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Filed pursuant to Rule 424(b)(1)
Registration No. 333-19051
PROSPECTUS
1,600,000 SHARES
[GO2NET LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock, par value $.01 per share, offered hereby
are being sold by go2net, Inc., a Delaware corporation (the "Company"). Prior to
this offering of Common Stock of the Company (the "Offering"), there has been no
public market for the Common Stock of the Company. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for listing on the Nasdaq SmallCap
Market and the Boston Stock Exchange under the symbols "GNET" and "GO,"
respectively.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION
WITH THE POSSIBILITY OF THE LOSS OF THE INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................ $8.00 $0.64 $7.36
- --------------------------------------------------------------------------------------------------------
Total(3)................................. $12,800,000 $1,024,000 $11,776,000
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(1) Does not include a non-accountable expense allowance payable by the Company
to Maxwell Capital, Inc. and National Securities Corporation, as
representatives of the Underwriters (the "Representatives"), equal to 2% of
the gross proceeds of the Offering, of which $80,000 has been paid to date,
and warrants to purchase 50,000 shares of Common Stock at an exercise price
of 165% of the initial public offering price per share to be issued to
National Securities Corporation (the "Representative's Warrants"). The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $200,000, excluding the non-accountable expense allowance payable to the
Representatives.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 240,000
additional shares of Common Stock at the price to public less underwriting
discounts and commissions solely for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $14,720,000, $1,177,600 and $13,542,400,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if accepted by them, approval of certain legal matters
by counsel to the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of the Common
Stock will be made in New York, New York on or about April 28, 1997.
------------------------
MAXWELL CAPITAL, INC. NATIONAL SECURITIES CORPORATION
------------------------
The date of this Prospectus is April 23, 1997.
<PAGE> 2
[ARTWORK DEPICTING THE COMPANY'S INTERNET SITE "HOME PAGE".]
Information contained on the Company's Internet site shall not be deemed part of
this Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The shares of Common Stock offered hereby involve a high
degree of risk. See "Risk Factors."
THE COMPANY
go2net, Inc. (the "Company") is an interactive technology and media company
that provides through its Internet site proprietary content and commodity
information relating to business and finance, sports and the Internet. In
addition, the Company offers a search/index guide that combines various existing
search/index guides into one guide (a "metasearch engine") and a Java-based
desktop content delivery system which allows users to obtain commodity
information and search the World Wide Web while simultaneously accessing other
Internet sites or running other applications. The Company focuses its editorial,
design and programming resources on developing proprietary content that seeks to
be original, entertaining, informative and compelling. The Company's Internet
site seeks 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. The Company launched
its Internet site on November 7, 1996. The Company's Internet site is located at
<URL:http://www.go2net.com/>.
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
under the go2search name in March 1997.
The Company's objective is to be a leading provider of content on the World
Wide Web, specifically in the areas of business and finance, sports and the
Internet, complemented by technologies such as search/index guides and
Java-based desktop content delivery systems. The Company focuses on utilizing
innovative technologies to deliver its content and to enhance the attractiveness
and utility of its product offerings with specially designed graphics and
animation. The Company's goal is to provide interactive content in all of its
content areas, and to seek advertisers and sponsors who wish to access the
demographic groups using the Company's Internet site.
The Company was incorporated on February 12, 1996 under the laws of the
State of Delaware.
THE OFFERING
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Common Stock offered........................... 1,600,000 shares
Common Stock to be outstanding
after the Offering........................... 4,257,850 shares(1)
Use of proceeds................................ For working capital, capital expenditures,
and other general corporate purposes. See
"Use of Proceeds."
Nasdaq SmallCap Market symbol.................. GNET
Boston Stock Exchange symbol................... GO
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SUMMARY FINANCIAL DATA
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PERIOD FROM INCEPTION
(FEBRUARY 12, 1996) THREE MONTHS ENDED
TO SEPTEMBER 30, 1996 DECEMBER 31, 1996
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<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................................... $ -- $ --
Total operating expenses............................... 431,141 369,951
Loss from operations................................... (431,141) (369,951)
Interest income, net................................... 13,383 7,280
Net loss............................................... (417,757) (362,671)
Net loss per share (2)................................. (0.16) (0.14)
Shares used in net loss per share computation (2)...... 2,548,680 2,644,260
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS
ACTUAL ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents......................................... $692,938 12,012,938
Working capital................................................... 668,540 11,988,540
Total assets...................................................... 921,086 12,241,086
Stockholders' equity.............................................. 888,472 12,208,472
</TABLE>
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(1) Excludes 587,500 shares of Common Stock issuable upon the exercise of
outstanding options as of March 31, 1997 at an exercise price equal to the
initial public offering price of the shares of Common Stock offered hereby
and 50,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants. See "Management -- 1996 Stock Option Plan" and
"Underwriting."
(2) Net loss per share is calculated using the weighted average number of shares
of Common Stock outstanding during such period. See Note 1 to Notes to
Financial Statements.
(3) Reflects the receipt of the estimated net proceeds of the sale by the
Company of 1,600,000 shares of Common Stock offered hereby at the initial
public offering price of $8.00 per share and the application of the net
proceeds therefrom, and no exercise of the Underwriters' over-allotment. See
"Use of Proceeds" and "Capitalization".
-----------------------------
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.
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RISK FACTORS
In evaluating the Company's business and an investment in the Company,
prospective investors should consider carefully the risk factors set forth
below, in addition to the other information presented in this Prospectus.
Prospective investors should note that this Prospectus contains certain
"forward-looking statements," as such term is defined in the Private Securities
Litigation Reform Act of 1995, including, without limitation, statements
containing the words "believes," "anticipates," "expects," "intends," "should,"
"seeks to," and similar words. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to, the risk factors set forth in this Prospectus. The accompanying
information contained in this Prospectus identifies certain important factors
that could cause such differences.
No Operating History; Accumulated Deficit; Anticipated Losses. The Company
was incorporated in February 1996 and to date has not generated any cash
revenues. The Company launched its Internet site on November 7, 1996.
Accordingly, the Company has no 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 site 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 site, 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 products, content 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, informative,
entertaining and compelling content to Internet users, develop and upgrade its
technology, 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 operating history makes prediction of future operating results difficult.
Accordingly, there can be no assurance that the Company will be able to generate
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 December 31, 1996, had an accumulated
deficit of $780,428. Upon completion of the Offering, 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 content and applications. 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. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Unpredictability of Future Revenues; Potential Fluctuations in Quarterly
Operating Results. As a result of the Company's lack of an 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
content provider 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
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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. See "-- No
Operating History; Accumulated Deficit; Anticipated Losses," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business -- Facilities."
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 site, 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 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 implement 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 site. To date the Company has not generated any cash
advertising revenues. However, at such time, if ever, that the Company
establishes relationships with advertisers, the Company expects that many, if
not all of such relationships, will be 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 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. To date the Company has only two advertisers on its Internet
site. The Company has a barter arrangement with Yahoo!, Inc., regarding the
trading of advertisement impressions on each other's Internet site. The other
advertiser is not currently paying for such advertising. 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 site, 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 site
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. See "Business -- Revenue Sources" and
"-- Advertising Sales," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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
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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 site. 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 site.
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. See
"Business -- Revenue Sources" and "-- Advertising Sales."
Uncertain Acceptance of the Company's Internet Content. The Company's
commercial viability depends in large part upon its ability to develop and
provide on the Internet original, entertaining, informative and compelling
content 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 charge
for access to certain portions of such original Internet content. There can be
no assurance that the Company's content 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 site 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
original content. Internet users can freely navigate and instantly switch among
a large number of Internet sites, many of which offer original content, making
it difficult for the Company to distinguish its content and attract users. In
addition, many other Internet sites offer very specific, highly targeted content
that may have greater appeal than the Company's multiple content Internet site
to members of the Company's targeted audience. 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
site than would users who use the most recent versions of such software. Such
difficulty could cause Internet users to cease using the Company's Internet
site. If the Company is unable to develop original, entertaining, informative
and compelling Internet content 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 content, 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. See "Business -- Products."
Competition. The Company competes with other Internet content providers
for Internet users and for advertising and subscription revenues. Competition
among Internet content providers is intense and is
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expected to increase significantly in the future. The Company's Internet site
competes against a variety of companies that provide similar content 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 Internet content to attract Internet
users and to support advertising and, in the future, subscription fees. In the
Company's niche of business and finance, sports and the Internet, in addition to
competing with numerous newspapers, magazines, television programs and radio
broadcasts which cover the same material, the Company competes with various
Internet content providers such as Starwave Corporation, Microsoft Corporation,
c/net, Inc., America OnLine, Inc., MGM Interactive, 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 offer a wider range of services than does the
Company, which may be sufficiently attractive to Internet users to attract users
to their services and consequently dissuade them from accessing the Company's
Internet site. If the Company is unable to attract a significant number of
Internet users to its Internet site, 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 content 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 Internet site, it will compete with a greater
number of Internet sites and other media 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 content and services in the future. There can be no
assurance that the Company's Internet site will compete successfully.
Competitive Factors. 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 service 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 site, the demographics of such user base, the
Company's ability to deliver focused and compelling advertising and
interactivity through its Internet site 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 content being provided,
the price charged for such content and the cost and accessibility of similar
content through the Internet or competing media. Given the intense competition
among Internet content providers 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, greater name recognition,
greater experience and established relationships with 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 content 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, content
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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. See "Business -- Competition."
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
content. Promoting the go2net brand name will depend on the Company's ability to
develop and deliver original, entertaining, informative and compelling Internet
content, which it cannot assure. If Internet users do not perceive the Company's
Internet content 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 Internet content, 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 Internet content 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 content 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 content 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. See
"Business -- Strategy."
Expansion of Operations and Managing Potential Growth. Since its
inception, the Company has grown rapidly, having hired 22 full-time employees
and approximately 18 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.
See "Dependence on Key Personnel," "Business -- Employees" and "Management."
No Specific Use of Proceeds; Broad Discretion of Management. One purpose
of the Offering is to establish a public market for the Common Stock, which will
facilitate future access by the Company to public equity and debt markets, and
enhance the Company's ability to use its Common Stock as a means of attracting
and retaining key employees. The Company has not designated any specific use for
the net proceeds from the sale of the shares of Common Stock being offered
hereby. Approximately 13.9% of the net proceeds of this Offering has been
allocated for working capital and other general corporate purposes. The
remaining net proceeds have been allocated to advertising and marketing, product
development, acquisitions, content licensing and collaborative ventures, capital
expenditures, expansion of facilities, personnel, and general and
administrative. The allocation of the net proceeds of this Offering represents
the Company's best estimate based on the expected utilization of funds necessary
to finance the Company's existing activities in accordance with management's
current objectives and market conditions. The amounts actually expended by the
Company for each purpose will vary significantly depending on a number of
factors, such as the amount of cash used or generated by the Company's
operations and management's assessment of the Company's specific needs.
Accordingly, management of the Company has significant flexibility in applying
the net proceeds of the Offering. See "Use of Proceeds."
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Benefits of the Offering to Current Stockholders. Prior to the Offering,
there has been no public market for the Company's Common Stock. As a result, the
Company's existing stockholders (which include the Company's directors, officers
and employees) will benefit from the establishment of a public market for the
Common Stock, despite the fact that all of such shares of Common Stock are
currently "restricted securities" as that term is defined in Rule 144 of the
Securities Act of 1933 (the "Securities Act") and may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act. Upon
completion of this Offering, the Company's existing stockholders will hold
shares of Common Stock having an aggregate value equal to $21,262,800, based on
the initial public offering price of $8.00 per share. In addition, completion of
the Offering will result in an increase in the tangible book value of the
existing stockholders' shares of Common Stock from $0.33 per share to $2.87 per
share. See "Risk Factors -- Dilution," "Risk Factors -- Shares Eligible for
Future Sale," "Dilution" and "Shares Eligible for Future Sale."
Need for Additional Capital to Finance Growth and Capital
Requirements. The Company expects to seek to enhance and expand its Internet
site in order to improve its competitive position and meet the increasing
demands for quality Internet content 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 content and applications. 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 content) or to otherwise respond to 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. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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 content
for the Company's Internet site requires the services of highly skilled writers
and editors knowledgeable in business and finance, sports and the Internet. The
number of such personnel available is extremely limited and competition for such
personnel among Internet and other media 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. In particular, the Company has
encountered difficulties in attracting qualified writers and editors with
expertise in business and finance, sports and the Internet, and there can be no
assurance that the Company will be able to attract and retain such writers and
editors. 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. See "Business -- Employees" and "Management."
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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. Although the Company will seek to establish relationships with key
advertisers and advertising agencies, the Company currently has relationships
with only two advertisers and the Company has not established any relationships
with advertising agencies. Achieving acceptance by potential advertisers and
advertising agencies of the Company's Internet site 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
site on other Internet sites and the willingness of the owners and operators of
such sites to direct users to the Company's Internet site 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 site. 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 site. 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 its go2search area of
its Internet site. There can be no assurance that such cooperation will be
available on terms acceptable to the Company or at all. The Company's ability to
develop original, entertaining, informative and compelling Internet content 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 content providers. 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 content
development efforts of third parties. For example, the Company relies on S&P
Comstock, DRI/McGraw-Hill, Dow Jones & Company, Inc., New York Stock Exchange,
Inc., The Nasdaq Stock Market, Inc., SportsTicker, Comtex, Edgar Online and
Market Guide, Inc. to provide a significant portion of the commodity information
included in the Company's Internet site. There can be no assurance the Company
will maintain these relationships in the future. Any failure of these third
parties to provide this commodity information to the Company could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business -- Products" and "Business -- Strategic
Relationships."
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 site 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. See "Business -- Industry Background."
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Dependence on the Metacrawler License. The Company and Netbot have 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 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. The Company anticipates that a
substantial portion of the traffic to its Internet site will be 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. See
"Business -- Metacrawler License Agreement."
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 content 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
content 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
development and launching of new Internet sites will also require significant
additional expenses and programming and editorial resources and will strain the
Company's management, financial and operational resources. Furthermore, any
expansion of business areas and new Internet sites, including the existing
Internet site, will necessarily rely on untested business models. See "-- Risks
of Technological Change." To date, the Company has generated no revenues from
Internet-based advertising or subscription fees, and there can be no assurance
that the Company will be able to generate revenues from these new 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. See "No Operating History; Accumulated Deficit; Anticipated
Losses," "Competition" and "Managing Potential Growth."
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
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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 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 content, 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 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. See "Business -- Industry Background."
Capacity Constraints and System Disruptions. The satisfactory performance,
reliability and availability of the Company's Internet site and its computer
network infrastructure are critical to attracting Internet users and maintaining
relationships with advertising customers. The Company's Internet 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 site or slower response times for users would reduce
the number of advertisements delivered and reduce the attractiveness of the
Company's Internet site 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 site may require
the Company to expand and adapt its computer network infrastructure. The
Company's inability to add additional computer software and hardware to
accommodate increased use of its Internet site 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 a third party for uninterrupted Internet access. In
addition, the Company is dependent on various third parties for substantially
all of its commodity 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. See "Business -- Strategic Relationships."
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, there can be no assurance that such insurance will be
sufficient to provide for all losses or damages incurred by the Company. See
"Business -- Facilities."
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
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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, privacy, copyrights, access,
obscene or indecent communications and the pricing, characteristics and quality
of Internet products and services. As a provider of Internet content, the
Company is subject to the provisions of existing and future federal and local
legislation that could be applied to the Company's operation. This may include,
but is not limited to, the provisions of the Communications Decency Act (the
"CDA"), which, among other things, imposes criminal penalties on anyone that
distributes "indecent" material over the Internet. In June 1996, the United
States District Court for the Eastern District of Pennsylvania held that the CDA
was unconstitutional and enjoined its enforcement. The decision of the District
Court is currently on appeal to the United States Supreme Court. There is also
precedent for local legislation being used to enforce community standards on
Internet sites that physically exist elsewhere. While the Company has no
intention of publishing the type of material which the CDA or other legislation
may deem illegal, the manner in which the CDA or other legislation will
ultimately be interpreted and enforced and its effect on the Company's
operations cannot yet be fully determined, and, therefore the CDA could subject
the Company to substantial liability. The CDA or other 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. See
"Business -- Government Regulations."
Liability for Information Retrieved From the Internet. Materials may be
printed from or downloaded into users' computers from the Internet services
provided by the Company, or from the Internet access or commodity 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 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. See "Business -- Government Regulations."
Limited Underwriting History and Relationship with Underwriters. Maxwell
Capital, Inc. has been operating as a broker-dealer for less than one year and
has never participated in a public offering as an underwriter. In evaluating an
investment in the Company, prospective investors in the Common Stock offered
hereby should consider Maxwell Capital, Inc.'s lack of experience. No assurance
can be given that Maxwell Capital Inc.'s lack of experience may not adversely
affect the proposed offering and subsequent development of a trading market, if
any. In addition, Russell C. Horowitz, President and Chief Executive Officer of
the Company, is the brother of David M. Horowitz, the President, Chief Executive
Officer and controlling stockholder of Maxwell Capital, Inc. Further, certain
employees of Maxwell Capital, Inc. own in the aggregate 171,000 shares of the
Company's Common Stock and an investor in Maxwell Capital, Inc. is a limited
partner in Xanthus Capital, Inc. and directly owns 50,000 shares of the
Company's Common Stock. Consequently, in accordance with the provisions of Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc., the Company and Maxwell Capital, Inc. have designated National Securities
Corporation to serve as a "qualified independent underwriter" for purposes of
making a recommendation as to the maximum offering price for the shares of
Common Stock offered hereby. National Securities Corporation has performed due
diligence with respect to the information contained in this Prospectus, has
participated in the preparation of the Registration Statement of which this
Prospectus is a part and has managed this Offering in accordance with Rule
2720(c)(3)(A)(i) of the Conduct Rules of the NASD. See "Underwriting."
Conflicts of Interest. Certain conflicts of interest are inherent in
certain areas of the marketing communications industry, particularly in
advertising. For example, the Company will most likely be unable to pursue
potential advertising and other opportunities because such advertising or other
opportunities may require the Company to provide advertising services to direct
competitors of the Company's then existing
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clients. The Company risks alienating or straining relationships with then
existing clients each time the Company agrees to provide services to indirect
competitors of such clients. In addition, Russell C. Horowitz, the Company's
President, Chief Executive Officer and director, and Manuel Rubio, a director of
the Company, serve as the Chief Executive Officer and Executive Vice President,
respectively, and directors 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 addition Messrs. Horowitz and Rubio are also limited
partners of Xanthus Capital, L.P. Xanthus Capital, L.P. beneficially owns
500,000 shares of the Company's Common Stock. As officers and directors of such
companies, Mr. Horowitz will be required to devote a portion of his time, and
Mr. Rubio will be required to devote a substantial portion of his time, to the
affairs of such companies. Messrs. Horowitz and Rubio will not, however, cause
any of such companies to engage in activities, or invest in companies, which
directly compete with the Company. Moreover, as directors and/or executive
officers of the Company, Messrs. Horowitz and Rubio will consider not only the
impact of strategic decisions on the Company, but also the impact of such
decisions on Xanthus Capital, L.P. In some cases, the impact of such decisions
could be disadvantageous to the Company while advantageous to Xanthus Capital,
L.P., or vice versa. In addition, Mr. Horowitz is the brother of the President,
Chief Executive Officer and controlling stockholder of Maxwell Capital, Inc. Any
of such conflicts of interest may have a material adverse effect on the
Company's business, financial condition and operating results. See "Management,"
"Certain Transactions," "Principal Stockholders" and "Underwriting."
Security Risks. The Company has instituted certain security measures
designed to protect its Internet site 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 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 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 servicemarks for
its logo and name, as well as for the names of each of its content areas. 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 original Internet content or domain names.
Policing unauthorized use of the Company's original Internet 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. See "Business -- Intellectual Property."
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. See
"Business -- Legal Proceedings."
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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 site 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.
Concentration of Stock Ownership. Upon completion of the Offering
(assuming no exercise of any portion of the Underwriters' over-allotment), the
Company's directors, officers and significant stockholders will beneficially own
approximately 47.7% of the outstanding Common Stock. In addition, Russell C.
Horowitz, the Company's President, Chief Executive Officer, Chief Financial
Officer and director, will directly own approximately 26.0% of the Common Stock.
In addition, Mr. Horowitz, along with Manuel Rubio, a director of the Company
who directly owns 100,000 shares of the Company's outstanding Common Stock, will
have dispositive and voting control with respect to an additional 11.7% of the
Common Stock by virtue of their positions as directors of Xanthus Management,
L.L.C., the general partner of Xanthus Capital, L.P., a merchant banking
operation which beneficially owns 500,000 shares of Common Stock. As a result,
such stockholders, and in particular, Mr. Horowitz, will continue to be able to
control the election of all of the Company's directors and the approval of all
significant corporate acts and transactions. Such concentration of ownership may
have the effect of delaying or preventing a change in the control of the
Company. See "Management," "Principal Stockholders" and "Certain Transactions."
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law. Upon completion of the Offering, the Company's Board of Directors will
have the authority to issue up to 1,000,000 shares of Preferred Stock without
any further vote of the Company's stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of Preferred Stock that may be issued in the future. Under the
Company's Certificate of Incorporation, the terms of the Preferred Stock may
provide for liquidation and dividend rights senior to those of the Common Stock.
The issuance of any shares of Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current intention or plan to issue any
of such shares of Preferred Stock in the immediate future. Further, certain
provisions of Delaware law, such as Section 203 of the Delaware General
Corporations Law, could delay, prevent or make more difficult a merger, tender
offer or proxy contest involving the Company. See "Description of Capital
Stock."
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for any of the Company's capital
stock, and there can be no assurance that an active trading market will develop
or be sustained for the Company's Common Stock. The initial public offering
price for the Common Stock has been determined between the Company and the
Underwriters, which price is not higher than the price recommended by National
Securities Corporation. Among the factors considered in determining the initial
public offering price were prevailing market and economic conditions, revenues,
if any, the market valuations of other companies engaged in activities similar
to those of the Company, estimates of the business potential and prospects of
the Company, the present state of the Company's business operations, the
Company's management and other factors deemed relevant. These factors may not be
indicative of the market price of the Common Stock after the Offering. In
addition, the stock markets in general, and the market prices for
Internet-related companies in particular, have historically experienced extreme
volatility that at times have been unrelated to the operating performance of
such companies. The trading price of the Common Stock could also be subject to
significant fluctuations in response to variations in quarterly results of
operations, announcements of new products or acquisitions by the Company or its
competitors, governmental regulatory actions, other developments or disputes
with respect to proprietary rights, general trends in the industry and overall
market conditions and other factors. These broad market and industry
fluctuations may adversely affect the market price of the Common Stock
regardless of the Company's operating performance. See "Underwriting."
Listing and Maintenance Criteria for Nasdaq and Boston Stock Exchange;
Penny Stock Rules. The Common Stock has been approved for listing on the
National Association of Securities Dealers Automated
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Quotation System ("Nasdaq") for the SmallCap Market and the Boston Stock
Exchange ("BSE"). However, in order to continue to maintain such listings, the
Company must continue to meet the maintenance standards of Nasdaq and the BSE.
In particular, Nasdaq has proposed rule changes increasing its quantitative
listing standards which, if enacted, would make it more difficult for the
Company to maintain compliance with the listing requirements of the Nasdaq
SmallCap Market. If the Company is unable to satisfy the maintenance criteria
for continued listing on Nasdaq and the BSE in the future, its securities will
be subject to being delisted, and trading, if any, would thereafter be conducted
in the over-the-counter market in the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc. There is
no assurance that the Company will be able to sustain the maintenance standards
for either Nasdaq SmallCap Market or BSE listing with respect to the shares of
Common Stock in the future. If the Company's shares of Common Stock fail to
maintain listing on Nasdaq's SmallCap Market or the BSE, the market value of the
securities likely would decline and purchasers in this Offering likely would
find it more difficult to dispose of or to obtain accurate quotations as to the
market value of the securities.
In addition, if the Company fails to maintain Nasdaq's SmallCap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Exchange Act is available, then any broker engaging in a
transaction in the Company's Common Stock would be required to provide any
customer with a risk disclosure document, disclosure of market quotations, if
any, disclosure of the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market value of the
Company's securities held in the customer's accounts. The bid and offer
quotation and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation. If brokers
become subject to the "penny stock" rules when engaging in transactions in the
Company's securities, they likely would become less willing to engage in such
transactions, thereby making it more difficult for purchasers in this Offering
to dispose of their securities.
Dilution. Purchasers in the Offering will suffer an immediate and
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. Purchasers of shares of Common Stock in the
Offering will experience an immediate dilution in the net tangible book value of
$5.13 per share, representing an immediate dilution of approximately 64% from
the initial public offering price. See "Dilution."
Dividend Policy. The Company has never declared or paid any dividends on
its capital stock and does not expect to declare or pay dividends for the
foreseeable future. The Company currently intends to retain future earnings, if
any, to finance the development and operation of its business. Any future
declarations and payments of dividends shall be at the sole discretion of the
Company's Board of Directors. Payment of dividends on the Common Stock would be
subject to the prior payment of all accrued and unpaid dividends on any shares
of Preferred Stock the Company may issue in the future at its sole discretion.
See "Dividend Policy" and "Description of Capital Stock."
Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have outstanding an aggregate of 4,257,850 shares of Common Stock,
assuming no exercise of any portion of the Underwriters' over-allotment option.
Of these shares, the 1,600,000 shares to be sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Affiliates"), may generally only
be sold in compliance with the limitations of Rule 144 described in the section
captioned "Shares Eligible for Future Sale." The remaining 2,657,850 outstanding
shares of Common Stock held by existing stockholders are "restricted securities"
as that term is defined in Rule 144 ("Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which rules are summarized below. As a result of the contractual
restriction described in the section captioned "Shares Eligible for Future
Sale," no Restricted Shares will be eligible for immediate sale upon completion
of the Offering. All Restricted Shares will be eligible for sale upon expiration
of the lock-up agreements 270 days after the date of this Prospectus in
accordance with the provisions of Rule 144, 144(k) or 701 under the Securities
Act, except for 5,000 shares which will become eligible for resale under Rule
144 in March 1998. All officers, directors, existing stockholders and option
holders of the Company will have agreed not to, directly or indirectly, without
the prior written consent of the Maxwell Capital, Inc., offer, sell or otherwise
17
<PAGE> 18
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or any securities exercisable for or convertible into shares of
Common Stock owned by them for a period of 270 days following completion of the
Offering, provided that Maxwell Capital, Inc. will not be permitted to waive
such lock-up agreements with respect to executive officers, directors and
holders of more than 5% of the Company's Common Stock until such time as the
trading price of the Common Stock exceeds 150% of the initial public offering
price per share for a period of thirty consecutive days.
As of March 31, 1997, options to purchase an aggregate of 587,500 shares of
Common Stock had been granted, of which options to acquire an aggregate of
222,166 shares of Common Sock will become exercisable on the 90th day following
the date of this Prospectus and the remaining options to purchase an aggregate
of 365,334 shares of Common Stock will become exercisable according to certain
vesting schedules assuming the option holder is employed by the Company on the
vesting date. An additional 162,500 shares of Common Stock are available for
future grants under the Company's 1996 Stock Option Plan. The Company intends to
file one or more registration statements on Form S-8 under the Securities Act to
register all shares of Common Stock subject to outstanding stock options and
Common Stock issuable under the Company's 1996 Stock Option Plan that do not
qualify for an exemption under Rule 701 from the registration requirements of
the Securities Act. The Company expects to file these registration statements
270 days after the date of this Prospectus, and such registration statements are
expected to become effective upon filing. Shares covered by these registrations
statements will thereupon be eligible for sale in the public markets, subject to
the lock-up agreements, to the extent applicable. In addition, in connection
with this Offering, the Company will sell to National Securities Corporation the
Representative's Warrants for nominal consideration. The Representative's
Warrants will entitle National Securities Corporation to purchase from the
Company 50,000 shares of Common Stock at an exercise price equal to 165% of the
initial public offering price per share. The holders of the Representative's
Warrants will have certain registration rights with respect to the shares of
Common Stock underlying such Warrants. See "Management -- 1996 Stock Option
Plan," "Shares Eligible for Future Sale," "Principal Stockholders" and
"Underwriting."
18
<PAGE> 19
THE COMPANY
The Company is an interactive technology and media company that provides
through its Internet site proprietary content and commodity information relating
to business and finance, sports and the Internet. In addition, the Company
offers a search/index guide that combines various existing search/index guides
into one guide (a "metasearch engine") and a Java-based desktop content delivery
system. The Company focuses its editorial, design and programming resources on
developing proprietary content that seeks to be original, entertaining,
informative and compelling. The Company's Internet site seeks 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. The Company launched its Internet site on November
7, 1996. The Company's Internet site is located at <URL:http://www.go2net.com/>.
See "Business."
On January 31, 1997, the Company sublicensed from Netbot on an exclusive
basis (with certain limited exceptions) the Metacrawler Service
<URL:http://www.metacrawler.com/>, a metasearch engine developed by the
University of Washington and Netbot, and associated intellectual property
rights. 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 under the go2search
name in March 1997.
The Company's objective is to be a leading provider of content on the World
Wide Web, specifically in the areas of business and finance, sports and the
Internet, complemented by technologies such as search/index guides and
Java-based desktop content delivery systems. The Company focuses on utilizing
innovative technologies to deliver its content and to enhance the attractiveness
and utility of its product offerings with specially designed graphics and
animation. The Company's goal is to provide interactive content in all of its
content areas, and to seek advertisers and sponsors who wish to access the
demographic groups using the Company's Internet site. See
"Business -- Strategy."
The Company was incorporated in February 1996 under the laws of the State
of Delaware. Its executive offices are located at 1301 Fifth Avenue, Suite 3320,
Seattle, Washington 98101 and its telephone number at that location is (206)
447-1595.
The go2net, go2sports, go2business, go2internet, go2search and go2vision
names and logos are service marks of the Company for which applications for
registration have been filed with the United States Patent and Trademark Office.
The Metacrawler name is a servicemark of Netbot. All other trademarks,
tradenames and servicemarks used in this Prospectus are the property of their
respective owners.
19
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered hereby are estimated to be approximately $11,320,000
($13,048,000 if the Underwriters' over-allotment option is exercised in full),
at the initial public offering price of $8.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of the Offering are to (i) increase the Company's
working capital, capitalization and financial flexibility and (ii) establish a
public market for the Common Stock, which will facilitate future access by the
Company to public equity and debt markets, and enhance the ability of the
Company to use its Common Stock as a means for attracting and retaining key
employees. The Company expects to use the net proceeds from the Offering
primarily for working capital, capital expenditures and other general corporate
purposes, including to (i) expand and improve the Company's operations, (ii)
increase the Company's advertising and marketing efforts, (iii) expand and
improve the Company's user support capabilities, (iv) develop new Internet
content and applications, and (v) expand the Company's facilities. The Company
intends to utilize the net proceeds from the Offering approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
DOLLAR AMOUNT NET PROCEEDS
------------- -------------
<S> <C> <C>
Advertising and marketing....................................... $ 2,000,000 17.7%
Product development............................................. 2,250,000 19.9
Acquisitions, content licensing and collaborative ventures...... 2,500,000 22.1
General and administrative...................................... 1,000,000 8.8
Capital expenditures............................................ 750,000 6.6
Personnel (recruiting, hiring, training and other associated
costs)........................................................ 750,000 6.6
Facilities (rent, capital improvements, moving expenses and
deposit)...................................................... 500,000 4.4
Working capital and other general corporate purposes............ 1,570,000 13.9
----------- ----
$11,320,000 100%
=========== ====
</TABLE>
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the Offering, based on the expected utilization of funds
necessary to finance the Company's existing activities in accordance with
management's current objectives and market conditions. The amounts actually
expended by the Company for each purpose will vary significantly depending on a
number of factors, such as the amount of cash used or generated by the Company's
operations and management's assessment of the Company's specific needs. The
Company may also use a portion of the net proceeds of the Offering to acquire
new technologies, businesses or products which will result in a reallocation of
the estimated amounts set forth in the table above (which reallocation may be
substantial). While the Company from time to time may evaluate such potential
acquisitions, the Company has no present agreements or commitments with respect
to any such possible acquisition, nor are any negotiations regarding any such
possible acquisitions currently ongoing. Pending such uses, the Company intends
to invest the net proceeds of the Offering in short-term investment grade,
interest bearing obligations. See "Risk Factors -- No Operating History;
Accumulated Deficit; Anticipated Losses, "Risk Factors -- Need for Additional
Capital to Finance Growth and Capital Requirements" and "Business."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock
and does not expect to declare or pay dividends for the foreseeable future. The
Company currently intends to retain future earnings, if any, to finance the
development and operation of its business. Any future declarations and payments
of dividends shall be at the sole discretion of the Company's Board of
Directors. Payment of dividends on the Common Stock would be subject to the
prior payment of all accrued and unpaid dividends on any shares of Preferred
Stock the Company may issue in the future at its sole discretion. See "Risk
Factors -- Dividend Policy" and "Description of Capital Stock."
20
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, (i) on an actual basis and (ii) on an as adjusted basis to
reflect the sale of the 1,600,000 shares of Common Stock offered hereby at the
initial public offering price of $8.00 per share (assuming no exercise by the
Underwriters of any portion of their overallotment option and after deducting
underwriting discounts and commissions and estimated offering expenses) and the
anticipated application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Stockholders' equity (deficit)(1):
9% Cumulative Redeemable Convertible Preferred Stock, par value
$1.00 per share; 1,000,000 shares authorized; no shares issued
and outstanding, actual; and as adjusted...................... $ -- $ --
Common Stock, par value $.01 per share; 9,000,000 shares
authorized; 2,657,100 shares issued and outstanding, actual;
4,257,100 shares issued and outstanding, as adjusted.......... 1,668,900 12,988,900
Accumulated deficit................................................ (780,428) (780,428)
---------- -----------
Total Stockholders' Equity and Capitalization............ $ 888,472 $12,208,472
========= ==========
</TABLE>
- ---------------
(1) Excludes 587,500 shares of Common Stock issuable upon the exercise of
outstanding options as of March 31, 1997, at an exercise price per share
equal to the initial public offering price of the Common Stock offered
hereby and 50,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants. See "Management -- 1996 Stock Option Plan,"
"Underwriting" and Notes 4 and 6 to Notes to Financial Statements.
21
<PAGE> 22
DILUTION
At December 31, 1996, the Company's net tangible book value was $878,325,
or $0.33 per share. Net tangible book value per share is determined by dividing
the Company's tangible net worth (the Company's total assets, excluding
intangible assets, less total liabilities) by the number of shares of Common
Stock outstanding as of December 31, 1996. After giving effect to the receipt of
$11,320,000 from the sale of 1,600,000 shares of Common Stock in the Offering at
the initial public offering price of $8.00 per share (assuming no exercise by
the Underwriters of their over-allotment option and after deducting estimated
underwriting discounts and commissions and estimated offering expenses) and the
application of the net proceeds as described under "Use of Proceeds", the net
tangible book value, as adjusted, of the Company at December 31, 1996 would have
been $12,198,325, or $2.87 per share, based on 4,257,100 shares of Common Stock
to be outstanding after the Offering. This represents an immediate increase in
net tangible book value of $2.54 per share to the existing stockholders of the
Company, and an immediate dilution in net tangible book value of $5.13 per share
to new investors, or approximately 64%. The following table illustrates the per
share dilution as of December 31, 1996:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $8.00
Net tangible book value per share............................... $0.33
Increase per share attributable to new investors................ $2.54
-----
Adjusted net tangible book value per share after the Offering........ $2.87
-----
Dilution per share to new investors.................................. $5.13
=====
</TABLE>
The following table sets forth, as of December 31, 1996, the differences
between the existing stockholders and new investors with respect to the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share (at the initial public offering price of
$8.00 per share before deducting underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED PAID
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------ ----------- ------ -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 2,657,100 62.4% $ 1,668,900 11.5% $0.63
New investors...................... 1,600,000 37.6% 12,800,000 88.5% $8.00
--------- ------ ----------- ------
Total.................... 4,257,100 100.00% $14,468,900 100.00%
========= ====== =========== ======
</TABLE>
The foregoing tables assume the exercise of neither the Underwriters'
over-allotment option, any outstanding stock options nor the Representative's
Warrants. At March 31, 1997, there were outstanding options to purchase an
aggregate of 587,500 shares of Common Stock each with an exercise price per
share equal to the initial public offering price. Accordingly, the exercise of
any of such options will not result in any further dilution to the new
investors. See "Management -- 1996 Stock Option Plan" and Notes 4, 6 and 7 to
Notes to Financial Statements.
22
<PAGE> 23
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 Prospectus.
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION THREE MONTHS
(FEBRUARY 12, 1996) ENDED
TO SEPTEMBER 30, 1996 DECEMBER 31, 1996
--------------------- -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ -- $ --
Cost of revenues......................................... -- --
Operating expenses:
Advertising and marketing.............................. 10,150 12,512
Product development.................................... 137,159 137,395
General and administrative............................. 283,832 220,044
---------- ----------
Total operating expenses....................... 431,141 369,951
---------- ----------
Loss from operations..................................... (431,141) (369,951)
Interest income.......................................... 13,383 7,280
---------- ----------
Net loss................................................. $ (417,757) $ (362,671)
========== ==========
Net loss per share....................................... $ (0.16) $ (0.14)
Shares used in computing net loss per share(1)........... 2,548,680 2,644,260
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1996
--------------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 865,742 $ 692,938
Working capital.......................................... 828,860 668,540
Total assets............................................. 1,066,241 921,086
Total liabilities........................................ 45,098 32,614
Stockholders' equity..................................... 1,021,143 888,472
</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 Notes to
Financial Statements.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is an interactive technology and media company that provides
through its Internet site proprietary content and commodity information relating
to business and finance, sports and the Internet. In addition, the Company
offers a search/index guide that combines various existing search/index guides
into one guide (a "metasearch engine") and a Java-based desktop content delivery
system. The Company provides such content and search technology through its
Internet site located at <URL:http://www.go2net.com/>.
The Company was incorporated on February 12, 1996 and its sole operating
activities through November 7, 1996 were the conception and development of its
Internet site and corresponding business plan, the hiring of employees,
including programmers, designers, editors, writers (referred to as content
contributors) and administrative staff, the creation and development of its
Internet site, the preparation and editing of proprietary and commodity content
to be provided thereon and the negotiation of contracts with service,
information, equipment and computer software and hardware providers. To date,
the Company has not generated any cash revenues.
The Company has no 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 site 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 site, 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 products, content 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, informative, entertaining and compelling content 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 operating history makes prediction of future operating
results difficult. Accordingly, there can be no assurance that the Company will
be able to generate 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 December 31,
1996, had an accumulated deficit of $780,428. Upon completion of the Offering,
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 content and
applications. 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. See "Risk Factors -- No Operating
History; Accumulated Deficit; Anticipated Losses."
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 site, 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 implement its operating strategy, the
Company may elect from time to time to make certain advertising and marketing or
24
<PAGE> 25
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. See "Risk Factors -- Unpredictability
of Future Revenues; Potential Fluctuations in Quarterly Operating Results."
RESULTS OF OPERATIONS
REVENUES
The Company did not launch its Internet site until November 7, 1996 at
which time it was still in the process of evaluating the technical features of
the site. From the date of inception to date, the Company has not generated any
cash revenues. The Company is not a party to any advertising or other agreement
or arrangement from which it can record deferred revenues or reasonably expect
to generate cash revenue in the immediate future. The sole source of funds for
the Company from the date of inception through December 31, 1996, other than the
sale of equity, has been interest income in the amount of $20,663. See "Risk
Factors -- No Operating History; Accumulated Deficit; Anticipated Losses."
COSTS OF REVENUES
Since inception, the Company has not incurred any cost of revenues as the
Company has not begun generating revenues. Costs incurred during the period from
inception to December 31, 1996 were recognized as product development 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 continue to 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 period from
inception through the Company's fiscal year ended on September 30, 1996 and the
three months ended December 31, 1996 were $10,150 and $12,512, 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's initial development and creation of its Internet site.
Product development expenses include compensation and related expenses, costs of
computer hardware and software, and the cost of acquiring, designing, developing
and editing Internet content. All of the costs incurred to date in connection
with the development of the Company's Internet site have been expensed. Product
development expenses incurred by the Company for the period from inception
through the Company's fiscal year ended on September 30, 1996 and the three
months ended December 31, 1996 were $137,159 and $137,395, respectively. The
Company believes that significant investments in enhancing its Internet site
will be necessary to become 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 corporate
purposes. General and administrative expenses incurred by the Company for the
period from inception through the Company's fiscal year ended on September 30,
1996 and the three months ended December 31, 1996 were $283,832 and $220,044,
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.
25
<PAGE> 26
Income Taxes. The Company has not recorded an income tax benefit because
it has incurred net operating losses since its inception. As of December 31,
1996, the Company had Federal net operating loss carry forwards of approximately
$750,000. 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 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 December 31, 1996, the Company's principal source of liquidity was
$692,938 in cash and cash equivalents derived from private sales of the
Company's equity securities. The Company also has a $500,000 revolving line of
credit with a commercial bank which expires on November 15, 1997. All borrowings
under such line of credit accrue interest at such bank's prime annual lending
rate plus 1%. In January 1997, the Company borrowed $125,000 under this line of
credit. The Company has primarily financed its operations through the private
sale of equity securities. See "Certain Transactions."
Capital expenditures were approximately $197,202 and $25,213 for the period
from inception through the Company's fiscal year ended on September 30, 1996 and
the three months ended December 31, 1996, respectively. The Company has no
material commitments for capital expenditures other than $96,000 relating to the
purchase of computer hardware and software. The Company anticipates a
substantial increase in its capital expenditures in 1997 consistent with its
anticipated growth.
The Company currently believes that available funds, cash flows expected to
be generated from operations, if any, the existing line of credit and the net
proceeds of the Offering will be sufficient to fund its working capital and
capital expenditures requirements for the twelve months following completion of
the Offering. 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 content material. 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
content) 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 in the Company's
business, financial condition and operating results. See "Risk Factors -- Need
for Additional Capital to Finance Growth and Capital Requirements."
26
<PAGE> 27
BUSINESS
GENERAL
The Company is an interactive technology and media company that provides
through its Internet site proprietary content and commodity information relating
to business and finance, sports and the Internet. In addition, the Company
offers a search/index guide that combines various existing search/index guides
into one guide (a "metasearch engine") and a Java-based desktop content delivery
system. The Company focuses its editorial, design and programming resources on
developing proprietary content that seeks to be original, entertaining,
informative and compelling. The Company's Internet site seeks 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. In order to reach this target market and
advertisers, the Company's Internet site seeks to provide:
- an online environment in which content contributors are active
participants in the Company's Internet site, interacting with both users
and one another;
- content that informs, educates, entertains, provides varying perspectives
and encourages users to participate or take action on the information
provided;
- an online environment that facilitates ease of use of the Company's
Internet site through its design, communication and navigation features
and tools; and
- advertising and sponsorship opportunities through an approach combining
brand integration, animated advertising, product promotion and content
area sponsorship.
The Company launched its Internet site on November 7, 1996. The Company's
Internet site is located at <URL:http//www.go2net.com/>.
On January 31, 1997, the Company sublicensed from 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
under the go2search name in March 1997.
The Company's objective is to be a leading provider of content on the World
Wide Web, specifically in the areas of business and finance, sports and the
Internet, complemented by technologies such as search/index guides and
Java-based desktop content delivery systems. The Company focuses on utilizing
innovative technologies to deliver its content and to enhance the attractiveness
and utility of its product offerings with specially designed graphics and
animation. The Company's goal is to provide interactive content in all of its
content areas, and to seek advertisers and sponsors who wish to access the
demographic groups using the Company's Internet site.
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
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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").
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.
Content on the Internet and in Traditional Media
The World Wide Web provides the opportunity for Internet content providers
to create a product that is timely, interactive, and offers 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 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,
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the Company believes that a significant opportunity exists for companies
providing original, entertaining, informative and compelling content on the
Internet. The Company believes that a significant opportunity exists to exploit
certain niches of the Internet user community by providing business and finance,
sports and Internet-related content, with complementary technologies such as
search/index guides and Java-based desktop content delivery systems. 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-based advertising and sponsorships amounted to approximately $55
million in 1995, and is expected 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
content providers charge a subscription fee for users to access certain of their
content as an additional revenue source. These subscription fees are charged to
either supplement advertising revenues or as an entirely separate revenue model.
For example, ESPNET.Sportszone charges its users for fantasy sports league
participation, and selected sports columns, and Individual, Inc. charges for
certain services on its NewsPage Web site, which provides a customized Internet
newspaper. 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 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.
THE go2net OPPORTUNITY
In December 1996, Web21 Inc.'s listing of the 25 most visited Web sites
included five sites offering sports information, three offering news related to
the Internet, three offering business or finance information and eight offering
search/index guides. In terms of business or finance content, there is a wealth
of financial resources and information available on the Internet. However, few
Web sites provide custom commodity information combined with quality proprietary
content from business and financial writers and analysts. As for sports content,
the demand for sports information in general is reflected by the fact that some
of the most accessed Web sites are dedicated solely to sports, such as ESPNET
Sportszone, NBA.com, Sportsline USA and iGolf. In addition, as use of the
Internet expands, the Company believes that there will be an increasing demand
for Internet-related information ranging from elementary aspects of the Internet
to the latest Internet software and technology enhancements, as well as the
other corresponding products and services. The Company believes that a
significant opportunity exists to exploit certain niches of the Internet user
community by providing business and finance, sports and Internet-related
content, complemented by technologies such as search/index guides, and
Java-based desktop content delivery systems.
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STRATEGY
The Company's objective is to be a leading provider of content on the World
Wide Web, specifically in the areas of business and finance, sports and the
Internet. The Company has also developed a complementary search/index guide and
a Java-based desktop content delivery system. The Company focuses on utilizing
innovative technologies to deliver its content and to enhance the attractiveness
and utility of its product offerings with specially designed graphics and
animation. The Company's goal is to provide interactive content in all of its
content areas, and to seek advertisers and sponsors who wish to access the
demographic groups using the Company's Internet site. 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 of the Company's strategy include:
Provide Compelling and Targeted Content. The Company seeks to create
content that is original, entertaining, informative and compelling. The
Company's Web site content focuses on what the Company believes are currently
the most popular areas of interest on the Internet: business and finance, sports
and the Internet itself. The Company seeks to offer information in these areas
which is written by content contributors with demonstrated expertise, experience
and notoriety in their fields. The Company supplements the content provided by
these contributors with supporting commodity and other information and content
provided by its in-house editorial staff. In addition, the Company recognizes
that as its content areas grow, it may be useful to spin off certain content
areas as their own URL's in order to maximize department revenues, and maximize
the navigational intuitiveness and usability of the department.
In addition, the Company believes that the creation of a virtual community
for the content found on its Web site is an important component in determining
who chooses to access its Web site. In particular, the Company's content
contributors and editors interact with users through electronic mail, and online
question and answer sessions. The Company also encourages its users to submit
articles and questions directly to its Web site. The Company hopes to provide
content that is formed through an interaction between the Company's editorial
staff and the users.
Establish Market Awareness and Brand Recognition. The Company believes
that establishing and maintaining the go2net brand is a critical element of its
operating strategy. The Company plans to create a brand identity that is built
around authoritative commentary and innovative delivery of information. In this
regard, the Company has placed significant emphasis on establishing brand
identity for its product offerings. The Company's brand and corporate identity
seeks to reflect an Internet site that provides a well-balanced array of
programming with varying perspectives. The Company will seek 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 also believes that
the go2net brand will be reinforced as a result of the consistent design and
imagery associated with each department of its Web site. The Company believes
that by successfully building its brand, there will be opportunities to expand
into new content offerings.
Leverage Strategic Relationships. The Company seeks to leverage its
current resources and infrastructure by entering into strategic relationships
with third party developers of content and Internet-related technologies. 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 with respect to a significant portion of the commodity
information included in the Company's Internet site. These relationships enable
the Company to complement its proprietary content offerings with information
developed or compiled by third parties.
Focus on Advertising Sales. The Company seeks to differentiate itself from
other Internet companies by offering advertising and sponsorship opportunities
that combine brand integration, animated advertising, product promotion and
content area sponsorship. The Company seeks to assist sponsors and advertisers
in promoting their products by providing alternatives to banner advertisements,
which are the current advertising standard on the World Wide Web.
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PRODUCTS
The Company's product strategy is to design and deliver content in an
intuitive manner and utilize the most current technologies available to it in
order to enhance the user's experience on its Web site. The Company believes
that the technology utilized in its Web site offers a practical means of
performing certain tasks. While most Web sites have typically chosen to focus on
one type of content, such as sports, business, health or movies, the Company
believes that the content offerings contained in the Company's Web site will
enable the Company to position itself as a Web site that is capable of providing
a wide variety of programming.
The Company's existing product offerings, all of which first appeared on
the Internet on November 7, 1996, include the following content areas and
technology applications:
go2sports: This content area offers exclusive insights from Hall of
Fame athletes, such as former Boston Celtic Bill Russell and former
Cincinnati Red Joe Morgan, and journalists such as Steve Rudman and the
Company's own in-house journalists. The Page 2, Hoop City, The Show and The
Gridiron areas of go2sports offer entertaining insights, commentary and a
real-time news ticker and scoreboard. Users are encouraged to contribute
writings, participate in polls, and interact with the Company's Web site
personalities. This content area also features a self-updating sports
ticker offering sports scores and sports news updates, and daily and weekly
sports articles. From November 7, 1996 through March 31, 1997, there were
approximately 44,000 unique visitors to go2sports. This number does not
include repeat visitors to the go2sports area.
go2business: This content area provides users with insights regarding
the financial markets, publicly traded companies, and general financial and
economic trends. Inside Scoop features the insights of prominent industry
analysts and writers, such as business author Jennifer James, Ph.D. Daily
Market Rap offers insights on the day's financial market activities by
William Fleckenstein, a professional money manager. Stock Picks is the
platform for the Company's investment professionals to select the stocks
that they believe can outperform the major market averages over various
investment horizons. go2business offers investment tools such as stock
quotes, graphs, historical data, personal portfolio monitoring, business
and financial news, company profiles and company filings. The Company has
sought to further enhance the attractiveness of this feature by including a
ubiquitous, configurable stock ticker. From November 7, 1996 through March
31, 1997, there were approximately 31,000 unique visitors to go2business.
This number does not include repeat visitors to the go2business area.
go2internet: This content area contains insights on the Internet's
recent developments, trends and issues, provided by recognized individuals
in the Internet industry. This content area includes articles contributed
by Paul Phillips, Internet security expert and the Company's Vice
President -- Technology, and Martin L. Schoffstall, co-founder of PSINet,
Inc. and a director of the Company, along with other technology
professionals and journalists. Steve Berlin, who contributes to MSNBC and
is published in Websight magazine, manages the Useless WWW Pages area of
go2internet. go2internet features interactive elements, such as the One
Book List area (a book review forum), as well as a scrolling news ticker
that updates the latest Internet and technology industry news. From
November 7, 1996 through March 31, 1997, there were approximately 222,000
unique visitors to go2internet. This number does not include repeat
visitors to the go2internet area.
go2search: Metacrawler <URL:http://www.metacrawler.com/> is a World
Wide Web search service developed by UW and Netbot. The Company has
sublicensed the Metacrawler Service from Netbot. The Company integrated the
Metacrawler Service into go2search in March 1997. Based on a seven-day log
of traffic to the Metacrawler Service taken by the Company in March 1997,
there was an average of approximately 72,000 visitors (measured as unique
machine addresses) per day to the Metacrawler Service and an average of
approximately 215,000 queries (searches) per day.
Metacrawler differs from other services in that it does not maintain
an internal database. Instead, it utilizes the databases of various
Web-based search engines and indexes. The exact search engines utilized by
Metacrawler have changed from time to time based on utility and the
relationship with individual search services. In March 1997, Metacrawler
sent its user queries to several Web search engines, including Lycos,
WebCrawler, Excite, Alta Vista and Yahoo! The Web search engines to which
Metacrawler sends its queries may change from time to time. Metacrawler
works by querying a number
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of search engines simultaneously, organizing the results into a uniform
format, and displaying them. With Metacrawler, the user also has the option
of scoring the hits.
go2vision: This product allows for users to obtain commodity
information and search the World Wide Web while simultaneously accessing
other Web sites or running other applications. go2vision was developed by
the Company's team of Java programmers. Since the software code was written
entirely in Java, it can be downloaded and used in response to a single
click of a mouse by the user. go2vision is designed to coexist on the
user's screen with other applications. It updates automatically with stock
quotes and sports scores, and includes a metasearch engine that allows the
user to probe the Internet while simultaneously browsing or using other
applications. go2vision has the ability to deliver both static and
animated, interactive advertisements for the Company's sponsors. Users can
have go2vision on their desktop all day long as go2vision continually
updates to deliver timely information. In addition, Internet users may
customize any of the features of go2vision. From November 7, 1996 through
March 31, 1997, there were approximately 4,400 unique visitors to
go2vision. This number does not include repeat visitors to the go2vision
area.
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, DRI/McGraw-Hill,
Dow Jones & Company, Inc., New York Stock Exchange, Inc., The Nasdaq Stock
Market, Inc., SportsTicker, Comtex, Edgar Online 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
will help to maximize the speed and accessibility of the Company's Web site for
users.
In January 1997, the Company licensed the Metacrawler Service from Netbot.
See "-- Metacrawler License Agreement."
The Company also has an ongoing advertising barter relationship with
Yahoo!, Inc., which the Company believes will enhance its brand recognition and
potentially expand its user base.
REVENUE SOURCES
Sponsors/Advertisers: To date, the Company's Internet site has only two
advertisers. The Company has a barter arrangement with Yahoo!, Inc., with
respect to the trading of advertisement impressions on each other's Internet
site. The other advertiser is not currently paying for advertising. The typical
advertiser being sought by the Company for its Web site is a large corporation
or organization which currently advertises nationally in print, radio,
television or electronic media. The Company seeks to establish advertising
relationships with these potential advertisers through its own marketing and
advertising sales department and to supplement these efforts from time to time
through national advertising agencies. The pricing strategy will generally be
based on the number of impressions delivered, with the goal of incentivizing
advertisers to sign longer term agreements. No assurance, however, can be given
that such pricing strategy can be implemented, or if implemented, will result in
significant advertising revenues to the Company.
Subscriptions, Memberships and Other Transactions: The Company believes
that there may be possibilities to segment certain proprietary content areas on
the Company's Web site as subscription areas, specifically with stock
recommendations in the business area, and with fantasy sports league
participation in the sports area, which have demonstrated popularity on the
World Wide Web. The Company has plans to offer these and other subscription
services in 1997, although there can be no assurance that the Company will be
able to initiate or successfully operate any subscription areas. As traffic to
the Company's Web site increases, the Company will review other opportunities
for deriving revenue, such as offering products and services from advertisers
and sponsors and itself, if safe, secure electronic payments can be developed
and widely implemented. There can be no assurance that the Company will be able
to initiate or successfully operate electronic commerce, for itself or its
sponsors/advertisers, through its Web site.
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ADVERTISING SALES
The Company expects to derive substantially all of its revenues from the
sale of advertising on its Web site. The Company's advertising sales staff
consists of two full-time employees located at the Company's executive offices
in Seattle, Washington. 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 from time to time with the use of
national advertising agencies. To date, the Company has generated no cash
advertising or sponsorship revenues. Currently, the Company's advertising sales
have been limited to barter transactions in which the Company trades impressions
with another Web site. While the Company has developed, and is seeking to
implement, the advertising sales strategy described in this Prospectus, there
can be no assurance that such strategy will be successful in achieving its
objectives. See "Risk Factors -- Dependence on Advertising Revenues" and "Risk
Factors -- Limited Experience in Sales and Marketing of Advertising."
The Company seeks to help grow the businesses of its potential sponsors and
advertisers by providing an alternative to banner advertising, which is the
current standard on the World Wide Web. To this end, the Company seeks to
provide two advertising elements: custom brand integration and company
promotion. The Company's advertising strategy is based on the concept of brand
and product integration. Brand logos are integrated into areas of the Company's
Web site without diminishing the presentation of the content. The brands are
woven into the design of the Web site in an attempt to hold a user's attention
with customized environments designed for each page. This approach is consistent
with the Company's endorsement of the sponsorship model for advertising.
The Company believes that the sponsorship of Internet content will play an
increasingly important role in generating advertising revenues. The World Wide
Web is relatively new to 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 key element of this
approach for the sponsor is that the product or service becomes associated with
the content or program. 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 a content program.
The Company seeks to offer each of its potential sponsors/advertisers the
opportunity to access the number of times their advertisements are viewed on a
daily basis through the establishment of a private, dedicated URL located on the
Company's Web servers. The Company believes that this process will make it
easier for the sponsor/advertiser to monitor the success of a particular
advertisement on a daily basis, and will give the sponsor/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 sponsor/advertiser, the
Company plans to establish during 1997 a page on its Web site where the user
will be asked from time to time to respond to a short survey in return for the
opportunity to win prizes provided by either the Company or a
sponsor/advertiser. The Company believes that such surveys may result in
generating more interest in specific content areas and attract sponsorship
interest. No assurance, however, can be given that, if the Company is able to
establish such a page on its Web site, users will actually participate in such
surveys or that advertisers or sponsors 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 site. 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
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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 site. 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. See "Risk Factors -- Dependence on
Acceptance of the Internet as an Advertising Medium; Lack of Measurement
Standards."
MARKETING
The Company's marketing strategy is to enhance, promote and support a
perception that the Company's Internet offerings have a balance of proprietary
content and general subject matter in its content areas. The Company believes
that it is necessary to provide the Internet user with content that allows them
an opportunity to act on the information provided. To that end, the Company has
positioned its technical team to supplement the content contributors and editors
with interactive elements. This enhances the ability of the Company to provide
Internet content that it believes to be creative, entertaining and unique to the
Internet medium.
During 1997, the Company will focus on a marketing strategy that will
include informing all search/index guides and information Web sites about the
Company's Web site; periodic press releases promoting new content, technologies,
important hires and other strategic relationships; and advertising on Web sites
and in trade magazines.
The Company believes that the combination of a strong brand identity and
meaningful content is an approach that has been successful to date for certain
of the prominent Web sites. In order to implement its marketing plan, the
Company intends to routinely gather information regarding the types of content
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, entertaining, informative and compelling
content, which cannot be assured. If Internet users do not perceive the
Company's Internet content to be such, or if the Company introduces new content
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 Internet content or creating or
maintaining its brand recognition. If the Company is unable to provide the
contemplated content or otherwise fail to establish and maintain brand
recognition, or if the Company incurs excessive expenses in an attempt to
improve its content or implement its marketing plan, the Company's business,
financial condition and operating results would be materially adversely
affected. See "Risk Factors."
RESEARCH AND DEVELOPMENT
A focus of the Company's research and development efforts is the
enhancement of its content delivery and presentation 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 will
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primarily be used in connection with existing applications. Examples of
potential Java-based software applications include the facilitation of
multi-player games, a Java interface to a metasearch engine and enhanced
financial monitoring and analysis tools. No assurance can be given that the
Company will be able to develop enhancements to its content delivery or
presentation or to develop any new Java-based software applications, or if so
developed, that such enhancements or applications will be commercially viable.
The Company also focuses its research and development efforts on the
development of new content areas and services that address the needs or
preferences of certain demographic groups that, in the belief of management, may
be attractive to advertisers and sponsors. No assurance can be given that the
Company will be able to develop new content areas or services, or if so
developed, that such content areas or services will be commercially viable.
Product development expenses for the period from inception through the Company's
fiscal year ended on September 30, 1996 and the three months ended December 31,
1996 were $137,159 and $137,395, respectively.
COMPETITION
The Company competes with other Internet content providers for the time and
attention of consumers and for advertising and subscription revenues.
Competition among Internet content providers is intense and is expected to
increase significantly in the future. The Company's Internet site competes
against a variety of companies that provide similar content 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 Internet content to attract Internet
users and to support advertising and, in the future, subscription fees. In the
Company's niche of business and finance, sports and the Internet, in addition to
competing with numerous newspapers, magazines, television programs and radio
broadcasts that cover the same material, the Company competes with various
Internet content providers 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 services than does the
Company, which services may be sufficiently attractive to Internet users to
attract users to their services and, consequently, dissuade them from accessing
the Company's Internet site. If the Company is unable to attract a significant
number of Internet users to its Internet site, 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 content 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 Internet site, it will compete with a greater number of Internet sites and
other media 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
content and services in the future. There can be no assurance that the Company's
Internet site 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 site, the demographics of such user base, the Company's
ability to deliver focused and compelling advertising and interactivity through
its Internet site 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
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<PAGE> 36
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 content being provided, the price
charged for such content and the cost and accessibility of similar content
through the Internet or competing media. Given the intense competition among
Internet content providers 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 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 content 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, content 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. See "Risk
Factors -- Competition; Low Barriers to Entry."
EMPLOYEES
As of March 31, 1997, the Company had a total of 22 employees all of whom
are based at the Company's executive offices in Seattle, Washington. Of the
total of 22 employees, 2 are in sales and marketing, 8 are in providing and
editing content for the Internet site, 4 are in programming, 2 in quality
assurance, 3 in design, technical support, documentation and product
development, and 3 are in administrative and finance functions. In addition, as
of March 31, 1997, the Company has agreements with approximately 18 independent
contractors to provide various services, articles and other content material for
inclusion in the Company's Internet site. None of the Company's employees are
represented by a labor union and the Company considers its employee relations to
be good. See "Risk Factors -- Dependence on Key Personnel" and "Risk Factors --
Managing Potential Growth."
FACILITIES
The Company's executive offices are located in downtown Seattle, Washington
in an office building in which the Company leases 7,166 square feet under a
sublease that expires on July 31, 1997. The Company has recently signed a
sublease for offices comprised of 13,481 square feet located in downtown
Seattle, Washington for a lease term which expires in September 2003. The
Company anticipates that it will relocate to these offices in June 1997. The
Company believes its new 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 site which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Risk Factors -- Capacity Constraints and Systems
Disruptions."
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 implement its business plan and its business, financial condition
and operating results would be materially adversely affected.
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The success of the Company is dependent upon its ability to protect and
leverage the value, if any, of its original Internet 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 servicemarks for
its logo and name, as well as for the names of each of its content areas. 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 original Internet content or domain names.
Policing unauthorized use of the Company's original Internet 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. See "Risk Factors -- Dependence on Licensed Technology; Protection
of Intellectual Property."
METACRAWLER LICENSE AGREEMENT
The Company and Netbot have entered into 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. The Company anticipates that a substantial portion of the traffic to
its Internet site will be 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. 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.
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
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<PAGE> 38
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. This may include, but is not limited to, the
Communications Decency Act (the "CDA") which, among other things, imposes
criminal penalties on anyone that distributes "indecent" material over the
Internet. In June 1996, the United States District Court for the Eastern
District of Pennsylvania held that the CDA is unconstitutional and enjoined its
enforcement. The decision of the District Court is currently on appeal to the
United States Supreme Court. In addition to the CDA, there is also precedent for
local legislation being used to enforce community standards on Internet sites
that physically exist elsewhere.
While the Company has no intention of distributing the types of materials
that the CDA or similar legislation might deem illegal, the manner in which such
legislation may be interpreted and enforced and its effect on the Company's
operations cannot yet be fully determined, and therefore the CDA or similar
legislation could subject the Company to substantial liability. Such laws 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.
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
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 site 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. See "Risk Factors -- Liability for Internet
Content; Government Regulations."
LEGAL PROCEEDINGS
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 aware of any legal proceedings or claims to which the Company is
currently a party. See "Risk Factors -- Dependence on Licensed Technology;
Protection of Intellectual Property."
In addition, the Company may be from time to time a party to legal or
administrative proceedings or arbitrations that arise in the ordinary course of
business. There is no pending or threatened legal or administrative proceeding
or arbitration to which the Company is currently a party.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company. Their respective backgrounds
are described following the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ----------------------------------------
<S> <C> <C>
Russell C. Horowitz....................... 30 President, Chief Executive Officer,
Chief Financial Officer, and Chairman of
the Board
John Keister.............................. 30 Chief Operating Officer
Paul S. Phillips.......................... 24 Vice President -- Technology
Martin L. Schoffstall(1).................. 36 Director
Dennis Cline(2)........................... 35 Director
Manuel Rubio(1)(2)(3)..................... 34 Director, Secretary
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Plan Committee.
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 July 1992, Mr. Horowitz was a founder of
Active Apparel Group, Inc., a New York, New York-based activewear and sportswear
supplier, whose shares are quoted for trading on the NASDAQ National Market
System under the symbol "AAGP." From July 1992 until April 1994, Mr. Horowitz
served as the Chief Financial Officer of Active Apparel Group, Inc. Since May
1994 Mr. Horowitz has served as the Director of Corporate Development and
Investor Relations for Active Apparel Group, Inc. 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. 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. 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. 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.
MARTIN L. SCHOFFSTALL has served as a director of the Company since August
1996. Mr. Schoffstall was a co-founder of PSINet, Inc., an Internet access and
service provider whose common stock is quoted for trading on the Nasdaq National
Market System under the symbol "PSIX". Mr. Schoffstall had been a Senior Vice
President, Chief Technology Officer and a director of PSINet, Inc. since its
inception in 1990 until 1996. In
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1996 Mr. Schoffstall founded Epicenter, Inc., an Internet content provider of
software, technology and on-line gaming for the World Wide Web. Mr. Schoffstall
serves as the President, Chief Executive Officer and Chairman of the Board of
Epicenter, Inc. Since June 1996, Mr. Schoffstall has served as a director of
Ascend Communications, Inc., a world-wide provider of remote computer networking
solutions whose common stock is quoted for trading on the Nasdaq National Market
System under the symbol "ASND." Prior to forming PSINet, Inc. and Epicenter,
Inc., Mr. Schoffstall was co-founder of, and from January 1987 to December 1989,
served as Vice President for Technology and Marketing for, NYSERNet. From May
1985 until December 1988, Mr. Schoffstall was an instructor at Renssalaer
Polytechnic Institute. Mr. Schoffstall also served, from May 1984 until May
1985, as Senior Systems Engineer for Cadmus Computer Systems and, from June 1982
until May 1984, as systems engineer for Internet protocols at Bolt, Beranek &
Newman Inc. Mr. Schoffstall co-authored the national standard network management
software, Simple Network Management Protocol. Mr. Schoffstall received a
E.C.S.C. from Renssalaer Polytechnic Institute in 1982.
DENNIS CLINE has served as a director of the Company since December 1996.
Since October 1996, Mr. Cline has served as the Vice President of International
Sales for McAfee Associates, Inc., a leading provider of network security and
management tools for corporate accounts whose common stock is traded on the
Nasdaq National Market System under the symbol "MCAF." From October 1995 to
October 1996, Mr. Cline served as Vice President of Worldwide Channel Sales for
McAfee Associates, Inc. From September 1994 to October 1995, Mr. Cline served as
Vice President of North American Sales of McAfee Associates, Inc. From November
1993 to September 1994, Mr. Cline performed sales consulting services for
various companies. From January 1993 to November 1993, Mr. Cline was Vice
President of Worldwide Sales for Fifth Generation Systems, a software utilities
company. From April 1992 to January 1993, Mr. Cline was a Director of Sales for
GCC Technologies, Inc., a manufacturer of computer printers. From June 1991 to
March 1992, Mr. Cline served as Director for Worldwide Sales for Alias Research,
a graphic software company. From January 1988 to August 1991, Mr. Cline was a
Sales Manager for Claris Corporation, an application software company; and from
February 1985 to January 1988 Mr. Cline was employed by Microsoft Corporation
where he served in a variety of sales and sales management positions.
MANUEL RUBIO has served as a director and Secretary of the Company since
its inception in February 1996. Mr. Rubio has served as a director of Xanthus
Management, L.L.C., the general partner of Xanthus Capital, L.P., and DMR
Investments, L.L.C. since March 1996. Prior thereto, Mr. Rubio was an associate
at the New York law firm of Berlack, Israels & Liberman from July 1993 until
March 1994. From October 1992 until June 1993, Mr. Rubio was an associate at the
Buenos Aires, Argentina law firm of Marval, O'Farrell & Mairal. From November
1987 until October 1992, Mr. Rubio was an associate at the New York law firm of
Willkie Farr & Gallagher. Mr. Rubio received a B.A. in Economics from Columbia
College of Columbia University in 1984 and a J.D. from Columbia University
School of Law in 1987.
The Company currently has authorized four directors. Each director holds
office until the next annual meeting of stockholders and until their respective
successors have been duly elected and qualified.
Executive officers of the Company are elected by the Board of Directors
annually and serve until their respective successors have been duly elected and
qualified. There are no family relationships among any of the executive officers
or directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors currently has three committees: the Audit
Committee, the Compensation Committee and the Stock Option Committee.
The Audit Committee was formed on March 10, 1996 and, among other things,
recommends the firm to be appointed as independent auditors to audit the
Company's financial statements, discusses the scope and results of the audit
with the independent auditors, reviews with management and the independent
auditors the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent auditors.
The current members of the Audit Committee are Martin L. Schoffstall and Manuel
Rubio.
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The Compensation Committee was formed on October 8, 1996 and, among other
things, reviews compensation arrangements for the Company's executive management
and non-employee directors. The current members of the Compensation Committee
are Dennis Cline and Manuel Rubio.
The Stock Option Committee was formed on March 10, 1996 and administers the
Company's 1996 Stock Option Plan. The current member of the Stock Option
Committee is Manuel Rubio.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1996, Manuel Rubio was the sole
member of the Company's Compensation Committee. Mr. Rubio is the Secretary of
the Company and an executive officer of Xanthus Management, L.L.C., the general
partner of Xanthus Capital, L.P. See "Certain Transactions."
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their services as members of the Board of Directors or any committee
thereof. Directors, however, are reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the Board or a committee thereof.
Dennis Cline and Martin L. Schoffstall were each granted options to purchase
10,000 shares of the Company's Common Stock. Such options have a 60-month term
and are exercisable at a price per share equal to the initial public offering
price of the Company's Common Stock. In August 1996, the Company sold an
aggregate of 37,500 shares of Preferred Stock to MLSI, LLC, a limited liability
company of which Martin L. Schoffstall is an executive officer, for an aggregate
purchase price of $75,000 ($2.00 per share). In December 1996, the Company sold
75,000 shares of Common Stock to Dennis Cline for an aggregate purchase price of
$150,000 ($2.00 per share). See "Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company to its Chief Executive Officer and Chief Operating Officer for
services rendered in all capacities during the period from the Company inception
(February 12, 1996) to September 30, 1996 (the end of the Company's fiscal
year). No officer earned salary and bonus in excess of $100,000 during such
period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
--------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
----------------------------------------------------- ------- ----- ---------------
<S> <C> <C> <C>
Russell C. Horowitz.................................. $21,000 $ 0 $ 5,292
Chief Executive Officer
John Keister......................................... $26,250 $ 0 $ 4,549
Chief Operating Officer
</TABLE>
- ---------------
(1) Includes payments to each executive of medical insurance premiums and
expenses relating to the use, maintenance and insurance of an automobile.
The Company has entered into employment agreements with each of Russell C.
Horowitz and John Keister pursuant to which they serve as President and Chief
Executive Officer, and Chief Operating Officer, respectively, of the Company.
Mr. Horowitz's employment agreement with the Company provides for a four
year term commencing March 1, 1996. Under this agreement Mr. Horowitz receives
an annual salary of $36,000. Mr. Keister's employment agreement with the Company
provides for a four year term commencing March 1, 1996. Under this agreement Mr.
Keister receives an annual salary of $45,000. While Mr. Horowitz's employment
agreement provides that he may be engaged in other non-competing business
activities, Mr. Horowitz has devoted substantially all of his time and effort to
performing his duties as an executive officer of the Company.
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Mr. Horowitz will continue to devote substantially all of his time and effort to
serving as an executive officer of the Company until, if ever, replacements or
successors to his duties are employed by the Company.
Each of the employment agreements described above provides for certain
employee benefits, including, without limitation, participation in the Company's
stock option plan or any other incentive or bonus plan which the Company may
institute in the future, as well as health insurance. Each of the employment
agreements provides for a one year non-competition period following termination
of the employment agreement. Each of such employment agreements provides for
termination of the employee by the Company for cause. None of such employment
agreements provides for termination upon a change of control of the Company.
OPTION GRANTS
During the period from inception (February 12, 1996) to September 30, 1996,
the Company did not grant any options to the individuals named in the Summary
Compensation Table. Subsequent to September 30, 1996, Russell C. Horowitz and
John Keister each were granted options to purchase 150,000 shares of Common
Stock at an exercise price per share equal to the initial public offering price
of the Company's Common Stock. The options granted each have a 60-month term and
provide that one-half of the options shall vest on the 90th day following
completion of the Offering, and a quarter of the options shall vest on each of
the one year and 18th month anniversary of the option grant.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan was adopted by the Company's Board of Directors
and stockholders on March 10, 1996. A maximum of 750,000 shares of Common Stock
may be issued pursuant to this plan upon the exercise of options. Under the 1996
Stock Option Plan, incentive stock options may be granted to employees and
officers of the Company and non-qualified stock options may be granted to
consultants, employees, non-employee directors and officers of the Company.
The 1996 Stock Option Plan is administered by the Stock Option Committee of
the Board of Directors, subject to the supervision and control of the entire
Board of Directors. Subject to the provisions of the 1996 Stock Option Plan, the
Stock Option Committee has the authority to select the optionee and determine
the terms of the options granted, including, among other things, (i) the number
of shares subject to each option, (ii) when the option becomes exercisable,
(iii) the exercise price of the option (which in the case of an incentive stock
option cannot be less than the fair market value of the Common Stock on the date
of grant, or less than 110% of fair market value in the case of employees or
officers holding 10% or more of the voting stock of the Company), (iv) the
duration of the option, and (v) the time, manner and form of payment upon
exercise of an option. In addition, the Company has agreed that it will not
issue any options with an exercise price less than 85% of the fair market value
on the date of grant without first obtaining shareholder approval for such grant
or a stock option plan authorizing such a grant, provided that in no event may
the exercise price be less than 85% of fair market value in the case of grants
to executive officers, directors and holders of more than 5% of the Common
Stock.
An option is not transferable by the optionee except by will or by the laws
of descent and distribution. Options may be exercisable only while the optionee
remains in the employ of the Company or for a designated period of time
thereafter. If an optionee becomes disabled or dies while in the employ of the
Company, the option is exercisable prior to the last day of the sixth or twelfth
month, respectively, following the date of termination of employment. If the
optionee leaves the employ of the Company for any other reason, the option is
exercisable for only 90 days following the date of termination of employment;
provided that the Stock Option Committee may extend this period up to six months
following the date of termination. Options which are exercisable following
termination of employment are exercisable only to the extent that the optionee
was entitled to exercise such options on the date of such termination.
As of March 31, 1997, options to acquire 587,500 shares of Common Stock had
been granted under the 1996 Stock Option Plan. All such options carry an
exercise price per share equal to the offering price of the
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<PAGE> 43
Common Stock offered hereby. None of such options are exercisable until, at the
earliest, the 90th day following the effective date of this Prospectus.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides, consistent with the
statutory provisions of the Delaware General Corporation Law, that no director
of the Company will be personally liable to the Company or any of its
stockholders for monetary damages arising from the director's breach of
fiduciary duty as a director. The preceding does not apply, however, with
respect to any action for unlawful payments of dividends, stock purchases or
redemptions, nor does it apply if the director (i) has breached his duty of
loyalty to the Company and its stockholders, (ii) does not act in good faith or,
in failing to act, does not act in good faith, (iii) has acted in a manner
involving intentional misconduct or a knowing violation of law or, in failing to
act, has acted in a manner involving intentional misconduct or a knowing
violation of law or (iv) has derived an improper personal benefit. The
provisions of the Company's Certificate of Incorporation limiting the liability
of directors for monetary damages do not affect the standard of conduct to which
directors must adhere, nor do such provisions affect the availability of
equitable relief. In addition, such limitations on personal liability do not
affect the availability of monetary damages under causes of action based upon
federal law.
The Company's Certificate of Incorporation and Bylaws provide for
indemnification of its executive officer and directors to the fullest extent
permitted by the Delaware General Corporation Law. See "Description of Capital
Stock -- Directors Liability."
43
<PAGE> 44
CERTAIN TRANSACTIONS
In March 1996, the Company sold an aggregate of 350,000 shares of its
Preferred Stock in a private placement for an aggregate purchase price of
$350,000 ($1.00 per share). John Keister, Chief Operating Officer of the
Company, purchased 5,000 shares of Preferred Stock in the private placement
which was subsequently gifted to members of his immediate family. In addition,
certain members of Russell Horowitz's immediate family purchased an aggregate of
93,000 shares of Common Stock in the private placement and a member of Manuel
Rubio's immediate family purchased 9,000 shares in the private placement.
In June 1996, the Company sold an aggregate of 500,000 shares of its
Preferred Stock in a private placement for an aggregate purchase price of
$1,000,000 ($2.00 per share). The sole purchaser of such shares was Xanthus
Capital, L.P., a Seattle, Washington based merchant bank. Russell C. Horowitz
and Manuel Rubio serve as the Chief Executive Officer and Executive Vice
President, respectively, and directors 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 addition Messrs. Horowitz and
Rubio are also limited partners of Xanthus Capital, L.P.
In August 1996, the Company sold an aggregate of 37,500 shares of Preferred
Stock to MLS-I, LLC, a limited liability company of which Martin L. Schoffstall
is an executive officer, for an aggregate purchase price of $75,000 ($2.00 per
share). The Company has also entered into an agreement with Mr. Schoffstall
pursuant to which Mr. Schoffstall contributes articles to be included on the
Company's Web site. The agreement commenced on September 1, 1996 and will expire
on September 1, 1998, subject to extensions by the parties thereto. In
consideration of providing such articles Mr. Schoffstall received a one-time
grant of 12,500 shares of Common Stock (subject to repurchase by the Company
depending on the length of time Mr. Schoffstall continues to provide such
articles to the Company).
In September 1996, the Company sold 25,000 shares of Preferred Stock to an
immediate family member of John Keister for an aggregate purchase price of
$50,000 ($2.00 per share).
Between November 8, 1996 and November 20, 1996, all of the Company's
927,500 shares of Preferred Stock issued and outstanding were converted, at a
conversion rate of one share of Preferred Stock for one share of Common Stock,
into an aggregate of 927,500 shares of Common Stock.
In December 1996, the Company sold an aggregate of 75,000 shares of Common
Stock to Dennis Cline for an aggregate purchase price of $150,000 ($2.00 per
share).
Russell C. Horowitz has guaranteed the obligations of the Company under its
$500,000 revolving line of credit described in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Mr. Horowitz received no
compensation for providing such guaranty.
David M. Horowitz, the brother of Russell C. Horowitz, is the President,
Chief Executive Officer and controlling stockholder of Maxwell Capital, Inc.,
the representative of the Underwriters in connection with the Offering. Maxwell
Capital, Inc. will receive the fees and expense reimbursement set forth on the
cover page of this Prospectus in connection with the Offering. See
"Underwriting."
The Company believes that all of the transactions described above were on
terms no less favorable to the Company than could have been obtained on an
arms-length basis from unaffiliated third parties. The Company has adopted a
policy pursuant to which all transactions (including, without limitation, the
borrowing of money) between the Company and its officers, directors and
affiliates will be on terms no less favorable to the Company than could be
obtained on an arms-length basis from unrelated third parties and will be
approved by a majority of the independent and disinterested members of the
Company's Board of Directors.
44
<PAGE> 45
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1997 and as adjusted to
reflect the sale of 1,600,000 shares of Common Stock offered hereby, (i) by each
person who is known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director and executive officer
of the Company and (iii) by all directors and executive officers of the Company
as a group. Unless otherwise indicated below, to the knowledge of the Company,
all persons listed below have sole voting and investment power with respect to
their shares of Common Stock, except to the extent authority is shared by
spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(1) THE OFFERING(1)(2)
------------------- -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Russell C. Horowitz(3)(4).............................. 1,605,000 60.4% 1,605,000 37.7%
c/o go2net, Inc.
1301 Fifth Avenue, Suite 3320
Seattle, Washington 98101
Xanthus Capital, L.P.(4)............................... 500,000 18.9% 500,000 11.7%
1301 Fifth Avenue, Suite 3320
Seattle, Washington 98101
John Keister........................................... 125,000 4.7% 125,000 2.9%
c/o go2net, Inc.
1301 Fifth Avenue, Suite 3320
Seattle, Washington 98101
Manuel Rubio(4)........................................ 600,000 22.6% 600,000 14.1%
c/o go2net, Inc.
1301 Fifth Avenue, Suite 3320
Seattle, Washington 98101
Paul S. Phillips....................................... 75,000 2.8% 75,000 1.8%
c/o go2net, Inc.
1301 Fifth Avenue, Suite 3320
Seattle, Washington 98101
Dennis Cline........................................... 75,000 2.8% 75,000 1.8%
5 Broadacre Drive
Mount Laurel, New Jersey 08054
Martin L. Schoffstall(5)............................... 50,000 1.9% 50,000 1.2%
5790 Devonshire Road
Harrisburg, Pennsylvania 17112
All executive officers and directors as a group (6 2,030,000 76.4% 2,030,000 47.7%
persons)(4)..........................................
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable, or become exercisable within 60 days from the date
hereof, are deemed outstanding. However, such shares are not deemed
outstanding for purposes of computing the percentage ownership of any other
person. Percentage ownership is based on 2,657,850 shares of Common Stock
outstanding prior to the Offering and 4,257,850 shares of Common Stock
outstanding after the Offering.
(2) Assumes no exercise of any portion of the Underwriters' over-allotment
option to purchase up to an aggregate of 240,000 shares of Common Stock.
(3) Includes 450,000 shares of Common Stock held by The Porpoise Corporation, a
Washington corporation wholly owned by Mr. Horowitz.
45
<PAGE> 46
(4) Includes 500,000 shares of Common Stock held by Xanthus Capital, L.P.
Messrs. Horowitz and Rubio may each be deemed to be beneficial owners of the
shares of Common Stock held by Xanthus Capital, L.P. by virtue of their role
as directors and executive officers and interest holders of Xanthus
Management, L.L.C., the general partner of Xanthus Capital, L.P. Messrs.
Horowitz and Rubio each disclaim beneficial ownership of such shares except
to the extent of their respective pecuniary interest in Xanthus Capital,
L.P.
(5) Includes 37,500 shares of Common Stock held by MLS-I, LLC, a limited
liability company of which Mr. Schoffstall is an executive officer.
46
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 9,000,000 shares of
Common Stock and 1,000,000 shares of Preferred Stock. As of March 31, 1997 there
were outstanding 2,657,850 shares of Common Stock (owned of record by 50
holders) and no shares of Preferred Stock. The following summary of certain
provisions of the Common Stock and Preferred Stock does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions of
the Company's Restated Certificate of Incorporation as amended and restated upon
the closing of the Offering (the "Certificate of Incorporation"), which is
included as an exhibit to the Registration Statement of which this Prospectus
forms a part, and by the provisions of the Delaware General Corporation Law.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share owned of record
on all matters upon which such holders are entitled to vote. Subject to the
preferential rights of holders of Preferred Stock that may adversely affect the
rights, preferences and privileges of holders of Common Stock, the holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Company's Board of Directors, in its sole discretion, out of funds
legally available therefor, and are further entitled to share ratably in any
distribution of the Company's assets, after payment of all debts and other
liabilities of the Company, upon liquidation, dissolution or winding up of the
affairs of the Company. See "Dividend Policy." The holders of Common Stock have
no preemptive rights, rights to cumulative voting, rights to redeem such shares
or rights to convert shares of Common Stock into any other securities of the
Company. All outstanding shares of the Common Stock are, and the shares of
Common Stock to be sold by the Company in this Offering will be, upon issuance
and delivery, validly issued, fully paid and nonassessable.
PREFERRED STOCK
After completion of the Offering, the Company's Board of Directors will
have the authority, without further stockholder approval, to issue up to
1,000,000 shares of Preferred Stock (the "Preferred Stock") in one or more
series and to fix the relative rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Company's Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price and the voting and other rights of the holders of the
Common Stock. The Company has no present plans to issue any shares of Preferred
Stock.
DIRECTORS LIABILITY
The Company's Certificate of Incorporation provides that no director shall
be personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct; (iii) acts
or omissions in respect of certain unlawful dividend payments or stock
redemptions or repurchases; or (iv) any transaction from which such director
derives improper personal benefit. The effect of this provision is to eliminate
the rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (iv) above. The limitations summarized above,
however, do not affect the ability of the Company or its stockholders to seek
non-monetary based remedies, such as an injunction or recission, against a
director for breach of his fiduciary duty nor would such limitations limit
liability under the Federal securities laws. The Company's Bylaws provide that
the Company shall, to the full extent permitted by the Delaware General
Corporation Law as currently in effect, indemnify and advance expenses to each
of its currently acting and former directors, officers, employees and agents
arising in connection with their acting in such capacities.
47
<PAGE> 48
DELAWARE ANTI-TAKEOVER STATUTE
Following the consummation of the Offering, the Company will be subject to
the "business combination" statute of Section 203 of the Delaware General
Corporation Law. In general, such statute prohibits a publicly-held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder," unless (i) the transaction is approved by the
Company's Board of Directors prior to the date the "interested stockholder"
obtains such status, (ii) upon the consummation of the transaction that resulted
in the stockholder becoming an "interested stockholder," the "interested
stockholder" owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding, those shares owned by (a) persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer,
or (iii) on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the "interested
stockholder." A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the "interested stockholder."
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
voting stock. By virtue of the Company's decision not to elect out of the
statute's provision, the statute applies to the Company. The statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.
CERTAIN CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CHANGES IN CONTROL
Under the Company's Certificate of Incorporation, there will be, as of the
closing of the Offering, 3,942,150 unissued and unreserved shares of Common
Stock and 1,000,000 unissued and unreserved shares of Preferred Stock, after
giving effect to sale of the 1,600,000 shares of Common Stock offered hereby,
the reservation of 750,000 shares of Common Stock for issuance under the
Company's 1996 Stock Option Plan and the reservation of 50,000 shares of Common
Stock for issuance under the Representative's Warrants. The unissued and
unreserved shares of capital stock may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital and for
facilitating corporate acquisitions, if any. Except pursuant to the Company's
1996 Stock Option Plan described under "Management -- 1996 Stock Option Plan" or
in order to attract additional employees, the Company does not currently have
any plans to issue additional shares of Common Stock or Preferred Stock. One of
the effects of unissued and unreserved shares of capital stock may be to enable
the Company's Board of Directors to render more difficult or discourage an
attempt to obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby to protect the continuity of the
Company's management. If, in the due exercise of its fiduciary obligations, for
example, the Company's Board of Directors determines that a takeover proposal is
not in the Company's best interests, such shares could be issued by the Board of
Directors without stockholder approval in one or more private transactions or
other transactions that might prevent or render more difficult or costly the
completion of the takeover transactions by diluting the voting or other rights
of the proposed acquiror or insurgent stockholder group, by creating a
substantial voting block in institutional or other hands that might undertake to
support the position of the incumbent Board of Directors, or by effecting an
acquisition that might complicate or preclude the takeover.
These provisions, along the other items described above, may have the
effect of delaying stockholder actions with respect to certain business
combinations and the election of new members to the Company's Board of
Directors. As such, the provisions could have the effect of discouraging open
market purchases of the Company's Common Stock because they may be considered
disadvantages by a stockholder who desires to participate in a business
combination or elect a new director. The existence of these provisions, along
with the other items described above, may have a depressive effect on the market
price of the Common Stock.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar is Continental Stock Transfer &
Trust Company, 2 Broadway, 19th Floor, New York, New York 10004.
48
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Prior to the Offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore, since
no shares of Common Stock outstanding prior to the Offering will be available
for sale for at least 270 days following the contemplated closing of the
Offering, unless otherwise consented to by Maxwell Capital, Inc., because of
certain contractual and legal restrictions, as currently in effect, on resale
(as described below), sales of substantial amounts of Common Stock in the public
market after such restrictions lapse could adversely affect the prevailing
market price at such time and the ability of the Company to raise equity capital
in the future.
Upon completion of this Offering, the Company will have outstanding an
aggregate of 4,257,850 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Of these shares, the 1,600,000 shares to be
sold in this Offering will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except that any shares purchased by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act ("Affiliates"), may
generally only be sold in compliance with the limitations of Rule 144 described
below. The remaining 2,657,850 outstanding shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules
are summarized below. As a result of the contractual restriction described
below, no Restricted Shares will be eligible for immediate sale upon completion
of the Offering. All Restricted Shares will be eligible for sale upon expiration
of the lock-up agreements 270 days after the date of this Prospectus in
accordance with Rule 144, 144(k) or 701 under the Securities Act, except for
5,000 shares which will become eligible for resale under Rule 144 in March 1998.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices of Common Stock and could impair the Company's
future ability to obtain capital through an offering of equity securities.
LOCK-UP AGREEMENTS
All officers and directors and existing stockholders and option holders of
the Company have agreed not to directly or indirectly, without the prior written
consent of the Maxwell Capital, Inc., offer, sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock,
or any securities exercisable for or convertible into shares of Common Stock
owned by them for a period of 270 days following the date of this Prospectus,
provided that Maxwell Capital, Inc. will not be permitted to waive such lock-up
agreements with respect to executive officers, directors and holders of more
than 5% of the Company's Common Stock until such time as the trading price of
the Common Stock exceeds 150% of the initial public offering price per share for
a period of thirty consecutive days.
In addition, the Company has agreed with Maxwell Capital, Inc. not to file
a registration statement with respect to any shares of Common Stock currently
outstanding without the prior written consent of Maxwell Capital, Inc.
REGISTRATION RIGHTS
None of the Company's existing stockholders are entitled to any form of
rights with respect to the registration of any shares of Common Stock under the
Securities Act. The holders of the Representative's Warrants will have certain
registration rights with respect to the shares of Common Stock underlying such
Warrants. See "Underwriting."
49
<PAGE> 50
SALES OF RESTRICTED SHARES
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of this Offering, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two years
(including the holding period of any prior owner except an Affiliate) would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of: (i) one percent of the number of shares of Common Stock
then outstanding (which will equal approximately 42,579 shares immediately after
this Offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company.
Further, under Rule 144(k), a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years (including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provision of Rule 144.
In addition, the Securities and Exchange Commission has adopted an
amendment to Rule 144, effective April 29, 1997, which reduces the holding
period before shares subject to Rules 144 and 144(k) become eligible for sale in
the public market by one year. Accordingly, all Restricted Shares will be
eligible for resale under Rule 144 following the expiration of the lock-up
period as described above, except for 5,000 shares which will become eligible
for resale under Rule 144 in March 1998.
OPTIONS
As of March 31, 1997, options to purchase an aggregate of 587,500 shares of
Common Stock had been granted; of which options to acquire an aggregate of
222,166 shares of Common Stock will become exercisable 90 days following the
date of this Prospectus and the remaining options to purchase an aggregate of
365,334 shares of Common Stock will be exercisable according to certain vesting
schedules assuming the option holder is employed by the Company at the vesting
date. An additional 162,500 shares of Common Stock are available for future
grants under the Company's 1996 Stock Option Plan. See "Management -- 1996 Stock
Option Plan."
In general, under Rule 701 as currently in effect, beginning 90 days after
the effective date of the Offering, certain shares issued upon exercise of
options granted by the Company prior to the date of this Prospectus will also be
available for sale in the public market. Any employee, officer or director of,
or consultant to, the Company who purchased his or her shares pursuant to a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits Affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-Affiliates may sell such shares in
reliance on Rule 144 without having to comply with the public information,
volume limitation or notice provisions of Rule 144. In both cases, a holder of
Rule 701 shares is required to wait until 90 days after the date of this
Prospectus before selling such shares.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issuable under the Company's 1996
Stock Option Plan that do not qualify for an exemption under Rule 701 from the
registration requirements of the Securities Act. The Company expects to file
these registration statements 270 days after the date of this Prospectus, and
such registration statements are expected to become effective upon filing.
Shares covered by these registration statements will thereupon be eligible for
sale in the public markets.
50
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Maxwell Capital, Inc.
and National Securities Corporation (the "Representatives") have agreed
severally to purchase, and the Company has agreed to sell, the respective number
of shares of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------- ----------------
<S> <C>
Maxwell Capital, Inc............................... 1,195,000
National Securities Corporation.................... 405,000
---------
Total.................................... 1,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel,
to the receipt of certain certificates, opinions and letters from the Company
and its independent auditors, and to certain other conditions, including the
conditions that no stop order suspending the effectiveness of the Registration
Statement be in effect and no proceedings for such purpose are pending before or
threatened by the Securities and Exchange Commission, and that there has been no
material adverse change or development involving a prospective material adverse
change in the business, financial condition or results of operation of the
Company from that set forth in the Registration Statement. The Underwriters are
obligated to take and pay for all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.32 per share. After the initial public offering of the shares of
Common Stock, the offering price and other selling terms may be changed by the
representative of the Underwriters.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 240,000 additional shares of
Common Stock at the initial public offering price set forth on the cover page of
this Prospectus, less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent the Underwriters exercise this
option and Maxwell Capital, Inc. does not purchase all of such shares, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it shown in the above table bears to the total number of shares of Common Stock
offered hereby. The Company will be obligated, pursuant to the option, to sell
shares of Common Stock to the Underwriters to the extent such option is
exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby.
The offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of such shares in whole or
in part.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, and to contribute to payments which the indemnified party may
be required to make in respect thereof. The Company has also agreed to pay to
the Representatives a non-accountable expense allowance equal to 2% of the gross
proceeds from the sale of the Common Stock offered hereby.
None of the Underwriters have, or will have, the right to designate or
nominate a member to the Company's Board of Directors.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary control.
51
<PAGE> 52
All officers, directors, existing stockholders and option holders of the
Company will have agreed not to, directly or indirectly, without the prior
written consent of Maxwell Capital, Inc., offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or any securities exercisable for or convertible into shares of Common
Stock owned by them for a period of 270 days following completion of the
Offering, provided that Maxwell Capital, Inc. will not be permitted to waive
such lock-up agreements with respect to executive officers, directors and
holders of more than 5% of the Company's Common Stock until such time as the
trading price of the Common Stock exceeds 150% of the initial public offering
price per share for a period of thirty consecutive days. See "Shares Eligible
for Resale." The Company has agreed that it will not, without the prior written
consent of Maxwell Capital Inc., offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or any
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following completion of the Offering, except that the Company
may issue, and grant options to purchase, shares of Common Stock under its 1996
Stock Option Plan and under currently outstanding options and the Company may
issue shares of Common Stock in connection with acquisitions.
In connection with this Offering, the Company has agreed to sell to
National Securities Corporation, for $.01 per warrant, warrants to purchase from
the Company up to 50,000 shares of Common Stock (the "Representative's
Warrants"). The Representative's Warrants are exercisable at an exercise price
per share equal to 165% of the initial public offering price per share for a
period of four years, commencing one year after the date of this Prospectus and
are restricted from sale, transfer, assignment or hypothecation, except to
officers of National Securities Corporation. The Representative's Warrants
provide for adjustment in the number of shares issuable upon exercise thereof as
a result of certain subdivisions and combinations of the Common Stock. The
Representative's Warrants grant to the holders thereof certain rights of
registration for the shares of Common Stock issuable upon exercise thereof.
The Company has agreed for a period of three years after the date of this
Prospectus to provide a designee of National Securities Corporation with all
notices of meetings of the Company's Board of Directors and all other
correspondence and communications sent by the Company to its Board of Directors
and to permit such designee to attend all such meetings of the Company's Board
of Directors in a non-voting, observer capacity.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions affected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase form the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position by exercising the over-allotment option
referred to above. In addition, the Representatives, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby they may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to shares of Common Stock that are distributed
in the Offering but subsequently purchased for the account of the Underwriters
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Stock at a level above that
which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation between the Company and the Underwriters. Among the
factors considered in determining the initial public offering price were
prevailing market conditions, expected and actual revenues and earnings of the
Company, market valuations of other companies engaged in activities similar to
those of the Company, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations, the Company's
management and other factors deemed relevant. See "Risk Factors -- No Prior
Public Market; Possible Volatility of Stock Prices."
52
<PAGE> 53
Under Rule 2720 of the Conduct Rules of the NASD, when a member, such as
Maxwell Capital, Inc., participates in a public offering of securities of a
company in which either it or its affiliates own 10% or more of the outstanding
voting securities or a "conflict of interest" is present, and there is no "bona
fide independent market" for such securities, then, among other things, the
public offering price can be no higher than that recommended by a qualified
independent underwriter. Maxwell Capital, Inc. does not own any of the Company's
outstanding voting stock or options to acquire such voting securities. However,
certain of Maxwell Capital, Inc.'s employees "beneficially own" (as such term is
defined in Rule 2720 of the Conduct Rules of the NASD) in the aggregate 171,000
shares of the Company's Common Stock, or 6.4% of the outstanding voting
securities of the Company prior to the completion of the Offering. Russell C.
Horowitz, the President and Chief Executive Officer of the Company, is the
brother of the President, Chief Executive Officer and controlling stockholder of
Maxwell Capital, Inc. In addition, an investor in Maxwell Capital, Inc. is also
a limited partner in Xanthus Capital, L.P. and directly owns 50,000 shares of
the Company's Common Stock. Consequently, this Offering will be conducted in
accordance with the applicable provisions of Rule 2720 of the Conduct Rules of
the NASD. In accordance with these provisions, the Company and Maxwell Capital,
Inc. have designated National Securities Corporation as a qualified independent
underwriter for this Offering.
National Securities Corporation is assuming the responsibilities of acting
as a qualified independent underwriter in connection with the pricing of,
conducting due diligence in connection with, and managing this Offering. The
NASD and the Securities and Exchange Commission have indicated that, in their
view, a qualified independent underwriter, such as National Securities
Corporation, may be deemed to be an underwriter, as that term is defined in the
Securities Act.
National Securities Corporation has performed due diligence with respect to
the information contained in the Registration Statement of which this Prospectus
forms a part, has recommended a maximum initial public offering price of $9.00
per share of Common Stock and has managed this Offering in accordance with Rule
2720(c)(3)(A)(i) of the Conduct Rules of the NASD. In connection therewith,
National Securities Corporation has rendered its opinion to the effect that the
terms under which the shares of Common Stock being offered hereby are fair to
the public, and that the initial public offering price for the shares of Common
Stock offered hereby does not exceed the maximum fair price.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hutchins, Wheeler & Dittmar, A Professional Corporation,
Boston, Massachusetts. A shareholder of Hutchins, Wheeler & Dittmar , A
Professional Corporation, owns 15,000 shares of the Company's Common Stock.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Graham & James LLP, Sacramento, California.
EXPERTS
The financial statements of the Company at September 30, 1996 and December
31, 1996 and for the period from February 12, 1996 (inception) to September 30,
1996 and the three months ended December 31, 1996, appearing herein and in the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, as permitted by the rules and
regulations of the Securities and Exchange Commission. Statements
53
<PAGE> 54
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement
and to the exhibits and schedules filed as a part thereof. A copy of the
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the Securities and Exchange Commission's principal
office located at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Offices located at 7
World Trade Center, 13th Floor, New York, New York 10048, and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part of such material, including any exhibit or schedule
thereto, may be obtained from the Securities and Exchange Commission upon the
payment of certain fees prescribed by the Securities and Exchange Commission.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
54
<PAGE> 55
go2net, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Balance Sheet.......................................................................... F-3
Statement of Operations................................................................ F-4
Statement of Stockholders' Equity...................................................... F-5
Statement of Cash Flows................................................................ F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
go2net, Inc.
We have audited the accompanying balance sheets of go2net, Inc. as of
December 31, 1996 and September 30, 1996, and the related statements of
operations, stockholders' equity and cash flows for the three month period ended
December 31, 1996 and 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 audit.
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 provides 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 December 31,
1996 and September 30, 1996, and the results of its operations and its cash
flows for the three month period ended December 31, 1996 and the period from
Inception (February 12, 1996) through September 30, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
February 3, 1997
Seattle, Washington
F-2
<PAGE> 57
go2net, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 692,938 $ 865,742
Prepaid expenses.............................................. 8,216 8,216
---------- ----------
Total current assets.................................. 701,154 873,958
Property and equipment, net..................................... 184,479 179,328
Other assets.................................................... 35,453 12,955
---------- ----------
Total assets.......................................... $ 921,086 $ 1,066,241
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -- accrued expenses......................... $ 32,614 $ 45,098
Stockholders' equity:
9% Cumulative Redeemable Convertible Preferred Stock, $1.00
par value, authorized 1,000,000 shares; no shares and
927,500 shares outstanding................................. -- 1,505,000
Common stock, $0.01 par value, authorized 9,000,000 shares;
outstanding 2,657,100 and 1,619,100 shares................. 1,668,900 13,900
Less 9% Cumulative Redeemable Convertible Preferred Stock
subscriptions receivable................................... -- (80,000)
Accumulated deficit........................................... (780,428) (417,757)
---------- ----------
Total stockholders' equity............................ 888,472 1,021,143
---------- ----------
Total liabilities and stockholders' equity............ $ 921,086 $ 1,066,241
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 58
go2net, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
THREE MONTHS ENDED (FEBRUARY 12, 1996)
DECEMBER 31, 1996 THROUGH SEPTEMBER 30, 1996
------------------ --------------------------
<S> <C> <C>
Operating expenses:
Advertising and marketing................... $ 12,512 $ 10,150
Product development......................... 137,395 137,159
General and administrative.................. 220,044 283,832
--------- ---------
Total operating expenses............ 369,951 431,141
--------- ---------
Loss from operations.......................... (369,951) (431,141)
Interest income, net.......................... 7,280 13,383
--------- ---------
Net loss...................................... $ (362,671) $ (417,757)
========= =========
Net loss per share............................ $ (0.14) $ (0.16)
Common shares and common equivalent shares 2,548,680
used to calculate net loss per share........ 2,644,260
</TABLE>
See accompanying notes.
F-4
<PAGE> 59
go2net, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (FEBRUARY 12, 1996) THROUGH SEPTEMBER 30, 1996
AND THREE MONTH PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED COMMON STOCK SUBSCRIPTION TOTAL
---------------------- ----------------------- NOTES ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT EQUITY
-------- ----------- ---------- ---------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash received for common stock
sold to founders............ 1,390,000 $ 13,900 $ 13,900
Issuance of common stock at no
cost........................ 229,100
Sale of preferred stock....... 927,500 $ 1,505,000 $ (80,000) 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........................ 927,500 1,505,000 1,619,100 13,900 (80,000) (417,757) 1,021,143
Payment of note receivable.... 80,000 80,000
Issuance of common stock at no
cost........................ 35,500
Conversion of preferred
stock....................... (927,500) (1,505,000) 927,540 1,505,000
Sale of common stock.......... 75,000 150,000 150,000
Net loss for three month
period ended December 31,
1996........................ (362,671) (362,671)
-------- ----------- ---------- ---------- ------------ ----------- -----------------
-- -- 2,657,100 $1,668,900 -- $(780,428) $ 888,472
========= ============ ========== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
go2net, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
THREE MONTH (FEBRUARY 12, 1996)
PERIOD ENDED THROUGH
DECEMBER 31, 1996 SEPTEMBER 30, 1996
----------------- ---------------------
<S> <C> <C>
Operating activities:
Net loss............................................ $(362,671) $ (417,757)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 21,620 19,278
Changes in assets and liabilities:
Prepaid expenses.................................... (8,216)
Other assets........................................ (1,000) (1,758)
Accrued expenses.................................... (12,483) 45,098
--------- ----------
Net cash used in operating activities................. (354,534) (363,355)
Investing activities:
Acquisition of property and equipment............... (25,213) (197,202)
Other assets........................................ (23,057) (12,601)
--------- ----------
Net cash used in investing activities................. (48,270) (209,803)
Financing activities:
Proceeds from issuance of 9% Cumulative Redeemable
Convertible Preferred Stock...................... 80,000 1,425,000
Proceeds from issuance of common stock.............. 150,000 13,900
--------- ----------
Net cash provided by financing activities............. 230,000 1,438,900
--------- ----------
Net increase in cash and cash equivalents............. (172,804) 865,742
Net cash and cash equivalents at beginning of
period.............................................. 865,742 --
--------- ----------
Cash and cash equivalents at end of period............ $ 692,938 $ 865,742
========= ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 61
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 and media company that provides through its Internet site
proprietary content and commodity information relating to business and finance,
sports and the Internet. In addition, the Company offers a search/index guide
that combines various existing search/index guides into one guide (a "metasearch
engine") and a Java-based desktop content delivery system.
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.
Trademarks and Other Intangible Assets
Trademarks and other intangibles are included with "Other Assets" and are
being amortized over a useful life of three years.
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.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of changes in tax rates is recognized in
income in the period that includes the enactment date.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock and preferred stock outstanding during such period, including
shares of common stock issued after such period. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, 9% Cumulative Convertible
Redeemable Preferred Stock and common stock issued by the Company at prices
below the assumed public offering price during the twelve-month period prior to
the proposed offering have been included in the
F-7
<PAGE> 62
go2net, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
calculation as if they were outstanding throughout the periods presented
regardless of whether they are antidilutive (using the treasury stock method at
an assumed public offering price of $8.00).
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for
fiscal years beginning after December 15, 1995, and will require that the
Company either recognize in its financial statements costs related to its stock
option plan, or make pro forma disclosures of such costs in a footnote to the
financial statements.
The Company will continue to use the intrinsic value-based method of
Accounting Principles Opinion No. 25, as allowed under SFAS No. 123, to account
for all of its stock option plan. Therefore, in its financial statements for
fiscal 1997, the Company will make the required pro forma disclosures in a
footnote to the financial statements. Implementation of SFAS No. 123 will have
no effect on the Company's results of operations or financial position.
2. BALANCE SHEET COMPONENTS
Cash and Cash Equivalents
The carrying value of cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ -------------
<S> <C> <C>
Cash................................................. $ 69,975 $ 25,354
Money market balances................................ 622,963 840,388
-------- --------
Cash and cash equivalents............................ $692,938 $ 865,742
======== ========
</TABLE>
The carrying value of the Company's cash equivalents approximate their fair
values based on quoted market prices.
Property and Equipment
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ ------------
<S> <C> <C>
Computer equipment................................... $184,510 $160,756
Office equipment..................................... 28,884 27,425
Leasehold improvements............................... 7,221 7,221
Other................................................ 1,800 1,800
-------- --------
222,415 197,202
Less accumulated depreciation and amortization....... (37,936) (17,874)
-------- --------
$184,479 $179,328
======== ========
</TABLE>
3. INCOME TAXES
As of December 31, 1996 and September 30, 1996, the Company had
approximately $749,000 and $394,000, respectively, of net operating losses for
federal income tax purposes, which expire 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).
F-8
<PAGE> 63
go2net, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ -------------
<S> <C> <C>
Depreciation and amortization........................ $ (1,845) $ (6,304)
Net operating losses................................. 262,041 133,953
Accruals, reserves and other......................... 9,152 12,540
---------
269,348 140,189
Less valuation allowance............................. (269,348) (140,189)
---------
$ -- $ --
========= =========
</TABLE>
4. STOCKHOLDERS' EQUITY
9% Cumulative Convertible Redeemable Preferred Stock
Each share of 9% Cumulative Convertible Redeemable Preferred Stock
("Preferred Stock") can, at the option of the holder, be converted to one share
of common stock. Holders of the Preferred Stock are entitled to cumulative
dividends when and if declared by the Board of Directors at a rate per share
equal to 9% of the original purchase price paid per share of the Preferred
Stock. Such accumulated and unpaid dividends shall, whether or not declared,
upon conversion of the Preferred Stock, be forgiven.
Holders of Preferred Stock have a liquidation preference equal to the price
paid at issuance plus all declared but unpaid dividends, which was $1,505,000 at
September 30, 1996. Any remaining assets shall be distributed ratably among
holders of the common stock and the Preferred Stock as a single class. The
Company may, at its discretion, redeem the outstanding Preferred Stock by paying
the original purchase price plus accumulated and unpaid dividends.
Each share of Preferred Stock is entitled to one vote per share, voting
together with the common stock as a single class.
In November, 1996, the holders of 927,500 shares of the Preferred Stock
exercised their rights to convert those shares to 927,500 shares of common
stock.
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 three month
period ended December 31, 1996 sold 75,000 shares of common stock for $2.00 per
share to a member of its Board of Directors. The Company also issued 264,600
shares to employees and independent contractors. 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 172,150 shares of common
stock subject to repurchase by the Company at December 31, 1996.
On December 27, 1996, the Board of Directors approved the filing of a
registration statement by the Company with the Securities and Exchange
Commission covering the proposed sale of shares of its common stock to the
public.
F-9
<PAGE> 64
go2net, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES
The Company has two short-term noncancelable leases for its facilities.
Rental expense from those leases amounted to approximately $34,600 for the
period from inception (February 12, 1996) through September 30, 1996 and $24,050
for the three month period ended December 31, 1996.
6. STOCK OPTION PLAN
In 1996, the Board of Directors adopted a Stock Option Plan providing for
the issuance of common stock options to employees and directors of the Company
and independent contractors. The stock options are either incentive or
non-qualified stock options.
The option price for stock options granted under the Stock Option Plan is
determined by the Stock Option Committee of the Board of Directors. 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.
As of December 31, 1996, the Company had granted options that allowed
employees to acquire 447,500 shares of the Company's common stock. The exercise
price for all such option grants is not established until (and only if) the
Company's common stock is sold in an initial public offering. The exercise price
for all such options will be established at a price equal to the price at which
the Company's common stock would be sold in an initial public offering. Stock
option plan shares generally vest over periods ranging from one to three years
but no options vest until the 90th day following completion of an initial public
offering of the Company's common stock.
As of December 31, 1996, the Company had issued options that allowed
independent contractors to acquire 87,000 shares of the Company's common stock.
Those options generally vest over periods ranging from one to three years but no
options vest until the 90th day following completion of an initial public
offering of the Company's common stock. The exercise price for all such option
grants is not established until (and only if) the Company's common stock is sold
in an initial public offering. The exercise price for all such options will be
established at a price equal to the price at which the Company's common stock
would be sold in an initial public offering.
As of December 31, 1996, the Company had reserved 750,000 shares of common
stock for issuance under the Plan. The Company had a total of 534,500 options
outstanding to purchase shares of common stock, none of which were exercisable.
There were 215,500 options available for future grant under the Plan as of
December 31, 1996.
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 $500,000 at the bank's
prime lending rate (8.5% per annum as of December 31, 1996) plus 1% and all
amounts outstanding under the agreement are due by November 15, 1997. The
revolving credit agreement is guaranteed by the Chief Executive Officer and
largest single stockholder of the Company.
F-10
<PAGE> 65
===============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
The Company........................... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Financial Data............... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 27
Management............................ 39
Certain Transactions.................. 44
Principal Stockholders................ 45
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 53
Index to Financial Statements......... F-1
</TABLE>
UNTIL MAY 19, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,600,000 SHARES
[GO2NET LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MAXWELL CAPITAL, INC.
NATIONAL SECURITIES CORPORATION
April 23, 1997
================================================================================
