessee's
plans, it shall set forth with specificity and detail the objections it has to
the same, and the changes that are needed to make such work acceptable to
Sublessor. Sublessor may condition its consent to any Alteration upon the
requirement that Sublessee, at Sublessee's sole cost and expense, obtain
builder's risk insurance or self-insure with regard to such Alteration, and/or
provide to Sublessor a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such Alterations. Sublessee shall reimburse
Sublessor for all actual and reasonable costs incurred by Sublessor in reviewing
Sublessee's plans for any proposed Alteration after the initial build out of its
space. Sublessee shall pay promptly for all work done by it or upon its order.
Except as specifically set forth herein, any Alterations Sublessee may be
required or permitted to make shall be made by Sublessee at Sublessee's sole
cost and expense (including, without limitation, all costs of complying with the
Americans with Disabilities Act, whether or not such compliance requires
structural improvements), and Sublessee shall notify Sublessor and Master Lessor
in advance of the commencement of any such work so that each of them may, at
each of their sole options, post appropriate notices of nonresponsibility. All
Alterations shall be made under the supervision of a competent architect or
licensed structural engineer, in a good and workmanlike manner and in accordance
with any plans approved by Sublessor and Master Lessor and all applicable laws
and all requirements of the Master Lease. Before commencement of any Alteration,
Sublessee shall provide to Sublessor a copy of the building permit for such work
and a list of all contractors or subcontractors to be used. Upon completion of
such Alteration, Sublessee shall timely and properly record a Notice of
Completion in the county recorder's office for the county in which the Premises
are located. Upon the expiration or sooner termination of this Sublease and upon
written demand by Sublessor, Sublessee shall, at Sublessee's sole cost and
expense, immediately and with all due diligence: (i) remove any Alterations made
or paid for by Sublessee; and (ii) repair and restore the Premises to its
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original condition, reasonable wear and tear excepted. Any Alteration not so
requested to be removed by Sublessor, and any furnishing, trade fixtures or
other personal property of Sublessee which cannot be removed from the Premises
without material damage thereto, shall become a part of the Premises and the
property of Sublessor (or Master Lessor, to the extent so provided in the Master
Lease) upon expiration or sooner termination of this Sublease and shall remain
on and be surrendered with the Premises.
11. REPAIRS AND MAINTENANCE. Except to the extent that Master Lessor
shall be obligated to maintain, repair or replace the same under the Master
Lease, Sublessee shall, at Sublessee's sole expense, keep, maintain, repair and
replace all of the Premises to the same extent as the tenant under the Master
Lease is so obligated. In addition, Sublessee shall, at Sublessee's sole
expense, immediately repair any Common Areas or elements of the Building damaged
by Sublessee or Sublessee's agents, employees, licensees, invitees and visitors.
All maintenance, repairs and replacement by Sublessee hereunder shall be
undertaken in accordance with, and shall be governed by, the requirements of
Section 0 above. Sublessee acknowledges that Sublessor is under no duty to make
any repairs or improvements to the Premises, and Sublessee hereby waives the
benefit of any statute or principal of law or equity, now or hereinafter in
effect, which would afford Sublessee the right to make repairs at Sublessor's
expense or to terminate this Sublease because of Sublessor's failure to keep the
Premises in good order, condition and repair.
12. INSURANCE. During the Term, Sublessee shall procure and maintain, at
its sole cost and expense, in full force and effect the policies of insurance
described below. Each policy of insurance required to be maintained by Sublessee
hereunder shall be issued by an insurance company authorized to do business in
the State of Washington, with a rating classification of at least an A-, Class
VIII status as rated from time to time in the most current edition of Best's
Insurance Reports and shall provide for only such deductibles as are reasonably
acceptable to Sublessor. Such policies shall be primary and non-contributing and
shall name Sublessor (and Master Lessor, to the extent required by the Master
Lease) as an additional named insured.
12.1 Property. A policy or policies of all risk property, fire, and
extended coverage insurance covering any and all personal property,
improvements, Alterations and betterments placed in the Premises by Sublessee,
including without limitation, coverage of vandalism and malicious mischief,
boilers and machinery, an inflation endorsement, and a sprinkler leakage
endorsement, in an amount equal to one hundred percent (100%) of the full
insurance replacement value of such personal property, improvements, Alterations
and betterments.
12.2 Liability. A policy or policies of comprehensive
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general liability insurance, in the form customary to the locality in which the
Premises are located, insuring Sublessee's activities and those of Sublessee's
officers, employees, agents, servants, licensees, subtenants, concessionaires,
contractors and invitees with respect to the Premises against loss, damage or
liability for injury or death of any person or loss or damage to property
occurring on the Premises or as a result of occupancy or use of the Premises and
contractual liability coverage for obligations assumed under this Sublease
(including without limitation the indemnity provisions of Section 0 below), with
a limit of not less than Three Million Dollars ($3,000,000) per occurrence for
injury to any number of persons and/or property damage in any one occurrence.
The adequacy of the coverage afforded by such insurance shall be subject to
review by Sublessor from time to time, and, if it appears in such review that a
prudent business person in the area operating a similar business to that
operated by the Sublessee on the Premises would increase the limits of such
insurance, Sublessee shall effect such increases within thirty (30) says of
receipt of notice from Sublessor requesting such increase.
12.3 Other Insurance. Sublessee shall also keep in full force and
effect during the Term (a) insurance payable to Sublessor against loss of Rent
in case of fire or other casualty, in an amount at least equal to the amount of
Rent payable by Sublessee during the one (1) year next ensuing, and (b) workers'
compensation insurance in amounts required by applicable law and employer's
liability insurance in an amount equal to Five Hundred Thousand Dollars
($500,000) per injury or illness.
12.4 Waiver of Subrogation. Any policy or policies of insurance
which either party obtains in connection with the Premises shall, to the extent
the same can be obtained without undue expense, include a clause or endorsement
denying the insurer any rights of subrogation against the other party (and with
respect to insurance obtained by Sublessee, against Master Lessor) to the extent
rights have been waived by the insured prior to the occurrence of injury or
loss. Sublessee and Sublessor waive any rights of recovery against the other
(and, in the case of Sublessee, against Master Lessor) for injury or loss due to
hazards covered by insurance containing such a waiver of subrogation clause or
endorsement to the extent of the injury or loss covered thereby.
12.5 Insurance Certificates. On or before the Term Commencement Date
(and from time to time, no later than thirty (30) days prior to the expiration
of each insurance policy) Sublessee shall furnish to Sublessor a certificate of
insurance issued by the insurance carrier of each policy of insurance carried by
Sublessee pursuant hereto. Such certificates of insurance shall reflect that
Sublessor (and Master Lessor, if required by the Master Lease) is an additional
named insured; and that such insurance policies shall not be cancelable, subject
to reduction of coverage or any other material amendment without a
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minimum of thirty (30) days prior written notice to Sublessor and any other
additional named insureds.
13. DAMAGE AND DESTRUCTION.
13.1 Termination of Master Lease. If as a result of any damage or
destruction, the Master Lease terminates as to all or any portion of the
Premises or Master Lessor, Sublessor and Sublessee either mutually agree or
Master Lessor alone or Sublessor with Sublessee's consent exercise any option
either may have to terminate the Master Lease as to all or any portion of the
Premises, this Sublease shall terminate to the same extent as of the date of
such termination of the Master Lease.
13.2 Continuation of Sublease; Reconstruction. If this Sublease is
not terminated following any damage or destruction as provided above, this
Sublease shall remain in full force and effect and Master Lessor shall repair,
restore or rebuild the Premises in the manner provided in the Master Lease.
13.3 Rent Abatement. Rent due and payable hereunder shall be abated
proportionately, but only if there is an abatement of rent under the Master
Lease (such abatement hereunder being equal to Sublessee's pro rata share of any
abatement under the Master Lease), during any period in which, by reason of any
such damage or destruction, Sublessor reasonably determines that there is
substantial interference with the operation of Sublessee's business in the
Premises, having regard to the extent to which Sublessee may be required to
discontinue its business in the Premises.
13.4 Waiver. With respect to any destruction which Master Lessor is
obligated to repair or may elect to repair under the terms of the Master Lease,
Sublessee hereby waives all rights to terminate this Lease pursuant to rights
otherwise presently or hereafter accorded by law to tenants, except as expressly
otherwise provided herein.
14. EMINENT DOMAIN.
14.1 Termination of Master Lease. If as a result of any condemnation
by eminent domain, inverse condemnation or sale in lieu of condemnation, for any
public or a quasi-public use or purpose ("Condemned" or "Condemnation"), the
Master Lease terminates as to all or any portion of the Premises or Master
Lessor, Sublessor and Sublessee either mutually agree or Master Lessor alone or
Sublessor with Sublessee's consent exercise any option either may have to
terminate the Master Lease as to all or a portion of the Premises, this Sublease
shall terminate to the same extent as of the date of the termination of the
Master Lease.
14.2 Partial Condemnation. If this Sublease is not terminated
following any such Condemnation as set forth above, this Sublease shall remain
in full force and effect and Master
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Lessor shall repair, restore or rebuild the Premises in the manner provided in
the Master Lease. After the date of such title vesting, the Monthly Base Rent
shall be reduced pursuant to Section 22.03 of the Master Lease.
14.3 Sublessee's Award. The entire Condemnation award shall belong
solely to Sublessor or Master Lessor, as the case may be. Notwithstanding the
foregoing, Sublessee shall have the right to recover from the condemning
authority, but not from Sublessor or Master Lessor, such compensation as may be
separately awarded to Sublessee (as opposed to any award to Sublessor or Master
Lessor) in connection with the costs of moving Sublessee's personal property,
fixtures, and leasehold improvements owned by Sublessee (as opposed to the
improvements owned by Sublessor or Master Lessor) to a new location.
14.4 Notice and Execution. Sublessor shall, immediately upon service
of process in connection with any condemnation or potential condemnation, give
Sublessee notice in writing thereof. Sublessee shall immediately execute and
deliver to the Sublessor all instruments that may be required to effectuate the
provisions of this Section.
15. DEFAULT.
15.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default" on the part of Sublessee
with or without notice from Sublessor (except as required by Section 0 below):
15.1.1 Abandonment. Sublessee's abandonment of the Premises;
15.1.2 Payment. Sublessee's failure to pay any installment of
Rent on or before five (5) days after receipt of written notice that payment is
due, which notice may be given on or after five (5) days after the payment is
due;
15.1.3 Performance. Sublessee's failure to perform any of
Sublessee's covenants, agreements or obligations hereunder (other than the
nonpayment of Rent which shall be governed by Section 0 above) on or before
thirty (30) days after written notice thereof from Sublessor;
15.1.4 Assignment. A general assignment by Sublessee for the
benefit of creditors;
15.1.5 Bankruptcy. The filing of a voluntary petition by
Sublessee, or the filing of an involuntary petition by any of Sublessee's
creditors seeking the rehabilitation, liquidation or reorganization of Sublessee
under any law relating to bankruptcy, insolvency or other relief of debtors;
15.1.6 Receivership. The appointment of a
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receiver or other custodian to take possession of substantially all of
Sublessee's assets or of this leasehold;
15.1.7 Insolvency, Dissolution, Etc. Sublessee shall become
insolvent or unable to pay its debts, or shall fail generally to pay its debts
as they become due; or any court shall enter a decree or order directing the
winding up or liquidation of Sublessee or of substantially all of its assets; or
Sublessee shall take any action toward the dissolution or winding up of its
affairs or the cessation or suspension of its use of the Premises; or
15.1.8 Attachment. Attachment, execution or other judicial
seizure of substantially all of Sublessee's assets or this leasehold.
15.2 Sublessor's Remedies.
15.2.1 Abandonment. If Sublessee vacates or abandons the
Premises, this Sublease shall continue in effect unless and until terminated by
Sublessor in writing, and Sublessor shall have all of the rights and remedies
provided by law for the enforcement of this Sublease.
15.2.2 Termination. Following the occurrence of any Event of
Default, Sublessor shall have the right, so long as the default continues, to
terminate this Sublease by written notice to Sublessee setting forth: (i) the
default; (ii) the requirements to cure it; and (iii) a demand for possession,
which shall be effective three (3) days after it is given. Sublessor shall not
be deemed to have terminated this Sublease other than by delivering written
notice of termination to Sublessee.
15.2.3 Possession. Following termination of the Sublease,
without prejudice to any other remedies Sublessor may have by reason of
Sublessee's default or of such termination, Sublessor may then or at any time
thereafter (i) peaceably reenter the Premises, or any part thereof, upon
voluntary surrender by Sublessee, or, expel or remove Sublessee and any other
persons occupying the Premises, using such legal proceedings as may be
available; (ii) repossess and enjoy the Premises, or relet the Premises or any
part thereof for such term or terms (which may be for a term extending beyond
the Term), at such rental or rentals and upon such other terms and conditions as
Sublessor in Sublessor's sole discretion shall determine, with the right to make
reasonable alterations and repairs to the Premises; and (iii) remove all
personal property from the Premises.
15.2.4 Recovery. Following termination of the Sublease,
Sublessor shall have all the rights and remedies a landlord is entitled to at
law and in equity, including the right to recover from Sublessee the following:
(i) the worth at the time of the award of the unpaid rent which had been earned
at the time of termination, less the rent, if any, that would have been
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earned if Sublessor had relet the Premises in a commercially reasonable manner;
(ii) the worth at the time of the award of the amount by which the unpaid rent
which would have been earned after termination until the time of the award
exceeds the amount of such rental loss that Sublessee proves could have been
reasonably avoided; (iii) the worth at the time of the award of the amount by
which the unpaid rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Sublessee proves could be reasonably
avoided; and (iv) any other amount necessary to compensate Sublessor for all
detriment proximately caused by Sublessee's failure to perform Sublessee's
obligations under the Sublease or which in the ordinary course of things would
be likely to result therefrom. The "worth at the time of award" of the amounts
referred to in (i) and (ii) of this subsection, shall be computed by allowing
interest at the Interest Rate set forth in Section 0 above. The "worth at the
time of the award" of the amount referred to in (iii) above shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%). Interest shall accrue on
any award calculated from the date the rent was due for each month at 18% per
annum.
15.2.5 Other. If Sublessee causes or threatens to cause a
breach of any of the covenants, terms or conditions contained in this Sublease,
Sublessor shall be entitled to retain all sums held by Sublessor, any trustee or
in any account provided for herein, to enjoin such breach or threatened breach,
and to invoke any remedy allowed at law, in equity, by statute or otherwise as
though re-entry, summary proceedings and other remedies were not provided for in
this Sublease.
15.2.6 Cumulative. Each right and remedy of Sublessor and
Sublessee provided for in this Sublease shall be cumulative and shall be in
addition to every other right or remedy provided for now or hereafter existing
at law, in equity, by statute or otherwise. The exercise or beginning of the
exercise by Sublessor of any one or more of the rights or remedies provided for
in this Sublease, or now or hereafter existing at law, in equity, by statute, or
otherwise, shall not preclude the simultaneous or later exercise by Sublessor of
any or all other rights or remedies provided for in this Sublease or now or
hereafter existing at law, in equity, by statute, or otherwise.
15.2.7 No Waiver. No failure by Sublessor or Sublessee to
insist upon the strict performance of any term hereof or to exercise any right
or remedy consequent upon a breach thereof, and no acceptance of full or partial
payment of rent during the continuance of any such breach shall constitute a
waiver of any such breach or of any such term. Efforts by Sublessor or Sublessee
to mitigate the damages caused by Sublessee's or Sublessor's breach of this
Sublease shall not be construed to be a waiver of Sublessor's or Sublessee's
right to recover damages under this Section.
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15.2.8 Sublessor's Right to Perform. Upon Sublessee's failure
to perform any obligation of Sublessee hereunder, including, without limitation,
payment of Sublessee's insurance premiums and charges of contractors who have
supplied materials or labor to the Premises, Sublessor shall have the right, but
not the obligation, to perform such obligations of Sublessee on behalf of
Sublessee and/or to make payment on behalf of Sublessee to such parties. Upon
demand, Sublessee shall reimburse Sublessor for the cost of Sublessor's
performing such obligations on Sublessee's behalf, including, without
limitation, reimbursement of any amounts that may be expended by Sublessor and
Sublessor's reasonable attorneys' fees, plus interest at the Interest Rate set
forth in Section 0 above, from the date of any such expenditure until the same
is repaid.
15.2.9 Additional Remedies. In addition to the foregoing
remedies and so long as this Sublease is not terminated, Sublessor shall have
the right to maintain or improve the Premises without terminating this Sublease,
to incur commercially reasonable expenses on behalf of Sublessee in seeking a
subtenant or assignee, including, without limitation, brokers' commissions,
expenses of remodeling the Premises, and other inducements Sublessor determines
are necessary, to cause a receiver to be appointed to administer the Premises
and new or existing subleases and to add to the Rent payable hereunder all of
Sublessor's costs in so doing, including reasonable attorneys' fees, with
interest at the Interest Rate set forth in Section 0 above from the date of such
expenditure until the same is repaid.
15.2.10 Additional Rent. For purposes of any unlawful detainer
action by Sublessor against Sublessee, Sublessor shall be entitled to recover as
Rent not only such sums specified as the Monthly Base Rent which may then be
overdue, but also any and all additional sums of money as may then be overdue.
15.2.11 Indemnification. Sublessor's exercise of any one or
more of the remedies set forth in this Section shall not affect the rights of
Sublessor or the obligations of Sublessee under the indemnification set forth in
Section 0 hereof.
15.2.12 After Default. Sublessor shall be under no obligation
to observe or perform any covenant of this Sublease on its part to be observed
or performed which accrues after the date of any Event of Default, and for so
long as the Event of Default continues.
15.3 Sublessee's Remedies. In the event of a default by Sublessor
hereunder, Sublessee shall have all remedies available to Sublessor as tenant
pursuant to the Master Lease.
16. INDEMNIFICATION.
16.1 Indemnification of Sublessor. Sublessee hereby releases and
shall indemnify, defend with counsel
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acceptable to Sublessor, and hold Sublessor, and its officers, directors,
employees and agents, harmless from and against any and all liabilities,
penalties, losses, damages, costs and expenses, demands, causes of action,
claims or judgments (including, without limitation, attorneys' fees and
expenses) (collectively, "Claims") arising, claimed or incurred against or by
Sublessor, or its officers, directors, employees or agents, from any matter or
thing arising from (i) the use or occupancy of the Premises by Sublessee, or its
officers, directors, employees, agents, licensees and invitees, the conduct of
Sublessee's business, or from any activity, work or other thing done, permitted
or suffered by Sublessee in or about the Premises; (ii) any accident, injury to
or death of Sublessee and/or its officers, directors, employees, agents,
invitees or licensees or any other person or loss of or damage to property of
Sublessee or any such persons occurring on or about the Premises or any part
thereof during the term hereof; (iii) any breach or default in the performance
of any obligation on Sublessee's part to be performed under the terms of this
Sublease; or (iv) the performance of any labor or services or the furnishing of
any materials or other property in respect of the Premises or any part thereof
at the request of Sublessee, or its officers, directors, agents and employees;
provided that Sublessee shall have no obligation to indemnify, defend and hold
Sublessor harmless from and against any Claims resulting solely from the
negligence or willful misconduct of Sublessor. Notwithstanding any provision
hereof to the contrary, the indemnification provided in this Section shall
survive any termination of this Sublease or expiration of the Term hereof.
Sublessee shall give prompt notice to Sublessor in case of casualty or accidents
known to Sublessee on or about the Premises.
16.2 Indemnification of Sublessee. Sublessor hereby releases and
shall indemnify, defend with counsel acceptable to Sublessee, and hold
Sublessee, and its officers, directors, employees and agents, harmless from and
against any and all Claims arising, claimed or incurred against or by Sublessee,
or its officers, directors, employees or agents, arising from (i) acts or
omissions of Sublessor; (ii) any accident, injury to or death of Sublessor
and/or its officers, directors, employees, agents, invitees or licensees or any
other person or loss of or damage to property of Sublessor or any such persons
occurring on or about the premises or any part thereof during the term hereof;
and (iii) any breach or default in the performance of any obligation on
Sublessor's part to be performed under the terms of this Sublease; provided,
that Sublessor shall have no obligation to indemnify, defend and hold Sublessee
harmless from and against any Claims resulting solely from the negligence or
willful misconduct of sublessee. Notwithstanding any provision hereof to the
contrary, the indemnification provided in this Section shall survive any
termination of this Sublease or expiration of the term hereof. Sublessor shall
give prompt notice to Sublessee in case of casualty or accidents known to
Sublessor on or about the Premises.
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17. BROKERAGE COMMISSION. Each party represents to the other that,
except for Flinn Ferguson, whose commission shall be paid by Sublessor, no
broker or finder can properly claim a right to a commission or a finder's fee
based upon contacts between the claimant and such party with respect to such
party, this Sublease or the Premises. Each party shall indemnify, defend and
hold the other party harmless from and against any loss, cost or expense,
including, but not limited to, attorneys' fees and court costs, resulting from
any claim for a fee or commission by any other broker or finder in connection
with the Premises and this Sublease.
18. GENERAL PROVISIONS.
18.1 Notices. All notices or demands of any kind required or
desired to be given hereunder shall be in writing and mailed postage prepaid by
certified or registered mail, return receipt requested, or by personal delivery,
to the appropriate address indicated in the Basic Sublease Information, or at
such other place or places as either Sublessor or Sublessee may, from time to
time, designate in a written notice given to the other. Notices shall be deemed
to be delivered four (4) days after the date of mailing thereof, or upon
receipt.
18.2 Entry by Sublessor. Sublessor and its authorized
representatives shall have the right to enter the Premises at all reasonable
times and upon reasonable notice (provided that in the event of an emergency,
notice need not be given) for the purpose of inspecting the same or taking any
action or doing any work permitted hereunder (but nothing herein contained in
this Lease shall create or imply any duty on the part of Sublessor to make any
such inspection or to take any such action or do any such work). No such entry
shall constitute an eviction of Sublessee. In connection with any such entry,
Sublessor will use reasonable efforts not to disrupt or interfere with the
normal operation of Sublessee's business.
18.3 Estoppel Certificates. Each party shall, from time to time
upon not less than thirty (30) days prior written notice from the other execute,
acknowledge and deliver to the other a statement in writing (a) certifying that
this Sublease is unmodified and in full force and effect (or, if modified,
stating the nature of such modification), and the date to which the Rent and
other charges are paid in advance, if any, and (b) acknowledging that there are
not, to such party's knowledge, any uncured defaults on the part of the other
hereunder, or specifying such defaults if any are claimed, and (c) setting forth
the date of expiration of the term hereof.
18.4 Liens. Sublessee covenants that it will not, during the Term
hereof, suffer or permit any lien to be attached to or upon the Premises, or any
portion thereof, by reason of any act or omission on the part of Sublessee, and
hereby agrees to save and hold harmless Sublessor from or against any such lien
or claim of lien. In the event any such lien does attach or any
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<PAGE> 26
claim of lien is made against the Premises which may be occasioned by any act or
omission upon the part of Sublessee, and shall not be released within thirty
(30) days after notice from Sublessor to Sublessee so to do, Sublessor in its
sole discretion, except as provided below, may pay and discharge the same and
remove any such lien from the Premises. Sublessee agrees to repay and reimburse
Sublessor, upon demand, for any amount which may have been paid by Sublessor in
discharging such lien, together with interest at the Interest Rate set forth in
Section 0 above from the date of the expenditure by Sublessor to the date of
repayment by Sublessee.
18.5 Time. Time is of the essence of this Sublease. If any date set
forth for the performance of any obligation or for the delivery of any
instrument or notice should be on a Saturday, Sunday or legal holiday,
compliance with such obligations or delivery shall be deemed acceptable on the
next business day following such Saturday, Sunday or legal holiday. As used
herein, the term "legal holiday" means any state or federal holiday for which
financial institutions and post offices are generally closed in the State of
Washington for observance thereof. Except as expressly provided to the contrary
in this Sublease, all references to days shall mean calendar days.
18.6 Entire Agreement. This Sublease contains all of the covenants,
conditions and agreements between the parties concerning the Premises, and shall
supersede all prior correspondence, agreements and understandings concerning the
Premises, both oral and written. No addition or modification of any term or
provision of this Sublease shall be effective unless set forth in writing and
signed by both Sublessor and Sublessee.
18.7 Successors and Assigns. Subject to the provisions of this
Sublease relating to assignment, mortgaging and subletting, this Sublease is
intended to and does bind the heirs, executors, administrators, successors and
assigns of any and all of the parties hereto.
18.8 Authority. Each individual executing this Sublease on behalf
of Sublessee represents and warrants that he or she is duly authorized to
execute and deliver this Sublease on behalf of Sublessee, and that this Sublease
is binding upon Sublessee in accordance with its terms.
18.9 Exhibits. The exhibits attached hereto are made a part of this
Sublease by this reference.
18.10 Attorneys' Fees. If any party commences an action against the
other party arising out of or in connection with this Sublease, the prevailing
party shall be entitled to recover from the losing party the cost and expenses
of such action, including reasonable collection fees, attorneys' fees and court
costs.
18.11 Governing Law. This Sublease shall be governed by and
construed in accordance with the laws of the State of
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Washington applicable to contracts to be performed in such State.
18.12 Captions. All captions and headings in this Sublease are for
the purposes of reference and convenience and shall not limit or expand the
provisions of this Sublease.
18.13 Master Lessor's Consent. This Sublease is condi- tioned upon
Master Lessor's written approval of this Sublease in substantially the form
attached hereto as Exhibit B, the form of which Sublessee hereby approves and
agrees to execute and deliver. If for any reason Master Lessor does not so
consent to this Sublease within the thirty (30) days after the full execution of
this Sublease, then this Sublease shall terminate, Sublessor shall return to
Sublessee any prepaid rent, and neither party shall have any other continuing
obligation to the other with respect to the Premises or this Sublease.
18.14 Definition of Sublessor. As used in this Sublease, the term
"Sublessor" means only the current owner of the leasehold interest of the lessee
under the Master Lease at the time in question. Each Sublessor is obligated to
perform the obligations of the Sublessor hereunder only during the time such
Sublessor owns such leasehold interest. Any Sublessor who transfers title to its
leasehold interest in the Premises is relieved of all liabilities of Sublessor
under this Sublease to be performed on or after the date of such transfer.
Sublessor and Master Lessor shall have the right to terminate the Master Lease
by mutual consent at any time, provided that Master Lessor agrees to recognize
the rights of Sublessee to the Premises pursuant to this Sublease. In the event
of such termination, Sublessee agrees to attorn to Master Lessor as its lessor
hereunder.
18.15 Force Majeure. As used in this Sublease, the term "Force
Majeure" as applied to the obligations of Sublessor shall mean strikes, lockouts
or labor unrest, shortages of labor or materials, disease, pestilence or
epidemic, acts of God, governmental actions or restrictions, war, enemy action,
riot, civil commotion, fire, accident or unavoidable casualty, or other causes
beyond the reasonable control of Sublessor.
18.16 Signs. Sublessee agrees that no signs, advertisements or
notices whatsoever shall be inscribed, painted, or affixed on or to any part of
the Premises, the Master Premises or the Building, without the written consent
of Sublessor and Master Lessor, if and to the extent required by the Master
Lease. Any such signs, advertisements or notices shall conform to the
requirements of applicable law and shall be installed at the sole cost and
expense of Sublessee. Any signs, advertisements, or notices placed by Sublessee
upon the Premises, Master Premises, or Building shall be removed by the
Sublessee at the expiration or sooner termination of the Term of this Sublease,
and any damage caused thereby shall be repaired by Sublessee, all at the sole
expense of Sublessee.
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18.17 Rules and Regulations. Sublessee agrees to observe and to be
bound and to cause its employees, visitors and invitees to observe and be bound
by all rules and regulations adopted or to be adopted by Master Lessor relative
to the Premises, Master Premises or the Building.
18.18 Joint and Several Liability. If more than one person and/or
entity is Sublessee, the obligations imposed under
this Sublease shall be joint and several.
18.19 Waivers. No provision of this Sublease shall be deemed to
have been waived by Sublessor unless such waiver is in writing signed by
Sublessor and addressed to Sublessee, nor shall any custom or practice which may
evolve between the parties in the administration of the terms hereof be
construed as a waiver of Sublessor's right to require that the obligations of
Sublessee hereunder be performed in strict accordance with the terms hereof.
18.20 Quiet Enjoyment. If Sublessee shall discharge the obligations
herein set forth to be discharged by Sublessee, Sublessee shall have and enjoy,
during the Term, the quiet and undisturbed possession of the Premises on the
terms and conditions set forth herein, together with the right to use the
Premises as provided in this Sublease.
IN WITNESS WHEREOF, the parties shall be deemed to have executed this
Sublease as of the date first set forth above.
SUBLESSOR: SUBLESSEE:
WELLS FARGO BANK, N.A., a go2net, Inc., a Delaware
national banking association corporation
By By
----------------------------------- ----------------------------------
Its Its
By
----------------------------------
Its
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<PAGE> 29
STATE OF WASHINGTON )
) ss.
COUNTY OF __________ )
I certify that I know or have satisfactory evidence that
_________________________ is the person who appeared before me, and said person
acknowledged that he signed this instrument, on oath stated that he was
authorized to execute the instrument and acknowledged it as the
__________________ of go2net, Inc., to be the free and voluntary act of such
parties for the uses and purposes mentioned in this instrument.
DATED:
--------------------------------------------------------------------------
[Notary Signature]
-----------------------------------------
[Type or Print Name of Notary]
NOTARY PUBLIC for the State of
Washington, residing
at
---------------------------------------
My appointment expires:
-----------------------------------------
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<PAGE> 30
STATE OF CALIFORNIA )
) ss.
COUNTY OF __________ )
I certify that I know or have satisfactory evidence that and
are the persons
who appeared before me, and said persons acknowledged that they signed this
instrument, on oath stated that they were authorized to execute the instrument
and acknowledged it as the
and of Wells Fargo
Bank, N.A. to be the free and voluntary act of such parties for
the uses and purposes mentioned in this instrument.
DATED:
--------------------------------------------------------------------------
[Notary Signature]
-----------------------------------------
[Type or Print Name of Notary]
NOTARY PUBLIC for the State of
California, residing
at
---------------------------------------
My appointment expires:
-----------------------------------------
28
<PAGE> 31
Exhibit A
DESCRIPTION OF PREMISES
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Exhibit B
MASTER LESSOR'S CONSENT LETTER
, 1997
Wright Runstad Properties L.P.
999 Third Avenue, Suite 1010
Seattle, Washington 98104
Attention: Joe McWilliams
Re: Sublease of Portions of First Interstate Center, Seattle,
Washington
Dear Joe:
As you know, Wells Fargo Bank, N.A. ("Wells Fargo") leases from Wright\Runstad
Properties L.P. ("Master Lessor") certain space located in the First Interstate
Center, 999 Third Avenue, Seattle, Washington, pursuant to that certain Office
Space Agreement, dated as of January 27, 1982 by and between 999 Third Avenue,
Ltd., a Washington limited partnership, predecessor in interest to Master
Lessor, and First Interstate Bank of Washington, N.A., predecessor in interest
to Sublessor, as amended by the First Amendment to Lease Agreement dated July
15, 1988 between 999 Third Avenue, Ltd., predecessor in interest to Master
Lessor and First Interstate Bank of Washington, N.A., and by the Second
Amendment to Office Lease dated
, 1994 between Wright-Carlyle Seattle,
predecessor in interest to Master Lessor and First Interstate
Bank of Washington, N.A. ("Master Lease").
Wells Fargo proposes to sublease to go2net, Inc., through September 18, 2003,
pursuant to a Sublease, 13,379 rentable square feet on floor 47. A copy of the
Sublease has been forwarded to Master Lessor.
Pursuant to Section 5.01 of the Master Lease, Master Lessor's consent is
required for the sublease described above.
If Master Lessor approves of the sublease described above pursuant to the
Sublease, please signify such approval by signing a copy of this letter in the
place provided below and returning it to the undersigned.
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Thank you for your attention in this matter.
Very truly yours,
Jeffrey Rader
ACCEPTED AND AGREED TO:
WRIGHT RUNSTAD PROPERTIES L.P.
By: Wright Runstad & Co.,
General Partner
By
------------------------------------
Joe McWilliams
Its
-----------------------------------
- --------------
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<PAGE> 34
EXHIBIT C
SUBLESSEE'S WORK LETTER
THIS SUBLESSEE'S WORK LETTER ("Work Letter") is a part of the Sublease
between Wells Fargo Bank, N.A. ("Sublessor") and go2net, Inc., a Delaware
corporation ("Sublessee"), dated as of _________________, 1997 ("Sublease"), for
certain Premises located in the First Interstate Center, 999 Third Avenue,
Seattle, Washington. All capitalized terms used, but not otherwise defined in
this Work Letter, shall have the definitions given them in the Sublease. All
alterations of the Premises by Sublessee ("Alterations") shall be governed by
the Master Lease, the Sublease and this Work Letter.
Sublessee is responsible for all work that is necessary to obtain a
certificate of occupancy for the Premises.
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<PAGE> 35
1. Approval of Sublessee's Plans and Specifications. At such time, and
from time to time, as Sublessee shall decide to perform Alterations to the
Premises, Sublessee shall submit to Sublessor and to Master Lessor, for
Sublessor's and Master Lessor's (to the extent required by the Master Lease)
written approval (which shall not be unreasonably withheld or conditioned), a
description of such alterations including the names of its proposed architect
and general contractor (if any) for the work described in this Work Letter,
together with information on their insurance, bonding, licensing, etc. Sublessor
agrees to approve or disapprove of Sublessee's chosen architect and contractors
within five (5) business days after Sublessee's identification of them to
Sublessor. Substitutions of the chosen architect and contractors (if any), shall
also be subject to Sublessor's (and Master Lessor's, to the extent required by
the Master Lease) prior written approval (not to be unreasonably withheld,
conditioned or delayed). The architect shall prepare the architectural plans,
drawings and specifications showing the all improvement work contemplated for
the Premises by Sublessee. All improvements which are the responsibility of
Sublessee are hereinafter referred to as "Sublessee's Work." At such time and
from time to time, as Sublessee shall decide to perform Alterations to the
Premises, Sublessee shall submit to Sublessor and to Master Lessor for
Sublessor's and Master Lessor's (to the extent required by the Master Lease)
approval, the architectural plans, drawings and specifications showing all of
the proposed Alterations. Sublessor agrees to approve or disapprove of
Sublessee's architectural plans, drawings and specifications within thirty (30)
days after delivery of such items to Sublessor by Sublessee. Once the plans,
drawings and specifications have been approved by Sublessor (and by Master
Lessor, to the extent required by the Master Lease), they shall hereinafter be
collectively referred to as the "Final Plans". Although Sublessor shall have
approved the Final Plans, Sublessor's sole interest in doing so is to protect
Sublessor's interests. Accordingly, Sublessee shall not rely upon Sublessor's
approvals and Sublessor shall not be the guarantor of, nor responsible for, the
correctness or accuracy of any Final Plans, or the compliance thereof with
applicable laws, and Sublessor shall not be subject to any liability of any kind
or nature by reason of any exercise of Sublessor's approval rights. As
Sublessee's Work progresses, Sublessee shall provide Sublessor with working
drawings for all Alterations, which working drawings, if and to the extent that
the same are not detailed in the Final Plans, shall be subject to Sublessor's
and Master Lessor's (to the extent required by the Master Lease) prior written
approval (which approval shall not be unreasonably withheld), and when approved,
shall become part of the Final Plans.
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<PAGE> 36
2. Permits. Sublessee shall be responsible, at Sublessee's sole expense,
for obtaining all required governmental approvals and permits for Sublessee's
Work and for obtaining a final certificate of occupancy to use the Premises for
the Permitted Uses. Sublessee shall submit to the City of Seattle a complete
application for the required building permit(s) no later than five (5) calendar
days after the date that Sublessor has approved Sublessee's Final Plans in
accordance with Section 1. Sublessee shall file all plans and other documents as
required, and shall procure any required licenses, permits and approvals prior
to the commencement of any construction of the Alterations. Sublessee shall
provide Sublessor with copies of ALL required permits and licenses that were
necessary to construct the Alterations promptly after completion of such
construction. All required permits and licenses shall indicate all regulatory
agency inspections and final acceptance of the Alterations.
3. Disbursement of Allowance. Pursuant to Section 2.1.2 of the Sublease,
Sublessor shall provide an Allowance of $4.00 per rentable square foot for
Sublessee's tenant improvements and/or cabling in the Premises. Sublessor shall
disburse the Allowance to Sublessee in one or more installments within ten (10)
business days after it receives (i) copies of invoices (and evidence of payment)
for materials, labor and/or cabling fees, (ii) evidence that final lien releases
have been filed, (iii) evidence that the final building inspection, if required,
by the City has been completed and approved, and (iv) except where Alterations
are cabling only, or other work of a similar type, a complete set of as built
drawings for the Premises.
4. Conduct of Sublessee's Work.
4.1 Prosecution of Work. All of Sublessee's Work shall be done in a
good and workmanlike manner, in strict compliance with the Final Plans and all
federal, state and local laws, ordinances, rules and regulations applicable and
in conformance to the requirements and standards of any insurance underwriting
board, inspection bureau or insurance carrier insuring the Premises. Sublessee
shall notify Sublessor at least five (5) business days prior to the commencement
of construction of the Alterations so that Sublessor may post appropriate
notices of nonresponsibility.
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4.2 Contracts. Prior to commencement of Sublessee's Work, Sublessee
shall provide to Sublessor a list of the suppliers, contractors and
subcontractors Sublessee desires to engage. Each of such contractors and
subcontractors shall be contractors licensed by the State of Washington and
shall be subject to the prior written approval of Sublessor (and Master Lessor,
to the extent required by the Master Lease), which approval shall not be
unreasonably withheld. Sublessor agrees to approve or disapprove of Sublessee's
proposed contractors and subcontractors within five (5) business days after
Sublessor's receipt of Sublessee's list, and the failure by Sublessor to approve
or disapprove of such contractors and subcontractors within such ten (10)
business day period shall constitute approval by Sublessor. Upon the request of
Sublessor, Sublessee shall provide to Sublessor satisfactory evidence that each
contractor and subcontractor shall have in full force workman's compensation
insurance in limits required by applicable law. Upon completion of the
Alterations, Sublessee shall timely and properly record a notice of completion
in the county recorder's office for the county in which the Premises are
located, if required by law.
4.3 Compliance With Laws. All Alterations shall comply with all
building codes and standards and ordinances of all regulatory agencies having
jurisdiction over said work. Such codes, ordinances, and standards shall
include, but not be limited to, the Federal Occupational Safety and Health Act
of 1970, the Americans with Disabilities Act, and local and state building,
electrical, mechanical and fire codes, and other federal, state and local laws
and ordinances as may be applicable.
4.4 Scheduling; Avoidance of Inconvenience. Sublessee shall perform
all demolition work, shall oversee the delivery of materials, equipment and the
removal of debris, and shall take all other reasonable measures necessary, so as
to avoid any inconvenience or annoyance to other tenants of the Building and
their employees and customers. Sublessee shall keep the Premises clean and shall
prevent any dirt or dust from infiltrating into the adjacent occupants' areas or
mechanical areas.
4.5 Affect on Building Systems. Sublessor shall not be responsible
for any disturbances or deficiency created in the air conditioning or other
mechanical, electrical or structural facilities within the Building as a result
of any of Sublessee's Work. If such disturbances or deficiencies result, it
shall be Sublessee's sole responsibility to correct the resulting conditions and
to restore the services to the complete satisfaction of Master Lessor,
Sublessor, their architects and engineers. If the deficiencies are not corrected
within 30 calendar days, Sublessor may correct all deficiencies at Sublessee's
expense.
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4.6 Inspection. Sublessor and Sublessor's agents shall have the
right, but not the obligation, to inspect the construction of the Alterations
from time to time during the progress thereof. If Sublessor shall give Sublessee
written notice of faulty construction or any other deviation from the Final
Plans, Sublessee shall promptly make the necessary corrections to Sublessor's
reasonable satisfaction. However, neither the right herein granted to Sublessor
to make such inspections, nor the making of such inspections by Sublessor, shall
operate as a waiver of any rights of Sublessor to require good and workmanlike
performance of all Sublessee's Work in accordance with the requirements of this
Work Letter. Notwithstanding any inspection or acceptance by Sublessor of
Sublessee's Work, or any portion thereof, Sublessee acknowledges that
Sublessor's sole interest in doing so is to protect Sublessor's interests.
Accordingly, Sublessee shall not rely upon Sublessor's inspections or approvals,
and agrees that Sublessor shall not be the guarantor of, nor responsible for,
any of Sublessee's Work, Sublessee shall be solely responsible for, and shall
remedy, at Sublessee's sole expense, any and all defects in the Alterations that
may appear during or after the completion thereof, whether the same shall affect
the Premises in particular or any part of the Building in general.
4.7 Change Orders. In no event shall any work of construction
related to the Alterations be undertaken by Sublessee in the Premises except as
shown on the Final Plans. In the event that Sublessee desires to make any
significant change in the Final Plans, Sublessee shall submit any such change in
writing (a "Change Order") to Sublessor for Sublessor's (and Master Lessor's, to
the extent required by the Master Lease) approval, which approval shall not be
unreasonably withheld. Sublessor agrees to approve or disapprove of any proposed
Change Order within five (5) business days after delivery of such proposal to
Sublessor by Sublessee, and the failure by Sublessor to approve or disapprove of
such proposed Change Order within such five (5) business day period shall
constitute approval by Sublessor.
5. Default. Subject to the written notice and cure periods set forth in
Section 15 of the Sublease, any default by Sublessee under the terms of this
Work Letter shall constitute an Event of Default under the Sublease, and shall
entitle Sublessor to exercise all remedies set forth in the Sublease.
6. Ownership of Improvements. Except as otherwise provided in Section 10
of the Sublease, all of Sublessee's Work (including all items of the
Alterations) shall become the property of Sublessor upon the expiration or
earlier termination of the Sublease and shall remain on the Premises at all
times during the term of the Sublease.
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7. Delays. Notwithstanding delays of any type or nature, (whether caused
by Force Majeure or otherwise) in the completion of Sublessee's Work, the
parties expressly acknowledge and agree that none of Sublessee's obligations
under the Sublease (including Sublessee's obligation to pay Rent) shall be
delayed, terminated or otherwise affected on account of any such delays.
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<PAGE> 40
Exhibit D
FURNITURE BEING PURCHASED BY SUBLESSEE
38
<PAGE> 41
Exhibit E
BILL OF SALE
For good and valuable consideration, receipt of which is hereby
acknowledged, the undersigned, Wells Fargo Bank, N.A., a national banking
association, does hereby give, grant, bargain, sell, transfer, assign, convey
and deliver to , a , pursuant to that certain Sublease dated
, by and between Seller and Buyer the personal property of
Seller, listed on Schedule 1 attached hereto and made a part hereof ("Personal
Property").
All references to "Seller" and "Buyer" herein shall be deemed to include
their respective heirs, representatives, nominees, successor and/or assigns,
where the contract permits.
Dated: .
WELLS FARGO BANK, N.A.
By
------------------------------------
Its
By
------------------------------------
Its
39
<PAGE> 1
EXHIBIT 11.1
GO2NET, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
For the year ended For the period from
inception (February 12,
1996) through
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Weighted average common shares outstanding 3,284,995 1,619,100
Weighted average common shares for shares 58,919 91,750
issued from September 30, 1996 through
April 22, 1997, calculated using the treasury stock
method at the offering price of $8 per share,
and treated as outstanding for the period presented
Weighted average number of common shares issued upon the 120,575 837,830
conversion of the 9% Cumulative, Redeemable, Convertible
Preferred Stock, calculated using the treasury stock
method at the offering price of $8 per share, and
treated as outstanding for the period presented, through
date of conversion
-------------------------- ---------------------------
========================== ===========================
Total weighted shares outstanding 3,464,489 2,548,680
========================== ===========================
Net loss $(1,718,480) $(417,758)
========================== ===========================
Net loss per share $(0.50) $(0.16)
========================== ===========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,891,801
<SECURITIES> 0
<RECEIVABLES> 59,462
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,096,377
<PP&E> 628,418
<DEPRECIATION> 119,414
<TOTAL-ASSETS> 12,619,714
<CURRENT-LIABILITIES> 185,393
<BONDS> 0
0
0
<COMMON> 14,570,558
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,619,714
<SALES> 254,389
<TOTAL-REVENUES> 254,389
<CGS> 180,253
<TOTAL-COSTS> 2,062,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,718,480)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,718,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,718,480)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
