<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1998
REGISTRATION NO. 333-62323
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INFOSPACE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 91-1718107
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
15375 N.E. 90TH STREET
REDMOND, WASHINGTON 98052
(425) 882-1602
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
NAVEEN JAIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INFOSPACE.COM, INC.
15375 N.E. 90TH STREET
REDMOND, WASHINGTON 98052
(425) 882-1602
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
STEPHEN M. GRAHAM BARRY E. TAYLOR
RICHARD C. SOHN PATRICK J. SCHULTHEIS
S. PAUL SASSALOS CRAIG D. NORRIS
PERKINS COIE LLP BENJAMIN L. CHUN
1201 THIRD AVENUE, 40TH FLOOR WILSON SONSINI GOODRICH & ROSATI
SEATTLE, WASHINGTON 98101-3099 PROFESSIONAL CORPORATION
(206) 583-8888 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1998
PROSPECTUS
5,000,000 SHARES
[LOGO OF INFOSPACE.COM, INC.]
COMMON STOCK
All of the 5,000,000 shares of Common Stock offered hereby are being sold by
the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $9.00 and $11.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for listing on the
Nasdaq National Market under the symbol INSP, subject to official notice of
issuance.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
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.
<TABLE>
<CAPTION>
================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------
Total (3).............................. $ $ $
================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,400,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1998
<PAGE>
INSIDE FRONT COVER
[ARTWORK]
ENABLING REAL WORLD CONTENT FOR THE INTERNET OF TODAY AND TOMORROW
[Circle containing the Company's logo surrounded by logos of the Company's
affiliates and photos of alternative Internet access devices]
InfoSpace.com provides its content services to a network of existing and
emerging Internet portals, destination sites and suppliers of PCs and other
Internet access devices. The Company has agreements with more than
90 affiliates covering more than 900 Web sites.
GATEFOLD
ENABLING REAL WORLD CONTENT FOR THE INTERNET OF TODAY AND TOMORROW
AGGREGATION
InfoSpace.com has acquired the rights to a wide range of content from more
than 65 third-party content providers. The Company focuses on content with
broad appeal, such as yellow pages and white pages, maps, classified
advertisements, real-time stock quotes, information on local businesses and
events, weather forecasts and horoscopes.
[InfoSpace.com web screen displaying content from third-party content
providers, and various provider logos]
INTEGRATION
The cornerstone of the Company's content is its nationwide yellow pages and
white pages directory information. Using proprietary technology, the Company
integrates this directory information with other value-added content to create
"The Ultimate Directory" to find people, places and things in the real world.
[Several InfoSpace.com web screens displaying integrated information,
including maps, lists of hotels and restaurants, city information and
information on an individual or business]
SYNDICATION
The Company has agreements with more than 90 affiliates covering more than 900
Web sites. InfoSpace.com's content services provide its affiliates with content
that helps to increase the convenience, relevance and enjoyment of their users'
visits, thereby promoting increased traffic and repeat usage.
[Three affiliate web screens displaying content provided by InfoSpace.com, and
various affiliate logos]
The Company's technology has been designed to support affiliates across
multiple platforms and formats, including the growing number of emerging
Internet access devices such as cellular phones, pagers, screen phones,
television set-top boxes, online kiosks and personal digital assistants.
[Photos of various alternative Internet access devices]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors."
THE COMPANY
InfoSpace.com is a leading aggregator and integrator of content services for
syndication to a broad network of affiliates, including existing and emerging
Internet portals, destination sites and suppliers of PCs and other Internet
access devices, such as cellular phones, pagers, screen phones, television set-
top boxes, online kiosks and personal digital assistants. The Company focuses
on content with broad appeal, such as yellow pages and white pages, maps,
classified advertisements, real-time stock quotes, information on local
businesses and events, weather forecasts and horoscopes. By aggregating content
from multiple sources and integrating it with related content to increase its
usefulness, the Company serves as a single source of value-added content. The
Company's affiliates include AOL, Netscape, Microsoft, Lycos, MetaCrawler,
Playboy, Dow Jones (The Wall Street Journal Interactive Edition), ABC LocalNet
and CBS's affiliated TV stations. The Company's services provide affiliates
with content that helps to increase the convenience, relevance and enjoyment of
their users' visits, thereby promoting increased traffic and repeat usage.
This, in turn, provides enhanced advertising and electronic commerce revenue
opportunities to affiliates with minimal additional investment. By leveraging
the Company's content relationships and technology, affiliates are free to
focus on their core competencies.
The Company has acquired the rights to a wide range of content from more than
65 third-party content providers. The cornerstone of the Company's content
services is its nationwide yellow pages and white pages directory information.
Using its proprietary technology, the Company integrates this directory
information with other value-added content to create "The Ultimate Guide" to
find people, places and things in the real world. As an example of the power of
the Company's contextual integration, a salesperson using the Company's content
services can, from the results of a single query, find the name and address of
a new customer, obtain directions to his or her office, check the weather
forecast and, typically, make an online reservation at the nearest hotel,
browse the menu of a nearby restaurant and review a schedule of entertainment
events for the locale.
The Company's content services are designed to be highly flexible and
customizable, enabling affiliates to select from among the Company's broad
range of content services only those desired. One of the Company's principal
strengths is its internally developed technology, which enables it to easily
and rapidly add new affiliates by employing a distributed, scalable
architecture adapted specifically for its Internet-based content services. The
Company helps its affiliates build and maintain their brands by delivering
content with the look and feel and navigation features specific to each
affiliate, creating the impression to end users that they have not left the
affiliate's site. The Company's technology has been designed to support
affiliates across multiple platforms and formats, including the growing number
of emerging Internet access devices. The Company's affiliate relationships
typically provide for revenue sharing from advertising sold by the Company and
the affiliates whose sites incorporate the Company's content where
advertisements are placed.
InfoSpace.com derives substantially all of its revenues from national
advertising, promotions and local Internet yellow pages advertising. Through
its direct sales force, the Company offers a variety of national advertising
and promotions that enable advertisers to access both broad and targeted
audiences. The Company also sells local Internet yellow pages advertising
through cooperative sales relationships with established independent yellow
pages publishers, media companies and direct marketing companies. The Company
believes that these relationships provide the Company access to local sales
expertise and customer relationships that give it an advantage over competitors
while minimizing the Company's investment in its own sales infrastructure.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 5,000,000 shares
Common Stock to be outstanding after this
offering....................................... 20,115,887 shares (1)
Use of proceeds................................. For working capital and other general corporate
purposes.
Proposed Nasdaq National Market symbol.......... INSP
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1996
(INCEPTION) SIX MONTHS
TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------
1996 1997 1997 1998
------------- ------------ ------ -------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues......................... $ 199 $1,685 $ 466 $ 2,855
Total operating expenses (2)..... 504 2,056 654 6,894
Loss from operations (2)......... (402) (718) (319) (4,582)
Net loss......................... $ (381) $ (697) $ (306) $(4,539)
Basic and diluted net loss per
share (3)....................... $(0.04) $(0.06) $(0.03) $ (0.39)
Shares used in computing basic
and diluted net loss per share
calculations (3)................ 9,280 10,998 10,986 11,572
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED (4)
------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 5,775 $50,875
Working capital....................................... 5,803 50,903
Total assets.......................................... 10,505 55,605
Total stockholders' equity............................ 9,540 54,640
</TABLE>
- --------------------
(1) Based on shares outstanding at September 30, 1998. Excludes as of September
30, 1998 (i) 1,785,049 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.19 per
share, (ii) 3,531,719 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.79 per
share, (iii) 1,505,575 shares of Common Stock reserved for future issuance
under the Company's Restated 1996 Flexible Stock Incentive Plan (the "1996
Plan"), and (iv) 450,000 shares of Common Stock reserved for issuance under
the Company's 1998 Employee Stock Purchase Plan (the "ESPP"). See
"Management--Benefit Plans," "Description of Capital Stock" and Notes 3 and
9 of the Company's Notes to Consolidated Financial Statements.
(2) For the six months ended June 30, 1998, includes a write-off of in-process
research and development of $4.7 million.
(3) See Note 7 of the Company's Notes to Consolidated Financial Statements for
information concerning the determination of net loss per share.
(4) As adjusted to reflect the sale and issuance of 5,000,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share and the receipt of the estimated net proceeds
therefrom. Does not reflect the issuance of 1,263,146 shares between July
1, 1998 and September 30, 1998. See "Use of Proceeds" and "Capitalization."
--------------------
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and gives effect to a one-
for-two reverse stock split of the Company's outstanding Common Stock
consummated in August 1998.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve known and
unknown risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. Actual results could differ
materially from those discussed in the forward-looking statements as a result
of certain factors, including those set forth below and elsewhere in this
Prospectus. The following risk factors should be considered carefully in
addition to the other information in this Prospectus before purchasing the
shares of Common Stock offered hereby.
Limited Operating History; History of Losses and Anticipated Future
Losses. The Company was founded in March 1996 and, accordingly, has a very
limited operating history on which to base an evaluation of its business and
prospects. The Company has incurred net losses since its inception, including
losses of approximately $381,000, $697,000 and $4.5 million for the period
from March 1, 1996 (inception) to December 31, 1996, the year ended December
31, 1997 and the six months ended June 30, 1998, respectively. At June 30,
1998, the Company had an accumulated deficit of approximately $5.6 million.
Although the Company has experienced sequential quarterly growth in revenues
over the past four quarters and has achieved profitability in certain
quarters, the Company expects to incur significant operating losses on a
quarterly basis for the foreseeable future, and there can be no assurance that
the Company will be profitable in any future period. Since its inception, the
Company has been engaged primarily in the development of its technology, the
acquisition of rights to third-party content, the sale of national
advertising, the establishment of relationships with independent yellow pages
publishers, media companies and direct marketing companies and the
establishment of relationships with existing and emerging Internet portals,
destination sites and suppliers of PCs and other Internet access devices, such
as cellular phones, pagers, screen phones, television set-top boxes, online
kiosks and personal digital assistants (collectively, "Internet points-of-
entry"). The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets such as Internet services. Such risks include, but are not limited to,
an evolving and unpredictable business model, uncertain adoption of the
Internet as a commercial or advertising medium, dependence on relationships
with third parties, dependence on key personnel, management of growth, rapidly
changing technology and competition. To address these risks and be able to
achieve and sustain profitability, the Company must, among other things: (i)
develop and maintain strategic relationships with content providers and
Internet points-of-entry; (ii) identify and acquire the rights to additional
content; (iii) successfully integrate new features with its content services;
(iv) expand its sales and marketing efforts, including relationships with
third parties to sell local advertising for the Company's Internet yellow
pages directory services; (v) maintain and increase its affiliate and
advertiser base; (vi) successfully expand into international markets; (vii)
retain and motivate qualified personnel; and (viii) successfully respond to
competitive developments. There can be no assurance that the Company will
effectively address the risks it faces, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. For these and other reasons, there can be no assurance
that the Company will ever achieve or sustain profitability. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Evolving and Unproven Business Model. The Company's business model is to
aggregate content from third-party content providers, integrate related
content, syndicate these content services to leading Internet points-of-entry
and generate revenues from the sale of advertisements and promotions on the
Web pages that deliver the Company's content services. The syndication
business model is relatively new to the Internet and is unproven. As such, the
Company's business model may not be successful, and the Company may need to
change its business model. Almost half of the Company's user traffic is
generated through the Company's own Web site, rather than through its
affiliate network. The Company's ability to generate significant advertising
and promotion revenues by syndicating content services will depend, in part,
on its ability to acquire the rights to information from third-party content
providers and to market successfully its content services to Internet points-
of-entry that currently do not rely substantially on third-party sources for
their content needs and do not
5
<PAGE>
typically utilize content services that are readily available to their
competitors. In addition, the Company intends to rely on independent yellow
pages publishers, media companies and direct marketing companies for the sale
of local advertising on the Company's Internet yellow pages directory
services, which strategy may prove to be unsuccessful. The Company's
relationships with its content providers, affiliates and advertisers are
evolving, subject to frequent change and frequently informal. There can be no
assurance that the Company's relationships with content providers, affiliates
and advertisers will not evolve in a manner that is adverse to the Company.
The Company intends to continue to develop its business model as it explores
opportunities internationally and in new and unproven areas such as electronic
commerce and in providing content services for emerging Internet access
devices. There can be no assurance that the Company's business model will be
successful. See "Business--The InfoSpace.com Solution" and "--Strategy."
Unpredictability of Future Results of Operations; Expected Fluctuations in
Quarterly Results of Operations; Seasonality. As a result of the Company's
limited operating history and the emerging nature of the markets in which it
competes, the Company is unable to accurately forecast its revenues. The
Company plans its operating expenses based on anticipated revenues. If
revenues in a particular period do not meet expectations, it is likely that
the Company will not be able to adjust significantly its level of expenditures
for such period, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company plans to
increase significantly its operating expenses in order to, among other things:
(i) expand its affiliate network, which may include the payment of additional
carriage fees to certain affiliates; (ii) expand its sales and marketing
operations and hire more salespersons; (iii) increase its advertising and
promotional activities; (iv) develop and upgrade its technology and purchase
equipment for its operations and network infrastructure; (v) expand
internationally; and (vi) expand its content services. Certain Internet
points-of-entry require the Company to make payments or pay other
consideration in exchange for including the Company's content services on
their Web site and other Internet points-of-entry may in the future require
payments for access to their Web site or Internet access device. Additionally,
the Company may incur costs relating to the acquisition of content or the
acquisition of businesses or technologies. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, financial condition and results of operations could be materially
adversely affected.
The Company's results of operations have varied on a quarterly basis during
its short operating history and will fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. Factors that may affect the Company's quarterly results of operations
include, but are not limited to: (i) the addition or loss of affiliates; (ii)
variable demand for the Company's content services by its affiliates; (iii)
the cost of acquiring and the availability of content; (iv) the overall level
of demand for content services; (v) the Company's ability to attract and
retain advertisers and content providers; (vi) seasonal trends in Internet
usage and advertising placements; (vii) the amount and timing of fees paid by
the Company to certain of its affiliates to include the Company's content
services on their Web sites; (viii) the productivity of the Company's direct
sales force and the sales forces of the independent yellow pages publishers,
media companies and direct marketing companies that sell local Internet yellow
pages advertising for the Company; (ix) the amount and timing of expenditures
for expansion of the Company's operations, including the hiring of new
employees, capital expenditures and related costs; (x) the Company's ability
to continue to enhance, maintain and support its technology; (xi) the
Company's ability to attract and retain personnel; (xii) the introduction of
new or enhanced services by the Company, its affiliates and their respective
competitors; (xiii) price competition or pricing changes in Internet
advertising and Internet services, such as the Company's content services;
(xiv) technical difficulties, system downtime, system failures or Internet
brown-outs; (xv) political or economic events and governmental actions
affecting Internet operations or content; and (xvi) general economic
conditions and economic conditions specific to the Internet. Any one of these
factors could cause the Company's revenues and operating results to vary
significantly in the future. In addition, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service or marketing decisions or acquisitions that could cause
significant declines in the Company's quarterly results of operations. Also,
the Company currently is involved in a lawsuit filed by a former employee
involving certain claims to purchase Common Stock. To the extent the Company
is required
6
<PAGE>
to issue shares of Common Stock or options to purchase Common Stock, the
Company would recognize an expense, which could have a material adverse effect
on the Company's results of operations for the period in which such issuance
occurs and any such issuance would be dilutive to existing stockholders. See
"--Legal Proceedings."
The Company has experienced, and expects to continue to experience,
seasonality in its business, with reduced user traffic on its affiliate
network expected during the summer and year-end vacation and holiday periods,
when usage of the Internet has typically declined. Advertising sales in
traditional media, such as broadcast and cable television, generally decline
in the first and third quarters of each year. Depending on the extent to which
the Internet and commercial online services are accepted as an advertising
medium, seasonality in the level of advertising expenditures could become more
pronounced for Internet-based advertising. Seasonality in Internet service
usage and advertising expenditures is likely to cause quarterly fluctuations
in the Company's results of operations and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Due to the foregoing factors, the Company's revenues and operating results
are difficult to forecast. The Company believes that its quarterly revenues,
expenses and operating results will vary significantly in the future and that
period-to-period comparisons are not meaningful and are not indicative of
future performance. As a result of the foregoing factors, it is likely that in
some future quarters or years the Company's results of operations will fall
below the expectations of securities analysts or investors, which would have a
material adverse effect on the trading price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Operating Results."
Reliance on Advertising and Promotion Revenues; Risks Associated With
Advertising Arrangements. The Company derives substantially all of its
revenues from the sale of advertisements and promotions on the Web pages that
deliver the Company's content services and expects that advertising and
promotion revenues will continue to account for substantially all of its
revenues in the foreseeable future. The Company's ability to increase its
advertising and promotion revenues will depend on, among other things,
national and local advertisers' acceptance of the Internet as an attractive
and sustainable medium, the development of a large base of end users of the
Company's content services having demographic characteristics attractive to
advertisers, the success of the Company's strategy to sell local Internet
yellow pages advertising through independent yellow pages publishers, media
companies and direct marketing companies, the expansion and productivity of
the Company's advertising sales force and the development of the Internet as
an attractive platform for electronic commerce. To date, substantially all of
the Company's revenues have been derived from national advertising and
promotions and the Company has not yet generated significant revenues from
local Internet yellow pages advertising, which the Company is relying on as a
significant source of future revenues. The Company intends to rely in
significant part on sales of local Internet yellow pages advertising generated
by the sales forces of independent yellow pages publishers, media companies
and direct marketing companies. The failure to generate these sales would have
a material adverse effect on the Company's business, financial condition and
results of operation. There can be no assurance that the Company will be
successful in generating significant future national and local advertising and
promotion revenues, and the failure to do so would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "--Dependence on Sales by Third Parties," "--Risks Associated
With International Expansion," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Advertising and
Promotions."
The Company's national advertising arrangements typically require the
Company to guarantee minimum levels of impressions or click throughs. These
arrangements expose the Company to potentially significant financial risks,
including the risk that the Company may fail to deliver required minimum
levels of impressions or click throughs, in which case the Company typically
continues to provide advertising without compensation until such levels are
met. In addition, such advertisers may terminate their agreements or may renew
their agreements on less favorable terms to the Company. In connection with
certain promotion arrangements and content agreements, the Company guarantees
the availability of advertising space. There can be no assurance
7
<PAGE>
that the Company will have sufficient inventory either to meet such guarantees
or to sell additional promotions and advertisements. The Company also provides
customized advertising campaigns for certain of its advertisers which may
require the dedication of resources and significant programming and design
efforts to accomplish. In addition, the Company has granted exclusivity to
certain of its advertisers and may in the future grant additional exclusivity
to additional advertisers. Such exclusivity arrangements may have the effect
of preventing the Company, for the duration of such arrangements, from
accepting advertising within a particular subject matter in the Company's
content services or across part or all of the Company's content services. The
inability of the Company to enter into further advertising or promotion
arrangements as a result of its exclusivity arrangements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Advertising and Promotions."
Reliance on Affiliate Relationships. The Company's ability to generate
revenues from advertising and promotions depends on its ability to secure and
maintain distribution for its content services on acceptable commercial terms
through a wide range of affiliates. The Company expects that revenues
generated from the sale of advertisements and promotions delivered through its
network of affiliates will continue to account for a significant portion of
the Company's revenues for the foreseeable future. In particular, the Company
expects that a limited number of its affiliates, including Netscape
Communications Corporation ("Netscape"), America Online, Inc. ("AOL") and
Lycos, Inc. ("Lycos") will account for a substantial portion of its affiliate
traffic and, therefore, revenues over time. The Company's distribution
arrangements with its affiliates typically are for limited durations of
between six months and two years and are generally terminable after six
months. There can be no assurance that such arrangements will be renewed upon
expiration of their terms. The Company and each affiliate generally share a
portion of the revenues generated by advertising on the Web pages that deliver
the Company's content services. The Company has recently entered into
agreements with Netscape and AOL under which the Company has paid, and will in
the future pay, certain carriage fees to Netscape and AOL. Under its agreement
with Netscape, which provides for a one-year term with automatic renewal
provisions, the Company paid licensing fees to Netscape and is obligated to
make additional payments to Netscape based on the number of click throughs to
the Company's services. Netscape guarantees to the Company a certain minimum
level of use of the Company's yellow pages and white pages directory services.
The agreement with AOL relating to the Company's white pages directory
services has a three-year term, which may be extended for an additional year
and subsequently renewed for up to three successive one-year terms at AOL's
discretion. This agreement may be terminated by AOL upon acquisition by AOL of
a competing white pages directory services business or for any reason after 18
months, upon payment of a termination fee, or at any time in the event of a
change of control of the Company. Under this agreement, the Company will pay
to AOL a quarterly carriage fee and share with AOL revenues generated by
advertising on the Company's white pages directory services delivered to AOL.
Under the terms of the agreement related to the Company's classifieds
information services, the Company has agreed to provide classified advertising
development and management services to AOL for two years, with up to three
one-year extensions at AOL's discretion. AOL will pay to the Company a
quarterly fee and share with the Company revenues generated by payments by
individuals and commercial listing services for listings on the AOL
classifieds service. This agreement may be terminated at any time in the event
of a change of control of the Company. There can be no assurance that the
Company's relationship with Netscape or AOL will be profitable or result in
benefits to the Company that outweigh the costs of the relationship.
The Company's affiliate relationships are in an early stage of development,
and there can be no assurance that affiliates, especially major affiliates,
will not demand a greater portion of advertising revenues or require the
Company to make payments for access to any such affiliate's site or device.
There can be no assurance that the Company would be able to timely or
effectively replace any major affiliate with other affiliates with comparable
traffic patterns and user demographics. The loss of any major affiliate or an
adverse change in the Company's pricing model could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Affiliate Network."
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Dependence on Advertising Sales by Third Parties; Limited History of
Internet Yellow Pages Advertising. The Company relies on arrangements with
independent yellow pages publishers, media companies and direct marketing
companies to generate local Internet yellow pages advertising revenues,
primarily from enhanced listings on the Company's Internet yellow pages
directory services in the form of enhanced yellow pages listings. Under its
arrangements with independent yellow pages publishers, the Company typically
provides exclusive rights to the publisher to sell local advertising in a
specific geographic area and does not restrict the publisher's ability to sell
advertising for any other source. The Company currently expects that a greater
portion of its future advertising revenues will be derived from these
relationships. There can be no assurance, however, that the sales forces of
these independent yellow pages publishers, media companies and direct
marketing companies will actively pursue this opportunity to sell local
Internet yellow pages advertisements to their customers, that their customers
will purchase Internet advertising or that significant revenues will be
generated by these relationships. The Company's independent yellow pages
publishers, media companies and direct marketing companies have only recently
begun to offer local Internet yellow pages advertising and, as such, have
extremely limited experience in forecasting and executing Internet advertising
business models. The Company's future operating plans are based, in part, on
the local Internet yellow pages forecasts of the independent yellow pages
publishers, media companies and direct marketing companies with which it has
relationships. The Company cannot accurately predict the timing or the extent
of the success of these local advertising efforts. These sales forces
generally do not have experience selling Internet advertising to local
advertisers, and the Company may have to expend significant time and effort in
training such sales forces. Further, the independent yellow pages publishers,
media companies and direct marketing companies have broad discretion in
setting advertising rates, and there can be no assurance that they will
develop a profitable business model. The Company also relies on the
advertisement production infrastructure of these companies for the billing and
collection of local advertising payments and the production and filing of
display advertisements and button advertisements. The failure of the sales
forces of independent yellow pages publishers, media companies and direct
marketing companies to successfully transfer print advertisements to
advertisements in the Company's Internet yellow pages directory services or
for these sales relationships to otherwise generate meaningful revenues for
the Company or for these companies to cease to maintain and support an
advertisement production infrastructure could have a material adverse effect
on the Company's business, financial condition and results of operations.
These risks are also applicable to the Company's ability to generate revenues
from its international operations. See "--Risks Associated With International
Expansion" and "Business--Advertising and Promotions."
Uncertain Adoption of the Internet as an Advertising Medium. Most
advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience with the Internet as an advertising
medium and have not devoted a significant portion of their advertising
expenditures to Internet advertising. There can be no assurance that
advertisers or advertising agencies will allocate or continue to allocate
funds for Internet advertising or that they will find such advertising to be
effective for promoting their products and services relative to traditional
methods of advertising. In addition, use of the Internet for advertising in
international markets is at a much earlier stage of development than in the
United States.
There are no widely accepted standards for the measurement of the
effectiveness of Internet advertising, and there can be no assurance that such
standards will develop sufficiently to support Internet advertising as a
significant advertising medium. Advertising rates are typically based on the
number of impressions received, and the Company's advertising customers may
not accept the Company's or other third parties' measurements of impressions
on the Web sites of the Company's affiliates utilizing the Company's content
services or such measurements may contain errors.
There is fluid and intense competition in the sale of advertising on the
Internet, resulting in a wide range of rates quoted and a variety of pricing
models offered by different vendors for a variety of advertising services,
which makes it difficult to project future levels of advertising revenues that
will be realized generally or by any specific company. It is also difficult to
predict which pricing models will be adopted by the industry or advertisers.
For example, widespread adoption of advertising rates based on the number of
click throughs
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from the Company's content services to advertisers' Web pages, instead of
rates based solely on the number of impressions, could materially adversely
affect the Company's revenues.
Acceptance of the Internet among advertisers and advertising agencies will
also depend, to a large extent, on the level of use of the Internet by
consumers and on the growth in the commercial use of the Internet. The
Internet may not prove to be a viable commercial market for a number of
reasons, including lack of acceptable security technologies, potentially
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development and commercialization of non-PC based
Internet appliances or performance improvements, including high speed modems.
In addition, "filter" software programs that limit or remove advertising from
the Web user's desktop are available. The widespread adoption of such software
by users could have a material adverse effect on the viability of advertising
on the Internet. Despite industry forecasts of growth in advertising on the
Internet, such growth may not occur or may occur more slowly than estimated.
If the commercial use of the Internet does not develop, or if the Internet
does not develop as an effective and measurable medium for advertising, the
Company's business, financial condition and results of operations will be
materially adversely affected. See "Business--Industry Background" and "--
Advertising and Promotions."
Risks Associated With Short-Term National Advertising Contracts. National
advertisements, which constitute a significant current and expected future
source of revenues, are typically sold pursuant to agreements with terms of
less than six months. Consequently, the Company's national advertising
customers may change or cancel their advertising expenditures, or move their
advertising to competing Internet sites or from the Internet to traditional
media, quickly and with minimal penalty, thereby increasing the Company's
exposure to competitive pressures and fluctuations in revenues and results of
operations. In selling national advertising, the Company also depends to a
significant extent on advertising agencies, which exercise substantial control
over the placement of advertisements for the Company's existing and potential
national advertising customers. There can be no assurance that current
advertisers will continue to purchase advertising from the Company or that the
Company will attract additional advertisers. If the Company loses advertising
customers, fails to attract new customers or is forced to reduce advertising
rates in order to retain or attract customers, the Company's business,
financial condition and results of operations will be materially adversely
affected. See "Business--Advertising and Promotions."
Dependence on a Limited Number of Advertisers. A substantial portion of the
Company's revenues to date have been derived from a limited number of
advertisers, and the Company expects that a limited number of advertisers will
continue to account for a significant percentage of the Company's revenues for
the foreseeable future. In particular, 800-U.S. Search, Inc. ("800-U.S.
Search") accounted for approximately 12.3% of the Company's revenues for the
six months ended June 30, 1998, and the Company's top ten advertisers
accounted for an aggregate of 48.1% of the Company's revenues during the same
period. The loss of one or more of these advertisers, including, but not
limited to, 800-U.S. Search, could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the nonpayment or late payment of amounts due by a significant
advertiser could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Advertising and Promotions."
Dependence on Third-Party Content. The Company's future success depends in
large part on its ability to aggregate, integrate and syndicate content of
broad appeal over the Internet to its affiliates. The Company typically does
not create its own content. Rather, the Company acquires the rights to
substantially all of the information it distributes from more than 65 third-
party content providers, including infoUSA, Inc. (formerly known as American
Business Information, Inc., "infoUSA") (national white and yellow pages),
Carroll Publishing, Inc. (government directories), Leisure Planet, Inc.
(enhanced hotel information), CareerPath, Inc. (employment listings) and ETAK,
Inc. ("ETAK") (mapping and directions). In particular, the Company is
substantially dependent on yellow pages and white pages data from infoUSA. The
Company's ability to maintain its relationships with such content providers
and to build new relationships with additional content providers is critical
to the success of the Company's business. In general, the licenses with the
third-party
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content providers are short term and do not require the Company to pay the
content provider a royalty or other fee for the right to include the content
on the Company's content services. However, the Company enters into revenue-
sharing arrangements with certain content providers and pays certain core
content providers, such as infoUSA and ETAK, a one-time or periodic fee or fee
per content query, and there can be no assurance that content providers will
not demand a greater portion of advertising revenues or require more fees for
access to content. In certain instances the Company enters into exclusive
relationships, which may limit the Company's ability to enter into additional
content agreements. The Company's inability to secure licenses from content
providers or the termination of a significant number of content provider
agreements would decrease the attractiveness to end users of the Company's
content and the amount of content that the Company can distribute to its
affiliates. This could result in decreased traffic on the Web sites that
deliver the Company's content services and, as a result, decreased advertising
and electronic commerce revenues, which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Content Services."
Dependence on Key Personnel; Need for Additional Personnel. The Company's
performance is substantially dependent on the continued services of its
executive officers and other key personnel. The loss of the services of any of
its executive officers or other key employees could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company has applied for, but not yet received, key person life
insurance on Naveen Jain, its President and Chief Executive Officer. If
obtained, such policy is expected to be in the amount of $5.0 million, and the
sole beneficiary will be the Company. The Company does not maintain key person
life insurance policies on any of its other employees. The Company does not
have employment agreements with any of its employees, and the employment
relationships of such personnel with the Company are, therefore, at will. The
Company's future success also depends on its ability to identify, attract,
hire, train, retain and motivate highly skilled technical, managerial, sales
and marketing personnel. The Company has increased the number of employees
from 15 at January 1, 1998 to 48 at September 30, 1998 and intends to hire a
significant number of sales, business development, marketing, technical and
administrative personnel during the next year. Competition for such personnel
is intense, and there can be no assurance that the Company will successfully
attract, assimilate or retain a sufficient number of qualified personnel. The
failure to retain and attract the necessary technical, managerial, sales and
marketing and administrative personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Employees" and "Management."
Management of Growth; New Management Team; Limited Senior Management
Resources. The Company has rapidly and significantly expanded its operations
and anticipates further significant expansion to accommodate expected growth
in its customer base and market opportunities. This expansion has placed, and
is expected to continue to place, a significant strain on the Company's
management, operational and financial resources. In 1998, the Company has
added a number of key managerial, technical and operations personnel,
including its Chief Financial Officer and Vice President, Legal and Business
Affairs, who have only recently joined the Company, and expects to add
additional key personnel in the near future. The Company is significantly
increasing its employee base, which has increased from 15 at January 1, 1998
to 48 at September 30, 1998. The Company has a short operating history and
only in August 1998 hired a Chief Financial Officer and other accounting
personnel. The Company has not implemented sophisticated operational and
financial systems, procedures and controls. To manage the expected growth of
its operations and personnel, the Company will be required to significantly
improve or replace existing management, operational and financial systems,
procedures and controls, and to expand, train and manage its growing employee
base. The Company also will be required to expand its finance, administrative
and operations staff. Further, the Company's management will be required to
maintain and expand its relationships with various Internet content providers,
advertisers, Internet points-of-entry and other third parties necessary to the
Company's business. There can be no assurance that the Company will complete
in a timely manner the improvements to its systems, procedures and controls
necessary to support the Company's future operations, that management will be
able to hire, train, retain, motivate and manage required personnel or that
Company management will be able to successfully identify, manage and exploit
existing and potential market
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opportunities. The Company's inability to manage growth effectively could have
a material adverse effect on its business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Employees" and "Management."
Risks Associated With International Expansion. A key component of the
Company's strategy is to expand its operations into international markets. The
Company has entered into a joint venture agreement with Thomson Directories
Limited ("Thomson") to replicate the Company's content services in Europe. The
joint venture, TDL InfoSpace (Europe) Limited ("TDL InfoSpace"), has targeted
the United Kingdom as its first market, and content services were launched in
the third quarter of 1998. The Company expects that TDL InfoSpace will expand
its content services to other European countries. Under the joint venture
agreement, each of the Company and Thomson is obligated to negotiate with TDL
InfoSpace and the other party to jointly offer content services in other
European countries prior to offering such services independently or with other
parties. To date, the Company has limited experience in developing and
syndicating localized versions of its content services internationally. There
can be no assurance that the Company will successfully execute its business
model in these markets. In addition, Internet usage and Internet advertising
are at an earlier stage of development internationally than in the United
States. The Company is relying on its business partner in Europe for U.K.
directory information and local sales forces and may enter into similar
relationships if it expands into other international markets. Accordingly, the
Company's success in such markets will be directly linked to the success of
its business partners in such activities. There can be no assurance that such
business partners will be successful or that such business partners will
dedicate sufficient resources to the business relationship. The failure of the
Company's business partners to successfully establish operations and sales and
marketing efforts in such markets could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Evolving and Unproven Business Model," "--Uncertain Adoption of the Internet
as an Advertising Medium," "--Dependence on Sales by Third Parties" and
"Business--International Expansion."
There are certain risks inherent in doing business in international markets,
such as unexpected changes in regulatory requirements, potentially adverse tax
consequences, work stoppages, export restrictions, export controls relating to
encryption technology, tariffs and other trade barriers, difficulties in
staffing and managing foreign operations, political instability,
transportation delays, changing economic conditions, expropriations, exposures
to different legal standards (particularly with respect to intellectual
property and distribution of information over the Internet), burdens with
complying with a variety of foreign laws, fluctuations in currency exchange
rates, and seasonal reductions in business activity during the summer months
in Europe and certain other parts of the world. Any of these factors could
have a material adverse effect on the success of the Company's international
operations and, consequently, on the Company's business, financial condition
and results of operations.
Intense Competition. The market for Internet products and services is highly
competitive, with no substantial barriers to entry, and the Company expects
that competition will continue to intensify. The market for the Company's
content services has only recently begun to develop, is rapidly evolving and
is likely to be characterized by an increasing number of market entrants with
competing products and services. Although the Company believes that the
diversity of the Internet market may provide opportunities for more than one
provider of content services similar to those of the Company, it is possible
that one or a few suppliers may dominate one or more market sectors. The
Company believes that the primary competitive factors in the market for
Internet content services are (i) the ability to provide content of broad
appeal, which is likely to result in increased user traffic and increase the
brand name value of the Internet point-of-entry to which the services are
provided; (ii) the ability to meet the specific content demands of a
particular Internet point-of-entry; (iii) the cost-effectiveness and
reliability of the content services; (iv) the ability to provide content that
is attractive to advertisers; (v) the ability to achieve comprehensive
coverage of a particular category of content; and (vi) the ability to
integrate related content to increase the utility of the content services
offered. There can be no assurance that the Company's competitors will not
develop content services that are superior to those of the Company or achieve
greater market acceptance than the Company's services. Any failure of
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the Company to provide services that achieve success in the short term could
result in an insurmountable loss in market share and brand acceptance and
could, therefore, have a material adverse effect on the Company's business,
financial condition and results of operations.
While the Company is unaware of any companies that compete with all of the
Company's content services, there are companies that offer services addressing
certain of the Company's target markets. In addition, some of these
competitors are currently members of the Company's affiliate network or
currently provide content included in the Company's content services. The
Company's directory services compete with other Internet yellow pages and
white pages directory services, including AnyWho?, a division of AT&T Corp.
("AT&T"), GTE SuperPages, Switchboard, ZIP2, directory services offered by the
Regional Bell Operating Companies (the "RBOCs"), including Big Yellow by Bell
Atlantic/NYNEX, infoUSA's Lookup USA, Microsoft Sidewalk and Yahoo! Yellow
Pages and White Pages. In addition, specific services provided by the Company
compete with specialized content providers. TDL InfoSpace's directory services
will compete with British Telecom's YELL service and Scoot (UK) Limited in the
United Kingdom and, as the Company expands internationally into other markets,
it expects to face competition from other established providers of directory
services. In the future, the Company may encounter competition from providers
of Web browser software, including Netscape and Microsoft Corporation
("Microsoft"), online services and other providers of Internet services that
elect to syndicate their own product and service offerings, such as AOL,
Yahoo! Inc. ("Yahoo!"), Excite, Inc. ("Excite"), Infoseek Corporation
("Infoseek"), Lycos, Wired Digital Inc.'s HotBot ("HotBot"), go2net, Inc.'s
MetaCrawler ("MetaCrawler"), CNET, Inc.'s Snap! ("Snap!") and traditional
media companies expanding onto the Internet, such as Time/Warner, Inc.
("Time/Warner"), ABC, CBS, NBC, Dow Jones & Company, Inc. ("Dow Jones"), The
Walt Disney Company ("Disney") and the Fox Broadcasting Company ("Fox").
A number of the Company's current advertising customers have established
relationships with certain of the Company's competitors and future advertising
customers may establish similar relationships. In addition, the Company
competes with online services and other Web site operators, as well as
traditional offline media such as print (including print yellow pages
directories) and television for a share of advertisers' total advertising
budgets. Competition among current and future suppliers of Internet content
services, as well as competition with other media for advertising placements,
could result in significant price competition and reductions in advertising
revenues.
Many of the Company's current competitors, as well as a number of potential
new competitors, have significantly greater financial, technical, marketing,
sales and other resources than the Company. There can be no assurance that the
Company will be able to compete successfully against its current and future
competitors. The Company's failure to compete with its competitors' product
and service offerings or for advertising revenues would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
Risk of System Failures, Delays and Inadequacies. The performance,
reliability and availability of the Company's content services and syndication
infrastructure are critical to its reputation and ability to attract and
retain affiliates, advertisers and content providers. The Company's computer
and communications hardware is located at its main headquarters in Redmond,
Washington and in additional hosting facilities provided by Exodus
Communications, Inc. ("Exodus Communications") and Savvis Communications
Corporation ("Savvis Communications") in Seattle, Washington. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, Internet breakdowns, break-ins,
earthquake and similar events. The Company does not presently have a formal
disaster recovery plan and does not carry sufficient business interruption
insurance to compensate it for losses that may occur. Services based on
sophisticated software and computer systems often encounter development delays
and the underlying software may contain undetected errors that could cause
system failures when introduced. Any system error or failure that causes
interruption in availability of content or an increase in response time could
result in a loss of potential or existing affiliates, advertisers, content
providers or end users and, if sustained or repeated, could reduce the
attractiveness of the Company's content services to such
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entities or individuals. In addition, because the Company's advertising
revenues are directly related to the number of advertisements delivered by the
Company to users, system interruptions that result in the unavailability of
the Company's content services or slower response times for users would reduce
the number of advertisements delivered and reduce revenues. The occurrence of
any of the foregoing risks could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Technology and Infrastructure" and "Business--Facilities."
Pending Legal Proceedings. On April 15, 1998, a former employee of the
Company filed a complaint in the Superior Court for Santa Clara County,
California alleging, among other things, that he has the right in connection
with his employment to purchase shares of Common Stock representing up to 5%
of the equity of the Company as of an unspecified date. In addition, the
former employee is also seeking compensatory damages, plus interest, punitive
damages, emotional distress damages and injunctive relief preventing any
capital reorganization or sale that would cause the plaintiff not to be a 5%
owner of the equity of the Company. The Company removed the suit to the
Federal District Court for the District of Northern California. The Company
has answered the complaint and denied the claims. Nevertheless, while the
Company believes its defenses to the former employee's claims are meritorious,
litigation is inherently uncertain, and there can be no assurance that the
Company will prevail in the suit. As of June 30, 1998, the Company has accrued
a liability of $240,000 for estimated settlement and defense costs. To the
extent the Company is required to issue shares of Common Stock or options to
purchase Common Stock as a result of the suit, the Company would recognize an
expense equal to the number of shares issued multiplied by the fair value of
the Common Stock on the date of issuance, less the exercise price of any
options required to be issued, to the extent that this amount exceeds the
expense already accrued as of June 30, 1998. This could have a material
adverse effect on the Company's results of operations, and any such issuance
would be dilutive to existing stockholders. The exercise price of any shares
which the Company may be required to issue as a result of the suit is unknown,
but could be as low as $0.01 per share. See Note 5 of the Company's Notes to
Consolidated Financial Statements.
Risk of Capacity Constraints; Reliance on Internally Developed Software and
Systems. A key element of the Company's strategy is to generate a high volume
of traffic accessing its content services. Accordingly, the satisfactory
performance, reliability and availability of the Company's data network
infrastructure are critical to the Company's reputation and its ability to
attract and retain affiliates and maintain adequate service levels. The
Company's revenues depend, in large part, on the number of users that access
the Company's content services. Any system interruptions that result in the
unavailability of the Company's content services would reduce the volume of
users able to access its content services and the attractiveness of the
Company's service offerings to its affiliates, advertisers and content
providers, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has developed custom software for its network servers, including
its Web Server Technology, Database Technology and Remote Data Aggregation
Engine. This software may contain undetected errors, defects or "bugs."
Although the Company has not experienced material adverse effects resulting
from any such errors or defects to date, there can be no assurance that errors
or defects will not be discovered in the future, and, once discovered, there
can be no assurance that any such errors or defects can be fixed. Any
substantial increase in the volume of traffic on the Internet points-of-entry
that deliver the Company's content services will require the Company to expand
and upgrade further its technology, transaction-processing systems and network
infrastructure. In addition, to the extent the Company expands into electronic
commerce, significant modifications to its systems may be required. The
Company could experience periodic temporary capacity constraints, which may
cause unanticipated system disruptions, slower response times and lower levels
of customer service. There can be no assurance that the Company will be able
to accurately project the rate or timing of increases, if any, in the use of
its content services or timely expand and upgrade its systems and
infrastructure to accommodate such increases. Any inability to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Technology and Infrastructure."
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Rapid Technological Change. The market for Internet products and services
and the online commerce industry are characterized by rapidly changing
technology, evolving industry standards and customer demands and frequent new
product and service introductions and enhancements. These characteristics are
exacerbated by the emerging nature of this market and the fact that many
companies are expected to introduce new Internet services in the near future.
The Company's future success depends in significant part on its ability to
improve the performance, content and reliability of the Company's content
services in response to both evolving demands of the market and competitive
product offerings, and there can be no assurance that the Company will be
successful in such efforts. The widespread adoption of new Internet
technologies or standards could require substantial expenditures by the
Company to modify or adapt its content services. See "Business--Industry
Background," "--Strategy," "--Competition" and "--Content Services."
Dependence on the Internet Infrastructure. The Company's success depends in
large part on the maintenance of the Internet infrastructure, such as a
reliable network backbone that provides adequate speed, data capacity and
security, and timely development of products, such as high-speed modems, that
enable reliable Internet access and services. To the extent that the Internet
continues to experience significant growth in the number of users, frequency
of use and amount of data transmitted, there can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
on it or that the performance or reliability of the Internet will not be
adversely affected by this continued growth. In addition, the Internet could
lose its commercial viability as a form of media due to delays in the
development or adoption of new standards and protocols to process increased
levels of Internet activity. There can be no assurance that the infrastructure
or complementary products and services necessary to establish and maintain the
Internet as a viable commercial medium will be developed or, if they are
developed, that the Internet will become a viable commercial medium for the
Company or its advertisers. If the necessary infrastructure or complementary
services or facilities are not developed, or if the Internet does not become a
viable commercial medium or platform for advertising, promotions and
electronic commerce, the Company's business, financial condition and results
of operations would be materially adversely affected. See "Business--Industry
Background."
Liability for Information Received From the Internet. The Company faces
possible liability for defamation, negligence, copyright, patent or trademark
infringement and other claims, such as product or service liability, based on
the nature and content of the materials that it provides. Such claims have
been brought, sometimes successfully, against Internet companies in the past.
The law in these areas is unclear, and, accordingly, the Company is unable to
predict the possible existence or extent of its liability in this area or
related areas. Further, the Company does not verify the accuracy of the
information supplied by third-party content providers. While the Company
carries general liability insurance with limits of $1.0 million, the Company's
insurance may not cover potential claims of this type, or may not be adequate
to indemnify the Company for all liability that may be imposed. Any imposition
of liability that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Governmental Regulation
and Legal Uncertainties."
A key component of the Company's content services is its yellow pages and
white pages directories. From time to time, the Company has been contacted by
individuals who believed their phone numbers or addresses were unlisted even
though they appeared in the Company's directory information. The Company's
white pages directories are not always updated to delete phone numbers or
addresses when individuals change from listed to unlisted information. The
Company has not been subject to any claims regarding unlisted numbers and
addresses to date; however, there can be no assurance that such claims will
not be made in the future or as to the Company's potential liability for such
claims.
Security Risks. Despite the implementation of security measures, the
Company's networks may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. A party who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions
in the Company's Internet operations. Internet and online service providers
have in the past experienced, and may in the future experience, interruptions
in service as a result of the accidental or intentional actions of Internet
users, current and former employees or others. The Company may be required to
expend significant capital
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or other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Although the Company intends to
continue to implement industry-standard security measures, there can be no
assurance that measures implemented by the Company will not be circumvented in
the future. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to users
accessing Web pages that deliver the Company's content services, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Technology and
Infrastructure--Data Network Infrastructure" and "Business--Facilities."
A significant barrier to online communications and commerce is the inability
to ensure secure transmission of information over public networks. To the
extent that the Company expands its electronic commerce services, it intends
to rely on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card
numbers. There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise of the algorithms used by the Company to protect
customer transaction data. If any such compromise of the Company's security
were to occur, it could have a material adverse effect on the Company's
reputation, business, financial condition and results of operations. Concerns
over the security of transactions conducted on the Internet and other online
services and the privacy of users may also inhibit the growth of the Internet
and other online services generally, and the Web in particular, especially as
a means of conducting commercial transactions. To the extent that activities
of the Company or third-party contractors involve the storage and transmission
of proprietary information, such as credit card numbers, security breaches
could damage the Company's reputation and expose the Company to a risk of loss
or litigation and possible liability. There can be no assurance that the
Company's security measures will prevent security breaches or that failure to
prevent such security breaches will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Intellectual Property and Proprietary Rights. The Company's success depends
significantly upon its proprietary technology. The Company currently relies on
a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. All
Company employees have executed confidentiality and non-use agreements which
transfer any rights they may have in copyrightable works or patentable
technologies to the Company. In addition, prior to entering into discussions
with potential content providers and affiliates regarding the Company's
business and technologies, the Company generally requires that such parties
enter into a non-disclosure agreement. If these discussions result in a
license or other business relationship, the Company also generally requires
that the agreement setting forth the parties' respective rights and
obligations include provisions for the protection of the Company's
intellectual property rights. For example, the Company's standard affiliate
agreement provides that the Company retains ownership of all patents and
copyrights in the Company's technology and requires its customers to display
the Company's copyright and trademark notices.
The Company has applied for registration of certain service marks and
trademarks, including "InfoSpace," "InfoSpace.com" and its logo in the United
States and in other countries, and will seek to register additional service
marks and trademarks, as appropriate. There can be no assurance that the
Company will be successful in obtaining the service marks and trademarks for
which it has applied. In addition, a patent is pending in the United States
relating to the Company's electronic commerce technology and the Company is
filing patent applications relating to other aspects of its technology,
including the methods by which information is obtained and provided to end
users of its content services. There can be no assurance that any patent with
respect to the Company's technology will be granted or that if granted such
patent will not be challenged or invalidated. There also can be no assurance
that the Company will develop proprietary products or technologies that are
patentable, that any issued patent will provide the Company with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have a material adverse effect on the Company's
ability to conduct business. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may copy aspects of the Company's
products or services or obtain and
16
<PAGE>
use information that the Company regards as proprietary. The laws of some
foreign countries do not protect proprietary rights to as great an extent as
do the laws of the United States, and the Company does not currently have any
patents or patent applications pending in any foreign country. There can be no
assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology or duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company. The failure of the Company to adequately protect its proprietary
rights or its competitors' successful duplication of its technology could have
a material adverse effect on the Company's business, financial condition and
results of operations.
There has been frequent litigation in the computer industry regarding
intellectual property rights. The Company has in the past been subject to
claims regarding its intellectual property rights. While all such claims have
been resolved, there can be no assurance that third parties will not in the
future claim infringement by the Company with respect to current or future
products, trademarks or other proprietary rights. Any such claims could be
time-consuming, result in costly litigation, diversion of management's
attention, cause product or service release delays, require the Company to
redesign its products or services or require the Company to enter into royalty
or licensing agreements. These royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company, or at all, any of
which occurrences could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Intellectual Property."
Governmental Regulation and Legal Uncertainties. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally, and laws or
regulations directly applicable to access to online commerce. However, due to
the increasing popularity and use of the Internet and other online services,
it is possible that laws and regulations will be adopted with respect to the
Internet or other online services covering issues such as user privacy,
pricing, content, taxation, copyrights, distribution and characteristics and
quality of products and services. Such regulation could limit growth in the
use of the Internet generally and decrease the acceptance of the Internet as a
communications and commercial medium, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company may be subject to Sections 5 and 12 of the Federal
Trade Commission Act (the "FTC Act"), which regulate advertising in all media,
including the Internet, and require advertisers to have substantiation for
advertising claims before disseminating advertisements. The FTC Act prohibits
the dissemination of false, deceptive, misleading and unfair advertising, and
grants the Federal Trade Commission (the "FTC") enforcement powers to impose
and seek civil and criminal penalties, consumer redress, injunctive relief and
other remedies upon persons who disseminate prohibited advertisements. The
Company could be subject to liability under the FTC Act if it were found to
have participated in creating and/or disseminating a prohibited advertisement
with knowledge, or had reason to know that the advertising was false or
deceptive. The FTC recently brought several actions charging deceptive
advertising via the Internet, and is actively seeking new cases involving
advertising via the Internet.
The Company may also be subject to the provisions of the recently enacted
Communications Decency Act (the "CDA"), which, among other things, imposes
substantial monetary fines and/or criminal penalties on anyone who distributes
or displays certain prohibited material over the Internet or knowingly permits
a telecommunications device under its control to be used for such purpose.
Although the manner in which the CDA will be interpreted and enforced and its
effect on the Company's operations cannot yet be fully determined, the CDA
could subject the Company to substantial liability. The CDA could also limit
the growth of the Internet generally and decrease the acceptance of the
Internet as an advertising medium.
Other federal, state, local or foreign laws, regulations and policies,
either now existing or that may be adopted in the future, may apply to the
business of the Company and may subject the Company to significant liability,
significantly limit growth in Internet usage, prevent the Company from
offering certain Internet products or services, or otherwise have a material
adverse effect on the Company's business, financial
17
<PAGE>
condition and results of operations. These laws, regulations and policies may
apply to matters such as, but not limited to, copyright, trademark, unfair
competition, antitrust, property ownership, negligence, defamation, indecency,
obscenity, personal privacy, trade secrecy, encryption, taxation and patents.
Moreover, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to the Company's business, or the application of existing laws
and regulations to the Internet and other online services could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Governmental Regulation."
Risks Associated With Acquisitions. The Company has in the past, and may in
the future, pursue acquisitions of complementary technologies or businesses.
However, there can be no assurance that the Company will identify suitable
acquisition opportunities. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities and the incurrence of
additional debt and contingent liabilities, large one-time write-offs and
amortization expenses related to goodwill and other intangible assets, which
could adversely affect the Company's results of operations or the price of the
Company's Common Stock. In June 1998, the Company acquired Outpost Network,
Inc. ("Outpost"), which included the acquisition of certain electronic
commerce technology (the "Outpost Technology") and the hiring of approximately
ten employees. The form of the transaction was a merger, whereby a wholly
owned subsidiary of the Company was merged with and into Outpost, with Outpost
as the surviving corporation. As a result of the merger, the former
shareholders of Outpost received 1,499,988 shares of the Company's Common
Stock and cash in lieu of fractional shares. In addition, the Company agreed
to offer employment to certain employees of Outpost. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
products, technology, information systems and personnel of the acquired
company, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no direct prior experience
and the potential loss of key employees of the acquired company. There can be
no assurance that the Company will successfully integrate the Outpost
Technology and personnel or any other businesses, technologies or personnel
that might be acquired in the future, and the Company's failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations. Although it has no present understandings,
commitments or agreements with respect to any material acquisitions or
investments, the Company may use a portion of the net proceeds of this
offering for future acquisitions. See "Use of Proceeds."
Uncertain Need and Availability of Additional Funding. Although the Company
believes that, following this offering, its cash reserves and cash flows from
operations will be adequate to fund its operations at least through the end of
1999, there can be no assurance that such sources will be adequate or that
additional funds will not be required either during or after such period.
There can be no assurance that additional financing will be available or, if
available, that it will be available on terms favorable to the Company or its
stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company will be reduced. If adequate funds are not available to satisfy either
short- or long-term capital requirements, the Company may be required to limit
its operations significantly. The Company's future capital requirements are
dependent upon many factors, including, but not limited to, the rate at which
the Company expands its sales and marketing operations, the amount and timing
of fees paid to affiliates to include the Company's content services on their
site or service, the extent to which the Company expands its content services,
the extent to which the Company develops and upgrades its technology and data
network infrastructure, the rate at which the Company expands internationally
and the response of competitors to the Company's service offerings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Control by Principal Stockholder and His Family. Upon completion of this
offering, Naveen Jain, the Company's President, Chief Executive Officer and
Chairman of the Board, together with his wife and trusts
18
<PAGE>
controlled by members of his family, will beneficially own approximately 50.0%
of the Common Stock (48.0% if the Underwriters' over-allotment option is
exercised in full). As a result, upon completion of this offering, the Jain
family will be able to (i) elect, or defeat the election of, the Company's
directors, (ii) amend or prevent amendment of the Company's Restated
Certificate of Incorporation or Restated Bylaws, (iii) effect or prevent a
merger, sale of assets or other corporate transaction and (iv) control the
outcome of any other matter submitted to the stockholders for vote. The
Company's public stockholders, for so long as they hold less than 50% of the
outstanding voting power of the Company, will not be able to control the
outcome of such transactions. The extent of ownership by the Jain family may
have the effect of preventing a change of control of the Company or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could have a
material adverse effect on the market price of the Common Stock or prevent the
Company's stockholders from realizing a premium over the then prevailing
market prices for their shares of Common Stock. See "Management," "Certain
Transactions" and "Principal Stockholders."
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field and
cannot distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
The Company has reviewed its internally developed information technology
systems and programs and believes that its systems are Year 2000 compliant and
that there are no significant Year 2000 issues within the Company's systems or
services. Noninformation technology systems that utilize embedded technology,
such as microcontrollers, may also need to be replaced or upgraded to become
Year 2000 compliant. However, the Company believes that it does not use any
noninformation technology systems. Because the Company believes that its
systems are Year 2000 compliant, it has not engaged in any official process
designed to assess potential costs associated with Year 2000 risks. The
Company utilizes third-party prepackaged software that may not be Year 2000
compliant. The Company believes that any defective software would be upgraded.
However, failure of such third-party prepackaged software to operate properly
with regard to the Year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, the purchasing patterns of its advertisers may be
affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available for Internet advertising, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company, to date, has not made any assessment of
the Year 2000 risks associated with its third-party prepackaged software or
its advertisers, and therefore is unable to determine whether lost revenues
associated with such risks would be material. The Company has not made any
contingency plans to address such risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock, and there can
be no assurance that an active trading market will develop or, if one does
develop, that it will be maintained. The initial public offering price, which
will be determined by negotiations between the Company and the Representatives
of the Underwriters, may not be indicative of prices that will prevail in the
trading market. The trading price of the Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in quarterly results of operations, the
addition or loss of affiliates or content providers, announcements of
technological innovations, new products or services by the Company or its
competitors, changes in financial estimates or recommendations by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the market valuations of other Internet, online service or software
companies, announcements by the Company of significant acquisitions, strategic
partnerships, joint ventures or capital commitments, additions or departures
of key personnel, sales of Common Stock, general market conditions and other
events or factors, many of which are beyond the Company's control. In
addition, the
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<PAGE>
stock market in general, and the Nasdaq National Market and the market for
Internet and technology companies in particular, has experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. These broad market and industry
factors may materially and adversely affect the market price of the Common
Stock, regardless of the Company's operating performance. The trading prices
of the stocks of many technology companies are at or near historical highs and
reflect price-earnings ratios substantially above historical levels. There can
be no assurance that these trading prices and price earnings ratios will be
sustained.
Shares Eligible for Future Sale. Sales of a substantial number of shares of
the Common Stock in the public market following this offering could adversely
affect prevailing market prices of the Common Stock. The 5,000,000 shares of
Common Stock offered hereby will be tradeable without restriction in the
public market unless purchased by an affiliate of the Company. The remaining
15,115,887 shares of outstanding Common Stock will be "restricted securities"
within the meaning of Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). Other than the shares offered hereby (i) no shares
will be eligible for sale prior to 180 days after the date of this Prospectus,
except in certain limited exceptions, without the prior written consent of
Hambrecht & Quist LLC, (ii) 11,282,004 shares will be eligible for sale 180
days after the date of this Prospectus upon the expiration of lock-up
agreements with the Underwriters and (iii) an additional 3,833,883 shares will
become eligible for sale thereafter at various times upon the expiration of
their respective one-year holding periods. Hambrecht & Quist LLC currently has
no plans to release any portion of the securities subject to these lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, Hambrecht & Quist LLC will consider, among other factors, market
conditions at the time, the number of shares proposed to be released or for
which the release is being requested and a stockholder's reasons for
requesting the release. Upon the closing of this offering, holders of
1,722,089 shares of Common Stock and warrants to purchase 3,020,499 shares of
Common Stock are entitled to certain rights with respect to the registration
of such shares under the Securities Act. In addition, the Company intends to
file a registration statement on Form S-8 under the Securities Act
approximately 180 days after the date of this Prospectus to register
approximately 3,490,625 shares of Common Stock reserved for issuance under the
Company's 1996 Plan and the ESPP. See "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
Antitakeover Effect of Certain Charter Provisions and Applicable Law; Right
of First Negotiation. The Company's Board of Directors has the authority to
issue up to 15,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by the stockholders of the
Company. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the
Company, may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of, and
the voting and other rights of the holders of, Common Stock. The Company has
no present plans to issue shares of Preferred Stock. The Company's Restated
Certificate of Incorporation and Restated Bylaws provide for the establishment
of a classified Board of Directors, supermajority voting provisions with
respect to certain business combinations, limitations on the ability of
stockholders to call special meetings, the lack of cumulative voting for
directors and procedures for advance notification of stockholder nominations
and proposals. AOL holds certain rights of first negotiation with respect to
proposals or discussions that would result in a sale of a controlling interest
in the Company or other merger, asset sale or other disposition that
effectively results in a change of control of the Company. These charter
provisions, certain provisions of Washington and Delaware law and AOL's right
of first negotiation could delay, deter or prevent a change of control of the
Company. See "Description of Capital Stock."
No Specific Use of Proceeds. The Company has not designated any specific use
for the net proceeds from the sale by the Company of the Common Stock offered
hereby. The Company expects to use the net proceeds for general corporate
purposes, including working capital to fund anticipated operating losses,
20
<PAGE>
payment of additional carriage fees and capital expenditures. The Company may,
when the opportunity arises, use an unspecified portion of the net proceeds to
acquire or invest in complementary businesses, products and technologies. From
time to time, in the ordinary course of business, the Company expects to
evaluate potential acquisitions of such businesses, products or technologies.
However, the Company has no present understandings, commitments or agreements
with respect to any material acquisition or investment. Accordingly,
management will have significant discretion in applying the net proceeds of
this offering. The failure of management to apply such funds effectively could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "Use of Proceeds."
Immediate and Substantial Dilution. The initial public offering price is
substantially higher than the net tangible book value per outstanding share of
Common Stock. Accordingly, purchasers of the Common Stock offered hereby will
suffer an immediate and substantial dilution of $7.46 per share (based on an
assumed initial public offering price of $10.00 per share). Additional
dilution will occur upon exercise of outstanding stock options and warrants
granted by the Company and in the event the Company issues shares of Common
Stock as a result of a lawsuit filed by a former employee. See "Dilution" and
"Business--Legal Proceedings."
Benefits of This Offering to Existing Stockholders. This offering will
provide substantial benefits to the current stockholders of the Company.
Consummation of this offering is expected to create a public market for the
Common Stock held by current stockholders, including executive officers and
certain directors of the Company. Existing stockholders paid approximately
$16,400,000 for an aggregate of approximately 15,100,000 shares of Common
Stock as of September 30, 1998. Based on an assumed initial public offering
price of $10.00 per share, the value of the shares held by such existing
stockholders is approximately $151,000,000, and therefore the unrealized gain
to existing stockholders of the Company resulting from this offering would be
approximately $134,600,000. See "Principal Stockholders" and "Shares Eligible
for Future Sale."
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<PAGE>
THE COMPANY
The Company began operations in March 1996 as a Washington corporation and
was incorporated in Delaware in April 1996, at which time operations in the
Washington corporation were transferred to the Delaware corporation. As used
in this Prospectus, references to the "Company" and "InfoSpace.com" refer to
InfoSpace.com, Inc., its predecessors and its consolidated subsidiaries. The
Company's executive offices are located at 15375 N.E. 90th Street, Redmond,
Washington 98052, and its telephone number is (425) 882-1602.
The Company has applied for federal registration of the marks "InfoSpace,"
"InfoSpace.com" and the Company's logo. This Prospectus also contains the
trademarks of other companies.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $10.00 per share, after deducting the estimated underwriting
discount and offering expenses, are estimated to be approximately $45.1
million (approximately $52.1 million if the Underwriters' over-allotment
option is exercised in full).
The principal purposes of this offering are to obtain additional capital, to
create a public market for the Common Stock, to facilitate future access by
the Company to public equity markets and to provide increased visibility and
credibility in a marketplace where many of the Company's current and potential
competitors are or will be publicly held companies. The Company has no
specific plan for the net proceeds of this offering. The Company expects to
use the net proceeds for general corporate purposes, including working capital
to fund anticipated operating losses, payment of additional carriage fees and
capital expenditures. The Company may, when the opportunity arises, use an
unspecified portion of the net proceeds to acquire or invest in complementary
businesses, products and technologies. From time to time, in the ordinary
course of business, the Company expects to evaluate potential acquisitions of
such businesses, products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition or investment. See "Risk Factors -- Risks Associated With
Acquisitions" and "-- No Specific Use of Proceeds."
Pending use of the net proceeds for the above purposes, the Company intends
to invest such funds in short-term, interest-bearing, investment-grade
securities and use such funds for general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings and
therefore does not anticipate paying any cash dividends in the foreseeable
future.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis, (ii) on a pro forma basis, giving effect to
the issuance by the Company of 1,263,146 shares of Common Stock between July
1, 1998 and September 30, 1998, and (iii) on a pro forma basis as adjusted to
give effect to the sale and issuance by the Company of the 5,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share and the receipt of the estimated net proceeds therefrom. This
table should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $0.0001 par value
per share; 15,000,000 shares
authorized; no shares issued and
outstanding, actual, pro forma and
pro forma as adjusted............. $ -- $ -- $ --
Common Stock, $0.0001 par value per
share; 40,000,000 shares
authorized; 13,852,741 shares
issued and outstanding, actual;
15,115,887 shares issued and
outstanding, pro forma;
20,115,887 shares issued and
outstanding, pro forma as adjusted
(1)............................... 1 2 7
Additional paid-in capital......... 15,828 25,662 70,757
Accumulated deficit................ (5,617) (5,617) (5,617)
Unearned compensation.............. (672) (672) (672)
----------- ----------- -----------
Total stockholders' equity....... 9,540 19,375 64,475
----------- ----------- -----------
Total capitalization........... $ 9,540 $ 19,375 $ 64,475
=========== =========== ===========
</TABLE>
- ---------------------
(1) Excludes (i) 1,687,124 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $1.64 per
share as of June 30, 1998, (ii) 2,028,523 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price
of $5.87 per share as of June 30, 1998, and (iii) 1,103,500 shares of
Common Stock reserved for future issuance under the Company's 1996 Plan as
of June 30, 1998. Also excludes 163,550 shares of Common Stock issuable
upon exercise of options at a weighted average exercise price of $8.85 per
share, the cancellation of options to purchase 65,625 shares of Common
Stock and 1,503,196 shares of Common Stock issuable upon exercise of
warrants issued by the Company at a weighted average exercise price of
$7.90 per share between July 1, 1998 and September 30, 1998. To the extent
that the outstanding options or warrants, or any options or warrants
issued in the future, are exercised, there will be further dilution to new
investors. See "Management--Benefit Plans," "Description of Capital Stock"
and Notes 3 and 9 of the Company's Notes to Consolidated Financial
Statements.
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<PAGE>
DILUTION
As of June 30, 1998, the Company had a pro forma net tangible book value of
approximately $15.9 million, or $1.05 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
of the Company reduced by the Company's total liabilities, divided by the
number of shares of Common Stock outstanding, as adjusted to give effect to
the issuance of 1,263,146 shares of Common Stock by the Company between July
1, 1998 and September 30, 1998. Without taking into account any other changes
in the pro forma net tangible book value after June 30, 1998, other than to
give effect to the receipt by the Company of the estimated net proceeds from
the sale of the 5,000,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $10.00 per share, the adjusted
pro forma net tangible book value of the Company as of June 30, 1998 would
have been approximately $51.2 million or $2.54 per share. This represents an
immediate increase in net tangible book value of $1.49 per share to existing
stockholders and an immediate dilution of $7.46 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $10.00
Pro forma net tangible book value per share before this
offering..................................................... $1.05
Increase per share attributable to new investors.............. 1.49
-----
Adjusted pro forma net tangible book value per share after this
offering....................................................... 2.54
------
Dilution per share to new investors............................. $ 7.46
======
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1998, the
differences between 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 paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 15,115,887 75.1% $16,395,594 24.7% $ 1.08
New investors.......... 5,000,000 24.9 50,000,000 75.3 10.00
---------- ----- ----------- -----
Total................ 20,115,887 100.0% $66,395,594 100.0%
========== ===== =========== =====
</TABLE>
Other than as noted above, the foregoing computations assume the exercise of
no stock options or warrants after June 30, 1998. As of September 30, 1998,
options to purchase 1,785,049 shares of Common Stock were outstanding, with a
weighted average exercise price of $2.19 per share, and warrants to purchase
3,531,719 shares of Common Stock were outstanding, with a weighted average
exercise price of $6.79 per share.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's Consolidated Financial Statements
and Notes thereto and other financial information included elsewhere in this
Prospectus. The selected consolidated statements of operations data for the
period from March 1, 1996 (inception) to December 31, 1996, for the year ended
December 31, 1997 and for the six months ended June 30, 1998 and the selected
consolidated balance sheet data at December 31, 1996 and 1997 and June 30,
1998 are derived from the audited consolidated financial statements of the
Company, which have been audited by Deloitte & Touche LLP, independent
auditors, and are included elsewhere in this Prospectus. The selected
consolidated statements of operations data for the six months ended June 30,
1997 and the selected consolidated balance sheet data at June 30, 1997 are
derived from unaudited consolidated financial statements of the Company that
are included elsewhere in this Prospectus, which in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information set forth
therein. The historical results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1996 SIX MONTHS
(INCEPTION) YEAR ENDED ENDED JUNE 30,
TO DECEMBER DECEMBER 31, ----------------
31, 1996 1997 1997 1998
------------- ------------ ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues........................ $ 199 $1,685 $ 466 $ 2,855
Cost of revenues................ 97 347 131 543
------ ------ ------ --------
Gross profit.................... 102 1,338 335 2,312
Operating expenses:
Product development........... 109 213 110 149
Sales and marketing........... 231 830 359 904
General and administrative.... 164 631 185 1,141
Amortization of purchased
advertising agreements....... -- 382 -- --
Write-off of in-process
research and development..... -- -- -- 4,700
------ ------ ------ --------
Total operating expenses.... 504 2,056 654 6,894
------ ------ ------ --------
Loss from operations............ (402) (718) (319) (4,582)
Other income, net............... 21 21 13 43
------ ------ ------ --------
Net loss........................ $ (381) $ (697) $ (306) $ (4,539)
====== ====== ====== ========
Basic and diluted net loss per
share (1)...................... $(0.04) $(0.06) $(0.03) $ (0.39)
====== ====== ====== ========
Shares used in computing basic
and diluted net loss
per share calculations (1)..... 9,280 10,998 10,986 11,572
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED
BALANCE SHEET
DATA:
Cash and cash
equivalents. $ 690 $ 324 $ 5,775
Working
capital..... 825 543 5,803
Total assets. 1,072 1,130 10,505
Total
stockholders'
equity...... 1,020 759 9,540
</TABLE>
- ---------------------
(1) See Note 7 of the Company's Notes to Consolidated Financial Statements for
information concerning the determination of net loss per share.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
In addition to historical information, the following "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contains
certain forward-looking statements that involve known and unknown risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below and in the section entitled "Risk
Factors," as well as those discussed elsewhere herein.
OVERVIEW
InfoSpace.com is a leading aggregator and integrator of content services for
syndication to a broad network of affiliates, including existing and emerging
Internet portals, destination sites and suppliers of PCs and other Internet
access devices such as cellular phones, pagers, screen phones, television set-
top boxes, online kiosks and personal digital assistants. The Company began
operations in March 1996. During the period from inception through December
31, 1996, the Company had insignificant revenues and was primarily engaged in
the development of technology for the aggregation, integration and syndication
of Internet content and the hiring of employees. In 1997, the Company expanded
its operations, adding business development and sales personnel in order to
capitalize on the opportunity to generate Internet advertising revenues. The
Company began generating material revenues in 1997 through the sale of
advertising on Web pages that deliver its content services. In May 1997, the
Company acquired Yellow Pages on the Internet, LLC ("YPI"), a Washington
limited liability company that provided Internet yellow pages directory
information. In July 1997, the Company added a sales office in the San
Francisco Bay Area. In June 1998, the Company acquired Outpost, a Washington
corporation engaged primarily in electronic commerce through the sale of cards
and gifts via the Internet. The number of Company employees was 13 as of
January 1, 1997, 15 as of January 1, 1998 and 48 as of September 30, 1998.
The Company derives substantially all of its revenues from the sale of
national advertising, promotions and local Internet yellow pages advertising.
National advertising consists of banner advertisements and other forms of
national advertising that are sold on a cost per thousand impressions ("CPM")
basis on Web pages that deliver the Company's content services. Examples of
banner advertisements include: (i) mass market placements for general
rotation; (ii) targeted placements for specified audiences; and (iii) targeted
placements for specified audiences in specified geographic areas. The most
common of the Company's nonbanner advertisements are known as "button
advertisements" and "textlinks," but also include customized advertising
solutions developed for specific advertisers. Revenues from national
advertising are recognized ratably over the related contractual term. A
portion of the Company's advertising revenues is shared with affiliates whose
sites incorporate the Company's content where advertisements are placed. The
Company records such revenue sharing as an expense in cost of revenues.
National advertising agreements generally have terms of less than six months
and guarantee a minimum number of impressions or click throughs. CPMs vary
depending on the type of advertisement purchased and the specificity of
targeting requested. Rates for banner advertising generally range from $10 to
$20 CPM for general rotation across undifferentiated users to $50 or greater
CPM for targeted category or geographic advertisements. The Company's rates
for button advertisements and textlinks are lower than those for banner
advertisements. Actual CPMs depend upon a variety of factors, including,
without limitation, the degree of targeting, the duration of the advertising
contract and the number of impressions purchased, and are often negotiated on
a case-by-case basis. Because of these factors, actual CPMs experienced by the
Company may fluctuate. The guarantee of minimum levels of impressions or click
throughs exposes the Company to
26
<PAGE>
potentially significant financial risks, including the risk that the Company
may fail to deliver required minimum levels of user impressions or click
throughs, in which case the Company typically continues to provide advertising
without compensation until such levels are met. See "Risk Factors--Reliance on
Advertising and Promotion Revenues."
In addition to its CPM-based national advertising, the Company also sells
promotions, which are integrated packages of advertising that bundle such
features as button and textlink advertisements, sponsorships of specific
categories of content or content services and electronic commerce features.
Promotions also include co-branding and distribution services that the Company
provides to content providers, for which the Company receives a carriage fee.
Promotion arrangements vary in terms and duration, but generally have longer
terms than arrangements for the Company's CPM-based advertising. The fee
arrangements are individually negotiated with advertisers and are based on the
range and the extent of customization. These arrangements typically include
minimum monthly payments. To the extent that the advertiser offers an
electronic commerce opportunity in its promotion, the Company may derive
transaction revenues based on the level of transactions made through its
promotion for the advertiser.
The Company has formed cooperative sales relationships with leading
independent yellow pages publishers, media companies and direct marketing
companies to sell local Internet yellow pages advertising on the Company's
yellow pages directory services in the form of enhanced yellow pages listings.
The local sales forces of these companies are empowered to sell Internet
yellow pages advertising on the Company's directory services, which are
bundled with the traditional print advertising they sell. Internet yellow
pages advertising agreements provide for terms of one year, with pricing
comparable to print yellow pages advertising, typically paid in monthly
installments. Costs to local advertisers generally range from $50 to $300 or
greater per year, depending on the types of enhancements selected. Agreements
for the Company's cooperative sales relationships typically have terms of one
to five years and provide for revenue sharing, which varies from relationship
to relationship. Typically, these agreements provide for guaranteed minimum
levels of payments to the Company based on floor prices of the listing
enhancements that are sold. These guaranteed minimum payments are recognized
ratably over the related contract term, and revenues earned above the
guaranteed minimum payment are recognized over the term that the local
advertising is provided.
In July 1998, the Company entered into a joint venture agreement with
Thomson to form TDL InfoSpace to replicate the Company's content services in
Europe. TDL InfoSpace has targeted the United Kingdom as its first market, and
content services were launched in the third quarter of 1998. Under the joint
venture agreement, Thomson will provide its directory information to TDL
InfoSpace and sell Internet yellow pages advertising for the joint venture
through its local sales forces. The Company will contribute its technology and
hosting services to TDL InfoSpace. Each of the Company and Thomson purchased a
50% interest in TDL InfoSpace and are required to provide reasonable working
capital to TDL InfoSpace. As of September 30, 1998, the Company had
contributed $496,000 to the joint venture. The Company will account for its
investment in the joint venture under the equity method.
In July 1998, the Company entered into agreements with Netscape to provide
yellow pages and white pages directory services, pursuant to which the Company
paid licensing fees to Netscape and is obligated to make additional carriage
fee payments to Netscape based on the number of click throughs to the
Company's services. Netscape guarantees to the Company a certain minimum level
of use of the Company's yellow pages and white pages directories.
In August 1998, the Company entered into two agreements with AOL to provide
white pages directory services and classifieds services to AOL. Under the
terms of the agreement related to the Company's white pages directory
services, the Company will pay to AOL a quarterly carriage fee and share with
AOL revenues generated by advertising on the Company's white pages directory
services delivered to AOL. Under the terms of the agreement related to the
Company's classifieds information services, AOL will pay to the Company a
quarterly fee and share with the Company revenues generated by payments by
individuals and commercial listing services for listings on the AOL
classifieds service. The amounts payable to Netscape and AOL constitute the
vast majority of the carriage fees set forth in Note 5 of the Company's Notes
to Consolidated Financial Statements.
27
<PAGE>
The Company anticipates that carriage fees paid to certain affiliates to
include the Company's content services on their Web site will continue for the
foreseeable future, and the Company may also pay such carriage fees to other
affiliates under arrangements similar to those with Netscape and AOL. Further,
the Company anticipates incurring material additional costs in the last half
of 1998, and substantially larger amounts in 1999 and thereafter, for more
traditional forms of advertising and public relations.
The Company has incurred losses since its inception and as of June 30, 1998
had an accumulated deficit of approximately $5.6 million. Losses incurred in
1997 totaled $697,000, including $382,000 in amortization of purchased
advertising agreements acquired in connection with the Company's acquisition
of YPI. For the six months ended June 30, 1998, losses incurred totaled $4.5
million, including a $4.7 million write-off associated with the Company's
acquisition of Outpost. See "--Technology From the Outpost Acquisition."
The Company believes that its future success will depend largely on its
ability to continue to offer content services that are attractive to its
existing and potential future affiliates. Accordingly, the Company plans to
increase significantly its operating expenses in order to, among other things:
(i) expand its affiliate network, which may include the payment of additional
carriage fees to certain affiliates; (ii) expand its sales and marketing
operations and hire more salespersons; (iii) increase its advertising and
promotional activities; (iv) develop and upgrade its technology and purchase
equipment for its operations and network infrastructure; (v) expand
internationally; and (vi) expand its content services. As such, the Company
expects to continue to incur operating losses for the foreseeable future.
In light of the rapidly evolving nature of the Company's business and
limited operating history, the Company believes that period-to-period
comparisons of its revenues and operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Although the Company has experienced sequential quarterly growth in revenues
over the past four quarters and has achieved profitability in certain
quarters, it does not believe that its historical growth rates or periodic
profitability are necessarily sustainable or indicative of future growth or
profitability.
28
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain consolidated statements of operations
data for the Company's six most recent quarters, as well as such data
expressed as a percentage of revenues. This information has been derived from
the Company's unaudited consolidated financial statements. In management's
opinion, this unaudited information has been prepared on the same basis as the
annual consolidated financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation for the quarters presented. This information should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 244 $ 222 $ 466 $ 753 $1,015 $ 1,840
Cost of revenues........ 59 72 76 140 202 341
----- ----- ----- ----- ------ -------
Gross profit............ 185 150 390 613 813 1,499
Operating expenses:
Product development... 55 55 48 55 50 99
Sales and marketing... 167 191 232 239 434 470
General and
administrative....... 87 99 107 339 310 831
Amortization of
purchased advertising
agreements........... -- -- -- 382 -- --
Write-off of in-
process research and
development.......... -- -- -- -- -- 4,700
----- ----- ----- ----- ------ -------
Total operating
expenses........... 309 345 387 1,015 794 6,100
----- ----- ----- ----- ------ -------
Income (loss) from
operations............. (124) (195) 3 (402) 19 (4,601)
Other income, net....... 7 6 5 3 5 38
----- ----- ----- ----- ------ -------
Net income (loss)....... $(117) $(189) $ 8 $(399) $ 24 $(4,563)
===== ===== ===== ===== ====== =======
<CAPTION>
AS A PERCENTAGE OF REVENUES
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 24.2 32.4 16.3 18.6 19.9 18.5
----- ----- ----- ----- ------ -------
Gross profit............ 75.8 67.6 83.7 81.4 80.1 81.5
Operating expenses:
Product development... 22.5 24.8 10.3 7.3 4.9 5.4
Sales and marketing... 68.4 86.0 49.8 31.7 42.8 25.5
General and
administrative....... 35.7 44.6 23.0 45.0 30.5 45.2
Amortization of
purchased advertising
agreements........... -- -- -- 50.7 -- --
Write-off of in-
process research and
development.......... -- -- -- -- -- 255.4
----- ----- ----- ----- ------ -------
Total operating
expenses........... 126.6 155.4 83.1 134.7 78.2 331.5
----- ----- ----- ----- ------ -------
Income (loss) from
operations............. (50.8) (87.8) 0.6 (53.3) 1.9 (250.0)
Other income, net....... 2.9 2.7 1.1 0.4 0.5 2.2
----- ----- ----- ----- ------ -------
Net income (loss)....... (47.9)% (85.1)% 1.7% (52.9)% 2.4% (247.8)%
===== ===== ===== ===== ====== =======
</TABLE>
29
<PAGE>
RESULTS OF OPERATIONS
Revenues. Substantially all of the Company's revenues are currently derived
from national advertising, promotions and local Internet yellow pages
advertising. Revenues increased during each of the four quarters ended June
30, 1998, primarily as a result of continued expansion of the Company's
affiliate network, increased sales and marketing efforts and increased use of
the Company's content services. A portion of the Company's revenues represent
barter transactions resulting from the exchange by the Company with another
company of banner advertising space for reciprocal banner advertising space or
for content licenses. Barter revenues aggregated $165,000 for the four
quarters in 1997 and were $195,000 for the quarter ended March 31, 1998 and
$189,000 for the quarter ended June 30, 1998. The Company records the
associated expense of the advertising used in advertising barter exchanges in
sales and marketing expenses and the expense of advertising for content
licenses in cost of revenues.
The Company has experienced, and expects to continue to experience,
seasonality in its business, with reduced user traffic on its affiliate
network expected during the summer and year-end vacation and holiday periods,
when usage of the Internet has typically declined. Advertising sales in
traditional media, such as broadcast and cable television, generally decline
in the first and third quarters of each year. Depending on the extent to which
the Internet and commercial online services are accepted as an advertising
medium, seasonality in the level of advertising expenditures could become more
pronounced for Internet-based advertising. Seasonality in Internet service
usage and advertising expenditures is likely to cause quarterly fluctuations
in the Company's results of operations and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Cost of Revenues. Cost of revenues consists of expenses associated with the
enhancement, maintenance and support of the Company's content services,
including salaries and related employee benefits for webmasters and developers
working on customer projects, communication costs such as high-speed Internet
access with dedicated DS-3 communication lines, equipment depreciation,
license fees related to third-party content, costs of aggregation and
syndication of content and amounts paid to affiliates pursuant to revenue-
sharing arrangements. For the six quarters ended June 30, 1998, the largest
expenditures were for license fees related to third-party content, Internet
access and, to a lesser extent, salaries and related benefits. These expenses
have continued to increase in absolute dollars and have remained relatively
constant as a percentage of revenues over the three quarters ended June 30,
1998. These expenses are expected to continue to increase in absolute dollars.
Product Development Expenses. Product development expenses consist
principally of personnel costs, and include expenses for research, design and
development of the proprietary technology used by the Company for the
aggregation, integration and delivery of its content services. These expenses
remained relatively constant for the five quarters ended March 31, 1998 and
increased by approximately $49,000 in the quarter ended June 30, 1998. Of this
increase, approximately $47,500 was attributable to personnel costs, which
included $17,500 of stock compensation expense. These expenses declined
significantly as a percentage of revenues due to the Company's revenue growth
during the six quarters ended June 30, 1998. The Company intends to increase
these expenses significantly in future periods in order to maintain and
enhance the Company's technology. These expenses may vary as a percentage of
revenues.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and related benefits for sales and marketing personnel,
traditional advertising and promotional expenses, carriage fees paid to
certain affiliates to include the Company's content services on their Web
sites, sales office expenses and travel expenses. These expenses have
continued to increase over the six quarters ended June 30, 1998 to support the
continued expansion of the Company's business. Total sales and marketing
expenses for the four quarters ended December 31, 1997 totaled approximately
$830,000, and increased to a total of approximately $903,000 for the two
subsequent quarters ended June 30, 1998. Thus, an average quarter in the first
half of calendar 1998 included sales and marketing expenditures of
approximately $451,000, compared to an average quarter in calendar 1997 of
$207,000, which equates to an average increase of 117% in quarterly sales and
30
<PAGE>
marketing expenditures, or $244,000 per quarter. Of this $244,000 average
increase, approximately 33% was attributable to increased personnel costs,
approximately 43% to increased barter advertising expense, and approximately
24% to advertising and marketing and other sales expenses. Sales and marketing
expenses increased significantly in the quarter ended March 31, 1998 as a
result of an increase in barter transactions, and continued to increase in the
quarter ended June 30, 1998 due to higher expenses required to support growth
of the Company's revenues. The expenses for barter advertising increased from
$39,000 in the quarter ended December 31, 1997 to approximately $150,000 in
the quarter ended March 31, 1998, then declined to approximately $135,000 in
the quarter ended June 30, 1998. Personnel expenses increased from $129,000 in
the quarter ended December 31, 1997 to approximately $164,000 in the quarter
ended March 31, 1998, then increased further to approximately $222,000 in the
quarter ended June 30, 1998. These constituted the majority of expense
increases between these periods. These expenses have fluctuated significantly
as a percentage of revenues over the six quarters ended June 30, 1998. The
Company anticipates substantial increases in sales and marketing expenses in
the future due to continued expansion of its sales and marketing efforts, a
substantial increase in carriage fees paid to certain affiliates to include
the Company's content services on their Web sites, including under the recent
agreements with Netscape and AOL, and increases in traditional forms of
advertising and public relations. The Company expects these expenses will be
significantly higher as a percentage of revenues for at least the two quarters
ended December 31, 1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of fees for professional services, bad debt expenses,
accrued litigation costs, general office expenses, salaries and related
benefits for administrative and executive staff, state taxes and occupancy
expenses. Sequential increases in quarterly general and administrative
expenses were due primarily to increased staffing levels necessary to manage
and support the Company's expanding operations. These expenses for the quarter
ended June 30, 1998, included an increase in the accrual for bad debts of
$150,000, due primarily to the write-off of amounts receivable from a single
customer that notified the Company during the quarter of its intention to file
for bankruptcy in the near future, and a $240,000 reserve for a pending
lawsuit. See "Risk Factors--Legal Proceedings" and Note 5 of the Company's
Notes to Consolidated Financial Statements. The Company anticipates that
general and administrative expenses will continue to increase in absolute
dollars due to a number of factors, including the recent addition of several
officers and managers to the Company's payroll and the expected hiring of
additional personnel to support increased operations, higher occupancy
expenses associated with the Company's new facility and increased costs
associated with being a public company. In addition, these expenses will
include approximately $250,000 per quarter for the next twelve quarters for
the amortization of intangible assets associated with the acquisition of
Outpost in June 1998. However, these expenses may vary as a percentage of
revenues.
Amortization of Purchased Advertising Agreements. Amortization of purchased
advertising agreements consists of amortization of short-term advertising
agreements acquired in connection with the acquisition of YPI in May 1997. The
advertising agreements provided yellow pages directory publishers with an
Internet distribution channel on which they could sell enhanced Internet
yellow pages listings to local advertisers. These agreements had terms of one
month to one year. All of the purchase price of YPI was allocated to these
agreements.
Write-Off of In-Process Research and Development. Write-offs of in-process
research and development are recorded at the time an acquisition is completed.
The quarter ended June 30, 1998 includes a $4.7 million write-off of in-
process research and development costs associated with the Company's
acquisition of Outpost.
Other Income. Other income consists primarily of interest income for all
periods. In the future, other income will include income or losses
attributable to the Company's 50% interest in TDL InfoSpace, the Company's
joint venture with Thomson.
Provision for Income Taxes. Net operating losses have been incurred to date
on a cumulative basis, and no tax benefit has been recorded.
31
<PAGE>
Net Income (Loss). The Company has sustained losses in four of the six
quarters ended June 30, 1998, and the cumulative losses through that date were
$5.6 million. The Company expects to incur operating losses on a quarterly
basis for the foreseeable future.
FACTORS AFFECTING QUARTERLY RESULTS OF OPERATIONS
The Company's results of operations have varied on a quarterly basis during
its short operating history and will fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. Factors that may affect the Company's quarterly results of operations
include, but are not limited to: (i) the addition or loss of affiliates; (ii)
variable demand for the Company's content services by its affiliates; (iii)
the cost of acquiring and the availability of content; (iv) the overall level
of demand for content services; (v) the Company's ability to attract and
retain advertisers and content providers; (vi) seasonal trends in Internet
usage and advertising placements; (vii) the amount and timing of fees paid by
the Company to certain of its affiliates to include the Company's content
services on their Web sites; (viii) the productivity of the Company's direct
sales force and the sales forces of the independent yellow pages publishers,
media companies and direct marketing companies that sell local Internet yellow
pages advertising for the Company; (ix) the amount and timing of expenditures
for expansion of the Company's operations, including the hiring of new
employees, capital expenditures and related costs; (x) the Company's ability
to continue to enhance, maintain and support its technology; (xi) the
Company's ability to attract and retain personnel; (xii) the introduction of
new or enhanced services by the Company, its affiliates and their respective
competitors; (xiii) price competition or pricing changes in Internet
advertising and Internet services, such as the Company's content services;
(xiv) technical difficulties, system downtime, system failures or Internet
brown-outs; (xv) political or economic events and governmental actions
affecting Internet operations or content; and (xvi) general economic
conditions and economic conditions specific to the Internet. Any one of these
factors could cause the Company's revenues and operating results to vary
significantly in the future. In addition, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service or marketing decisions or acquisitions that could cause
significant declines in the Company's quarterly results of operations. Also,
the Company currently is involved in a lawsuit filed by a former employee
involving certain claims to purchase Common Stock. While the Company believes
its defenses are meritorious, litigation is inherently uncertain, and the
Company may be required to issue to the plaintiff shares of Common Stock or
options to purchase Common Stock. To the extent the Company is required to
issue shares of Common Stock or options to purchase Common Stock, the Company
would recognize an expense, which could have a material adverse effect on the
Company's results of operations for the period in which such issuance occurs,
and any such issuance would be dilutive to existing stockholders. See
"Business--Legal Proceedings."
The Company's limited operating history and the emerging nature of its
markets make any prediction of future revenues difficult. The Company's
expense levels are based, in part, on its expectations with regard to future
revenues, and to a large extent such expenses are fixed, particularly in the
short term. There can be no assurance that the Company will be able to predict
its future revenues accurately and the Company may be unable to reduce
spending commitments in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant revenue shortfall in relation
to the Company's expectations could result in significant declines in the
Company's quarterly results of operations.
Due to the foregoing factors, the Company's revenues and operating results
are difficult to forecast. The Company believes that its quarterly revenues,
expenses and operating results will vary significantly in the future and that
period-to-period comparisons are not meaningful and are not indicative of
future performance. As a result of the foregoing factors, it is likely that in
some future quarters or years the Company's results of operations will fall
below the expectations of securities analysts or investors, which would have a
material adverse effect on the trading price of the Common Stock.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From its inception in March 1996 through May 1998, the Company funded
operations with approximately $1.5 million in equity financing and, to a
lesser extent, from revenues generated for services performed. In May 1998,
the Company completed a $5.1 million private placement of Common Stock, and in
July and August 1998, the Company completed an additional private placement of
Common Stock for $8.2 million. Sales of Common Stock to employees pursuant to
the Company's 1998 Stock Purchase Rights Plan also raised $1.6 million in July
1998. As of June 30, 1998, the Company had cash and cash equivalents of $5.8
million and subsequently raised $9.8 million of additional cash from these
private placements.
Net cash provided (used) by operating activities was $(462,000) from the
Company's inception in March 1996 through December 31, 1996, $(216,000) in the
year ended December 31, 1997 and $613,000 in the six months ended June 30,
1998. Cash used in operating activities from inception through June 1998
consisted primarily of net operating losses and increases in accounts
receivable, which were partially offset by increases in accrued expenses and
accounts payable.
Net cash used by investing activities was $219,000 in the period from
inception through December 31, 1996, $150,000 in the year ended December 31,
1997 and $381,000 in the six months ended June 30, 1998. Cash used in
investing activities consists of business acquisitions, purchase of property
and equipment and proceeds from the sale of fixed assets.
The Company anticipates that it will spend up to $2.5 million for capital
equipment in the next twelve months. The Company has also entered into various
agreements that provide for the Company to make payments for carriage
agreements of $1.6 million and trademark licenses of $3.0 million during the
remainder of 1998 and for carriage fees of $9.8 million thereafter.
The Company believes that existing cash balances, cash equivalents and cash
generated from operations, together with the net proceeds from this offering,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures in the short term (for the next 12 months) and at least
through the next 15 months. There can be no assurance that the underlying
assumed levels of revenues and expenses will prove to be accurate. The Company
may seek additional funding through public or private financings or other
arrangements prior to such time. Adequate funds may not be available when
needed or may not be available on terms favorable to the Company. If
additional funds are raised by issuing equity securities, dilution to existing
stockholders will result. If funding is insufficient at any time in the
future, the Company may be unable to develop or enhance its products or
services, take advantage of business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements. The Company
has reviewed its internally developed information technology systems and
programs, and believes that its systems are Year 2000 compliant and that there
are no significant Year 2000 issues within the Company's systems or services.
Noninformation technology systems that utilize embedded technology, such as
microcontrollers, may also need to be replaced or upgraded to become Year 2000
compliant. However, the Company believes that it does not use any
noninformation technology systems. Because the Company believes that its
systems are Year 2000 compliant, it has not engaged in any official process
designed to assess potential costs associated with Year 2000 risks. The
Company utilizes third-party
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prepackaged software that may not be Year 2000 compliant. The Company believes
that any defective software would be upgraded. However, failure of such third-
party prepackaged software to operate properly with regard to the Year 2000
and thereafter could require the Company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Furthermore, the purchasing patterns of its advertisers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available for Internet advertising, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company, to date, has not made any assessment of the Year 2000
risks associated with its third-party prepackaged software or its advertisers,
and therefore is unable to determine whether lost revenues associated with
such risks would be material. The Company has not made any contingency plans
to address such risks.
TECHNOLOGY FROM THE OUTPOST ACQUISITION
In June 1998, the Company acquired Outpost, which included the acquisition
of the Outpost Technology and the hiring of approximately ten employees. In
the second quarter of 1998, the Company wrote off approximately $4.7 million
in connection with the Outpost acquisition.
In connection with the acquisition, the Company obtained a valuation of the
acquired assets from an independent accounting firm. The major assumptions
underlying the valuation of the assets acquired from Outpost, including core
technology, assembled workforce and in-process research and development, were:
. The revenue and margin contribution of each technology (in-process and
future yet-to-be defined).
. The percentage of carryover of technology from products under development
and products scheduled for development in the future.
. The expected life of the technology.
. Anticipated module development and module introduction schedules.
. Revenue forecasts, including expected aggregate growth rates for the
business as a whole and expected growth rates for the Internet content
provider industry.
. Forecasted operating expenses, including selling, general and
administrative expenses, as a percentage of revenues.
. A rate of return of 30% utilized to discount to present value the cash
flows associated with the in-process technologies.
Within the acquired Outpost Technology (smart-shopping services) there are
four main modules that the Company intends to integrate into the InfoSpace.com
Web site. These modules in their developed state as of the acquisition date of
Outpost had certain technological limitations. Significant technology
development efforts have been and continue to be undertaken to complete these
technologies. Such efforts include the following modules:
. Integrated content that will provide users with product pricing and
merchant information.
. Transaction proxy that will allow the Company to track sales transactions
from beginning to end and to receive confirmation reports from the
retailers.
. Branding that will allow users to travel to affiliate Web sites without
leaving the InfoSpace.com Web site.
. Universal shopping cart that will allow users to make multiple purchases
at different retailers in one execution.
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The integrated content module was completed and integrated into the
Company's Web site in the third quarter of 1998. The transaction proxy,
branding and universal shopping cart modules are scheduled for completion and
integration in the second or third quarter of 1999. The Company estimates it
will spend at least $500,000 to complete this initial development of the final
three modules. However, such estimate is subject to change because
technological feasibility has not been achieved and unforeseen items could
impact the estimate. Progress on the modules and costs expended thus far on
their development are consistent with the Company's projections for completion
dates and estimated costs of development. While the Company expects these
modules to be successfully developed, and to benefit the Company once they are
completed and fully integrated into the Company's full suite of service
offerings, the development of new technologies and enhancements to existing
technologies involves a number of risks, and there can be no assurance that
such development efforts will be successful. See "Risk Factors--Rapid
Technological Change."
The direct impact of the smart-shopping service on current and future
results of operations, liquidity and capital resources is not known, as the
first module of the Outpost Technology has only recently been integrated into
the Company's Web site and other services and product offerings. However, the
Company believes that these services will allow its affiliates to broaden and
enhance their core programming at minimal cost and generate additional
advertising and transaction revenue opportunities for both the Company and its
affiliates. Further, the benefits to the Company and its affiliates can
potentially extend beyond electronic commerce transactions by (i) enabling the
Company to apply the Outpost Technology to other functions such as building
employment classifieds and databases of local events, (ii) allowing end users
to access consolidated bank statements or statements of airline frequent flyer
miles, and (iii) attracting additional Web users who are then exposed to the
many other features in the Company's suite of products and services. While the
Company is positioning itself for, and is expending considerable resources in
anticipation of, electronic commerce transaction revenues, there can be no
assurance that the Company's modules under development will be timely or
successfully developed, and the failure to do so could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company anticipates receiving a number of synergies as a result of the
Outpost acquisition, including gaining knowledgeable electronic commerce
development staff and acquiring products and services at least partially
developed, which together may reduce time-to-market for subsequent electronic
commerce product development and implementation. The Company anticipates that
any successful electronic commerce products or services will, when generating
material revenues, yield economies of scale in Company-wide selling, general
and administrative expenses. However, there can be no assurance that the
Company will realize any of such benefits. See "Risk Factors--Risks Associated
With Acquisitions."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") 130, "Reporting
Comprehensive Income." SFAS 130 establishes the standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains/losses on available-for-sale
securities. The disclosure prescribed by SFAS 130 must be made for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required
upon adoption. The Company had no comprehensive income items to report for the
period from March 1, 1996 (inception) to December 31, 1996, the year ended
December 31, 1997 or the six months ended June 30, 1998.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the
way that companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers, as well as
reporting selected information about operating segments in interim financial
reports to stockholders. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company has adopted the
reporting requirements of SFAS 131 in its consolidated financial statements
for the year ending December 31, 1998.
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BUSINESS
OVERVIEW
InfoSpace.com is a leading aggregator and integrator of content services for
syndication to a broad network of affiliates, including existing and emerging
Internet portals, destination sites and suppliers of PCs and other Internet
access devices, such as cellular phones, pagers, screen phones, television
set-top boxes, online kiosks and personal digital assistants. The Company
focuses on content with broad appeal, such as yellow pages and white pages,
maps, classified advertisements, real-time stock quotes, information on local
businesses and events, weather forecasts and horoscopes. By aggregating
content from multiple sources and integrating it with related content to
increase its usefulness, the Company serves as a single source of value-added
content. The Company's affiliates include AOL, Netscape, Microsoft, Lycos,
MetaCrawler, Playboy, Dow Jones (The Wall Street Journal Interactive Edition),
ABC LocalNet and CBS's affiliated TV stations. The Company's services provide
affiliates with content that helps to increase the convenience, relevance and
enjoyment of their users' visits, thereby promoting increased traffic and
repeat usage. This, in turn, provides enhanced advertising and electronic
commerce revenue opportunities to affiliates with minimal additional
investment. By leveraging the Company's content relationships and technology,
affiliates are free to focus on their core competencies.
The Company has acquired the rights to a wide range of content from more
than 65 third-party content providers. The cornerstone of the Company's
content services is its nationwide yellow pages and white pages directory
information. Using its proprietary technology, the Company integrates this
directory information with other value-added content to create "The Ultimate
Guide" to find people, places and things in the real world. As an example of
the power of the Company's contextual integration, a salesperson using the
Company's content services can, from the results of a single query, find the
name and address of a new customer, obtain directions to his or her office,
check the weather forecast and, typically, make an online reservation at the
nearest hotel, browse the menu of a nearby restaurant and review a schedule of
entertainment events for the locale.
The Company's content services are designed to be highly flexible and
customizable, enabling affiliates to select from among the Company's broad
range of content services only those desired. One of the Company's principal
strengths is its internally developed technology, which enables it to easily
and rapidly add new affiliates by employing a distributed, scalable
architecture adapted specifically for its Internet-based content services. The
Company helps its affiliates build and maintain their brands by delivering
content with the look and feel and navigation features specific to each
affiliate, creating the impression to end users that they have not left the
affiliate's site. The Company's technology has been designed to support
affiliates across multiple platforms and formats, including the growing number
of emerging Internet access devices. The Company's affiliate relationships
typically provide for revenue sharing from advertising sold by the Company and
the affiliates whose sites incorporate the Company's content where
advertisements are placed.
InfoSpace.com derives substantially all of its revenues from national
advertising, promotions and local Internet yellow pages advertising. Through
its direct sales force, the Company offers a variety of national advertising
and promotions that enable advertisers to access both broad and targeted
audiences. The Company also sells local Internet yellow pages advertising
through cooperative sales relationships with established independent yellow
pages publishers, media companies and direct marketing companies. The Company
believes that these relationships provide the Company access to local sales
expertise and customer relationships that give it an advantage over
competitors while minimizing the Company's investment in its own sales
infrastructure.
Based on information received from RelevantKnowledge, Inc., the Company
estimates that its own sites, together with those of its affiliate network
(which includes AOL, for which the Company has not yet launched its services),
provide it with an unduplicated reach of 42 million unique Web users,
representing approximately 79% of all Web users in the United States. "Reach"
is defined as unique Web visitors who visited the site over the course of the
reporting period expressed as a percentage of all Web users in the United
States.
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INDUSTRY BACKGROUND
The Internet has developed into an important mass medium to distribute and
collect information, communicate, interact and be entertained. International
Data Corporation ("IDC") estimates that the number of Internet users worldwide
will grow from approximately 69 million in 1997 to 320 million in 2002. As the
number of users has increased, the Internet has emerged as an effective means
to market products and services, helping to fuel its growth as a commercial
medium. Jupiter Communications, LLC estimates that total spending on Internet
advertising in the United States will grow from $1.9 billion in 1998 to $7.7
billion in 2002. Local advertising on the Internet is projected to grow at an
even faster pace, from 9% of Internet advertising in 1996 to 37% in 1998 and
54% in 2002. IDC also estimates that the value of goods and services purchased
on the Internet will increase from more than $12 billion in 1997 to over $400
billion in 2002.
The commercial potential of the Internet has resulted in a proliferation of
Web sites through which businesses, communities, media companies, news
services, affinity groups and individuals seek to inform, entertain,
communicate and conduct business with Internet users worldwide. New Internet
businesses, such as E-Loan Inc., InsWeb Corporation and Microsoft's Expedia,
have been established to offer goods and services in novel ways using the
Internet. Other popular Internet destination sites such as FindLaw, iVillage
and Xoom offer users the ability to engage and participate in a virtual
community with users of similar interests. At the same time, many traditional
media and publishing companies have transitioned their brand and content onto
the Internet, such as ABC's ABC LocalNet, Disney's Family.com, CBS's CBS Local
Guide, Playboy's Playboy.com and Dow Jones (The Wall Street Journal
Interactive Edition). Hundreds of thousands of corporations have established
Web sites and corporate intranets and extranets to communicate with employees,
customers and business partners over the Internet. IDC estimates that the
number of Web sites (URLs) will grow from 351 million in 1997 to 7.7 billion
in 2002.
This rapid growth in the number of Web sites and the wide array of content
associated with them has caused the emergence of the "portal," an integrated
online service through which users can access a wide range of information and
services without having to navigate through multiple sites. Leading Internet
service providers, such as AOL, Internet software and services companies, such
as Microsoft and Netscape, and Internet search engines and directories, such
as those offered by Yahoo!, Lycos, Excite and Infoseek, have sought to
capitalize on their positions as the most frequently visited sites on the
Internet by establishing themselves as primary portals. These companies have
regularly added to their service offerings, aggregating third-party content,
such as stock quotes, news and yellow pages, and incorporating links to and
from other related sites, in order to prolong their users' visits and promote
repeat usage. In this environment, popular destination and corporate sites
have found it increasingly difficult to compete for the attention of users and
to preserve user loyalty. Many of these sites have found it necessary to add
to the amount of information and services accessible through their sites,
supplementing their more targeted or thematic content with useful third-party
content and services and effectively becoming portals themselves.
The popularity of the Internet has also resulted in the emergence of new
Internet access devices and the adaptation of traditional communications
devices for Internet access, including cellular phones, pagers, screen phones,
television set-top boxes, online kiosks and personal digital assistants. IDC
predicts that, by 2002, shipments of non-PC Internet access devices will
almost equal those of PCs. In order to drive market acceptance of their
devices, these suppliers seek an integrated package of content and services
that is specifically designed to complement the display format and
navigational features of their devices.
In order to differentiate their services and attract the attention of users
on the increasingly crowded Web, existing and emerging Internet portals,
destination sites and suppliers of PCs and other Internet access devices all
need to continually expand and enrich their offerings with value-added content
and services. The objective of these companies is to effectively increase the
audience for their services in terms of both reach and frequency. The greater
the size of their audience, the greater the advertising and electronic
commerce opportunities afforded to them. Accordingly, these companies are
highly dependent upon continually
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increasing traffic usage, particularly repeat usage, and cultivating a
favorable demographic in order to attract advertisers and secure higher
advertising rates. These companies must invest heavily in advertising and
promotion in order to build their brand and drive users to their sites or
devices. To ensure their long-term viability and success, Internet companies
will need to effectively manage the revenue potential of each visit in order
to justify their customer acquisition costs.
As the Internet evolves into a mass medium, the Company believes there will
be a need for outsourced syndication services to enable existing and emerging
Internet portals, destination sites and suppliers of PCs and other Internet
access devices (collectively, "Internet points-of-entry") to broaden their
content offering and exploit the revenue potential of their audience. In more
traditional media such as television, radio and print, syndicated content
provided by the major television networks, programming syndicators and wire
services, such as Reuters and Associated Press, has been widely used by local
television stations, radio stations and newspapers in order to augment their
core programming with additional programming and, in so doing, extend their
audience reach and retention. The diverse Internet points-of-entry similarly
need a source of syndicated content that will increase the convenience,
relevancy and enjoyment of their users' experience, thereby generating repeat
usage and making it less likely that users will click to another service. Such
syndicated content must be delivered to these Internet points-of-entry through
a reliable, scalable infrastructure that can ensure high-quality service. As a
result, the Company believes there is an opportunity for a highly focused
company to provide outsourced content services to Internet companies.
THE INFOSPACE.COM SOLUTION
InfoSpace.com is a leading aggregator and integrator of content services for
syndication to a broad network of affiliates, including existing and emerging
Internet portals, destination sites and suppliers of PCs and other Internet
access devices, such as cellular phones, pagers, screen phones, television
set-top boxes, online kiosks and personal digital assistants. The Company
focuses on content with broad appeal, such as yellow pages and white pages,
maps, classified advertisements, real-time stock quotes, information on local
businesses and events, weather forecasts and horoscopes. By aggregating
content from multiple sources and integrating it with related content to
increase its usefulness, the Company serves as a single source of value- added
content. The Company's affiliates include AOL, Netscape, Microsoft, Lycos,
MetaCrawler, Playboy, Dow Jones (The Wall Street Journal Interactive Edition),
ABC LocalNet and CBS's affiliated TV stations. Affiliates use the Company's
services to expand their programming and increase traffic, thereby enhancing
advertising and electronic commerce revenue opportunities.
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InfoSpace.com is a leading aggregator and integrator of content services for
syndication to a broad network of affiliates.
[GRAPHIC OF INFOSPACE.COM SOLUTION, CONSTITUENTS, AND CONSTITUENT BENEFITS]
Aggregation
The Company currently aggregates content from more than 65 third-party
content providers to create an array of value-added information and services.
The Company's proprietary technology enables the Company to rapidly aggregate
substantial volumes of data and content in multiple formats and from multiple
sources. In most cases, the Company receives regular data feeds from its
content providers and stores the content on the Company's Web servers in order
to maintain its reliability and increase its accessibility. In other cases,
the Company's proprietary technology allows Web users to transparently access
content that is stored directly on the content provider's system. In either
case, the Company's technology enables it to aggregate heterogeneous content
into an integrated service, which is then delivered to the Company's
affiliates.
Integration
The Company's proprietary technology integrates related content and enhances
its value through increased context. Using directory services as the
cornerstone of its content services, the Company integrates a broad range of
relevant and related localized information, such as maps, classified
advertisements, news, and local event, business and weather information, as
well as other content and services with everyday relevance, including real-
time stock quotes, government directory listings, television listings and
lottery results. The Company also integrates traditional yellow pages
categories with its natural word search feature, which enables users of its
directory services to more intuitively navigate within the services and to
achieve more accurate and relevant responses to their queries. For example, a
user employing general search engines to seek information about buying a
tuxedo might receive, in response to a query on the word "tuxedo," a list of
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Web sites containing articles about the history and usage of tuxedos. Through
the Company's services, that same query would be able to locate retailers of
tuxedos in the user's neighborhood, as well as identify retailers of related
goods and services such as dress shoes, limousine rentals and florists.
Syndication
The Company's solution is designed to efficiently and reliably syndicate
integrated content services over the Internet to a broad network of affiliates
serving millions of end users. The Company's technology has been designed with
built-in redundancies and a template-driven automated publishing engine to
allow affiliates to reliably and cost-effectively integrate the Company's
content into their Web site or Internet access device. The Company's
technology solution enables it to easily and rapidly add new affiliates by
employing a distributed, scalable architecture adapted specifically for the
Company's Internet-based content services, and has been designed to support
affiliates across multiple platforms and formats, including Web sites,
cellular phones, pagers, screen phones, television set-top boxes, online
kiosks and personal digital assistants.
The Company's solution is highly flexible and customizable, enabling
affiliates to select from among the Company's broad range of content services
only those desired and to specify the placement of the selected content
services within their existing Web sites and devices. In response to user
queries originating from an affiliated Web site or device, the Company's
automated publishing engine dynamically builds a page to conform to the
display format and look and feel and navigation features specific to that
affiliate. This feature helps its affiliates build and maintain their brands
by creating the impression to end users that they have not left the
affiliate's site. The Company manages access to the content and processes user
queries from its own Web server until ultimate delivery of its services to an
affiliate, serving as a cost-effective, single source supplier of content
services.
Constituent Benefits
Benefits to Affiliates. The Company's services provide affiliates with
content that helps to increase the convenience, relevance and enjoyment of
their users' visits, thereby promoting increased traffic and repeat usage. In
addition, the Company believes its yellow pages and white pages directory
services can attract a greater mix of consumers, as opposed to viewers or
browsers. These benefits, in turn, provide enhanced advertising and electronic
commerce revenue opportunities to affiliates with minimal additional
investment. By leveraging the Company's content relationships and technology,
affiliates are free to focus on their core competencies.
Benefits to Advertisers. The Company's network of more than 900 affiliate
Web sites and its access to various Internet access devices position the
Company as a one-stop vendor for advertisers. The Company's advertisers can
take advantage of the Company's access to a broad and diverse audience of
Internet users derived through its network of affiliates. Based on information
received from RelevantKnowledge, Inc., the Company estimates that its own
sites, together with those of its affiliate network (which includes AOL, for
which the Company has not yet launched its services), provide it with an
unduplicated reach of 42 million unique Web users, representing approximately
79% of all Web users in the United States. The Company's yellow pages and
white pages directory services provide advertisers with access to targeted
audiences and consumers. Further, the Company's local Internet yellow pages
advertising enables local advertisers to significantly expand their reach onto
the Internet. The Company's proprietary advertising server technology enables
it to offer differentiated, customized solutions to advertisers, and provides
real-time tracking and measurement capabilities to allow advertisers to
receive meaningful feedback on the effectiveness of their advertising
programs.
Benefits to Content Providers. The Company's solution provides expanded
distribution and branding opportunities for content providers. The Company
also enables them to distribute their content to emerging Internet access
devices with little or no additional investment. In addition, the Company
enhances the value of third-party content by integrating it with yellow pages
and white pages directory services and other content.
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STRATEGY
The Company's mission is to be a universal provider of technology-enhanced
content services for the Internet, while cultivating diverse advertising
revenue sources. Key elements of the Company's strategy include the following:
Expand Network of Affiliates. The Company intends to expand its affiliate
relationships to all forms of Internet points-of-entry. The Company's
proprietary technology enables the Company to provide content services to
virtually any Web site or Internet access device in a manner that is designed
to be optimal for each particular platform. The Company has affiliated with,
and seeks to continue to affiliate with, leading Internet and traditional
media companies, providing its services to a wide variety of existing and
emerging Internet portals, destination sites and suppliers of Internet access
devices. The Company believes that by expanding its network of affiliates it
provides greater economic value to advertisers and content providers by
increasing the breadth and depth of their audiences, as well as to the Company
through additional advertising and electronic commerce opportunities.
Develop Services for Leading Providers of Emerging Internet Access
Devices. As part of its strategy to expand its affiliate network, the Company
seeks to develop content services for leading suppliers of emerging Internet
access devices and related software. In addressing this opportunity, the
Company leverages its proprietary technology that enables the distribution of
its content services across a wide variety of formats and devices. The Company
maintains development relationships with leading providers of emerging
Internet access devices such as AT&T Wireless Data Division, a division of
AT&T, for cellular phones, Lucent Technologies Inc., InfoGear Technology
Corporation and Mitsui & Co., Ltd. for screen phones, Planetweb, Inc. for
television set-top boxes and Source Media, Inc.'s Interactive Channel and
@Home Corporation for Internet access via cable. The Company believes that it
can become a leading provider of Internet content services as these devices
penetrate the market of Internet users.
Continue to Add New Content Services. The Company seeks to identify content
and services with broad appeal to Internet users that will increase the value
and functionality of its services. The Company believes that users place a
premium on content that is relevant to their everyday lives and will therefore
increase the frequency and duration of their visits to Web sites or devices
that access such content. The Company focuses its efforts on content providers
that can provide comprehensive coverage on a national level and content that
has the potential for targeted advertising or commerce opportunities. By
regularly adding and integrating new and useful content, the Company believes
that it can drive increased traffic to its affiliates and generate additional
revenue opportunities.
Capture Local Advertising Revenues Through Leveraged Sales. The Company
believes that local advertising represents an attractive and underserved
Internet market opportunity. Currently, spending on Internet advertising by
local businesses is a very small percentage of their overall advertising
expenditures. The Company believes that its directory-based integrated content
services provide a platform for targeted and differentiated local advertising
solutions that will be of substantial appeal and generate tangible economic
benefits to local businesses. To pursue this opportunity, the Company has
formed cooperative sales relationships with leading independent yellow pages
publishers and media companies, providing access to more than 1,300
salespeople and their local business contacts. The Company has also
established relationships with direct marketing companies to sell local
Internet yellow pages advertising through mail and telephone solicitation.
Pursue Global Expansion Opportunities. The Company intends to capitalize on
what it perceives to be a significant opportunity for its content services in
international markets. The Company expects to reduce the costs and risks of
international expansion by entering into strategic alliances with partners
able to provide local directory information and local sales forces with
extensive local contacts. The Company has initiated its international
expansion by entering into a joint venture agreement with Thomson, the largest
independent provider of print directory information in the United Kingdom.
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Expand Electronic Commerce Capabilities. The Company believes that
electronic commerce will continue to grow as an increasing number of
businesses and consumers embrace the Internet as an attractive platform for
evaluating, selecting and purchasing goods and services. In February 1998, the
Company began providing electronic commerce services through the
implementation of a search engine that allowed end users to obtain limited
comparative price information on specific products. Subsequently, the Company
implemented its integrated content module in the third quarter of 1998. In
addition, the Company is developing its transaction proxy, branding and
universal shopping cart modules, which are scheduled for completion and
integration into the Company's suite of services in the second and third
quarters of 1999. The transaction proxy module will allow the Company to track
sales transactions from beginning to end and to receive confirmation reports
from the retailers. The branding module will allow users to travel to
affiliate Web sites without leaving the Infospace.com Web site. The universal
shopping cart module will allow users to make multiple purchases at different
retailers in one execution and allow end users to make these purchases from
any Web site without leaving an affiliate's Web site. The Company believes
that these services will allow its affiliates to broaden and enhance their
core programming at minimal cost and generate additional advertising and
transaction revenue opportunities for both the Company and its affiliates.
CONTENT SERVICES
The Company seeks to provide its affiliates with content of broad appeal to
end users, including local information, financial data and Web community
services. The Company believes that such content can provide advertisers with
opportunities to both reach a broad audience and target specific subgroups
within that audience. In most cases, the Company receives regular data feeds
from its content providers and stores the content on the Company's Web servers
in order to maintain its reliability and increase its accessibility. In other
cases, the Company's proprietary technology allows Web users to transparently
access content that is stored directly on the content provider's system. In
either case, the Company's technology enables it to aggregate heterogeneous
content into an integrated service, which is then delivered to the Company's
affiliates. The Company's technology pulls content dynamically into a Web page
or device output display that maintains the look and feel and navigation
features of each affiliate's Web site or access device.
The Company has acquired rights to third-party content pursuant to over 65
license agreements, typically having terms of one to five years. The license
agreements require the content provider to update content on a regular basis,
the frequency of which varies depending on the type of content. In certain
arrangements, the content provider pays a carriage fee to the Company for
syndication of its content to the Company's network of affiliates. In other
instances, the Company shares with the content provider advertising revenues
attributable to end-user access of the provider's content. For certain of the
Company's content, including its core directory and map content, the Company
pays a one-time or periodic fee or fee per content query to the content
provider. The Company typically enters into nonexclusive arrangements with its
content providers, but has, in certain instances, entered into exclusive
relationships, which may limit the Company's ability to enter into additional
content agreements.
Directory Services
The cornerstone of the Company's content services is its nationwide yellow
pages and white pages directories. Yellow pages and white pages are an
indispensable resource for locating information regarding individuals and
businesses. Today, printed yellow pages and white pages directories are
published by RBOCs as well as an estimated 200 independent yellow pages
publishers in the United States.
Yellow pages have traditionally provided an effective way for local
businesses to advertise and attract customers. As a result, yellow pages
advertising has become a large and lucrative industry in the United States,
growing, according to the Yellow Pages Publishers Association (the "YPPA"),
from $11.5 billion in revenues in 1997 to a projected $12.1 billion in 1998.
The yellow pages industry has begun to adapt to an electronic environment,
anticipating that users will increasingly access directory information through
the Internet. The YPPA estimates that by 2010, online yellow pages revenues
will surpass those of printed versions. According to a recent survey by the
NYPM/Kelsey Group of 80,000 Internet users, 89% of Internet users are aware of
Internet yellow pages directories and nearly 62% had visited a directory site
within the past month.
The Company licenses what it believes to be the most comprehensive and
accurate database of businesses and households in the United States and Canada
through a five-year agreement with infoUSA (formerly
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known as American Business Information, Inc.). infoUSA is a leading provider
of online yellow pages and white pages directory information. Pursuant to its
agreement with infoUSA, the Company pays infoUSA an annual fee and will build
a co-branded version of its directory services for infoUSA's Web site. The
Company and infoUSA will share revenues generated by this co-branded Web site.
The Company receives access to infoUSA's business and household data, and
infoUSA is required to update its information monthly. The Company enhances
this content with expanded yellow pages information obtained under agreements
with independent yellow pages publishers which the Company estimates, based on
1997 revenue data published by Simba Information Inc., represent approximately
30% of the independent yellow pages market share in the United States. This
expanded information includes not only names, addresses and telephone numbers,
but also types of business, hours of operation and franchise affiliations.
The Company integrates its yellow pages and white pages information with
each other and utilizes yellow pages category headings in combination with a
natural word search feature to provide a user-friendly interface and
navigation vehicle for its directory services. The Company also typically
includes maps and directions for addresses included in its directory services.
The Company further enhances the relevance and accuracy of responses to user
queries by employing a radial search feature to its directory services, which
allows users to specify the geographic scope within a radial distance of a
specific address, rather than more conventional methods of searching by ZIP
code or city and county divisions. These features enable the Company to create
a powerful package of localized directory information.
Information Services
In addition to its directory services, the Company syndicates other valuable
information of broad appeal. The Company seeks to provide a comprehensive
offering of content with everyday significance in order to become "The
Ultimate Guide" for Internet users seeking to locate people, places and things
in the real world. Principal categories of content currently offered by the
Company include:
<TABLE>
<S> <C>
YELLOW PAGES WHITE PAGES
by name and category, fax numbers, phone numbers, email addresses,
maps and directions reverse lookup, celebrities
CLASSIFIEDS INVESTING
autos, homes, apartments, jobs, real-time stock quotes, market
personals information, research
NET COMMUNITY CITY GUIDE
home pages, email, chat room, city-related links, concerts,
auction weather, schools
E-SHOPPING PUBLIC RECORDS
product search, product departments, "Find Anyone!", background checks,
discount books, greeting cards social security numbers, adoption
reunions
NEWS BREAK FUN STUFF
top stories, world, business, daily horoscopes, minimart, lottery
technology, sports results
INTERNATIONAL GOVERNMENT
country slide shows, directory federal, state and local listings,
services for Canada, Spain, the public officials
United Kingdom and other countries
</TABLE>
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The Company's future success will depend in large part on its ability to
aggregate, integrate and syndicate content of broad appeal. The Company's
ability to maintain its relationships with content providers and to build new
relationships with additional content providers is critical to the success of
the Company's business. See "Risk Factors--Dependence on Third-Party Content."
In addition, the Company's business model is relatively new and unproven, and
there can be no assurance that this business model will be successful. See
"Risk Factors--Evolving and Unproven Business Model."
AFFILIATE NETWORK
InfoSpace.com provides its content services to a network of existing and
emerging Internet portals, destination sites and suppliers of PCs and other
Internet access devices, such as cellular phones, pagers, screen phones,
television set-top boxes, online kiosks and personal digital assistants. The
Company has agreements with more than 90 affiliates covering more than 900 Web
sites. Based on information received from RelevantKnowledge, Inc., the Company
estimates that its own sites, together with those of its affiliate network
(which includes AOL, for which the Company has not yet launched its services),
provide it with an unduplicated reach of 42 million unique Web users,
representing approximately 79% of all Web users in the United States.
Internet Portals and Destination Sites
The Company's affiliates include leading Internet portals and a wide variety
of destination sites, such as the following:
INTERNET PORTALS
<TABLE>
<S> <C>
AFFILIATE LOCATION OR WEB SITE ADDRESS
America Online AOL service, aol.com and digitalcities.com
AT&T WorldNet att.net
go2net metacrawler.com
Lycos lycos.com
Microsoft Network essentials.msn.com
Netscape netscape.com
DESTINATION SITES
AFFILIATE WEB SITE ADDRESS
ABC News/Starwave abcnews.com and individual ABC network
affiliate Web sites (e.g., WABC's
7online.com, KOMO's komotv.com)
CBS cbs.com and individual CBS network affiliate
Web sites (e.g., WBBM's cbs2chicago.com,
KCBS's kcbs.cbsnow.com)
Paxson Communications affiliate television station Web sites (e.g.,
pax.net/WCPX)
Ask Jeeves askjeeves.com
Deja News dejanews.com
Disney OnLine family.com
Dow Jones wsj.com
FindLaw findlaw.com
Market Guide marketguide.com
Microsoft Expedia expedia.com
Morris Online savannah.com
Playboy playboy.com
World Now worldnow.com
</TABLE>
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The Company's content services are designed to be highly flexible and
customizable, enabling affiliates to select from among the Company's broad
range of content services only those desired and to specify the placement of
the selected content within their own Web sites and devices. For example, one
of the Company's affiliates, local television station WABC's 7online.com, has
selected the Company's yellow pages directory information and classifieds
information and offers this content on its Web site. Lycos, another affiliate,
uses the Company's white pages directory services, branded as "People Find,"
throughout its service and uses the Company's smart-shopping feature service
on the Lycos home page.
In response to user queries originating from an affiliated Web site or
device, the Company's automated publishing engine dynamically builds a page to
conform to the display format and look and feel and navigation features
specific to that affiliate. This feature helps its affiliates build and
maintain their brands by creating the impression to end users that they have
not left the affiliate's site. The Company manages the access of content and
processes user queries from its own Web server until ultimate delivery of its
services to an affiliate, serving as a cost-effective single source supplier
of content.
The Company's agreements typically provide for sharing a portion of the
revenues generated by advertising on the Web pages that deliver the Company's
content services. Both the Company and the affiliate typically retain the
rights to sell such advertising. The Company's distribution arrangements with
its affiliates typically are for limited durations of between six months and
two years and are generally terminable after six months. There can be no
assurance that such arrangements will be renewed upon expiration of their
terms. The Company has also entered into strategic alliances with AOL and
Netscape, two of the largest Internet portals measured in terms of user
traffic.
Netscape. Under its July 1998 agreements with Netscape, each of which has a
one-year term with automatic renewal provisions, the Company is the exclusive
provider of co-branded yellow pages and white pages directory services on the
Netscape home page (Netcenter). In addition, Netscape will include a link for
these services in the bookmark section of future versions of the U.S. English-
language version of Netscape Communicator client software. The Company paid
trademark licensing fees to Netscape in connection with these agreements and
is obligated to make additional payments to Netscape based on the number of
click throughs to the Company's services. Netscape guarantees to the Company a
certain minimum level of use of the Company's yellow pages and white pages
directory services.
AOL. The Company recently entered into agreements with AOL to provide white
pages directory services and classifieds information services to AOL. These
services have not yet been launched. Under the terms of the agreement related
to the Company's white pages directory services, the Company has agreed to
place its white pages directory services on AOL's NetFind home page and
throughout various other parts of AOL's proprietary service, its Digital City
service and AOL.com. The white pages directory services are to be provided to
AOL for a three-year term, beginning on the date of first commercial launch
(anticipated to be November 1, 1998), which term may be extended for an
additional year and subsequently renewed for up to three successive one-year
terms at AOL's discretion. This agreement may be terminated by AOL upon the
acquisition by AOL of a competing white pages directory services business or
for any reason after 18 months, upon payment of a termination fee, or at any
time in the event of a change of control of the Company. Under this agreement,
the Company will pay to AOL a quarterly carriage fee and share with AOL
revenues generated by advertising on the Company's white pages directory
services delivered to AOL. Under the terms of the agreement related to the
Company's classifieds information services, the Company has agreed to provide
classified advertising development and management services to AOL for two
years, with up to three one-year extensions at AOL's discretion. AOL will pay
to the Company a quarterly fee and share with the Company revenues generated
by payments by individuals and commercial listing services for listings on the
AOL classifieds service. In connection with these agreements, AOL received a
warrant to purchase Common Stock and has certain rights of first negotiation
in the event of a proposed sale of the Company. See "Description of Capital
Stock--Warrants" and "--Antitakeover Effects of Certain Provisions of Restated
Certificate of Incorporation and Washington and Delaware Law; Right of First
Negotiation."
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Internet Access Devices
The Company is working with a number of leading PC manufacturers that are
incorporating Internet access as part of the start-up menu of the PC. In
addition, the Company believes that the growing number of non-PC Internet
access devices presents a significant potential distribution channel for the
Company's content services. Numerous suppliers of cellular telephones, pagers,
screen telephones, television set-top boxes, online kiosks and personal
digital assistants are adapting familiar appliances to provide user-friendly
access to the Internet.
The Company has entered into agreements with numerous providers of Internet
access devices, including the following:
SELECTED INTERNET ACCESS DEVICE AFFILIATES
<TABLE>
<CAPTION>
MEANS OF INTERNET ACCESS COMPANY
------------------------ -------
<C> <S>
PCs Acer America; Gateway 2000; Pixel (for Packard
Bell NEC)
Cellular Phones AT&T Wireless; Unwired Planet
Pagers WolfeTech (for Motorola PageWriter)
Screen Telephones InfoGear; Mitel; Mitsui; Lucent
Television Set-Top Boxes American Interactive Media; @Home; @World;
Lucent; On Command; Planetweb; Source Media
King kiosk platform; Lexitech kiosk software
Online Kiosks platform
Personal Digital Assistants AT&T Wireless; InfoGear; Unwired Planet
</TABLE>
The Company believes that users of Internet access devices, in particular,
seek useful information of everyday relevance and are more likely to access
the Internet for specific real-world information. Since providers of Internet
access devices generally do not generate their own content or have less
content available to them than Web sites, the Company believes there is an
opportunity for its content services to be an integral part of the information
services bundled with these access devices. The Company is working with these
affiliates to identify, acquire and integrate new information services that
bring additional value to their devices. The Company's technology allows it to
readily adapt the delivery of its services to the individual format and
display features of its Internet access device affiliates.
Typically, the Company's agreements with Internet access device affiliates
have terms of between one and three years and, in some cases, provide for the
sharing of revenues between the affiliate and the Company generated by
advertising included with the delivery of its content services. In other
cases, the Company receives license fees on a per query or per device basis or
through other arrangements for use of its content services.
The Company's ability to generate revenues from national advertising and
promotions depends on its ability to secure and maintain distribution for its
content services on acceptable commercial terms through a range of affiliates.
The Company's affiliate relationships are in an early stage of development,
and there can be no assurance that affiliates, especially major affiliates,
will not demand a greater portion of advertising revenues or require the
Company to pay carriage fees for access to their sites or devices. The loss of
any major affiliate or an adverse change in the Company's pricing model or
revenue-sharing arrangements could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Reliance on Affiliate Relationships."
ADVERTISING AND PROMOTIONS
The Company derives substantially all of its revenues from national
advertising, with pricing based on CPMs, non-CPM-based promotions and local
Internet yellow pages advertising. The Company's clients
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<PAGE>
include a broad range of businesses that advertise on the Internet, including
certain of the Company's content providers and affiliates.
National Advertising
Banner Advertisements. A banner advertisement is prominently displayed at
the top and, in some cases, at the bottom of each Web page generated for
delivery of the Company's content services. From each banner advertisement,
users can hyperlink directly to an advertiser's Web site, thus enabling the
advertiser to
directly interact with an interested consumer. Mass market placements deliver
general rotation banner advertisements throughout the Company's content
services. Targeted placements deliver banner advertisements to specified
audiences. For example, advertisers can reach consumers in general by placing
banner advertisements that rotate throughout the Company's directory services,
classifieds and electronic commerce services. Alternatively, advertisers can
narrow their target audience by category of information or service requested
by users or by geographic location. For example, advertisers can target
investors by advertising only on pages containing the Company's real-time
stock quotes or potential used car buyers by advertising only on pages
containing the Company's automobile classifieds.
Other National Advertising. The Company also sells CPM-based national
advertising other than banner advertisements. The most common of these
advertisements are known as "button advertisements" and "textlinks," but can
also include customized advertising solutions developed for specific
advertisers. Button advertisements are smaller than banner advertisements and
can be placed anywhere on a Web page. Textlinks appear on a Web page as
highlighted text, usually containing the advertiser's name. Multiple button
advertisements and textlinks can appear on the same Web page along with banner
advertisements. Both button advertisements and textlinks typically feature
click-through hyperlinks to the advertiser's own Web site.
The Company's national advertising agreements generally have terms of less
than six months and guarantee a minimum number of impressions or click
throughs. The Company charges fees for banner advertising based on the
specificity of the target audience, generally ranging from $10 to $20 CPM for
general rotation across undifferentiated users to $50 or greater CPM for
targeted category or geographic advertisements. The Company's rates for button
advertisements and textlinks are lower than those for banner advertisements.
Actual CPMs depend on a variety of factors, including, without limitation, the
degree of targeting, the duration of the advertising contract and the number
of impressions purchased, and are often negotiated on a case-by-case basis.
Because of these factors, actual CPMs experienced by the Company may
fluctuate. The guarantee of minimum levels of impressions or click throughs
exposes the Company to potentially significant financial risks, including the
risk that the Company may fail to deliver required minimum levels of user
impressions or click throughs, in which case the Company typically continues
to provide advertising without compensation until such levels are met. See
"Risk Factors--Reliance on Advertising and Promotion Revenues."
Promotions
In addition to its CPM-based national advertising, the Company also sells
promotions, which are integrated packages of advertising that bundle such
features as button and textlink advertisements, sponsorships of specific
categories of content or content services and electronic commerce features.
Promotions also include distribution and co-branding services that the Company
provides to content providers, for which the Company receives a carriage fee.
These arrangements are individually negotiated by the Company with each
advertiser and have a range of specially adapted features involving various
compensation structures (such as guaranteed fee payments), none of which are
based on CPMs. One of the most common forms of the Company's promotions are
"sponsorships," which allow advertisers to sponsor a specific category of
content on the Company's content services. These sponsorships consist of a
button advertisement or textlink which appears prominently on the page each
time that content category is queried by a user. In some cases, the Company
has entered into exclusive sponsorship arrangements for certain
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<PAGE>
categories of content. Promotions may also include an electronic commerce
feature, in which a button advertisement offers the end user an opportunity to
make an immediate online purchase.
The Company's promotions are specifically designed to allow advertisers to
integrate various forms of online advertising, such as button advertisements
and textlinks, content sponsorship and electronic commerce links and also
include innovative specially-designed advertising campaigns to fully exploit
the reach of the Company's content services. For example, the Company has
entered into an agreement with BarnesandNoble.com, Inc. ("BarnesandNoble.com")
under which BarnesandNoble.com is the exclusive bookseller on a majority of the
Company's content services. Pursuant to this agreement, a button advertisement
appears on Web pages for certain categories of content, which offers the end
user the opportunity to purchase a book related to that category. For example,
a search for local restaurants in New York City results in a BarnesandNoble.com
button advertisement that, when clicked, lists restaurant guides and cookbooks
for New York City restaurants.
Promotion arrangements vary in terms and duration, but generally have longer
terms than arrangements for the Company's CPM-based advertising. The fee
arrangements are individually negotiated with advertisers and are based on the
range and the extent of customization. These arrangements typically include
minimum monthly payments. To the extent that the advertiser offers an
electronic commerce opportunity in its promotion, the Company may derive
transaction revenues based on the level of transactions made through its
promotion for the advertiser.
In addition, the Company works with advertisers to develop customized
advertising solutions that may include both CPM-based national advertising and
non-CPM-based promotions. For example, the Company's campaign for 800-U.S.
Search involves a variety of targeted banner advertisements, button
advertisements and textlinks, as well as co-branding of 800-U.S. Search
services with the Company's content services, such as the "Find Anyone!"
service. The Company's advertising agreement with 800-U.S. Search has a four-
year term. Revenues generated from 800-U.S. Search accounted for approximately
12.3% of the Company's revenues for the six months ended June 30, 1998.
As of June 30, 1998, the Company had agreements with over 35 advertisers for
national advertising or promotions. The following is a representative list of
brands or companies for which advertisers purchased national advertising or
promotions on the Company's content services during the six months ended June
30, 1998:
800-U.S. Search IBM
Apartments for Rent iVillage
AT&T Leisure Planet
BarnesandNoble.com Locate-Me
BuyComp.com MasterCard International
Computel Securities Microsoft
Dell Computers Owners Network
Delta Air Lines QSpace
eBay Stoneage
E-loan Information Services Women.com
Excite
Local Internet Yellow Pages Advertising
The Company believes that local Internet advertising represents an attractive
and largely unexploited market opportunity. Spending on Internet advertising by
local businesses is currently a very small percentage
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<PAGE>
of their overall advertising expenditures. The Company believes that its
affiliate network provides an attractive Internet platform for local
advertisers to reach a broader audience and extend the reach of their
advertising beyond their geographic area, as well as to achieve targeted
advertising within their geographic area.
The Company generates an Internet yellow pages listing free of charge for
all U.S. local business listings provided by infoUSA. This listing includes
name, address and telephone number information, as well as maps and door-to-
door directions. Similar to traditional yellow pages industry practices, the
Company generates revenues by selling enhancements to this basic listing.
Enhancement options include boldface type, enlarged type size, multi-category
listings, preferred placement, email listings and Web site links, display
advertisements and category sponsorships.
Internet yellow pages advertising agreements provide for terms of one year,
with pricing comparable to print yellow pages advertising, typically paid in
monthly installments. Costs to the local advertiser generally range from $50
to $300 or greater per year, depending on the types of enhancements selected.
For convenience, these payments usually accompany the local advertiser's
monthly payment for its print advertising.
The Company has formed cooperative sales relationships with leading
independent yellow pages publishers, including TransWestern Publishing
Company, Ltd. and McLeodUSA Publishing Company, and media companies, including
Guy Gannett Communications and E.W. Scripps, which provide access to over
1,300 salespeople and their local sales contacts. Further, the Company has
started to build relationships with direct marketing companies, whose mail and
telephone solicitations complement the sales forces of the independent yellow
pages publishers and media companies. The Company's agreements with these
companies typically have terms of one to five years and provide for revenue
sharing, which varies from relationship to relationship. In addition, the
Company typically agrees that the yellow pages publisher will be the Company's
exclusive provider of Internet yellow pages advertising within a particular
geographic region. The local sales forces of these companies are empowered to
sell Internet yellow pages advertising on the Company's directory services,
which are generally bundled with the traditional print advertising they sell.
As such, the Company believes its Internet yellow pages advertising offers
these sales forces attractive incremental revenue opportunities from their
existing client bases. These companies maintain, as part of their existing
print advertising infrastructure, the systems necessary for generating online
display advertisements, processing invoices and collecting payments from
advertisers. To assist in their efforts, the Company provides the technology
to streamline the transmission of data necessary to generate the enhanced
Internet yellow pages listings. This technology allows advertising data files
to be rapidly posted and integrated directly into the Company's directory
services. The Company believes that these relationships provide local
expertise and access to local advertisers, as well as established advertising
production capabilities, that give it an advantage over competitors while
minimizing its investment in its own sales force and operations.
The Company currently derives substantially all of its revenues from the
sale of advertisements and promotions on the Web pages that deliver the
Company's content, and expects that advertising and promotion revenues will
continue to account for substantially all of its revenues in the foreseeable
future. The Company's dependence on advertising and promotion revenues
involves a number of risks. See "Risk Factors--Reliance on Advertising and
Promotion Revenues," "--Dependence on Sales by Third Parties," "--Uncertain
Adoption of the Internet as an Advertising Medium" and "--Risks Associated
With Short-Term National Advertising Contracts."
TECHNOLOGY AND INFRASTRUCTURE
One of the Company's principal strengths is its internally developed
technology, which has been designed specifically for the Company's Internet-
based content services. The Company's technology architecture features
specially adapted capabilities to enhance performance, reliability and
scalability, consisting of multiple proprietary software modules that support
the core functions of the Company's operations. These modules include Web
Server Technology, Database Technology and a Remote Data Aggregation Engine.
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Web Server Technology
The Company's Web Server Technology was designed to enable rapid development
and deployment of information over multiple platforms and formats. It
incorporates an automated publishing engine that dynamically builds a page to
conform to the look and feel and navigation features of each affiliate. As
such, the Company's technology enables it to deliver content in a manner
optimized to the unique display formats of existing and emerging Internet
access devices, such as cellular phones, pagers, screen phones, television
set-top boxes, online kiosks and personal digital assistants.
The Company's Web Server Technology includes other features that are
designed to optimize the performance of the Company's content services,
including: (i) an HTML compressor that enables modifications of file content
to reduce size, thereby reducing download time for users; (ii) an "Adaptive
Keep-Alive" feature that maximizes the time during which client server
connections are kept open, based on current server load, thereby increasing
user navigation and Web site traversal speed; and (iii) a Proxy Server that
provides the capability for real-time integration and branding of content that
resides remotely with third-party content providers.
Database Technology
The Company has developed proprietary database technology to address the
specific requirements of the Company's business strategy and content services.
The Company's Co-operative Database Architecture is designed to function with
a high degree of efficiency within the unique operating parameters of the
Internet, whereas commonly used database systems were developed prior to the
widespread acceptance of the Internet. The architecture is tightly integrated
with the Company's Web Server Technology and incorporates the following
features:
Heterogeneous Database Clustering. The Company's Heterogeneous Database
Clustering allows disparate data sources to be combined and accessed through a
single uniform interface, regardless of data structure or content. These
clusters facilitate database bridging, which allows a single database query to
produce a single result set containing data extracted from multiple databases,
a vital component of the Company's ability to aggregate content from multiple
sources. Database clustering in this manner reduces dependence on single data
sources, facilitates easy data updates and reduces integration efforts. In
addition, the Company's pre-search and post-search processing capabilities
enable search parameters to be modified in real time before and after querying
a database.
Dynamic Parallel Index Traversal. The Company's Dynamic Parallel Index
Traversal mechanism utilizes the search parameters supplied by the user to
determine the appropriate database index (from among multiple indices) to
efficiently locate the data requested. Further, an index compression mechanism
allows the Company to achieve an efficient balance between disk space and
compression/decompression when storing or accessing data.
Automatic Query State Recovery. In a response to a database query,
conventional databases access previously displayed results in order to display
successive results to a given query, thus increasing response time by
performing redundant operations. The Company's Automatic Query State Recovery
mechanism decreases response time by maintaining the state of a query to allow
the prompt access of successive results. This feature is particularly
important, for example, when an end-user query retrieves a large number of
results.
Natural Language Interface. The Company incorporates a natural word search
interpreter, which successfully utilizes familiar category and topic headings
traditional to print directory media to generate relevant and related results
to information queries. By incorporating a familiar navigation feature into
its services, the Company believes it provides end users with a more intuitive
mechanism to search for and locate information.
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Remote Data Aggregation Engine
The Company has developed its Remote Data Aggregation Engine to allow data
from a variety of sources on the Internet to be retrieved, parsed and
presented as a single virtual database result, either in real-time or at
predetermined intervals. The Company's Template-Driven Profiling system
catalogs the data on each source site, which is later accessed by the
Company's Remote Data Aggregation Engine for real-time retrieval. Data results
can be internally cached to reduce network traffic and deliver the fastest
possible results to the end user.
The Remote Data Aggregation Engine has numerous applications, one of which
is collecting real-time information from multiple sources in a manner that
eliminates the need for a data provider to perform any local modifications.
This technology is currently being applied in the Company's price comparison
service. Various other potential uses of the technology have been identified,
including the collection and real-time updating of event data such as concert
information, performing arts schedules and sporting events, and the
aggregation of classified listings, such as employment listings from corporate
Web sites.
Data Network Infrastructure
The Company maintains a carrier-class data network center designed to ensure
high-level performance and reliability of its content services. The Company
connects directly to the Internet from its facilities in Redmond, Washington
through redundant, dedicated DS-3 communication lines provided by multiple
telecommunication service providers. The Company's hardware resides in a
secure climate-controlled room, with local directors providing load balancing
and failover. In addition to the facilities located at the Company
headquarters, the Company contracts for co-location facilities with Exodus
Communications and Savvis Communications at two locations in Seattle,
Washington. As the Company expands its operations, it expects to locate server
facilities at various strategic geographic locations.
Product Development
The Company believes that strong product development capabilities are
essential to developing the technology necessary to successfully implement its
strategy of expanding its affiliate network, acquiring value-added content to
add to its content services, expanding internationally and into other services
and maintaining the attractiveness and competitiveness of its content
services. The Company has invested significant time and resources in creating
its proprietary technology. Product development expenses were $109,671,
$212,677 and $149,176 for the period from March 1, 1996 (inception) to
December 31, 1996, the year ended December 31, 1997 and the six months ended
June 30, 1998, respectively.
The market for Internet products and services and the online commerce
industry are characterized by rapidly changing technology, evolving industry
standards and customer demands and frequent new product and service
introductions and enhancements. The Company's future success will depend in
significant part on its ability to improve the performance, content and
reliability of the Company's content services in response to both the evolving
demands of the market and competitive product offerings, and there can be no
assurance that the Company will be successful in such efforts. See "Risk
Factors--Rapid Technological Change."
INTERNATIONAL EXPANSION
The Company intends to capitalize on what it perceives to be a significant
opportunity for its content services in international markets. The Company
expects to reduce the costs and risks of international expansion by entering
into strategic alliances with partners able to provide local directory
information, as well as local sales forces and contacts.
The Company has entered into a joint venture with Thomson to form TDL
InfoSpace to replicate the Company's content services in Europe. TDL InfoSpace
has targeted the United Kingdom as its first market,
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and content services were launched in the third quarter of 1998. Thomson is
the largest provider of independent print directory information in the United
Kingdom, with a local sales force of 450 employees. Under the joint venture
agreement, Thomson will provide its directory information to TDL InfoSpace and
sell Internet yellow pages advertising for the joint venture through its local
sales forces. The Company will contribute its technology and hosting services
to TDL InfoSpace. Each of the Company and Thomson purchased a 50% interest in
TDL InfoSpace and are required to provide reasonable working capital to TDL
InfoSpace.
The Company expects that TDL InfoSpace will expand its content services to
other European countries in 1999. Under the joint venture agreement, each of
the Company and Thomson is obligated to negotiate with TDL InfoSpace and the
other party to jointly offer content services in other European countries
prior to offering such services independently or with other parties. In
addition, the Company is currently investigating additional international
opportunities. The expansion into international markets involves a number of
risks. See "Risk Factors--Risks Associated With International Expansion."
INTELLECTUAL PROPERTY
The Company's success depends significantly upon its proprietary technology.
The Company currently relies on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. All Company employees have executed
confidentiality and nonuse agreements which provide that any rights they may
have in copyrightable works or patentable technologies to the Company. In
addition, prior to entering into discussions with potential content providers
and affiliates regarding the Company's business and technologies, the Company
generally requires that such parties enter into a nondisclosure agreement. If
these discussions result in a license or other business relationship, the
Company also generally requires that the agreement setting forth the parties'
respective rights and obligations include provisions for the protection of the
Company's intellectual property rights. For example, the Company's standard
affiliate agreement provides that the Company retains ownership of all patents
and copyrights in the Company's technology and requires its customers to
display the Company's copyright and trademark notices.
The Company has applied for registration of certain service marks and
trademarks, including "InfoSpace," "InfoSpace.com" and its logo in the United
States and in other countries, and will seek to register additional service
marks and trademarks, as appropriate. There can be no assurance that the
Company will be successful in obtaining the service marks and trademarks for
which it has applied. In addition, a patent is pending in the United States
relating to the Company's electronic commerce technology and the Company is
filing patent applications relating to other aspects of its technology,
including the methods by which information is obtained and provided to end
users of its content services. There can be no assurance that any patent with
respect to the Company's technology will be granted or that if granted such
patent will not be challenged or invalidated. There also can be no assurance
that the Company will develop proprietary products or technologies that are
patentable, that any issued patent will provide the Company with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have a material adverse effect on the Company's
ability to conduct business. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may copy aspects of the Company's
products or services or obtain and use information that the Company regards as
proprietary. The laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States, and the
Company does not currently have any patents or patent applications pending in
any foreign country. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology or duplicate the
Company's products or design around patents issued to the Company or other
intellectual property rights of the Company. The failure of the Company to
adequately protect its proprietary rights or its competitors' successful
duplication of its technology could have a material adverse effect on the
Company's business, financial condition and results of operations.
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There has been frequent litigation in the computer industry regarding
intellectual property rights. The Company has in the past been subject to
claims regarding its intellectual property rights. While all such claims have
been resolved, there can be no assurance that third parties will not in the
future claim infringement by the Company with respect to current or future
products, trademarks or other proprietary rights. Any such claims could be
time-consuming, result in costly litigation, diversion of management's
attention, cause product or service release delays, require the Company to
redesign its products or services or require the Company to enter into royalty
or licensing agreements. These royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company, or at all, any of
which occurrences could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The market for Internet products and services is highly competitive, with no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The market for the Company's content services has only
recently begun to develop, is rapidly evolving and is likely to be
characterized by an increasing number of market entrants with competing
products and services. Although the Company believes that the diversity of the
Internet market may provide opportunities for more than one provider of
content services similar to those of the Company, it is possible that one or a
few suppliers may dominate one or more market sectors. The Company believes
that the primary competitive factors in the market for Internet content
services are (i) the ability to provide content of broad appeal, which is
likely to result in increased user traffic and increase the brand name value
of the Internet point-of-entry to which the services are provided; (ii) the
ability to meet the specific content demands of a particular Internet point-
of-entry; (iii) the cost-effectiveness and reliability of the content
services; (iv) the ability to provide content that is attractive to
advertisers; (v) the ability to achieve comprehensive coverage of a particular
category of content; and (vi) the ability to integrate related content to
increase the utility of the content services offered. There can be no
assurance that the Company's competitors will not develop content services
that are superior to those of the Company or achieve greater market acceptance
than the Company's services. Any failure of the Company to provide services
that achieve success in the short term could result in an insurmountable loss
in market share and brand acceptance and could, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations.
While the Company is unaware of any companies that compete with all of the
Company's content services, there are companies that offer services addressing
certain of the Company's target markets. In addition, some of these
competitors are currently members of the Company's affiliate network or
currently provide content included in the Company's content services. The
Company's directory services compete with other Internet yellow pages and
white pages directory services, including AnyWho?, a division of AT&T, GTE
SuperPages, Switchboard, ZIP2, directory services offered by the RBOCs,
including Big Yellow by Bell Atlantic/NYNEX, infoUSA's Lookup USA, Microsoft
Sidewalk and Yahoo! Yellow Pages and White Pages. In addition, specific
services provided by the Company compete with specialized content providers.
TDL InfoSpace's directory services will compete with British Telecom's YELL
service and Scoot (UK) Limited in the United Kingdom and, as the Company
expands internationally into other markets, it expects to face competition
from other established providers of directory services. In the future, the
Company may encounter competition from providers of Web browser software,
including Netscape and Microsoft, online services and other providers of
Internet services that elect to syndicate their own product and service
offerings, such as AOL, Yahoo!, Excite, Infoseek, Lycos, HotBot, MetaCrawler,
Snap! and traditional media companies expanding onto the Internet, such as
Time/Warner, ABC, CBS, NBC, Dow Jones, Disney and Fox.
A number of the Company's current advertising customers have established
relationships with certain of the Company's competitors and future advertising
customers may establish similar relationships. In addition, the Company
competes with online services and other Web site operators, as well as
traditional offline media such as print (including print yellow pages
directories) and television for a share of advertisers' total advertising
budgets. Competition among current and future suppliers of Internet content
services, as well as
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competition with other media for advertising placements, could result in
significant price competition and reductions in advertising revenues.
Many of the Company's current competitors, as well as a number of potential
new competitors, have significantly greater financial, technical, marketing,
sales and other resources than the Company. There can be no assurance that the
Company will be able to compete successfully against its current and future
competitors. The Company's failure to compete with its competitors' product
and service offerings or for advertising revenues would have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENTAL REGULATION
The Company is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet
and other online services, it is possible that laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, pricing, content, taxation, copyrights, distribution and
characteristics and quality of products and services. Such regulation could
limit growth in the use of the Internet generally and decrease the acceptance
of the Internet as a communications and commercial medium, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company may be subject to Sections 5 and 12 of the
FTC Act, which regulate advertising in all media, including the Internet, and
require advertisers to have substantiation for advertising claims before
disseminating advertisements. The FTC Act prohibits the dissemination of
false, deceptive, misleading and unfair advertising, and grants the FTC
enforcement powers to impose and seek civil and criminal penalties, consumer
redress, injunctive relief and other remedies upon persons who disseminate
prohibited advertisements. The Company could be subject to liability under the
FTC Act if it were found to have participated in creating and/or disseminating
a prohibited advertisement with knowledge, or reason to know that the
advertising was false or deceptive. The FTC recently brought several actions
charging deceptive advertising via the Internet, and is actively seeking new
cases involving advertising via the Internet.
The Company may also be subject to the provisions of the recently enacted
the CDA, which, among other things, imposes substantial monetary fines and/or
criminal penalties on anyone who distributes or displays certain prohibited
material over the Internet or knowingly permits a telecommunications device
under its control to be used for such purpose. Although the manner in which
the CDA will be interpreted and enforced and its effect on the Company's
operations cannot yet be fully determined, the CDA could subject the Company
to substantial liability. The CDA could also limit the growth of the Internet
generally and decrease the acceptance of the Internet as an advertising
medium.
Other federal, state, local or foreign laws, regulations and policies,
either now existing or that may be adopted in the future, may apply to the
business of the Company and may subject the Company to significant liability,
significantly limit growth in Internet usage, prevent the Company from
offering certain Internet products or services, or otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations. These laws, regulations and policies may apply to matters such as,
but not limited to, copyright, trademark, unfair competition, antitrust,
property ownership, negligence, defamation, indecency, obscenity, personal
privacy, trade secrecy, encryption, taxation and patents.
Moreover, the applicability to the Internet and other online services of
existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to the Company's business, or the application of existing laws
and regulations to the Internet and other online services could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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EMPLOYEES
As of September 30, 1998, the Company had 48 employees. None of the
Company's employees is represented by a labor union, and the Company considers
its employee relations to be good. Competition for qualified personnel in the
Company's industry is intense, particularly among software development and
other technical staff. The Company believes that its future success will
depend in part on its continued ability to attract, hire and retain qualified
personnel. See "Risk Factors--Management of Growth; New Management Team;
Limited Senior Management Resources" and "--Dependence on Key Personnel; Need
for Additional Personnel."
FACILITIES
The Company's principal administrative, engineering, marketing and sales
facilities total approximately 14,850 square feet and are located in Redmond,
Washington. Under the current lease, which commenced on July 13, 1998, and
expires on August 31, 2003, the Company pays a monthly base rent of $17,670
during the first three years of the lease and $19,678 during the final two
years of the lease. The Company has both the right to extend the term of this
lease for an additional 60 months and the right of first opportunity on
adjacent expansion space. The Company also maintains a sales office housed in
an approximately 630-square-foot space in Sausalito, California under a lease
that expires on February 14, 1999 with a monthly base rent of $1,489.90. Under
the lease at its former location in Redmond, the Company paid an aggregate
rent of $28,840 for the first seven months of 1998 and an aggregate rent of
$49,440 during 1997. The Company does not own any real estate.
Substantially all of the Company's computer and communications hardware is
located at the Company's facilities in Redmond, Washington and the Company
also leases redundant network facilities at two locations in Seattle,
Washington under agreements that expire in June 1999 and July 2001. The
Company intends to install additional hardware and high-speed Internet
connections at a location outside the West Coast and in the United Kingdom to
support the Company's joint venture, TDL InfoSpace. The Company's systems and
operations at these locations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. While the Company maintains redundant systems, it does not
maintain a formal disaster recovery plan and does not carry sufficient
business interruption insurance to compensate it for losses that may occur.
Despite the implementation of network security measures by the Company, its
servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays, loss of
data or the inability to accept and fulfill customer queries of the Company's
database, although the proprietary, customized nature of its software helps to
reduce the risks posed by computer viruses and electronic break-ins. The
occurrence of any of the foregoing risks could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors--Risk of System Failures, Delays and Inadequacies."
LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its
business, including claims of alleged infringement of third-party trademarks
and other intellectual property rights by the Company. Such claims, even if
not meritorious, could require the expenditure of significant financial and
managerial resources.
On April 15, 1998, a former employee of the Company filed a complaint in the
Superior Court for Santa Clara County, California alleging, among other
things, that he has the right in connection with his employment to purchase
shares of Common Stock representing up to 5% of the equity of the Company as
of an unspecified date. In addition, the former employee is also seeking
compensatory damages, plus interest, punitive damages, emotional distress
damages and injunctive relief preventing any capital reorganization or sale
that would cause the plaintiff not to be a 5% owner of the equity of the
Company. The Company removed the suit to the Federal District Court for the
District of Northern California. The Company has answered the complaint and
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denied the claims. Nevertheless, while the Company believes its defenses to
the former employee's claims are meritorious, litigation is inherently
uncertain, and there can be no assurance that the Company will prevail in the
suit. As of June 30, 1998, the Company has accrued a liability of $240,000 for
estimated settlement and defense costs. To the extent the Company is required
to issue shares of Common Stock or options to purchase Common Stock as a
result of the suit, the Company would recognize an expense equal to the number
of shares issued multiplied by the fair value of the Common Stock on the date
of issuance, less the exercise price of any options required to be issued, to
the extent that this amount exceeds the expense already accrued as of June 30,
1998. This could have a material adverse effect on the Company's results of
operations, and any such issuance would be dilutive to existing stockholders.
The exercise price of any shares which the Company may be required to issue as
a result of the suit is unknown, but could be as low as $0.01 per share. See
Note 5 of the Company's Notes to Consolidated Financial Statements.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of September 30, 1998
with respect to the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Naveen Jain............. 39 President, Chief Executive Officer and Chairman of the Board
Ellen B. Alben.......... 36 Vice President, Legal and Business Affairs and Secretary
Douglas A. Bevis........ 53 Vice President and Chief Financial Officer
John E. Cunningham, IV 41
(1).................... Director
Peter L. S. Currie (2).. 41 Director
Gary C. List (1)(2)..... 46 Director
Carl Stork.............. 38 Director
</TABLE>
- ---------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Naveen Jain founded the Company in March 1996. Mr. Jain has served as the
Company's President and Chief Executive Officer since its inception and as its
sole director from its inception to June 1998, when he was appointed Chairman
of the Board upon the Board's expansion to five directors. From June 1989 to
March 1996, Mr. Jain held various positions at Microsoft Corporation,
including Group Manager for MSN, Microsoft's online service. From 1987 to
1989, Mr. Jain served as Software Development Manager for Tandon Computer
Corporation, a PC manufacturing company. From 1985 to 1987, Mr. Jain served as
Software Manager for UniLogic, Inc., a PC manufacturing company and from 1982
to 1985, he served as Product Manager and Software Engineer at Unisys
Corporation/Convergent Technologies, a computer manufacturing company. Mr.
Jain holds a B.S. from the University of Roorkee and an M.B.A. from St.
Xavier's School of Management.
Ellen B. Alben joined the Company in May 1998 as Vice President, Legal and
Business Affairs and Secretary. From April 1997 to May 1998, she was a senior
attorney with Perkins Coie LLP. From September 1996 to April 1997, Ms. Alben
served as a consultant to Paragon Trade Brands, Inc. ("Paragon Trade Brands"),
a private-label diaper manufacturer, and as special securities counsel to
companies raising private financing. From September 1995 through June 1996,
she served as Vice President, General Counsel and Secretary of Paragon Trade
Brands. Paragon Trade Brands filed for bankruptcy protection under Chapter 11
of the Bankruptcy Code in January 1997. From July 1994 to September 1995, she
served as Senior Associate Counsel of The Hillhaven Corporation ("Hillhaven"),
a nursing home provider, and from June 1993 to July 1994 she served as
Associate Counsel of Hillhaven. Prior to joining Hillhaven, Ms. Alben
practiced law with private law firms for seven years, specializing in
corporate securities, finance, and mergers and acquisitions. She holds a B.A.
from Duke University and a J.D. from Stanford Law School.
Douglas A. Bevis joined the Company in August 1998 as Vice President and
Chief Financial Officer. From September 1996 until July 1998, he served as
Vice President and Chief Financial Officer of Apex PC Solutions, Inc.
("Apex"), a manufacturer of stand-alone switching systems and integrated
server cabinet solutions for the client/server computing market, and served as
Secretary of Apex from December 1996 to March 1998. From September 1990 to
February 1996, Mr. Bevis was employed at CH2M HILL, Inc., a national
environmental engineering consulting firm, where he served as Vice President
and Treasurer from September 1990 to April 1993 and as Senior Vice President
and Chief Financial Officer from April 1993 to February 1996. Mr. Bevis holds
a B.A. from Beloit College, a Master of Architecture degree from the
University of Minnesota and an M.B.A. from Harvard Business School.
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John E. Cunningham, IV has served as a director of the Company since July
1998. Since April 1995 he has served as President of Kellett Investment
Corporation, an investment fund for later-stage, high-growth private
companies. He is on the Board of Directors of Petra Capital, LLC. and Real
Time Data ("Real Time Data"), a consolidator of the vending services industry
utilizing proprietary wireless information systems. During 1997, Mr.
Cunningham was interim Chief Executive Officer of Real Time Data. From
December 1994 to August 1996, he was President of Pulson Communications, Inc.
From February 1991 to November 1994, he served as Chairman and Chief Executive
Officer of RealCom Office Communications, a privately held telecommunications
company that merged with MFS Communications Company, Inc., and was
subsequently acquired by WorldCom, Inc. Mr. Cunningham holds a B.A. from Santa
Clara University and an M.B.A. from the University of Virginia.
Peter L. S. Currie has served as a director of the Company since July 1998.
Mr. Currie is Executive Vice President and Chief Administrative Officer of
Netscape Communications Corporation, where he has held various management
positions since April 1995. From April 1989 to April 1995, Mr. Currie held
various management positions at McCaw Cellular Communications, Inc. ("McCaw
Cellular"), including Executive Vice President and Chief Financial Officer and
Executive Vice President of Corporate Development. Before joining McCaw
Cellular, he was a Principal at Morgan Stanley & Co. Incorporated. Mr. Currie
holds a B.A. from Williams College and an M.B.A. from Stanford University.
Gary C. List has served as a director of the Company since July 1998. Since
June 1997, Mr. List has served as Chief Executive of TDL Group Limited and
Chief Executive Officer and Chairman of its primary subsidiary, Thomson
Directories Limited, a print directory publishing company. From October 1987
to June 1997, Mr. List held various executive positions with US West, Inc.,
including President of US West International Information Services and Vice
President and Chief Financial Officer of US West Marketing Resources Group.
Carl Stork has served as a director of the Company since September 1998.
Since May 1997, Mr. Stork has been General Manager, Hardware Strategy and
Business Development, at Microsoft Corporation. Mr. Stork has held various
other management positions at Microsoft since 1981. Mr. Stork holds a B.S.
from Harvard University and an M.B.A. from the University of Washington.
BOARD OF DIRECTORS
The Company's Restated Certificate of Incorporation and Restated Bylaws
provide that the Board of Directors shall be composed of not less than five or
more than nine directors, with the specific number to be set by resolution of
the Board. The Company currently has five directors, but intends to recruit
and add another nonemployee director to the Board after completion of this
offering.
At the first election of directors following this offering, the Board of
Directors will be divided into three classes, with each class to be as equal
in number as possible. Each Class 1 director will be elected to serve until
the next ensuing annual meeting of stockholders, each Class 2 director will be
elected to serve until the second ensuing annual meeting of stockholders and
each Class 3 director will be elected to serve until the third ensuing annual
meeting of stockholders. Thereafter, each newly elected director will serve
for a term ending at the third annual meeting of stockholders following such
election. All directors hold office until the annual meeting of stockholders
at which their terms expire and their successors are elected and qualified.
Directors may be removed by stockholders only for cause.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Messrs. List and Cunningham. The
Compensation Committee reviews and approves the compensation and benefits for
the Company's executive officers, administers the Company's 1996 Plan and
makes recommendations to the Board of Directors regarding such matters.
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The Audit Committee consists of Messrs. Currie and List. Among other
functions, the Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent
auditors, reviews the Company's balance sheet, statement of operations and
cash flows and reviews and evaluates the Company's internal control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. List and
Cunningham. No member of the Board of Directors or of the Compensation
Committee serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
DIRECTOR COMPENSATION
Directors of the Company are paid $750 for each Board of Directors meeting
attended in person, $500 for each Board of Directors meeting attended by
telephone and $500 for each committee meeting attended. The Company also
reimburses directors for travel expenses incurred to attend meetings of the
Board of Directors or committee meetings. Directors of the Company are
eligible to participate in the 1996 Plan and the ESPP. See "--Benefit Plans--
Stock Option Program for Nonemployee Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
directors to the full extent permitted by Delaware law. Delaware law provides
that a corporation's certificate of incorporation may contain a provision
eliminating or limiting the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law (the "DGCL"),
or (iv) for any transaction from which the director derived an improper
personal benefit. The Company's Restated Bylaws provide that the Company shall
indemnify its directors and officers and may indemnify its employees and
agents to the full extent permitted by law. The Company believes that
indemnification under its Restated Bylaws covers at least negligence and gross
negligence on the part of indemnified parties.
The Company has entered into agreements to indemnify its directors and
executive officers. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these agreements are necessary to attract and retain qualified directors
and officers.
EXECUTIVE COMPENSATION
No executive officer of the Company earned more than $100,000 in salary and
bonus from the Company in the fiscal year ended December 31, 1997. Naveen
Jain, the Company's President and Chief Executive Officer, received no salary
or compensation from the Company for his services from the time of the
Company's inception to July 1998. Beginning July 1998, Mr. Jain will receive
an annual salary of $125,000. Mr. Jain does not currently hold options to
purchase capital stock of the Company.
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BENEFIT PLANS
Restated 1996 Flexible Stock Incentive Plan
The Company adopted the Restated 1996 Flexible Stock Incentive Plan in 1996.
The purpose of the 1996 Plan is to provide an opportunity for employees,
officers, directors, independent contractors and consultants of the Company to
acquire Common Stock of the Company. The 1996 Plan provides for grants of
stock options, stock appreciation rights ("SARs") and stock awards. An
aggregate of 3,000,000 shares of Common Stock have been authorized for
issuance under the 1996 Plan. As of September 30, 1998, options to purchase
1,494,425 shares of Common Stock were outstanding under the 1996 Plan, with
exercise prices ranging from $.02 to $12.00 per share and options to purchase
1,505,575 shares were available for future grant.
Stock Option Grants. The Board or the Compensation Committee (the "Plan
Administrator") has the authority to select individuals who are to receive
options under the 1996 Plan and the terms and conditions of each option so
granted, including the type of option granted (incentive or nonqualified), the
exercise price (which must be at least equal to the fair market value of the
Common Stock on the date of grant with respect to incentive stock options),
vesting provisions and the option term.
Stock Appreciation Rights. The Plan Administrator may grant SARs to selected
individuals separately or in tandem with a stock option award. An SAR is an
incentive award that permits the holder to receive, for each share covered by
the SAR, an amount equal to the amount by which the fair market value of a
share of Common Stock on the date of exercise exceeds the exercise price of
such share. The SAR may contain such terms, provisions and conditions not
inconsistent with the 1996 Plan as may be established by the Plan
Administrator.
Stock Awards. The Plan Administrator is authorized under the 1996 Plan to
issue shares of Common Stock to eligible individuals on such terms and
conditions and subject to such restrictions, if any, as the Plan Administrator
may determine.
Adjustments. Proportional adjustments to the aggregate number of shares
issuable under the 1996 Plan and to outstanding awards are made for stock
splits and other capital adjustments.
Corporate Transactions. In the event of certain Corporate Transactions (as
defined below), each outstanding option, SAR or stock award that would
otherwise vest within twelve months from the effective date of the Corporate
Transaction will vest and become exercisable, or nonforfeitable, as
applicable, immediately prior to the effective date of the Corporate
Transaction. The remainder of each outstanding option, SAR or stock award will
terminate and any restricted stock will be reconveyed to or repurchased by the
Company prior to the effective date of the Corporate Transaction. However,
acceleration, termination or repurchase of any option, SAR or stock award will
not occur if such award is, in connection with the Corporate Transaction, to
be assumed by the successor corporation or parent thereof.
"Corporate Transaction," as defined in the 1996 Plan, includes (i) a merger
or consolidation in which the Company is not the surviving entity (other than
a transaction to change the state of the Company's incorporation or a
transaction in which holders of the Company's outstanding securities
immediately before such transaction own more than 50% of the voting power of
the entity following such transaction); (ii) the disposition of all or
substantially all of the assets of the Company (other than a disposition in
which stockholders immediately before such transaction own more than 50% of
the total voting power of the purchaser or other transferee following such
transaction); and (iii) certain reverse mergers in which the Company is the
surviving entity but the Company's stockholders immediately prior to such
merger do not hold more than 50% of the total voting power of the Company
immediately following such merger.
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Stock Option Program for Nonemployee Directors
Under the 1996 Plan, the Company grants a nonqualified stock option to
purchase 1,250 shares of Common Stock to each nonemployee director on the date
the director is first appointed or elected to the Board of Directors, which
fully vests on the first anniversary of the date of grant. Nonemployee
directors serving at the time of the adoption of the program each received
grants of 1,250 shares of Common Stock. Commencing with the Company's 1999
Annual Meeting of Stockholders, the Company will grant an additional
nonqualified stock option to purchase 1,250 shares of Common Stock to each
nonemployee director immediately following their reelection at each annual
meeting of stockholders, which option fully vests on the first anniversary of
the date of such grant.
1998 Employee Stock Purchase Plan
The Company adopted the 1998 Employee Stock Purchase Plan in August 1998.
The ESPP will be implemented upon the effectiveness of this offering. The ESPP
is intended to qualify under Section 423 of the Internal Revenue Code of 1986,
as amended, and permits eligible employees of the Company and its subsidiaries
to purchase Common Stock through payroll deductions of up to 15% of their
compensation. Under the ESPP, no employee may purchase Common Stock worth more
than $25,000 in any calendar year, valued as of the first day of each offering
period. In addition, owners of 5% or more of the Company's or a subsidiary's
Common Stock may not participate in the ESPP. An aggregate of 450,000 shares
of Common Stock are authorized for issuance under the ESPP.
The ESPP will be implemented with six-month offering periods, the first such
period to commence upon the effectiveness of this offering. Thereafter,
offering periods will begin on each January 1 and July 1. The price of Common
Stock purchased under the ESPP will be the lesser of 85% of the fair market
value on the first day of an offering period and 85% of the fair market value
on the last day of an offering period, except that the purchase price for the
first offering period will be equal to the lesser of 100% of the initial
public offering price of the Common Stock offered hereby and 85% of the fair
market value on December 31, 1998. The ESPP does not have a fixed expiration
date, but may be terminated by the Company's Board of Directors at any time.
No shares of Common Stock have been issued under the ESPP.
In the event of a merger, consolidation, or acquisition by another
corporation of all or substantially all of the Company's assets, or the
liquidation or dissolution of the Company, the last day of an offering period
on which a participant may purchase stock will be the business day immediately
preceding the effective date of such event, unless the plan administrator
provides for the assumption or substitution of the outstanding purchase
rights.
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CERTAIN TRANSACTIONS
On April 10, 1996, Naveen Jain purchased 10,000,000 shares of Common Stock
for an aggregate price of $2,000. In April 1998, Mr. Jain made an interest-
free loan to the Company in the amount of $150,000, which has been fully
repaid by the Company. On April 10, 1996, the Company granted an option to
purchase 250,000 shares of Common Stock at an exercise price of $0.02 per
share to Anuradha Jain, Mr. Jain's wife, in connection with her employment as
the Company's Director of Human Resources, and granted an option to purchase
150,000 shares of Common Stock at an exercise price of $0.02 per share to
Punam Agrawal, Mr. Jain's sister-in-law, in connection with her employment as
the Company's Director of Marketing. In a private placement with other
investors on May 21, 1998, the Company sold 25,000 shares of Common Stock at
$4.00 per share to Siddarth Agrawal, Mr. Jain's brother-in-law, and 100,000
shares of Common Stock to TEOCO Corporation at $4.00 per share. Atul Jain, Mr.
Jain's brother, is President of TEOCO Corporation.
On May 21, 1998, the Company sold shares of Common Stock in a private
placement transaction as follows (the "May 1998 Stock Purchase"): 937,500
shares of Common Stock at $4.00 per share and warrants to purchase up to
1,688,729 shares of Common Stock at a weighted average exercise price of $5.87
per share to Acorn Ventures-IS, LLC ("Acorn Ventures"); 156,250 shares of
Common Stock at $4.00 per share and warrants to purchase up to 230,281 shares
of Common Stock at a weighted average exercise price of $5.87 per share to
Kellett Partners, LLP ("Kellett Partners"); and 31,250 shares of Common Stock
at $4.00 per share and warrants to purchase up to 76,762 shares of Common
Stock at a weighted average exercise price of $5.87 per share to John and
Carolyn Cunningham. John E. Cunningham, IV, a director of the Company, is
President of Kellett Investment Corporation, an affiliate of Kellett Partners.
Mr. Cunningham disclaims beneficial ownership of such shares held by Kellett
Partners. Carolyn Cunningham is John Cunningham's spouse.
Pursuant to the terms of the May 1998 Stock Purchase, on August 6, 1998, the
Company issued Common Stock and warrants to purchase Common Stock in exchange
for the termination of certain anti-dilution rights as follows: 16,680 shares
of Common Stock and warrants to purchase up to 30,047 shares of Common Stock
at a weighted average exercise price of $5.87 to Acorn Ventures; 2,427 shares
of Common Stock and warrants to purchase up to 3,578 shares of Common Stock at
a weighted average exercise price of $5.87 to Kellett Partners; and 482 shares
of Common Stock and warrants to purchase up to 1,186 shares of Common Stock at
a weighted average exercise price of $5.87 to John and Carolyn Cunningham.
Acorn Ventures, Kellett Partners and John and Carolyn Cunningham are entitled
to certain registration rights with respect to the shares of Common Stock and
the Common Stock issuable upon exercise of the warrants purchased in the
private placement. See "Description of Capital Stock--Registration Rights."
On May 21, 1998, the Company entered into Consulting Agreements with Acorn
Ventures, John E. Cunningham, IV and Kellett Partners, pursuant to which the
Company is required to pay reasonable out-of-pocket expenses incurred by such
persons in connection with such persons' services as consultants. In addition,
the Company has entered into agreements to indemnify Acorn Ventures, John E.
Cunningham, IV and Kellett Partners against expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by such persons in any
action or proceeding in which such persons are parties or participants arising
out of such persons' services as consultants. These consulting services
include assistance in defining the Company's business strategy, identifying
and meeting with sources of financing and assisting the Company in structuring
and negotiating such financings. The Consulting Agreements have terms of five
years and are terminable by either party upon breach of the Consulting
Agreement by the other party or on 30 days' notice. Other than the
reimbursement of out-of-pocket expenses, there is no other cash compensation
under the Consulting Agreements.
In July 1998, the Company sold 25,000 shares of Common Stock at $8.00 per
share in a private placement transaction to the Bevis Family Trust. Douglas A.
Bevis, the Company's Vice President and Chief Financial Officer, is Trustee of
the Bevis Family Trust and is a beneficiary of the Bevis Family Trust, along
with his four siblings. Mr. Bevis disclaims beneficial ownership of such
shares except as to the extent of his
62
<PAGE>
proportionate interest in the trust. In addition, in July 1998, the Company
sold 80,000 shares of Common Stock at $7.50 per share to Mr. Bevis pursuant to
the Company's 1998 Stock Purchase Rights Plan.
In July 1998, the Company sold 12,500 shares of Common Stock at $8.00 per
share to Steven Brady in a private placement with other investors. Mr. Brady
is the brother of Ellen B. Alben, the Company's Vice President, Legal and
Business Affairs and Secretary.
Thomson Directories Limited entered into a joint venture agreement with the
Company in July 1998. Gary C. List, a director of the Company, is Chief
Executive Officer of Thomson and a beneficial shareholder and the Chief
Executive Officer of TDL Group Limited, the holding company of Thomson. The
Company sold Mr. List 12,500 shares of Common Stock at $8.00 per share in a
private placement with other investors in July 1998.
On August 6, 1998, the Company sold shares of Common Stock in a private
placement as follows: 62,500 shares at $8.00 per share to Acorn Ventures;
140,625 shares at $8.00 per share to Kellett Partners; and 15,625 shares at
$8.00 per share to John and Carolyn Cunningham. John E. Cunningham, IV, a
director of the Company, is President of Kellett Investment Corporation, an
affiliate of Kellett Partners. Mr. Cunningham disclaims beneficial ownership
of such shares held by Kellett Partners. Acorn Ventures, Kellett Partners and
John and Carolyn Cunningham are entitled to certain registration rights with
respect to the shares purchased in the private placement. See "Description of
Capital Stock--Registration Rights."
The Company believes that all the transactions set forth above were made on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. Any future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors, and will be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management--Limitation of Liability and
Indemnification Matters."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock as of September
30, 1998 and as adjusted to reflect the sale of the 5,000,000 shares of Common
Stock offered hereby for (i) each person or entity known by the Company to
beneficially own more than 5% of the Common Stock, (ii) each director of the
Company, (iii) the Company's Chief Executive Officer, and (iv) all of the
Company's directors and executive officers as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole voting
and investment power with respect to such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
---------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OFFERING OFFERING
- ------------------------ ---------------------- --------- ---------
<S> <C> <C> <C>
Naveen Jain (2)................. 10,128,124 66.3% 50.0%
c/o InfoSpace.com, Inc.
15375 N.E. 90th Street
Redmond, WA 98052
Acorn Ventures-IS, LLC (3)...... 2,735,456 16.3 12.5
1309 114th Avenue S.E.
Suite 200
Bellevue, WA 98004
John E. Cunningham, IV (4)...... 658,466 4.3 3.2
Gary C. List.................... 12,500 * *
Peter L. S. Currie.............. -- -- --
Carl Stork...................... -- -- --
All directors and executive
officers as a group (7 persons)
(5)............................ 10,904,090 70.0 53.0
</TABLE>
- ---------------------
* Less than 1%
(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 or warrants held by that
person that are currently exercisable or will become exercisable within 60
days are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing the percentage ownership of any other person.
Unless otherwise indicated in the footnotes below, the persons and
entities named in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable.
(2) Represents 7,466,666 shares of Common Stock held in the name of Naveen and
Anuradha Jain, 500,000 shares of Common Stock held by the Jain Family
Irrevocable Trust, 1,000,000 shares of Common Stock held by Naveen Jain
GRAT No. 1, 1,000,000 shares of Common Stock held by Anuradha Jain GRAT
No. 1 and 161,458 shares subject to options exercisable by Anuradha Jain
within 60 days of September 30, 1998. Anuradha Jain is Mr. Jain's spouse.
(3) Includes 1,718,776 shares of Common Stock issuable upon exercise of
warrants currently exercisable.
(4) Includes 77,948 shares of Common Stock issuable upon exercise of warrants
currently exercisable. Also includes 533,161 shares of Common Stock
beneficially owned by Kellett Partners, LLP (consisting of 299,302 shares
of Common Stock and 233,859 shares of Common Stock upon exercise of
warrants currently exercisable). Mr. Cunningham is President of Kellett
Investment Corporation, an affiliate of Kellett Partners, LLP. Mr.
Cunningham disclaims beneficial ownership of such shares beneficially held
by Kellett Partners, LLP.
(5) Includes 473,265 shares subject to options and warrants exercisable within
60 days of September 30, 1998.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $0.0001 par value per share, and 15,000,000 shares of Preferred
Stock, $0.0001 par value per share. The Company's Restated Certificate of
Incorporation was amended on August 25, 1998 to, among other things, increase
the number of authorized shares of Common Stock from 40,000,000 to 50,000,000.
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 reference to, the provisions of the Company's Restated Certificate
of Incorporation, which is included as an exhibit to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.
COMMON STOCK
As of September 30, 1998, there were 15,115,887 shares of Common Stock
outstanding held of record by approximately 95 stockholders. There will be
20,115,887 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options
after September 30, 1998) after giving effect to the sale of Common Stock
offered to the public hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available for the payment of
dividends. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of
any outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the shares of Common Stock to be issued upon completion of
this offering will be fully paid and nonassessable. See "Risk Factors--Control
by Principal Stockholder and His Family" and "Dividend Policy."
PREFERRED STOCK
There are no shares of Preferred Stock outstanding. Pursuant to the
Company's Restated Certificate of Incorporation, the Board of Directors has
the authority, without further action by the stockholders, to issue up to
15,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges and relative, participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the Common Stock. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. Preferred Stock could thus be issued quickly with
terms calculated to delay or prevent a change of control of the Company or
make removal of management more difficult. Additionally, the issuance of
Preferred Stock may have the effect of decreasing the market price of the
Common Stock, and may adversely affect the voting and other rights of the
holders of Common Stock. The Company has no plans to issue any Preferred
Stock. See "Risk Factors--Antitakeover Effect of Certain Charter Provisions
and Applicable Law; Right of First Negotiation."
WARRANTS
As of September 30, 1998, there were outstanding warrants to purchase
3,531,719 shares of Common Stock. Five investors hold warrants to purchase an
aggregate of 2,028,523 and 35,313 shares of Common Stock, which expire on May
21, 2008 and August 6, 2008, respectively, at a weighted average exercise
price of $5.87 per share. One investor holds a warrant to purchase 477,967
shares at an exercise price of $0.02 per
65
<PAGE>
share. This warrant expires on October 30, 2002. On August 24, 1998, in
connection with the agreement relating to the Company's white pages directory
services, the Company issued to AOL warrants to purchase up to 989,916 shares
of Common Stock, which warrants vest in 16 equal quarterly installments over
four years, based on the delivery by AOL of a minimum number of searches on
the Company's white pages directory service, and have an exercise price of
$12.00 per share.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF RESTATED CERTIFICATE OF
INCORPORATION AND WASHINGTON AND DELAWARE LAW; RIGHT OF FIRST NEGOTIATION
As noted above, the Company's Board of Directors, without stockholder
approval, has the authority under the Company's Restated Certificate of
Incorporation to issue Preferred Stock with rights superior to the rights of
the holders of Common Stock. As a result, Preferred Stock could be issued
quickly and easily, could adversely affect the rights of holders of Common
Stock and could be issued with terms calculated to delay or prevent a change
of control of the Company or make removal of management more difficult.
Election and Removal of Directors. Effective with the first annual meeting
of stockholders following this offering, the Company's Restated Bylaws provide
for the division of the Company's Board of Directors into three classes, as
nearly equal in number as possible, with the directors in each class serving
for a three-year term, and one class being elected each year by the Company's
stockholders. See "Management--Board of Directors." Directors may be removed
only for cause. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for stockholders to replace
a majority of directors.
Approval for Certain Business Combinations. The Company's Restated
Certificate of Incorporation requires that certain business combinations
(including a merger, share exchange and the sale, lease, exchange, mortgage,
pledge, transfer or other disposition or encumbrance of a substantial part of
the Company's assets other than in the usual and regular course of business)
be approved by the holders of not less than two-thirds of the outstanding
shares, unless such business combination has been approved by a majority of
the Board of Directors, in which case the affirmative vote required shall be a
majority of the outstanding shares.
Stockholder Meetings. Under the Company's Restated Certificate of
Incorporation and Restated Bylaws, the stockholders may call a special meeting
only upon the request of holders of at least 30% of the outstanding shares.
Additionally, the Board of Directors, the Chairman of the Board and the
President may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. The Company's Restated Bylaws establish advance notice procedures
with respect to stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the direction of
the Board of Directors or a committee thereof.
The laws of the Washington, where the Company's principal executive offices
are located, impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act (the "WBCA") prohibits a "Target
Corporation," with certain exceptions, from engaging in certain "Significant
Business Transactions" with a person or group of persons which beneficially
owns 10% or more of the voting securities of the Target Corporation (an
"Acquiring Person") for a period of five years after such acquisition, unless
the transaction or acquisition of shares is approved by a majority of the
members of the Target Corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a
merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or
more of the employees of the Target Corporation as a result of the Acquiring
Person's acquisition of 10% or more of the shares or allowing the Acquiring
Person to receive any disproportionate benefit as a stockholder. After the
five-year period, a Significant Business Transaction may take place as long as
it complies
66
<PAGE>
with certain fair price provisions of the statute or is approved at an annual
or special meeting of stockholders. A Target Corporation includes a foreign
corporation if (i) the corporation has a class of voting stock registered
pursuant to Section 12 or 15 of the Securities Exchange Act of 1934, as
amended, (ii) the corporation's principal executive office is located in
Washington, (iii) any of (a) more than 10% of the corporation's stockholders
of record are Washington residents, (b) more than 10% of its shares of record
are owned by Washington residents or (c) 1,000 or more of its stockholders of
record are Washington residents, (iv) a majority of the corporation's
employees are Washington residents or more than 1,000 Washington residents are
employees of the corporation and (v) a majority of the corporation's tangible
assets are located in Washington or the corporation has more than $50 million
of tangible assets located in Washington. A corporation may not "opt out" of
this statute. If the Company meets the definition of a Target Corporation,
Chapter 23B.19 of the WBCA may have the effect of delaying, deferring or
preventing a change of control of the Company.
The Company is subject to Section 203 of the DGCL ("Section 203"), which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless (i) prior to such date, the board of directors of the
corporation approves either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock, excluding shares held by directors, officers and
certain employee stock plans, or (iii) on or after the consummation date the
business combination is approved by the board of directors and by the
affirmative vote at an annual or special meeting of stockholders of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder. For purposes of Section 203, a "business combination" includes,
among other things, a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and an "interested
stockholder" is generally a person who, together with affiliates and
associates of such person, (i) owns 15% or more of the corporation's voting
stock or (ii) is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the prior three years.
Pursuant to certain agreements with AOL, if the Company receives an
unsolicited proposal, or the Company determines to solicit proposals or
otherwise enter into discussions that would result in a sale of a controlling
interest in the Company or other merger, asset sale or other disposition that
effectively results in a change of control of the Company (a "Disposition"),
then the Company is required to give written notice to AOL, and AOL has seven
days to provide notice to the Company of its desire to negotiate in good faith
with the Company regarding a Disposition involving AOL. In the event that AOL
timely delivers such a notice, then the Company will negotiate exclusively and
in good faith with AOL regarding a Disposition for a period of 30 days from
the date of delivery of the Company's initial notice to AOL, after which the
Company will be free to negotiate a Disposition with other third parties if
the Company and AOL cannot in good faith come to terms. If such a Disposition
is not consummated within five months from the date of delivery of the
Company's initial notice to AOL, the process described above will again apply.
AOL's right of first negotiation could have the effect of delaying, deterring
or preventing a change of control of the Company.
These charter provisions, provisions of Washington and Delaware law and
AOL's right of first negotiation may have the effect of delaying, deterring or
preventing a change of control of the Company.
REGISTRATION RIGHTS
Pursuant to certain Investor Rights Agreements with the Company, dated as of
May 21, 1998, three investors holding an aggregate of 1,144,589 shares of
Common Stock and warrants to purchase 2,030,583 shares of Common Stock (the
"Holders") are entitled to certain rights with respect to the registration of
such shares under the Securities Act. If the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other security holders, the Holders are entitled to notice of
such registration and to include shares of Common Stock in such registration
at the
67
<PAGE>
Company's expense. Additionally, the Holders are entitled to certain demand
registration rights pursuant to which they may require the Company to file a
registration statement under the Securities Act at the Company's expense with
respect to their shares of Common Stock, and the Company is required to use
its commercially reasonable efforts to effect such registration. Further, the
Holders may require the Company to file up to three additional registration
statements on Form S-3 (and no more than two in any calendar year), with the
Company bearing the expense for up to one such registration in any calendar
year. All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration.
Pursuant to certain Stockholder Rights Agreements with the Company, dated as
of August 6, 1998, six investors holding an aggregate of 492,500 shares of
Common Stock are entitled to notice of registration if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, and are entitled to
include shares of Common Stock in such registration at the Company's expense.
These registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration.
In connection with the acquisition of all the outstanding membership units
of YPI, the former members of YPI holding an aggregate of 85,000 shares of
Common Stock may require the Company to file additional registration
statements on Form S-3 at the expense of those stockholders requesting such
registration.
AOL, which holds a warrant to purchase 989,916 shares of Common Stock, is
entitled to notice of registration if the Company proposes to register any of
its securities under the Securities Act, either for its own account or for the
account of other security holders, and is entitled to include shares of Common
Stock issuable upon the exercise of such warrant in such registration at the
Company's expense. Further, AOL may require the Company to file up to four
additional registration statements on Form S-3, with the Company bearing the
expense for such registrations. These registration rights are subject to
certain conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, Seattle, Washington.
NASDAQ NATIONAL MARKET LISTING
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "INSP," subject to official notice of issuance.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company and there can be no assurance that a significant public market
for the Common Stock will be developed or be sustained after this offering.
Sales of substantial amounts of Common Stock in the public market after this
offering, or the possibility of such sales occurring, could adversely affect
prevailing market prices for the Common Stock or the future ability of the
Company to raise capital through an offering of equity securities.
After this offering, the Company will have outstanding an aggregate of
20,115,887 shares of Common Stock. Of these shares, the 5,000,000 shares
offered hereby will be freely tradable in the public market without
restriction under the Securities Act, unless such shares are held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 15,115,887 shares of Common Stock outstanding
upon completion of this offering will be "restricted securities," as that term
is defined in Rule 144 under the Securities Act (the "Restricted Shares"). The
Restricted Shares were issued and sold by the Company in private transactions
in reliance upon exemptions from registration under the Securities Act.
Restricted Shares may be sold in the public market only if they are registered
or if they qualify for an exemption from registration, such as Rule 144 or 701
under the Securities Act, which are summarized below.
Pursuant to certain "lock-up" agreements, all the executive officers,
directors and certain stockholders and employees of the Company, who
collectively hold an aggregate of approximately 14,992,902 Restricted Shares
of the Company, have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 180
days from the date of this Prospectus. Hambrecht & Quist LLC may, in its sole
discretion and at any time without prior notice, release all or any portion of
the Common Stock subject to these lock-up agreements. Hambrecht & Quist LLC
currently has no plans to release any portion of the securities subject to
these lock-up agreements. When determining whether or not to release shares
from the lock-up agreements, Hambrecht & Quist LLC will consider, among other
factors, market conditions at the time, the number of shares proposed to be
released or for which the release is being requested and a stockholder's
reasons for requesting the release. The Company has also entered into an
agreement with Hambrecht & Quist LLC that the Company will not offer, sell or
otherwise dispose of Common Stock for a period of 180 days from the date of
this Prospectus.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701, including certain shares issuable upon exercise of options,
will be as follows: (i) no shares will be eligible for sale prior to 180 days
after the date of this Prospectus, (ii) 11,282,004 shares will be eligible for
sale 180 days after the date of this Prospectus upon the expiration of lock-up
agreements with the Underwriters and (iii) an additional 3,833,883 shares will
become eligible for sale thereafter at various times upon the expiration of
their respective one-year holding periods.
Following the expiration of such lock-up periods, 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 pursuant to
Rule 701 under the Securities Act. Rule 701 permits resales of such shares in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this Prospectus, a person (or persons whose shares of the
Company are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner who is not an
affiliate of the Company) 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 then outstanding shares of Common Stock (approximately 201,159 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
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<PAGE>
sale. Sales under Rule 144 are also subject to certain manner of sale and
notice requirements and to the availability of current public information
about the Company. 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 two
years (including the holding period of any prior owner who is not an affiliate
of the Company) is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
The Company intends to file after the effective date of this offering a
Registration Statement on Form S-8 to register approximately 3,490,625 shares
of Common Stock issuable upon the exercise of outstanding stock options or
reserved for issuance under the 1996 Plan and the ESPP. Such Registration
Statement will become effective automatically upon filing. Shares issued under
the foregoing plans, after the filing of a Registration Statement on Form S-8,
may be sold in the open market, subject, in the case of certain holders, to
the Rule 144 limitations applicable to affiliates, the above-referenced lock-
up agreements and vesting restrictions imposed by the Company.
Following this offering, the holders of an aggregate of 1,722,089 shares of
outstanding Common Stock and up to 3,020,499 shares of Common Stock issuable
upon exercise of warrants will, under certain circumstances, have rights to
require the Company to register their shares for future sale. See "Description
of Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist
LLC, NationsBanc Montgomery Securities LLC and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, have severally agreed to purchase from
the Company the following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................
NationsBanc Montgomery Securities LLC............................
Dain Rauscher Wessels............................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares 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 $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price
and other selling terms may be changed by the Representatives of the
Underwriters. The Representatives have advised the Company that the
Underwriters do not intend to confirm discretionary sales in excess of five
percent of the shares of Common Stock offered hereby.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 750,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise this option, 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 to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain stockholders of the Company, including the executive officers and
directors, who will own (or have the right to purchase) in the aggregate
16,871,436 shares of Common Stock (including shares issuable upon exercise of
options to purchase Common Stock) after the offering, have agreed that they
will not, without
71
<PAGE>
the prior written consent of Hambrecht & Quist LLC, offer, sell, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares
of Common Stock or securities exchangeable for or convertible into shares of
Common Stock owned by them during the 180-day period following the date of
this Prospectus. The Company has agreed that it will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common
Stock during the 180-day period following the date of this Prospectus, except
that the Company may issue shares upon the exercise of options granted prior
to the date hereof, and may grant additional options under its stock option
plans, provided that, without the prior written consent of Hambrecht & Quist
LLC, such additional options shall not be exercisable during such period.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and results of operations of the
Company, market valuations of other companies engaged in activities similar to
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. The estimated initial public
offering price range set forth on the cover of this preliminary prospectus is
subject to change as a result of market conditions and other factors.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with this offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with this offering when shares of Common Stock sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
In August 1998, H & Q InfoSpace Investors, LP and Hambrecht & Quist
California purchased 175,000 and 75,000 shares of Common Stock, respectively,
at $8.00 per share as part of an equity financing on the same terms pursuant
to which all other participants in the financing purchased their shares.
Certain of the interests of H & Q InfoSpace Investors, LP and Hambrecht &
Quist California are beneficially owned by persons affiliated with Hambrecht &
Quist LLC.
In August 1998, InfoSpace Investors General Partners purchased 23,750 shares
of Common Stock at $8.00 per share as part of an equity financing on the same
terms pursuant to which all other participants in the financing purchased
their shares. All of such shares are beneficially owned by persons affiliated
with NationsBanc Montgomery Securities LLC.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities
being offered hereby will be passed on for the Company by Perkins Coie LLP,
Seattle, Washington. Certain legal matters in connection with this offering
will be passed on for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
72
<PAGE>
EXPERTS
The consolidated financial statements of InfoSpace.com, Inc. as of December
31, 1996, December 31, 1997 and June 30, 1998 and for the period from March 1,
1996 (date of inception) through December 31, 1996, the year ended December
31, 1997, and the six-month period ended June 30, 1998, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing elsewhere herein, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Outpost Network, Inc. as of December 31, 1996
and December 31, 1997, and for the years then ended, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing elsewhere herein, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1, of which this Prospectus
is a part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits thereto for further information with respect to the Company
and the Common Stock offered hereby. Statements contained herein concerning
the provisions of any documents are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement. Each such statement is qualified in its entirety
by such reference. The Registration Statement, including exhibits filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. Information concerning the
Company is also available for inspection at the offices of the Nasdaq National
Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by independent auditors and may furnish its stockholders with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary consolidated financial information.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS:
Pro Forma Combined Consolidated Statements of Operations for the Six
Months Ended June 30, 1998............................................... F-2
Pro Forma Combined Consolidated Statements of Operations for the Year
Ended December 31, 1997.................................................. F-3
Notes to Unaudited Pro Forma Combined Consolidated Financial Statements... F-4
INFOSPACE.COM, INC.:
Independent Auditors' Report.............................................. F-6
Consolidated Balance Sheets............................................... F-7
Consolidated Statements of Operations..................................... F-8
Consolidated Statements of Changes in Stockholders' Equity................ F-9
Consolidated Statements of Cash Flows..................................... F-10
Notes to Consolidated Financial Statements................................ F-11
OUTPOST NETWORK, INC.:
Independent Auditors' Report.............................................. F-24
Balance Sheets............................................................ F-25
Statements of Operations.................................................. F-26
Statements of Changes in Shareholders' Equity (Deficiency)................ F-27
Statements of Cash Flows.................................................. F-28
Notes to Financial Statements............................................. F-29
</TABLE>
F-1
<PAGE>
INFOSPACE.COM, INC. AND OUTPOST NETWORK, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
INFOSPACE.COM OUTPOST NETWORK
JANUARY 1, 1998- JANUARY 1, 1998- PRO FORMA PRO FORMA
JUNE 30, 1998 JUNE 2, 1998 ADJUSTMENTS COMBINED
---------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ 2,855,010 $ 61,610 $(142,601)(1) $ 2,774,019
Cost of revenues........ 543,654 152,778 91,665 (2) 788,097
----------- ----------- --------- -----------
Gross profit (loss)... 2,311,356 (91,168) (234,266) 1,985,922
Operating expenses:
Product development.... 149,176 69,822 3,335 (3) 222,333
Sales and marketing.... 903,299 128,069 (107,601)(1) 923,767
General and
administrative........ 1,141,270 733,383 290,450 (1),(4) 2,165,103
Amortization of
purchased advertising
agreements............ --
Write-off of in-process
research and
development........... 4,700,000 4,700,000
----------- ----------- --------- -----------
Total operating
expenses........... 6,893,745 931,274 186,184 8,011,203
Loss from operations.... (4,582,389) (1,022,442) (420,450) (6,025,281)
Other income (expense),
net.................... 43,206 (24,356) 18,850
----------- ----------- --------- -----------
Net loss................ $(4,539,183) $(1,046,798) $(420,450) $(6,006,431)
=========== =========== ========= ===========
Basic and diluted net
loss per share......... $ (0.39) $ (0.47)
=========== ===========
Shares used in computing
basic and diluted net
loss per share
calculations........... 11,572,406 1,267,946 (5) 12,840,352
=========== ========= ===========
</TABLE>
(1),(2),(3),(4),(5)refers to relevant notes in Note 4 to the Unaudited Pro
Forma Combined Consolidated Financial Statements.
See accompanying notes to the Unaudited Pro Forma Combined Consolidated
Financial Statements.
F-2
<PAGE>
INFOSPACE.COM, INC. AND OUTPOST NETWORK, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
OUTPOST PRO FORMA PRO FORMA
INFOSPACE.COM NETWORK ADJUSTMENTS COMBINED
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................ $1,685,096 $ 293,963 $ (63,069)(1) $ 1,915,990
Cost of revenues........ 347,183 412,964 219,996 (2) 980,143
---------- ------------ ------------ ------------
Gross profit (loss). 1,337,913 (119,001) (283,065) 935,847
Operating expenses:
Product development... 212,677 356,218 8,004 (3) 576,899
Sales and marketing... 830,054 201,244 (63,069)(1) 968,229
General and
administrative....... 631,400 921,391 781,080 (4) 2,333,871
Amortiation of
purchased advertising
agreements........... 382,188 382,188
---------- ------------ ------------ ------------
Total operating
expenses........... 2,056,319 1,478,853 726,015 4,261,187
Loss from operations.... (718,406) (1,597,854) (1,009,080) (3,325,340)
Other income (expense),
net.................... 21,296 (27,148) (5,852)
---------- ------------ ------------ ------------
Net loss................ $ (697,110) $ (1,625,002) $ (1,009,080) $ (3,331,192)
========== ============ ============ ============
Basic and diluted net
loss per share......... $ (0.06) $ (0.27)
========== ============
Shares used in computing
basic and diluted net
loss per share
calculations .......... 10,998,157 1,499,988 (5) 12,498,145
========== ============ ============
</TABLE>
(1),(2),(3),(4),(5)refers to relevant notes in Note 4 to the Unaudited Pro
Forma Combined Consolidated Financial Statements.
See accompanying notes to the Unaudited Pro Forma Combined Consolidated
Financial Statements.
F-3
<PAGE>
INFOSPACE.COM, INC. AND OUTPOST NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
1. THE PERIODS COMBINED
The InfoSpace.com, Inc. consolidated statements of operations for the six
months ended June 30, 1998 and the year ended December 31, 1997 have been
combined with the Outpost Networks, Inc. statements of operations for the
period from January 1, 1998 to June 2, 1998, and the year ended December 31,
1997, respectively, as if the Merger had occurred as of the beginning of each
period presented under the purchase method of accounting. The results of
Outpost Networks, Inc. for the period June 3, 1998 to June 30, 1998 have
already been consolidated into the InfoSpace.com, Inc. consolidated statement
of operations for the six months ended June 30, 1998 as the Merger was
effected on June 2, 1998.
2. PRO FORMA BASIS OF PRESENTATION
These Unaudited Pro Forma Combined Consolidated Financial Statements are
based on estimates and assumptions. The pro forma adjustments made in
connection with the development of the pro forma information are preliminary
and have been made solely for purposes of developing such pro forma
information as necessary to comply with the disclosure requirements of the
Securities Exchange Commission. The Unaudited Pro Forma Combined Consolidated
Financial Statements do not purport to be indicative of the combined financial
position or results of operations of future periods or indicative of the
results of operations of future periods or indicative of the results that
actually would have been realized had the entities been a single entity during
these periods.
The Unaudited Pro Forma Combined Consolidated Financial Statements as of
December 31, 1997 reflect the issuance of 1,499,988 shares of InfoSpace.com,
Inc. Common Stock in exchange for 34,972,768 shares of Outpost Networks, Inc.
Common Stock outstanding as of June 2, 1998. These shares are already included
as outstanding for the period June 3, 1998 to June 30, 1998 in the historical
Consolidated Financial Statements of InfoSpace.com, Inc., as of June 30, 1998
as the Merger was effected on June 2, 1998. The pro forma adjustments reflect
the additional shares that would be used in computing basic and diluted
earnings per share as if the Merger had occurred at the beginning of the
period.
3. PRO FORMA EARNINGS PER SHARE
The Pro Forma Combined Consolidated Financial Statements for InfoSpace.com,
Inc. have been prepared as if the Merger was completed at the beginning of the
periods presented. The pro forma basic net loss per share is based on the
combined weighted average number of shares of InfoSpace.com, Inc. Common Stock
outstanding during the period and the number of InfoSpace.com, Inc. Common
Stock to be issued in exchange as discussed in Note 2.
The Pro Forma diluted loss per share is computed using the weighted average
number of InfoSpace.com, Inc. Common Stock and dilutive common equivalent
shares outstanding during the period and the number of shares of
InfoSpace.com, Inc. Common Stock to be issued in exchange. Common equivalent
shares consist of the incremental common shares issuable upon conversion of
the exercise of stock options and warrants using the treasury stock method.
Common equivalent shares are excluded from the computation if their effect is
antidilutive. The combined Company had a pro forma net loss for all periods
presented herein; therefore, none of the options and warrants outstanding
during each of the periods presented were included in the computation of pro
forma dilutive earnings per share as they were antidilutive.
4. PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
The objective of the pro forma information is to show what the significant
effects on the historical financial information might have been had the
Companies been merged for the periods presented.
F-4
<PAGE>
INFOSPACE.COM, INC. AND OUTPOST NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accordingly, all intercompany transactions between the two entities have been
included as eliminations in the pro forma adjustments column.
Additionally, under the purchase method of accounting, the purchase price is
allocated to the net assets acquired based upon their estimated fair value.
The following represents the purchase price allocation for Outpost Networks,
Inc.:
<TABLE>
<S> <C>
Book value of net liabilities acquired...................... $ (191,000)
Core technology............................................. 1,100,000
In-process research and development......................... 4,700,000
Assembled workforce......................................... 40,000
----------
Fair value of net assets acquired........................... 5,649,000
==========
Cash paid................................................... 35,000
Fair value of shares issued................................. 6,000,000
Acquisition costs........................................... 1,957,000
----------
Purchase price.............................................. 7,992,000
==========
Excess of purchase price over net assets acquired........... $2,343,000
==========
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
the assets acquired. The goodwill will be capitalized and amortized over a
period of three years.
The core technology and assembled workforce will be capitalized and
amortized over a period of five years. The Unaudited Pro Forma Combined
Consolidated Statements of Operations reflect adjustments for such
amortization. Amortization of the core technology is recorded as cost of
revenues, the workforce is recorded as product development, and goodwill is
recorded as general and administrative expense.
Detail of the specific pro forma adjustments are as follows:
(1) Pro Forma Adjustment represents the elimination of intercompany
revenue and expense for the respective period. For the period from January
1, 1998 to June 2, 1998 intercompany revenue and expense was $142,601. For
the year ended December 31, 1997, intercompany revenue and expense was
$63,069.
(2) Pro Forma Adjustment represents the amortization of core technology.
For the period from January 1, 1998 to June 2, 1998, the expense would have
been $91,665. For the year ended December 31, 1997, the expense would have
been $219,996.
(3) Pro Forma Adjustment represents the amortization of assembled
technology. For the period from January 1, 1998 to June 2, 1998, the
expense would have been $3,335. For the year ended December 31, 1997, the
expense would have been $8,004.
(4) Pro Forma Adjustment represents the amortization of goodwill. For the
period from January 1, 1998 to June 2, 1998, the expense would have been
$325,450. For the year ended December 31, 1997, the expense would have been
$781,080.
(5) Pro Forma Adjustment represents the issuance of 1,499,988 shares of
InfoSpace.com, Inc. Common Stock in exchange for 34,972,768 shares of
Outpost Networks, Inc. Common Stock outstanding as of June 2, 1998. The pro
forma adjustments reflect the additional shares that would be used in
computing basic and diluted earnings per share as if the Merger had
occurred at the beginning of each period. A portion of these shares are
already included as outstanding for the period June 3, 1998 to June 30,
1998 in the historical Consolidated Financial Statements of InfoSpace.com,
Inc., as of June 30, 1998 as the Merger was effected on June 2, 1998.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
InfoSpace.com, Inc.
Redmond, Washington
We have audited the accompanying consolidated balance sheets of
InfoSpace.com, Inc. (the Company) as of December 31, 1996 and 1997, and June
30, 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the period from March 1, 1996
(inception) to December 31, 1996, the year ended December 31, 1997, and the
six months ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of InfoSpace.com, Inc. as of
December 31, 1996 and 1997, and June 30, 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the period from March 1, 1996 (inception) to December 31, 1996, the year ended
December 31, 1997, and the six months ended June 30, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
August 25, 1998
F-6
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997, AND JUNE 30, 1998
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 690,174 $ 324,415 $ 5,774,724
Accounts receivable, net of allowance
for doubtful accounts of $-0-,
$47,000 and $235,000, respectively... 126,574 467,187 897,166
Inventory............................. 4,845
Prepaid expenses and other assets..... 59,334 121,573 91,502
---------- ----------- -----------
Total current assets................ 876,082 913,175 6,768,237
Property and equipment, net............. 195,862 216,439 280,687
Intangible assets:
Goodwill.............................. 2,343,223
Purchased technology.................. 1,100,000
Other................................. 100,000
Less: Accumulated amortization........ (86,729)
-----------
Intangible assets, net.............. 3,456,494
---------- ----------- -----------
Total................................... $1,071,944 $ 1,129,614 $10,505,418
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 39,553 $ 85,814 $ 126,414
Accrued expenses...................... 4,663 204,311 635,955
Deferred revenues..................... 7,239 50,000 202,887
Notes payable......................... 30,000
---------- ----------- -----------
Total current liabilities........... 51,455 370,125 965,256
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, par value $.0001--
Authorized, 15,000,000 shares; no
shares issued or outstanding.........
Common stock, par value $.0001--
Authorized, 30,000,000, 30,000,000
and 40,000,000 shares, respectively;
issued and outstanding, 10,945,253,
11,030,253 and 13,852,741 shares,
respectively......................... 1,095 1,103 1,385
Additional paid-in capital............ 1,471,355 1,998,255 15,827,800
Accumulated deficit................... (380,524) (1,077,634) (5,616,817)
Unearned compensation................. (71,437) (162,235) (672,206)
---------- ----------- -----------
Total stockholders' equity.......... 1,020,489 759,489 9,540,162
---------- ----------- -----------
Total................................... $1,071,944 $ 1,129,614 $10,505,418
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MARCH 1, 1996 (INCEPTION) TO DECEMBER 31, 1996,
YEAR ENDED DECEMBER 31, 1997, AND THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
MARCH 1 TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Revenues................................ $ 199,372 $1,685,096 $ 2,855,010
Cost of revenues........................ 96,641 347,183 543,654
--------- ---------- -----------
Gross profit.......................... 102,731 1,337,913 2,311,356
Operating expenses:
Product development.................... 109,671 212,677 149,176
Sales and marketing.................... 230,774 830,054 903,299
General and administrative............. 163,896 631,400 1,141,270
Amortization of purchased advertising
agreements............................ 382,188
Write-off of in-process research and
development........................... 4,700,000
--------- ---------- -----------
Total operating expenses............ 504,341 2,056,319 6,893,745
--------- ---------- -----------
Loss from operations.................... (401,610) (718,406) (4,582,389)
Other income, net....................... 21,086 21,296 43,206
--------- ---------- -----------
Net loss................................ $(380,524) $ (697,110) $(4,539,183)
========= ========== ===========
Basic and diluted net loss per share.... $ (0.04) $ (0.06) $ (0.39)
========= ========== ===========
Shares used in computing basic and
diluted net loss per share
calculations........................... 9,280,163 10,998,157 11,572,406
========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM MARCH 1, 1996 (INCEPTION) TO DECEMBER 31, 1996,
YEAR ENDED DECEMBER 31, 1997, AND THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
----------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
---------- ------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1996
(inception)............ -- $ -- $ -- $ -- $ -- $ --
Common stock issued.... 10,945,253 1,095 1,370,105 1,371,200
Unearned compensation--
Stock options......... 101,250 (101,250)
Compensation expense--
Stock options......... 29,813 29,813
Net loss............... (380,524) (380,524)
---------- ------ ----------- ----------- --------- -----------
Balance, December 31,
1996................... 10,945,253 1,095 1,471,355 (380,524) (71,437) 1,020,489
Common stock issued for
acquisition........... 85,000 8 292,180 292,188
Unearned compensation--
Stock options......... 234,720 (234,720)
Compensation expense--
Stock options......... 143,922 143,922
Net loss............... (697,110) (697,110)
---------- ------ ----------- ----------- --------- -----------
Balance, December 31,
1997................... 11,030,253 1,103 1,998,255 (1,077,634) (162,235) 759,489
Common stock and
warrants issued for
acquisition........... 1,499,988 150 7,902,159 7,902,309
Common stock issued.... 1,322,500 132 5,278,455 5,278,587
Warrants issued........ 40,161 40,161
Unearned compensation--
Stock options......... 608,770 (608,770)
Compensation expense--
Stock options......... 98,799 98,799
Net loss............... (4,539,183) (4,539,183)
---------- ------ ----------- ----------- --------- -----------
Balance, June 30, 1998.. 13,852,741 $1,385 $15,827,800 $(5,616,817) $(672,206) $ 9,540,162
========== ====== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INFOSPACE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 1, 1996 (INCEPTION) TO DECEMBER 31, 1996,
YEAR ENDED DECEMBER 31, 1997, AND THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
MARCH 1 TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Operating Activities:
Net loss............................... $(380,524) $(697,110) $(4,539,183)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization...... 23,513 96,502 151,527
Write-off of in-process research
and development................... 4,700,000
Amortization of purchased
advertising agreements............ 382,188
Compensation expense--stock
options........................... 29,813 143,922 98,799
Noncash services exchanged......... (60,000) 25,872
Bad debt expense................... 47,000 255,812
Loss (gain) on disposal of fixed
assets............................ 3,743 (3,771)
Cash provided (used) by changes in
operating assets and liabilities;
net of assets acquired:
Accounts receivable............... (126,574) (387,613) (685,791)
Inventory......................... 155
Prepaid expenses.................. (59,334) 30,071
Goodwill and other intangible
assets........................... (33,152) (60,000)
Accounts payable.................. 39,553 46,261 40,601
Accrued expenses.................. 4,663 199,648 445,771
Deferred revenues................. 7,239 42,761 152,887
--------- --------- -----------
Net cash provided (used) by
operating activities............ (461,651) (215,850) 612,750
Investing Activities:
Business acquisitions, net of cash
acquired.............................. (311,951)
Purchase of property and equipment..... (219,375) (120,822) (74,235)
Proceeds from sale of fixed assets..... 4,997
Other.................................. (29,087)
--------- --------- -----------
Net cash used by investing
activities...................... (219,375) (149,909) (381,189)
Financing Activities:
Proceeds from issuance of common stock. 1,371,200 5,178,587
Proceeds from sale of warrants......... 40,161
--------- --------- -----------
Net cash provided by financing
activities...................... 1,371,200 5,218,748
--------- --------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 690,174 (365,759) 5,450,309
Beginning of period.................... 690,174 324,415
--------- --------- -----------
End of period.......................... $ 690,174 $ 324,415 $ 5,774,724
========= ========= ===========
Supplemental Disclosure of Noncash
Financing and Investing Activities:
Acquisition of membership interest of
Yellow Pages on the Internet, LLC
(YPI) through issuance of common stock
and assumption of $90,000 payable..... $ -- $ 382,188 $ --
Acquisition of common stock of Outpost
Network, Inc. through issuance of
common stock and warrants and
assumption of liabilities of $191,000. 7,932,000
Stock issued for legal and consulting
services.............................. 50,000
Stock issued for settlement of legal
claim................................. 50,000
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MARCH 1, 1996 (INCEPTION) TO DECEMBER 31, 1996, YEAR ENDED
DECEMBER 31, 1997, AND THE SIX MONTHS ENDED JUNE 30, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business: InfoSpace.com, Inc. (the Company or InfoSpace),
previously known as InfoSpace, Inc., a Delaware corporation, was founded in
1996. The Company is an aggregator and integrator of content services that it
syndicates to a broad network of affiliates, including existing and emerging
Internet portals, destination sites and suppliers of PCs and other Internet
access devices, such as cellular phones, pagers, screen phones, television
set-top boxes, online kiosks and personal digital assistants. The Company
focuses on content with broad appeal, such as yellow pages and white pages,
maps, classified advertisements, real-time stock quotes, information on local
businesses and events, weather forecasts and horoscopes.
The Company derives revenues from the sale of national advertising,
promotions and local Internet yellow pages advertising.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated. The consolidated
financial information contained herein includes the accounts of Outpost
Network, Inc. (Outpost), as of June 30, 1998, and for the period from June 2,
1998, to June 30, 1998 (see Note 4).
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less when purchased to be
cash equivalents.
Inventory: Inventory consists primarily of cards and stamps and is stated at
the lower of cost or market, on a first-in, first-out basis.
Property and equipment: Property and equipment are stated at cost.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer equipment................................................ 3 years
Office furniture and equipment.................................... 7 years
</TABLE>
Intangible assets: Goodwill, purchased technology and other intangibles are
amortized on a straight-line basis over their estimated useful life. All
goodwill currently recorded is amortized over three years. Purchased
technology is amortized over five years, and other intangibles, primarily
consisting of purchased domain name licenses, are amortized over an estimated
useful life of three years.
Other assets: Management periodically reevaluates long-lived assets,
consisting primarily of purchased technology, goodwill, property and
equipment, to determine whether there has been any impairment of the value of
these assets and the appropriateness of their estimated remaining life. No
impairment has been recognized as of June 30, 1998.
Revenue recognition: The Company's revenues are derived from short-term
advertising agreements in which the Company receives a fixed fee or a fee
based on a per impression or click through basis.
Local advertising: Guaranteed minimum payments are recognized over the term
of cooperative sales agreements between the Company and independent yellow
pages publishers. Revenue earned above the guaranteed minimum payments are
recognized over the term of local advertising agreements between yellow pages
advertisers and independent yellow pages publishers.
National advertising: Revenues from contracts based on the number of
impressions displayed or click throughs provided are recognized as the
services are rendered.
F-11
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Promotions: Revenues from fixed fee or carriage fee agreements are
recognized ratably over the related contract term. Commissions and transaction
fees in excess of the guaranteed minimums are recognized in the period the
transaction occurred and was reported by the content providers. For carriage
fee contracts that are performance based with an established maximum, the
Company recognizes revenues as the services are rendered, not to exceed the
maximum amount over the fixed term.
Also included in revenues are barter revenues from the exchange by the
Company with another company of advertising space for reciprocal advertising
space or applicable goods and services. Barter revenues are recorded as
advertising revenues at the lower of the estimated fair value of goods and
services received or impressions given, and are recognized when both the
Company's advertisements and the reciprocal advertisements are run, or goods
or services are received. In cases where there is not sufficient evidence of
fair market value, no revenue is recognized.
Deferred revenues are primarily comprised of billings in excess of
recognized revenues relating to advertising agreements and payments received
pursuant to advertising agreements in advance of revenue recognition. The
Company records a liability at month-end for any shortfalls of minimum
impressions or click throughs that were not attained during the period of the
agreement.
Cost of revenues: Cost of revenues consist primarily of direct personnel
expenses, content license fees, equipment depreciation, communications expense
and costs of aggregation and syndication of content and amounts paid pursuant
to revenue sharing arrangements. Costs associated with revenue sharing
arrangements are accrued monthly. Fees paid for content licenses are
capitalized and amortized under the straight-line method over the license
period.
Product development: Product development costs are generally charged to
operations as incurred. Costs in this classification include the development
of new products and enhancements of existing products. Statement of Financial
Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based upon the Company's product development
process, technological feasibility is established upon completion of a working
model. Costs incurred by the Company between completion of a working model and
the point at which the product is ready for general release have been
insignificant.
Advertising costs: Costs for print advertising are recorded as expense the
first time an advertisement appears. Advertising costs related to electronic
impressions are recorded as expense as impressions are provided. Advertising
expense totaled $8,908 and $217,798 for the years ended December 31, 1996 and
1997, and $416,084 for the six months ended June 30, 1998, respectively.
Unearned compensation: Unearned compensation represents the unamortized
difference between the option exercise price and the fair market value of the
Company's common stock for shares subject to grant at the grant date, for
options issued under the Company's stock incentive plan (see Note 3). The
amortization of deferred compensation is being charged to operations and is
being amortized over the vesting period of the options.
Concentration of credit risk: Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents and trade receivables. The Company places its cash equivalents
with major financial institutions. The Company operates in one business
segment and sells advertising to various companies across several industries.
Accounts receivable are typically unsecured and are derived from revenues
earned from customers primarily located in the United States operating in a
wide variety of industries and geographic areas. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential
credit losses. For the periods ended December 31, 1996 and 1997, no one
customer accounted for more than 10% of revenues. For the six months ended
June 30, 1998, one customer accounted for approximately 12% of revenues. At
December 31, 1996, one customer accounted for
F-12
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximately 20% of accounts receivable and three customers accounted for
approximately 42% of accounts receivable. At December 31, 1997, one customer
accounted for approximately 14% of accounts receivable. At June 30, 1998, two
customers accounted for approximately 22% and 10% of accounts receivable.
Income taxes: The Company has adopted SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets, including net operating
losses, and liabilities are determined based on temporary differences between
the book and tax bases of assets and liabilities. A valuation allowance is
established for deferred tax assets that are unlikely to be realized.
Reclassifications: Certain reclassifications have been made to the 1996 and
1997 financial statements to conform with the 1998 presentation.
Reverse stock split: A one-for-two reverse stock split of the Company's
common stock was effected on August 25, 1998. All references in the financial
statements to shares, share prices, per share amounts and stock plans have
been adjusted retroactively for the one-for-two reverse stock split.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts may differ from estimates.
Recent accounting pronouncements: In June 1997 the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes the standards for reporting comprehensive income and
its components in financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gains/losses on available-for-sale securities. The disclosure
prescribed by SFAS No. 130 must be made for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required upon adoption. The
Company had no comprehensive income items to report for the period from March
1, 1996 (inception) to December 31, 1996, the year ended December 31, 1997,
and the six months ended June 30, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers as well as
the reporting of selected information about operating segments in interim
financial reports to stockholders. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company will
adopt the reporting requirements of SFAS No. 131 in its financial statements
for the year ending December 31, 1998.
F-13
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Property and equipment:
Computer equipment.................... $207,817 $ 308,741 $ 423,695
Office equipment...................... 3,044 7,105 17,494
Office furniture...................... 8,514 19,534 23,013
-------- --------- ---------
219,375 335,380 464,202
Accumulated depreciation.............. (23,513) (118,941) (183,515)
-------- --------- ---------
$195,862 $ 216,439 $ 280,687
======== ========= =========
Accrued expenses:
Salaries and related expenses......... $ 2,215 $ 33,777 $ 117,964
Accrued license fees.................. 16,736 72,609
Accrued legal fees.................... 1,400 12,717 65,000
Accrued commissions................... 42,398
Accrued taxes......................... 3,890 40,000
Accrued settlement costs.............. 695 137,000 240,000
Other................................. 353 191 57,984
-------- --------- ---------
$ 4,663 $ 204,311 $ 635,955
======== ========= =========
</TABLE>
NOTE 3: STOCKHOLDERS' EQUITY
Authorized shares: At incorporation, the Company was authorized to issue
25,000,000 shares, consisting of 20,000,000 shares of common stock with a par
value of $.0001 per share and 5,000,000 shares of preferred stock with a par
value of $.0001 per share. The preferred stock may be issued in one or more
series.
On June 17, 1996, the Certificate of Incorporation was amended to increase
the authorized number of shares of all classes of Company stock to 45,000,000
shares, consisting of 30,000,000 shares of common stock with a par value of
$.0001 per share and 15,000,000 shares of preferred stock with par value of
$.0001 per share.
On May 1, 1998, the Certificate of Incorporation was amended to increase the
authorized number of shares of all classes of Company stock to 55,000,000
shares, consisting of 40,000,000 shares of common stock with a par value of
$.0001 per share and 15,000,000 shares of preferred stock with a par value of
$.0001 per share.
On August 25, 1998, the Board of Directors approved and the Company effected
a one-for-two reverse stock split of the Company's common stock. All
references in the financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the one-for-two
reverse stock split.
On August 25, 1998, the Company filed a Restated Certificate of
Incorporation. The effect was to change the authorized number of all classes
of Company Stock to 65,000,000 shares, consisting of 50,000,000 shares of
common stock with a par value of $.0001 per share and 15,000,000 shares of
preferred stock with a par value of $.0001 per share after giving effect to
the one-for-two reverse stock split.
Restated 1996 Flexible Stock Incentive Plan: On June 3, 1998, the Board of
Directors approved the Restated 1996 Flexible Stock Incentive Plan (the Plan).
The Plan provides employees (including officers and directors who are
employees) of the Company an opportunity to purchase shares of stock pursuant
to options which may qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended (the Code), and employees,
officers, directors, independent contractors and consultants of the
F-14
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company an opportunity to purchase shares of stock pursuant to options which
are not described in Section 422 of the Code (nonqualified stock options). The
Plan also provides for the sale or bonus of stock to eligible individuals in
connection with the performance of service for the Company. Finally, the Plan
authorizes the grant of stock appreciation rights, either separately or in
tandem with stock options, which entitle holders to cash compensation measured
by appreciation in the value of the stock. Not more than 2,500,000 shares of
stock shall be available for the grant of options or the issuance of stock
under the Plan. If an option is surrendered or for any other reason ceases to
be exercisable in whole or in part, the shares which were subject to option
but on which the option has not been exercised shall continue to be available
under the Plan. The Plan is administered by the Board of Directors. Options
granted under the Plan typically vest over four years, 25% one year from the
date of grant and ratably thereafter on a monthly basis.
On June 3, 1998, the Board of Directors approved the Option Exchange Program
and the Option Replacement Program, allowing employees of the Company to
exchange their nonqualified stock options for incentive stock options.
Nonqualified stock options to purchase a total of 362,553 shares were
exchanged for incentive stock options to purchase the equivalent number of
shares with an exercise price equal to the fair market value at the date of
exchange.
Included in the table below as outstanding at June 30, 1998 are options to
purchase 290,624 shares that were issued outside of the Plan, 269,374 of which
were exercisable as of June 30, 1998.
Activity and price information regarding the options are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding, March 1, 1996 (inception)................... -- $ --
Granted................................................ 1,012,500 0.12
---------
Outstanding, December 31, 1996........................... 1,012,500 0.12
Granted................................................ 350,500 3.08
---------
Outstanding, December 31, 1997........................... 1,363,000 0.88
Granted................................................ 692,052 3.05
Cancelled.............................................. (362,553) 1.57
Forfeited.............................................. (5,375) 0.23
---------
Outstanding, June 30, 1998............................... 1,687,124 1.64
=========
Options exercisable, June 30, 1998....................... 834,076 1.35
=========
</TABLE>
Information regarding stock option grants during the period from March 1
(inception) to December 31, 1996, the year ended December 31, 1997, and the
six months ended June 30, 1998, is summarized as follows:
<TABLE>
<CAPTION>
MARCH 1 TO YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE FAIR EXERCISE FAIR EXERCISE FAIR
SHARES PRICE VALUE SHARES PRICE VALUE SHARES PRICE VALUE
------- -------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price exceeds
market price........... 50,000 $2.00 $0.02 250,000 $4.00 $ -- -- $ -- $ --
Exercise price equals
market price........... 900,000 0.02 447,375 4.03 1.01
Exercise price is
less than market price. 62,500 0.02 1.63 100,500 0.78 2.65 259,000 1.37 2.75
</TABLE>
F-15
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to follow the measurement provisions of Accounting
Principles Board Opinion No. 25, under which no recognition of expense is
required in accounting for stock options granted to employees for which the
exercise price equals or exceeds the fair value of the stock at the grant
date. Compensation expense of $29,813, $143,922, and $98,799 was recognized
during the period from March 1, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the six months ended June 30, 1998,
respectively, for options granted with exercise prices less than grant date
fair value.
To estimate compensation expense which would be recognized under SFAS No.
123, Accounting for Stock-based Compensation, the Company uses the modified
Black-Scholes option-pricing model with the following weighted-average
assumptions for options granted through June 30, 1998: risk-free interest rate
ranging from 5.39% to 6%, expected dividend yield of -0-%; no volatility; and
expected life of six years.
Had compensation expense for the Plan been determined based on fair value at
the grant dates for awards under the Plan consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net losses for the
periods presented would have been adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
SIX MONTHS
MARCH 1 TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Net loss as reported............... $(380,524) $(697,110) $(4,539,183)
Net loss--Pro forma................ (380,859) (698,600) (4,567,851)
Basic and diluted net loss per
share--Pro forma.................. (0.04) (0.06) (0.40)
</TABLE>
Additional information regarding options outstanding as of June 30, 1998, is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02............... 1,003,124 7.83 $0.02 554,785 $0.02
3.00............... 5,125 9.35 3.00 125 3.00
4.00-6.00.......... 678,875 6.11 4.02 279,166 4.00
--------- -------
1,687,124 7.14 1.64 834,076 1.35
========= =======
</TABLE>
At June 30, 1998, 1,103,500 shares were available for future grants under
the Plan.
In connection with the May 1998 private placement offering, the Company
issued warrants to purchase 2,028,523 shares of common stock to five third-
party participants for consulting services performed in identifying,
structuring and negotiating future financings. These warrants expire on
May 21, 2008. The exercise prices are as follows:
<TABLE>
<CAPTION>
SHARES PRICE
------ ------
<S> <C>
1,081,879........................................................... $ 4.00
473,322........................................................... 6.00
473,322........................................................... 10.00
</TABLE>
Stock purchase rights plan: On June 26, 1998, the Board of Directors
approved the InfoSpace, Inc. Stock Purchase Rights Plan. The plan is offered
to employees of the Company and its subsidiaries. The purpose of
F-16
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the plan is to provide an opportunity for employees to invest in the Company
and increase their incentive to remain with the Company. A maximum of
1,000,000 shares of common stock are available for issuance under the plan.
During July 1998 the Company offered shares to employees under the plan,
resulting in the sale of 223,251 shares at $7.50 per share.
NOTE 4: BUSINESS COMBINATIONS
YPI: On May 16, 1997, the Company acquired all outstanding Membership
Interest Units of YPI, a limited liability company. YPI operations began to be
included in the Company's financial statements on the effective date of the
acquisition, May 1, 1997. The YPI advertising agreements provided yellow pages
directory publishers with an Internet distribution channel and had terms of
one month to one year. All of the purchase price of YPI was allocated to the
advertising agreements. YPI is a yellow pages sales consortium business. In
conjunction with the acquisition, the Company acquired certain advertising
agreements, all of which expired by December 31, 1997, and assumed a note
payable for $90,000.
In connection with the acquisition of YPI during May 1997, 1,000,000 shares
of common stock were placed into an escrow account. The aggregate number of
shares of the escrow stock to be delivered was derived from revenues generated
by the business during the measurement period. Before December 31, 1997, the
number of shares to be released from escrow was finalized and a total of
85,000 escrow shares were issued to the sellers on January 2, 1998. These
shares were included in the calculation of earnings per share as of the
effective date of acquisition, May 1, 1997. The remaining 915,000 common
shares were returned to the Company for cancellation. The Company acquired YPI
primarily to obtain rights to its advertising agreements and the services of
its founder to further develop the Company's business. This transaction has
been accounted for in the accompanying financial statements as a purchase of
advertising rights based on the fair value of Company shares issued and
liabilities assumed for $382,000. Initial advertising agreements have expired
and renewals are insignificant; therefore the Company has expensed all related
costs. YPI's shareholders have represented that YPI had no significant
operations and that detailed YPI financial information is not available.
The allocation of purchase price is summarized as follows:
<TABLE>
<CAPTION>
BOOK AND
FAIR
VALUE
--------
<S> <C>
Book value of net liabilities acquired at cost................... $(90,000)
Fair value adjustments:
Fair value of advertising contracts acquired................... 396,000
--------
$306,000
========
Purchase price:
Fair value of shares issued for membership interest units...... $292,000
Acquisition expenses............................................. 14,000
--------
$306,000
========
</TABLE>
Outpost Network, Inc.: On June 2, 1998, the Company acquired all of the
common stock of Outpost, a privately held company, for a purchase
consideration of 1,499,988 shares of the Company's common stock, cash of
$35,000, assumed liabilities of $264,000, and acquisition expenses of
$1,957,000. In conjunction with the acquisition, the Company was required to
issue warrants valued at $1,902,000 to a former consultant, which are included
in acquisition costs. The exercise price of the warrants was specified in the
consulting agreement between the Company and the former consultant dated
October 30, 1997. Pursuant to this agreement, the former consultant rendered
advice to the Company regarding the structure and terms of the
F-17
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Outpost merger and the warrants were earned based on the completion of the
merger. Therefore, the warrant value was determined on June 2, 1998, the
effective date of the merger. The transaction was accounted for as a purchase
for accounting purposes.
The allocation of purchase price is summarized as follows:
<TABLE>
<CAPTION>
BOOK AND
FAIR VALUE
----------
<S> <C>
Book value of net liabilities acquired at cost.................. $ (191,000)
Fair value adjustments:
Fair value of purchased technology, including in-process
research and development..................................... 5,800,000
Fair value of assembled workforce............................. 40,000
----------
Fair value of net assets acquired............................... 5,649,000
Purchase price:
Cash paid..................................................... 35,000
Fair value of shares issued................................... 6,000,000
Acquisition costs (including the warrants issued with a fair
value of $1,902,000)......................................... 1,957,000
----------
Excess of purchase price over net assets acquired, allocated to
Goodwill (amortized over three years).......................... $2,343,000
==========
</TABLE>
The $5,800,000 value of purchased technology includes purchased in-process
research and development for future InfoSpace products. Generally accepted
accounting principles require purchased in-process research and development to
be recorded and charged to expense in the period acquired. Accordingly, the
results of operations for the six months ended June 30, 1998, include the
write-off of $4,700,000 of purchased in-process research and development. The
remaining $1,100,000 represents the purchase of core technology and existing
products which are being amortized over an estimated useful life of five
years.
The following unaudited pro forma information shows the results of the
Company for the year ended December 31, 1997, and the six months ended June
30, 1998, as if the acquisition of Outpost occurred on January 1, 1997. The
pro forma information includes adjustments relating to the financing of the
acquisition, the effect of amortizing goodwill and other intangible assets
acquired, as well as the related tax effects, and assumes that Company shares
issued in conjunction with the acquisition were outstanding as of January 1,
1997. The pro forma results of operations are unaudited, have been prepared
for comparative purposes only, and do not purport to indicate the results of
operations which would actually have occurred had the combination been in
effect on the date indicated or which may occur in the future:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue......................................... $ 1,915,990 $ 2,774,019
Net loss........................................ (3,331,192) (6,006,431)
Basic and diluted net loss per share............ (0.27) (0.47)
</TABLE>
F-18
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: COMMITMENTS AND CONTINGENCIES
The Company has noncancellable operating leases for corporate facilities.
The leases expire through 2003. Rent expense under operating leases totalled
$36,000, $83,000, and $41,000, for the period from March 1, 1996 (inception)
to December 31, 1996, the year ended December 31, 1997, and the six months
ended June 30, 1998, respectively.
Future minimum rental payments required under noncancellable operating
leases are as follows for the years ending December 31:
<TABLE>
<S> <C>
July 1 to December 31, 1998.................................... $ 92,587
1999........................................................... 248,296
2000........................................................... 212,040
2001........................................................... 222,080
2002........................................................... 236,136
2003........................................................... 137,746
----------
$1,148,885
==========
</TABLE>
Future payments required under noncancellable affiliate carriage fee
agreements are as follows for the years ending December 31 (see Note 9--
Subsequent Events):
<TABLE>
<S> <C>
July 1 to December 31, 1998................................... $ 1,558,333
1999.......................................................... 4,516,667
2000.......................................................... 2,825,000
2001.......................................................... 1,750,000
2002.......................................................... 750,000
-----------
$11,400,000
===========
</TABLE>
On April 15, 1998, a former employee of the Company filed a complaint in the
Superior Court for Santa Clara County, California alleging, among other
things, that he has the right in connection with his employment to purchase
shares of common stock representing up to 5% of the equity of the Company as
of an unspecified date. In addition, the former employee is also seeking
compensatory damages, plus interest, punitive damages, emotional distress
damages and injunctive relief preventing any capital reorganization or sale
that would cause the plaintiff not to be a 5% owner of the equity of the
Company. The Company removed the suit to the Federal District Court for the
District of Northern California. The Company has answered the complaint and
denied the claims. Nevertheless, while the Company believes its defenses to
the former employee's claims are meritorious, litigation is inherently
uncertain, and there can be no assurance that the Company will prevail in the
suit. As of June 30, 1998, the Company has accrued a liability of $240,000 for
estimated settlement and defense costs. To the extent the Company is required
to issue shares of common stock or options to purchase common stock as a
result of the suit, the Company would recognize an expense equal to the number
of shares issued multiplied by the fair value of the common stock on the date
of issuance, less the exercise price of any options required to be issued, to
the extent that this amount exceeds the expense already accrued as of June 30,
1998. This could have a material adverse effect on the Company's results of
operations, and any such issuance would be dilutive to existing stockholders.
The exercise price of any shares which the Company may be required to issue as
a result of the suit is unknown, but could be as low as $0.01 per share. No
estimate of the possible range of loss can be made at this time.
F-19
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: INCOME TAXES
No provision for federal income tax has been recorded as the Company has
incurred net operating losses through June 30, 1998. The tax effects of
temporary differences and net operating loss carryforwards that give rise to
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward......... $ 111,000 $ 228,000 $ 99,000
Intangible amortization................. 10,000 10,000 1,542,000
Compensation expense--Stock options..... 10,000 59,000 88,000
Allowance for bad debt.................. 16,000 80,000
Litigation accrual...................... 47,000 84,000
Other, net.............................. 1,000 2,000 6,000
--------- --------- -----------
Gross deferred tax assets............. 132,000 362,000 1,899,000
Deferred tax liabilities:
Depreciation............................ 4,000 20,000 17,000
Other................................... 1,000
--------- --------- -----------
Gross deferred tax liabilities........ 5,000 20,000 17,000
--------- --------- -----------
Net deferred tax assets............... 127,000 342,000 1,882,000
Valuation allowance....................... (127,000) (342,000) (1,882,000)
--------- --------- -----------
Deferred tax balance...................... $ -- $ -- $ --
========= ========= ===========
</TABLE>
At December 31, 1996 and 1997, and June 30, 1998, the Company fully reserved
its deferred tax assets. The Company believes sufficient uncertainty exists
regarding the realizability of the deferred tax assets such that a full
valuation allowance is required. The net change in the valuation allowance
during the period from March 1 to December 31, 1996, the year ended December
31, 1997, and the six months ended June 30, 1998, was an increase of $127,000,
$215,000, and $1,540,000, respectively. At June 30, 1998, the Company has tax
basis federal net operating loss carryforwards of $290,000, which expire
beginning in 2012.
NOTE 7: NET LOSS PER SHARE
The Company has adopted SFAS No. 128, Earnings per Share. Basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using
the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of the incremental common
shares issuable upon conversion of the exercise of stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is antidilutive. The Company had a net loss
for all periods presented herein; therefore, none of the options and warrants
outstanding during each of the periods presented, as discussed in Note 3, were
included in the computation of diluted earnings per share as they were
antidilutive. Options and warrants to purchase a total of 1,012,500,
1,363,000, and 3,715,647 shares of common stock were excluded from the
calculations of diluted earnings per share for the period from March 1 to
December 31, 1996, the year ended December 31, 1997, and the six months ended
June 30, 1998, respectively.
F-20
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: RELATED-PARTY TRANSACTIONS
During the period from March 1, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the six months ended June 30, 1998, the
Company sold advertising to other entities in which the Company's president
has equity interests resulting in revenues of $10,000, $200,000, and $145,000,
respectively.
NOTE 9: SUBSEQUENT EVENTS
Joint venture agreement: On July 16, 1998, the Company established InfoSpace
Investments, Ltd., a wholly owned subsidiary incorporated in England and
Wales. On July 16, 1998, the Company and InfoSpace Investments, Ltd. entered
into a joint venture agreement (the Joint Venture Agreement) with another
party forming a new company, TDL InfoSpace (Europe) Limited (TDL InfoSpace),
with the purpose of carrying on the business of the aggregation and
syndication of content on the Internet initially in the United Kingdom. Under
the Joint Venture Agreement, the joint venture partner will provide its
directory information to the newly formed company and sell Internet yellow
pages advertising of the joint venture through its local sales forces. The
Company will contribute its technology and hosting services to the newly
formed company. InfoSpace Investments, Ltd. and the joint venture partner are
required to provide working capital to the newly formed company as is
reasonably required either in cash or borrowing facilities. On July 17, 1998,
the Company transferred $496,000 to InfoSpace Investments, Ltd. InfoSpace
Investments, Ltd. utilized these funds to acquire 475,000 shares of TDL
InfoSpace, which represents a noncontrolling 50% interest. Under the terms of
the Joint Venture Agreement, the Company has certain obligations as guarantor,
principally to guarantee the performance by InfoSpace Investments, Ltd. of its
obligations under the Joint Venture Agreement. The Company will account for
its investment in the joint venture under the equity method.
Trademark license and directory services agreements: On July 1, 1998, the
Company entered into two trademark license agreements with an Internet portal
company to license two of its trademarks for a one-time, nonrefundable license
fee of $1,500,000 per agreement. The trademark license fees will be
capitalized and amortized over the life of the agreement.
The Company entered into two directory services agreements with Netscape
Communications Corporation (Netscape) effective as of July 1, 1998. Under the
agreements, which provide for a one-year term, with automatic renewal, the
Company is the exclusive provider of co-branded yellow pages and white pages
directory services on the Netscape home page (Netcenter). Netscape guarantees
to the Company a certain minimum level of use of the Company's yellow pages
and white pages directories. Pursuant to the terms of these agreements, the
Company is obligated to make additional payments to Netscape based on the
number of click throughs to the Company's services. This minimum payment is
included in the noncancellable affiliate carriage fee payments disclosed in
Note 5.
Private equity placement: During July and August 1998, the Company sold
1,020,000 shares of common stock at $8.00 per share to existing stockholders,
officers of the Company and other private investors. Certain of these
investors are entitled to piggy-back registration rights on registrations by
the Company at any time after an initial public offering of the Company's
common stock.
Also in August 1998, the Company, in exchange for the termination of certain
antidilution rights, issued to existing stockholders an aggregate of 19,895
shares of common stock and warrants to purchase 18,833 shares of common stock
at $4.00 per share, 8,240 shares of common stock at $6.00 per share, and 8,240
shares of common stock at $10.00 per share.
Additionally, in July 1998, the Company issued warrants to purchase 477,967
shares of common stock at an exercise price of $.02 to a former consultant in
conjunction with the acquisition of Outpost (see Note 4). These warrants
expire on October 30, 2002.
F-21
<PAGE>
INFOSPACE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During August 1998, the Company settled a trademark infringement claim filed
against the Company by a company bearing the same name. Under the terms of the
settlement, the Company secured all right, title, and interest in and to the
"InfoSpace" name and trademark both domestically and internationally for
$290,000. In addition to the settlement, the Company also entered into a
software license and maintenance agreement with the same company.
White pages and classifieds agreements: On August 24, 1998, the Company
entered into agreements with America Online, Inc. (AOL) to provide white pages
directory and classifieds information services to AOL. These services have not
yet been launched. The white pages directory services are to be provided to
AOL for a three-year term beginning on the date of first commercial launch
(anticipated to be November 1, 1998), which term may be extended for an
additional year and subsequently renewed for up to three successive one-year
terms at AOL's discretion. This agreement may be terminated by AOL upon the
acquisition by AOL of a competing white pages directory services business or
for any reason after 18 months, upon payment by AOL of a termination fee, or
at any time in the event of a change of control of the Company. Under this
agreement, the Company will pay AOL a quarterly carriage fee and share with
AOL revenues generated by advertising on the Company's white pages directory
services delivered to AOL. The quarterly cash fees are included in the
noncancellable affiliate carriage fee payments disclosed in Note 5. A
termination fee is due for nonperformance. The classifieds information
services are to be provided to AOL for a two-year term, with up to three one-
year extensions at AOL's discretion. AOL will pay to the Company a quarterly
fee and share with the Company revenues generated by payments by individuals
and commercial listing services for listings on the AOL classified service.
Pursuant to the terms of these agreements, the Company has granted AOL the
right to negotiate with the Company exclusively and in good faith for a period
of 30 days with respect to proposals or discussions that would result in a
sale of a controlling interest of the Company or other merger, asset sale or
other disposition that effectively results in a change of control of the
Company. In connection with the agreements, on August 24, 1998, the Company
issued to AOL warrants to purchase up to 989,916 shares of Common Stock, which
warrants vest in 16 equal quarterly installments over four years, based on the
delivery by AOL of a minimum number of searches on the Company's white pages
directory service. The warrants have an exercise price of $12.00 per share.
The revenue and revenue sharing will be accounted for under the Company's
existing revenue recognition policies described in Note 1. Carriage fees and
guaranteed click throughs are recognized as expense over the applicable
period. Termination fees will be recognized as revenue when earned. The
warrants will be valued under the fair value method, as required under SFAS
123, and amortized ratably over the term of the agreement. This accounting
treatment is based on the provisions of EITF 96-18 and SFAS 123.
Restated 1996 Flexible Stock Incentive Plan
Pursuant to an amendment to the 1996 Plan approved on August 24, 1998, an
additional 500,000 shares of common stock were reserved for future issuance.
1998 Employee Stock Purchase Plan
The Company adopted the 1998 Employee Stock Purchase Plan (the ESPP) in
August 1998. The ESPP will be implemented upon the effectiveness of an initial
public offering. The ESPP is intended to qualify under Section 423 of the
Code, and permits eligible employees of the Company and its subsidiaries to
F-22
<PAGE>
purchase common stock through payroll deductions of up to 15% of their
compensation. Under the ESPP, no employee may purchase common stock worth more
than $25,000 in any calendar year, valued as of the first day of each offering
period. In addition, owners of 5% or more of the Company's or subsidiary's
common stock may not participate in the ESPP. An aggregate of 450,000 shares
of common stock are authorized for issuance under the ESPP.
The ESPP will be implemented with six-month offering periods, the first such
period to commence upon the effectiveness of an initial public offering.
Thereafter, offering periods will begin on each January 1 and July 1. The
price of common stock purchased under the ESPP will be the lesser of 85% of
the fair market value on the first day of an offering period and 85% of the
fair market value on the last day of an offering period, except that the
purchase price for the first offering period will be equal to the lesser of
100% of the initial public offering price of the Common Stock offered hereby
and 85% of the fair market value on December 31, 1998. The ESPP does not have
a fixed expiration date, but may be terminated by the Company's Board of
Directors at any time. No shares have been issued under the ESPP.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Outpost Network, Inc.
Redmond, Washington
We have audited the accompanying balance sheets of Outpost Network, Inc. (the
Company) as of December 31, 1996 and 1997, and the related statements of
operations, changes in shareholders' equity (deficiency), and cash flows for
the years ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Outpost Network, Inc. as of December 31,
1996 and 1997, and the results of its operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
July 27, 1998
F-24
<PAGE>
OUTPOST NETWORK, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997, AND JUNE 2, 1998
<TABLE>
<CAPTION>
JUNE 2,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 144,098 $ 18,385 $ 11,967
Receivables from employees............ 2,855 1,102 --
Other receivables..................... 1,351 2,499
Inventory, net of reserve of $-0-,
$28,437 and $58,826.................. 31,771 16,000 5,000
Prepaid expenses...................... 14,576 668 --
----------- ----------- -----------
Total current assets................ 193,300 37,506 19,466
Property and equipment, net............. 90,485 77,730 56,037
Other assets............................ 4,765 4,566 --
----------- ----------- -----------
Total................................... $ 288,550 $ 119,802 $ 75,503
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable...................... $ 75,295 $ 268,915 $ --
Accrued expenses...................... 121,035 29,472
Notes payable......................... 544,000 263,918
----------- ----------- -----------
Total current liabilities........... 75,295 933,950 293,390
Commitments and contingencies (Note 6)
Shareholders' equity (deficiency):
Series A Convertible Preferred stock,
$.01 par value--
Authorized, 1,700,000, -0- and -0-
shares; issued and outstanding,
1,327,750, -0- and -0- shares;
liquidation preference of $213,255,
$-0- and $-0-........................ 13,278
Series B Convertible Preferred stock,
$.01 par value--
Authorized, 11,000,000 shares; no
shares issued and outstanding........
Common stock, $.01 par value--
Authorized, 10,000,000, 20,000,000
and 35,000,000 shares; issued and
outstanding, 2,155,000, 3,482,750 and
34,972,768 shares.................... 21,550 34,828 349,728
Paid-in capital....................... 1,899,331 2,496,930 3,825,088
Accumulated deficit................... (1,720,904) (3,345,906) (4,392,703)
----------- ----------- -----------
Total shareholders' equity
(deficiency)....................... 213,255 (814,148) (217,887)
----------- ----------- -----------
Total................................... $ 288,550 $ 119,802 $ 75,503
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-25
<PAGE>
OUTPOST NETWORK, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997, AND THE PERIOD FROM JANUARY 1, 1998 TO
JUNE 2, 1998
<TABLE>
<CAPTION>
PERIOD FROM
JAN. 1 TO
JUNE 2,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................. $ 47,611 $ 293,963 $ 61,610
Cost of revenues......................... 220,092 412,964 152,778
----------- ----------- -----------
Gross loss........................... (172,481) (119,001) (91,168)
Operating expenses:
Product development.................... 273,467 356,218 69,822
Sales and marketing.................... 213,706 201,244 128,069
General and administrative............. 430,705 921,391 733,383
----------- ----------- -----------
Total operating expenses............. 917,878 1,478,853 931,274
----------- ----------- -----------
Loss from operations..................... (1,090,359) (1,597,854) (1,022,442)
Other income (expense)................... 18,947 (27,148) (24,355)
----------- ----------- -----------
Net loss................................. $(1,071,412) $(1,625,002) $(1,046,797)
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-26
<PAGE>
OUTPOST NETWORK, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE PERIOD FROM JANUARY 1, 1998 TO
JUNE 2, 1998
<TABLE>
<CAPTION>
PARTNERS'
CAPITAL PREFERRED STOCK COMMON STOCK
--------- -------------------- ------------------- PAID-IN ACCUMULATED
AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- -------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $ 631,274 -- $ -- -- $ -- $ -- $ (649,492) $ (18,218)
Issuance of common
stock in exchange for
member interests...... (631,274) 2,155,000 21,550 609,724
Issuance of Series A
Preferred stock, net
of issuance costs..... 1,327,750 13,278 1,289,607 1,302,885
Net loss............... (1,071,412) (1,071,412)
--------- ---------- -------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,327,750 13,278 2,155,000 21,550 1,899,331 (1,720,904) 213,255
Conversion of Series A
Preferred stock to
common stock.......... (1,327,750) (13,278) 1,327,750 13,278
Compensation expense--
Stock warrants........ 597,599 597,599
Net loss............... (1,625,002) (1,625,002)
--------- ---------- -------- ---------- -------- ---------- ----------- -----------
Balance, December 31,
1997................... 3,482,750 34,828 2,496,930 (3,345,906) (814,148)
Exercise of common
stock warrants........ 9,056,000 90,560 90,560
Conversion of debt for
stock................. 13,196,480 131,965 575,735 707,700
Issuance of common
stock................. 6,087,538 60,875 243,502 304,377
Noncash issuance of
common stock.......... 3,150,000 31,500 508,921 540,421
Net loss............... (1,046,797) (1,046,797)
--------- ---------- -------- ---------- -------- ---------- ----------- -----------
Balance, June 2, 1998
(unaudited)............ $ -- $ -- $ -- 34,972,768 $349,728 $3,825,088 $(4,392,703) $ (217,887)
========= ========== ======== ========== ======== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-27
<PAGE>
OUTPOST NETWORK, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND THE PERIOD FROM JANUARY 1, 1998 TO JUNE 2, 1998
<TABLE>
<CAPTION>
PERIOD FROM
JAN. 1 TO
1996 1997 JUNE 2, 1998
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Operating Activities:
Net loss............................... $(1,071,412) $(1,625,002) $(1,046,797)
Adjustments to reconcile net loss to
net cash
used by operating activities:
Depreciation and amortization...... 29,681 49,753 21,693
Inventory obsolescence expense..... -- 28,437 30,389
Compensation expense--Stock Warrant
Grants............................ -- 597,599 --
Compensation expense--Stock Grants. -- -- 540,421
Loss on disposal of fixed assets... 663 -- --
Cash provided (used) by changes in
operating assets and liabilities:
Employee and other receivables.... (2,855) 402 (46)
Inventory......................... (27,940) (12,666) (19,389)
Prepaid expenses and other current
assets........................... (14,576) 13,908 668
Other assets...................... (4,765) 199 4,566
Accounts payable.................. 47,217 193,620 (129,915)
Accrued expenses.................. (18,500) 121,035 (43,687)
----------- ----------- -----------
Net cash used by operating
activities...................... (1,062,487) (632,715) (642,097)
Investing Activities:
Acquisition of property and equipment.. (97,036) (36,998) --
----------- ----------- -----------
Net cash used by investing
activities...................... (97,036) (36,998) --
Financing Activities:
Proceeds from issuance of notes
payable............................... -- 544,000 250,242
Proceeds from issuance of common stock. -- -- 304,377
Proceeds from issuance of preferred
stock................................. 1,302,885 -- --
Proceeds from exercise of warrants..... -- -- 81,060
----------- ----------- -----------
Net cash provided by financing
activities...................... 1,302,885 544,000 635,679
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 143,362 (125,713) (6,418)
Cash and cash equivalents:
Beginning of period.................... 736 144,098 18,385
----------- ----------- -----------
End of period.......................... $ 144,098 $ 18,385 $ 11,967
=========== =========== ===========
Supplemental Disclosure of Noncash
Financing and Investing Activities:
Conversion of debt to common stock.... 707,700
Issuance of common stock for services. 540,421
Noncash exercise of warrants.......... 9,500
</TABLE>
See notes to financial statements.
F-28
<PAGE>
OUTPOST NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND THE PERIOD FROM JANUARY 1, 1998 TO JUNE 2, 1998
NOTE 1: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company: Outpost Network, Inc. (the Company) provides greeting card and
related retail sale items to its Internet-using customers solely through its
worldwide websites. The Company develops software needed to support its
business and holds patents, trademarks, Uniform Resource Locators (URLS) and
copyrights in connection with its business. The Company's first website opened
on September 18, 1995. Since that time, the Company has developed a number of
additional websites. The Company's basic business is to provide the Internet
user the ability to order and send greeting cards through the Company's
websites. The Company was founded on April 19, 1995, as a limited liability
company and was incorporated in Washington on January 2, 1996.
Business combination: During May 1998, the Company entered into a stock
purchase agreement to exchange all outstanding capital stock for 1,499,988
shares of InfoSpace.com, Inc.'s common stock. The transaction was consummated
on June 2, 1998.
Revenue recognition: Revenues consist of sales of cards and related retail
items and is recognized at the time of shipment.
Product development: Costs incurred in the development of new products and
enhancements of existing products are classified as product development and
are charged to expense as incurred.
Cash and cash equivalents: The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less to be cash
equivalents.
Inventory: Inventory consists primarily of cards and stamps and is stated at
the lower of cost or market, determined on a first-in, first-out basis.
Property and equipment: Property and equipment are stated at cost.
Depreciation is computed under the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<S> <C>
Computers and equipment.......................................... 3 years
Software......................................................... 3 years
Furniture and fixtures........................................... 5 years
</TABLE>
Other assets: Management periodically reevaluates long-lived assets,
consisting primarily of property and equipment, to determine whether there has
been any impairment of the value of these assets and the appropriateness of
their estimated remaining life. No impairment has been recognized as of
December 31, 1997.
Income taxes: The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets, including net operating losses, and liabilities are
determined based on temporary differences between the book and tax bases of
assets and liabilities. A valuation allowance is established for deferred tax
assets that are unlikely to be realized.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported
F-29
<PAGE>
OUTPOST NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual amounts may
differ from those estimates.
Interim financial information: The interim financial information as of June
2, 1998, and for the period from January 1, 1998 to June 2, 1998, was prepared
by the Company in a manner consistent with audited financial statements and
pursuant to the rules and requirements of the Securities and Exchange
Commission. The unaudited information, in management's opinion, reflects all
adjustments that are of a normal recurring nature and that are necessary to
present fairly the results for the periods presented. The results of
operations for the period from January 1, 1998 to June 2, 1998, are not
necessarily indicative of the results to be expected for the entire year.
Recent accounting pronouncements: In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and
unrealized gains/losses on available-for-sale securities. The disclosure
prescribed by SFAS No. 130 must be made for fiscal years beginning after
December 15, 1997. Reclassifications of financial statements for earlier
periods provided for comparative purposes is required upon adoption. The
Company will adopt the reporting requirements of SFAS No. 130 in its financial
statements for the year ending December 31, 1998. Additionally, in June 1997,
the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. This statement establishes standards for the way
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers, as well as the
reporting of selected information about operating segments in interim
financial reports to stockholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt the reporting
requirements of SFAS No. 131 in its financial statements for the year ending
December 31, 1998.
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computers and equipment................................ $116,050 $152,539
Software............................................... 5,088 5,088
Furniture and fixtures................................. 5,066 5,574
-------- --------
126,204 163,201
Accumulated depreciation............................... (35,719) (85,471)
-------- --------
$ 90,485 $ 77,730
======== ========
</TABLE>
NOTE 3: NOTES PAYABLE
The Company had $544,000 of unsecured convertible notes outstanding at
December 31, 1997. This consists of the following:
. $344,000 issued to related and unrelated parties at various dates during
1997 bearing interest at 10%. These notes were convertible into senior
convertible debentures upon the event of a
F-30
<PAGE>
OUTPOST NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
convertible debt financing closing between the Company, the holder, and
an outside investor, within 90 days of issuance of the notes.
. $200,000 convertible note issued to a related party during 1997 bearing
interest at 9%. Upon closing of an equity financing in the amount of
$1,500,000 or more, this note is convertible into shares or other equity
of the Company issued in the financing.
The debt and equity financings specified above did not occur; however,
$540,000 of the convertible notes outstanding as of December 31, 1997 and
$119,824 of notes payable issued subsequent to December 31, 1997, were
converted into shares of common stock subsequent to year end in conjunction
with the merger with InfoSpace.com, Inc.
The weighted average interest rate for the year ended December 31, 1997 is
9.06%. No interest was paid during 1997.
NOTE 4: SHAREHOLDERS' EQUITY
Authorized shares: The Company was originally founded as a limited liability
company on April 19, 1995, and equity at December 31, 1995, consisted of
members' interest. The Company was incorporated on January 2, 1996, at which
time it was authorized to issue 5,000,000 shares, consisting of 3,000,000
shares of common stock with a par value of $.001 and 2,000,000 shares of
preferred stock with a par value of $.001. The preferred stock may be issued
in one or more series.
On January 24, 1996, the articles of incorporation were amended to increase
the authorized number of shares of all classes of Company stock to 11,700,000
shares, consisting of 10,000,000 shares of common stock with a par value of
$.01 and 1,700,000 shares of preferred stock at a par value of $.01. A series
of preferred stock was designated as Series A Preferred stock, consisting of
1,700,000 shares.
On October 30, 1997, the articles of incorporation were amended to increase
the authorized number of shares of all classes of Company stock to 31,000,000
shares, consisting of 20,000,000 shares of common stock with a par value of
$.01 and 11,000,000 shares preferred stock at a par value of $.01. All shares
of Series A Preferred stock were converted into common stock at a ratio of
1:1. The Company also designated 11,000,000 shares as Series B Preferred
stock.
On May 7, 1998, the articles of incorporation were amended to increase the
authorized number of shares of common stock to 35,000,000 shares with a par
value of $.01 per share.
Preferred stock: During January and February 1996, the Company sold
1,327,750 shares of $.01 par value Series A Preferred stock at a price of
$1.00 per share. On October 30, 1997 all outstanding shares of Series A
Preferred stock were converted to common stock at a ratio of 1:1.
Stock warrants: On November 18, 1997, the Company granted warrants to
purchase 9,056,000 shares of common stock at an exercise price of $.01 per
share to employees, outside consultants, and certain shareholders. These
warrants vested immediately and expire if not exercised on or before May 20,
1998. All warrants outstanding at December 31, 1997, were exercised in May
1998. The Company recorded
F-31
<PAGE>
OUTPOST NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
compensation expense totalling $597,599 related to these warrants. The
following table summarizes information about stock warrants outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01............. 9,056,000 0.4 $0.01 9,056,000 $0.01
</TABLE>
The 9,056,000 stock warrants were exercised at $.01 per share during May
1998.
Other: 3,150,000 shares of common stock were issued to outside consultants
and employees for services rendered during May 1998 valued at $540,421.
NOTE 5: INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1997. The
following table sets forth the primary components of deferred tax assets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards..................... $ 360,090 $ 699,636
Nondeductible reserves and expenses.................. 3,482 9,680
--------- ---------
Gross deferred tax assets............................ 363,572 709,316
Valuation allowance.................................. (363,572) (709,316)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1996 and 1997, the Company believes it more likely than not
that the full benefit of the deferred tax assets will not be realized. As
such, a full valuation allowance has been recorded. At December 31, 1997, the
Company has tax basis federal net operating loss carryforwards of $2,057,753
which expire beginning in 2011.
NOTE 6: COMMITMENTS AND CONTINGENCIES
In January 1998, the Company began sharing office space with InfoSpace,
Inc., which subsequently acquired the Company (Note 1). As a result, the
Company had no significant lease obligations as of December 31, 1997. Rent
expense under operating leases totalled $27,000 and $56,000 for the years
ended December 31, 1996 and 1997, respectively.
NOTE 7: RELATED PARTY TRANSACTIONS
Notes payable at December 31, 1997 include $400,000 payable to a
shareholder, $4,000 payable to an employee and $65,000 payable to an
individual who holds warrants to purchase stock in the Company. Accrued but
unpaid interest and interest expense on these notes as of and for the year
ended December 31, 1997, is $17,919, $-0-, and $2,753, respectively. Interest
rates range from 9% to 10%.
F-32
<PAGE>
INSIDE BACK COVER
[ARTWORK]
ADVERTISING AND PROMOTIONS
[InfoSpace.com web screen displaying banner ads, sponsorships and featured
listings]
Text: Banner ads and national promotions are sold by InfoSpace direct
advertising sales representatives.
[InfoSpace.com web screen displaying yellow pages ad for attorney]
Text: Promotions and preferred listings are sold to local advertisers by sales
representatives at affiliated yellow pages publishers.
[Ultimate Product Search web page]
Text: InfoSpace.com's Ultimate Product Search enables shoppers to quickly
compare availability and prices online.
[Web page showing search results from Ultimate Product Search]
Text: When shoppers click through to buy, the merchant shares transaction
revenue with the Company.
[InfoSpace.com web screen displaying apartment rental information.]
Text: Information suppliers like these apartment guides pay promotional fees to
InfoSpace.com to merchandise their content--similar to the way they pay
traditional retailers for "rack space."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS 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 SOLICI-
TATION 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............................................................. 22
Use of Proceeds......................................................... 22
Dividend Policy......................................................... 22
Capitalization.......................................................... 23
Dilution................................................................ 24
Selected Consolidated Financial Data.................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 26
Business................................................................ 36
Management.............................................................. 57
Certain Transactions.................................................... 62
Principal Stockholders.................................................. 64
Description of Capital Stock............................................ 65
Shares Eligible for Future Sale......................................... 69
Underwriting............................................................ 71
Legal Matters........................................................... 72
Experts................................................................. 73
Additional Information.................................................. 73
Index to Consolidated Financial Statements.............................. F-1
</TABLE>
-----------
UNTIL , 1998 (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 OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 SHARES
[LOGO OF INFOSPACE.COM, INC.(TM)]
COMMON STOCK
---------------
PROSPECTUS
---------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES LLC
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale
of the Common Stock being registered hereby. All amounts shown are estimates,
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 16,963
NASD filing fee.................................................. 6,250
Nasdaq National Market listing fee............................... 95,000
Blue Sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 250,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 325,000
Directors and officers insurance................................. 200,000
Transfer Agent and Registrar fees................................ 10,000
Miscellaneous expenses........................................... 136,787
----------
Total.......................................................... $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with
the defense or settlement of such actions, and the statute requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.
Section 10 of the registrant's Restated Bylaws (Exhibit 3.2 hereto) requires
indemnification to the full extent permitted under the DGCL as it now exists
or may hereafter be amended. Subject to any restrictions imposed by the DGCL,
the Restated Bylaws provide an unconditional right to indemnification for all
expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was serving as a
director or officer of the registrant or that, being or having been a director
or officer of the registrant, such person is or was serving at the request of
the registrant as a director, officer, employee or agent of another
corporation, or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan. The Restated
Bylaws also provide that the registrant may, by action of its Board of
Directors, provide indemnification to its employees and agents with the same
scope and effect as the foregoing indemnification of directors and officers;
provided, however, that an undertaking shall be made by an employee or agent
only if required by the Board of Directors.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary
II-1
<PAGE>
damages for breach of fiduciary duty as a director, except for liability for
(i) any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
Article 10 of the registrant's Restated Certificate of Incorporation
(Exhibit 3.1 hereto) provides that to the full extent that the DGCL, as it now
exists or may hereafter be amended, permits the limitation or elimination of
the liability of directors, a director of the registrant shall not be liable
to the registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director. Any amendment to or repeal of such Article 10
shall not adversely affect any right or protection of a director of the
registrant for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.1 to this
Registration Statement and incorporated herein by reference. The
indemnification agreements provide the registrant's officers and directors
with indemnification to the maximum extent permitted by the DGCL. Reference is
made to the Underwriting Agreement (Exhibit 1.1 hereto), in which the
Underwriters have agreed to indemnify the officers and directors of the
registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation in April 1996, the registrant has issued and sold
unregistered securities as follows:
(1) An aggregate of 10,000,000 shares of Common Stock was issued in a
private placement in April 1996 to Naveen Jain. The aggregate consideration
received for such shares was $2,000.
(2) An aggregate of 267,316 shares of Common Stock was issued in a
private placement on June 10, 1996, to three investors. The aggregate
consideration received for such shares was $219,199.94 or $0.82 per share.
(3) An aggregate of 609,756 shares of Common Stock was issued in a
private placement on June 17, 1996, to two investors. The aggregate
consideration received for such shares was $999,999.84 or $1.64 per share.
(4) An aggregate of 68,182 shares of Common Stock was issued in a private
placement on October 7, 1996, to one investor. The aggregate consideration
received for such shares was $150,000.40 or $2.20 per share.
(5) An aggregate of 1,000,000 shares of Common Stock was issued on May 6,
1997, in connection with the registrant's acquisition of all the issued and
outstanding membership interests in Yellow Pages on the Internet, LLC
("YPI"). Such shares were placed in an escrow account upon issuance pending
finalization of the purchase price for YPI. Prior to December 31, 1997, the
purchase price was finalized and on January 2, 1998 an aggregate of 85,000
shares of Common Stock was issued to the former members of YPI. The
remaining 915,000 shares held in the escrow account were released to the
registrant and canceled.
(6) An aggregate of 27,500 shares of Common Stock was issued in a private
placement on February 4, 1998 to one investor. The aggregate consideration
received for such shares was $110,000 or $4.00 per share.
(7) An aggregate of 12,500 shares of Common Stock was issued on April 20,
1998 to a former employee of the Company in connection with the settlement
of a dispute involving compensation.
(8) An aggregate of 7,500 shares of Common Stock was issued in a private
placement on May 4, 1998 to the law firm of Garvey Schubert & Barer in
consideration for legal services rendered.
(9) An aggregate of 1,499,988 shares of Common Stock was issued on June
2, 1998, in exchange for the entire issued share capital of Outpost
Network, Inc. ("Outpost"). The form of the transaction was a
II-2
<PAGE>
merger, whereby a wholly owned subsidiary of the registrant was merged with
and into Outpost (the "Outpost Merger"). The recipients of the Common Stock
were the former shareholders of Outpost.
(10) An aggregate of 125,000 shares of Common Stock was issued in a
private placement on May 21, 1998 to two investors. The aggregate
consideration was $500,000 or $4.00 per share
(11) An aggregate of 1,145,000 shares of Common Stock and warrants for
the purchase of 2,028,523 shares of Common Stock at a weighted average
exercise price of $5.87 per share were issued in a private placement on May
21, 1998 to five investors pursuant to Common Stock and Common Stock
Warrant Purchase Agreements (the "May 1998 Stock Purchase"). The aggregate
consideration received for such shares was $4,580,000 and the aggregate
consideration received for such warrants was $40,570.38.
(12) An aggregate of 5,000 shares of Common Stock was issued on June 30,
1998 to a consultant in exchange for services.
(13) An aggregate of 223,251 shares of Common Stock was issued on July 6,
1998 to nineteen investors pursuant to the registrant's 1998 Stock Purchase
Rights Plan, adopted June 26, 1998. The aggregate consideration received
for such shares was $1,674,393.75 or $7.50 per share.
(14) A warrant for the purchase of 477,967 shares of Common Stock with an
exercise price of $0.02 per share was issued on July 14, 1998, to a former
consultant to the registrant in connection with the Outpost Merger.
(15) An aggregate of 1,020,000 shares of Common Stock was issued in a
private placement completed in July and August 1998 to 26 investors. The
aggregate consideration received for such shares was $8,160,000 or $8.00
per share.
(16) An aggregate of 19,895 shares of Common Stock and warrants to
purchase 35,313 shares of Common Stock with a weighted average exercise
price of $5.87 per share were issued on August 6, 1998 to five investors in
connection with the May 1998 Stock Purchase.
(17) From April 1996 through September 30, 1998, the registrant granted
stock options to purchase an aggregate of 1,756,925 shares of Common Stock
to employees, consultants and directors with exercise prices ranging from
$0.02 to $12.00 per share pursuant to the registrant's Restated 1996
Flexible Stock Incentive Plan in consideration for services. From April 10,
1996 to September 30, 1998, the registrant also granted stock options
outside of the plan to purchase 484,624 shares of Common Stock, with
exercise prices of $1.72 per share, to employees, consultants and
directors.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Rule 701 promulgated thereunder on the basis that these options were offered
and sold either pursuant to a written compensatory benefit plan or pursuant to
written contracts relating to consideration, as provided by Rule 701, or
pursuant to Section 4(2) thereof on the basis that the transactions did not
involve a public offering.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1.* Form of Underwriting Agreement.
2.1.++ Agreement and Plan of Merger, dated as of May 12, 1998, among the
registrant, OutPost Network, Inc., certain shareholders of OutPost
Network, Inc. and OutPost Acquisition, Inc.
3.1.++ Restated Certificate of Incorporation of the registrant.
3.2.++ Restated Bylaws of the registrant.
5.1* Opinion of Perkins Coie LLP as to the legality of the shares.
10.1.++ Form of Indemnification Agreement between the registrant and each of
its Directors and Executive Officers.
10.2.++ Restated 1996 Flexible Stock Incentive Plan.
10.3.++ 1998 Employee Stock Purchase Plan
Lease, dated May 14, 1998, between the registrant and TIAA Realty,
10.4.++ Inc.
10.5.++ Registration Rights Agreement, dated May 1, 1997, among the
registrant, John E. Richards, Peter S. Richards, John Enger and
Alexander Hutton Capital L.L.C., as subsequently amended by
Agreement dated as of January 2, 1998, among the registrant, John
E. Richards, Peter S. Richards, John Enger and Alexander Hutton
Capital L.L.C.
10.6.++ Agreement, dated January 2, 1998, among the registrant, John E.
Richards, Peter S. Richards, John Enger and Alexander Hutton
Capital, L.L.C.
10.7.++ Form of Common Stock and Common Stock Warrant Purchase Agreements,
dated May 21, 1998, between the registrant and each of Acorn
Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.8.++ Form of Investor Rights Agreements, dated as of May 21, 1998,
between the registrant and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.9.++ Form of Co-Sale Agreements, dated as of May 21, 1998, among the
registrant, Naveen Jain and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.10.++ Form of Common Stock Warrant, dated May 21, 1998, between the
registrant and each of Acorn Ventures-IS, LLC, Kellett Partners,
LLP and John and Carolyn Cunningham.
10.11.++ Common Stock Purchase Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.12.++ Stockholder Rights Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.13.++ Form of Amendment to Common Stock and Common Stock Warrant Purchase
Agreements, dated August 6, 1998, between the Registrant and each
of Acorn Ventures-IS, LLC, Kellett Partners, LLP and John and
Carolyn Cunningham.
10.14.+++ License Agreement, dated July 28, 1998, between the registrant and
American Business Information, Inc. (now known as infoUSA, Inc.).
10.15.+++ Amended and Restated Content Provider Agreement, made as of August
24, 1998, effective as of April 25, 1998, between the registrant
and 800-U.S. Search.
10.16.+ Interactive White Pages Marketing Agreement, dated as of August 24,
1998, between the registrant and America Online, Inc.
10.17.+ Development and Management Agreement, dated as of August 24, 1998,
between the registrant and America Online, Inc.
10.18*+ U.S. English Language White Pages Directory Services Agreement,
effective July 1, 1998, between the registrant and Netscape
Communications Corporation.
10.19*+ Trademark License Agreement, dated July 1, 1998, between the
registrant and Netscape Communications Corporation.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.20*+ U.S. English Language Yellow Pages Directory Services Agreement, dated July 2, 1998, between the
registrant and Netscape Communications Corporation.
10.21*+ Trademark License Agreement, dated July 1, 1998, between the registrant and Netscape Communications
Corporation.
10.22*+ Amendment No. 1 to Netcenter Services Agreement--Yellow Pages, effective August 7, 1998, between the
registrant and Netscape Communications Corporation.
10.23*+ Amendment No. 1 to Netcenter Services Agreement--White Pages, effective August 7, 1998, between the
registrant and Netscape Communications Corporation.
10.24*+ Amendment No. 2 to Netcenter Services Agreement--White Pages between the registrant and Netscape
Communications Corporation.
21.1.++ Subsidiaries of the registrant.
23.1. Consent of Deloitte & Touche LLP, Independent Auditors.
23.2.* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit 5.1 hereto).
24.1.++ Power of Attorney
24.2 Power of Attorney for Carl Stork.
27.1.++ Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
+ Confidential treatment requested.
++ Previously filed.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the
registrant or related notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Redmond, State of Washington, on the 5th day of October, 1998.
INFOSPACE.COM, INC.
/s/ Ellen B. Alben
By: _________________________________
Ellen B. Alben, Vice
President,Legal and Business
Affairs and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 5th day of October, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Naveen Jain President, Chief Executive
____________________________________ Officer and Chairman of the
Naveen Jain Board (Principal Executive
Officer)
* Douglas A. Bevis Vice President and Chief
____________________________________ Financial Officer
Douglas A. Bevis (Principal Financial and
Accounting Officer)
* John E. Cunningham, IV Director
____________________________________
John E. Cunningham, IV
* Peter L. S. Currie Director
____________________________________
Peter L. S. Currie
* Gary C. List Director
____________________________________
Gary C. List
/s/ Carl Stork Director
____________________________________
Carl Stork
/s/ Ellen B. Alben
*By: ________________________________
Ellen B. Alben
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1.* Form of Underwriting Agreement.
2.1.++ Agreement and Plan of Merger, dated as of May 12, 1998, among the
registrant, OutPost Network, Inc., certain shareholders of OutPost
Network, Inc. and OutPost Acquisition, Inc.
3.1.++ Restated Certificate of Incorporation of the registrant.
3.2.++ Restated Bylaws of the registrant.
5.1.* Opinion of Perkins Coie LLP as to the legality of the shares.
10.1.++ Form of Indemnification Agreement between the registrant and each of
its Directors and Executive Officers.
10.2.++ Restated 1996 Flexible Stock Incentive Plan.
10.3.++ 1998 Employee Stock Purchase Plan
Lease, dated May 14, 1998, between the registrant and TIAA Realty,
10.4.++ Inc.
10.5.++ Registration Rights Agreement, dated May 1, 1997, among the
registrant, John E. Richards, Peter S. Richards, John Enger and
Alexander Hutton Capital L.L.C., as subsequently amended by
Agreement dated as of January 2, 1998, among the registrant, John
E. Richards, Peter S. Richards, John Enger and Alexander Hutton
Capital L.L.C.
10.6.++ Agreement, dated January 2, 1998, among the registrant, John E.
Richards, Peter S. Richards, John Enger and Alexander Hutton
Capital, L.L.C.
10.7.++ Form of Common Stock and Common Stock Warrant Purchase Agreements,
dated May 21, 1998, between the registrant and each of Acorn
Ventures-IS, LLC, Kellett Partners, LLP and John and Carolyn
Cunningham.
10.8.++ Form of Investor Rights Agreements, dated as of May 21, 1998,
between the registrant and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.9.++ Form of Co-Sale Agreements, dated as of May 21, 1998, among the
registrant, Naveen Jain and each of Acorn Ventures-IS, LLC, Kellett
Partners, LLP and John and Carolyn Cunningham.
10.10.++ Form of Common Stock Warrant, dated May 21, 1998, between the
registrant and each of Acorn Ventures-IS, LLC, Kellett Partners,
LLP and John and Carolyn Cunningham.
10.11.++ Common Stock Purchase Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.12.++ Stockholder Rights Agreement, dated as of August 6, 1998, by and
among the registrant and the investors named therein.
10.13.++ Form of Amendment to Common Stock and Common Stock Warrant Purchase
Agreements, dated August 6, 1998, between the Registrant and each
of Acorn Ventures-IS, LLC, Kellett Partners, LLP and John and
Carolyn Cunningham.
10.14.+++ License Agreement, dated July 28, 1998, between the registrant and
American Business Information, Inc. (now known as infoUSA, Inc.).
10.15.+++ Amended and Restated Content Provider Agreement, made as of August
24, 1998, effective as of April 25, 1998, between the registrant
and 800-U.S. Search.
10.16+ Interactive White Pages Marketing Agreement, dated as of August 24,
1998, between the registrant and America Online, Inc.
10.17+ Development and Management Agreement, dated as of August 24, 1998,
between the registrant and America Online, Inc.
10.18*+ U.S. English Language White Pages Directory Services Agreement,
effective July 1, 1998, between the registrant and Netscape
Communications Corporation.
</TABLE>
<PAGE>
INDEX TO EXHIBITS--(CONTINUED)
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
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10.19*+ Trademark License Agreement, dated July 1, 1998, between the
registrant and Netscape Communications Corporation.
10.20*+ U.S. English Language Yellow Pages Directory Services Agreement, dated
July 2, 1998, between the registrant and Netscape Communications
Corporation.
10.21*+ Trademark License Agreement, dated July 1, 1998, between the
registrant and Netscape Communications Corporation.
10.22*+ Amendment No. 1 to Netcenter Services Agreement--Yellow Pages,
effective August 7, 1998, between the registrant and Netscape
Communications Corporation.
10.23*+ Amendment No. 1 to Netcenter Services Agreement--White Pages,
effective August 7, 1998, between the registrant and Netscape
Communications Corporation.
10.24*+ Amendment No. 2 to Netcenter Services Agreement--White Pages between
the registrant and Netscape Communications Corporation.
21.1.++ Subsidiaries of the registrant.
23.1. Consent of Deloitte & Touche LLP, Independent Auditors.
Consent of Perkins Coie LLP (contained in the opinion filed as
23.2.* Exhibit 5.1 hereto).
24.1.++ Power of Attorney
24.2 Power of Attorney for Carl Stork.
27.1.++ Financial Data Schedule.
</TABLE>
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* To be filed by amendment.
+ Confidential treatment requested.
++ Previously filed.
<PAGE>
EXHIBIT 10.16
[REDACTED VERSION]
INTERACTIVE WHITE PAGES MARKETING AGREEMENT
This Interactive Marketing Agreement (the "Agreement"), dated as of August
24, 1998 (the "Effective Date"), is between America Online, Inc. , a Delaware
corporation, with principal offices at 22000 AOL Way, Dulles, Virginia 20166
("AOL", as further defined in Exhibit A), Digital City, Inc., a Delaware
corporation with principal offices at 8615 Westwood Center Drive, Vienna, VA
22182 ("DCI"), and InfoSpace, Inc., a Delaware corporation with principal
offices at 15375 90th Ave., NE, Redmond, WA 98052 ("InfoSpace"). AOL and
InfoSpace may be referred to individually as a "Party" and collectively as the
"Parties:"
INTRODUCTION
AOL and InfoSpace each desires to enter into an interactive marketing
relationship whereby AOL will promote and distribute an interactive site
referred to (and as further defined) herein as the AOL White Pages. This
relationship is further described below and is subject to the terms and
conditions set forth in this Agreement. Defined terms used but not defined in
the body of the Agreement will be as defined on Exhibit A attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1. AOL PROMOTION OF AOL WHITE PAGES.
Upon commercial launch of the AOL White Pages on the AOL Service which the
parties anticipate will occur on November 1, 1998 (the "Commercial Launch
Date"), AOL will provide [*] promotions for the AOL White Pages through such
areas of the AOL Service, the Digital City Service, and AOL.com as AOL deems
appropriate in its editorial discretion (the "Promotions"). With respect to
AOL.com, the AOL White Pages will be prominently featured on the AOL NetFind
home page (which in turn will be prominently featured on the AOL.com homepage).
If AOL.com is redesigned such that the placement described in the preceding
sentence is changed, AOL will provide the AOL White Pages with equivalent
promotions after such redesign. The specific form, placement, duration, and
nature of, and Content to be contained within the Promotions will be as
determined by AOL in its discretion; provided that AOL will consult with
InfoSpace on these Promotions, which will include appropriate placement on AOL
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"[*]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
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NetFind and the Research & Learn Channel on the AOL Service and similar
placement in the event of a redesign of the AOL Service. Notwithstanding the
foregoing, AOL shall have the right to delay the launch of the AOL White Pages
for a period of time not to exceed sixty days from November 1, 1998 (unless
further delay is a result of a failure by InfoSpace to deliver the AOL White
Pages accepted by AOL pursuant to Section 3.2 below), provided that should AOL
choose to delay the launch of the AOL White Pages, the Term shall be extended
for a period of time equal to the amount of time that the launch was delayed
(and the Quarters of the Term shall be adjusted accordingly), unless further
delay is a result of a failure by InfoSpace to deliver the AOL White Pages
accepted by AOL pursuant to Section 3.2 below.
1.2. INFOSPACE PROMOTION OF AOL WHITE PAGES AND AOL.
InfoSpace shall promote AOL and AOL products as set forth in detail on
Exhibit B. In no event shall InfoSpace promote the Public InfoSpace Site or any
other Interactive Site on the AOL White Pages, or otherwise promote the Public
InfoSpace Site or any Interactive Site in promotions targeted specifically to
AOL Users or AOL Members, provided however that InfoSpace "house ads" shall be
permitted subject to the provisions of Section 4.6 and to the extent consistent
with the other restrictions and limitations outlined in Section 4 hereof,
including without limitation the restrictions relating to the promotion of, and
the directing of traffic to, certain types of sites and content. In the event
that a site which would otherwise qualify as an Interactive Site is a co-branded
site or service with a party that would otherwise be a permissible advertiser
hereunder, InfoSpace will not be prevented from promoting such site as if it
were a third party advertisement; provided that InfoSpace will take reasonable
measures on any such site promoted on the AOL White Pages to ensure that
significant traffic from such site is not directed toward sites that contain
content or services falling within the restrictions outlined in Section 4.
1.3 KEYWORD.
The keyword "White Pages" shall direct users of the AOL Service to the AOL
White Pages.
1.4. SUSPENSION OF PROMOTIONS.
Without limiting the remedies that AOL may have at law or equity, AOL's
obligation to provide promotions for the AOL White Pages, and its exclusivity
obligations pursuant to Section 5 hereunder, shall be suspended or reduced (in
AOL's discretion) to the extent that (a) the AOL White Pages have not been
accepted in accordance with Section 3 below, (b) the AOL White Pages are not in
conformance with the Operating Standards outlined on Exhibit D and such
nonconformance has not been
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cured by InfoSpace within five business days or such shorter period as is
specified for such nonconformance as provided in Exhibit D (including without
limitation such shorter service level response and workaround times provided for
in Section 5 of Exhibit D), or (c) InfoSpace is otherwise in material breach of
this Agreement and such breach has not been cured by InfoSpace pursuant to this
Agreement.
2. AOL WHITE PAGES SITE.
2.1 DESIGN OF AOL WHITE PAGES.
Except as otherwise specifically set forth herein, AOL shall determine the
design, Look and Feel and Content of the AOL White Pages, including without
limitation the user interface, search features, functionality, Content,
navigational features, and branding; provided that, with respect to the search
features and functionality, AOL shall conform to the Specifications (subject to
AOL's ability to direct changes in such features and functionality as provided
for elsewhere in this Agreement). AOL will consult with InfoSpace regarding
such elements, provided that AOL will have final approval over all such elements
in its discretion. InfoSpace will provide to AOL a comprehensive AOL White
Pages including without limitation comprehensive national White Pages listings
and the Content and services described on Exhibit C. InfoSpace will review,
delete, edit, create, update and otherwise manage all Content and services
available on or through the AOL White Pages in accordance with the terms of this
Agreement. In no event shall InfoSpace sell, or offer for sale through the AOL
White Pages, any Advertisements, products or services, whether through banner
ads, sponsorships or any other vehicle, other than in accordance with the
provisions of Section 4 below.
2.2 PRODUCTION WORK.
InfoSpace will be responsible for all production work associated with the
AOL White Pages, including all related costs and expenses. InfoSpace shall make
available to AOL an employee of InfoSpace who will be the project manager of the
AOL White Pages, whose responsibilities will include, among other things,
managing implementation of the transactions contemplated hereby and InfoSpace's
relationship with AOL.
2.3 COMMUNICATIONS; HOSTING.
2.3.1 Except to the extent that AOL determines otherwise pursuant to this
Section 2.3, InfoSpace will be responsible for hosting and maintaining all pages
of the AOL White Pages. InfoSpace will bear all costs necessary to comply with
the operating standards set forth on Exhibit D and all communications costs and
expenses associated with the AOL White Pages so as to maintain a level of speed
and performance that is consistent with the other White Pages services on the
internet as viewed through the
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AOL Service. To the extent necessary for InfoSpace to comply with the Agreement
(or as otherwise agreed by the Parties), InfoSpace will, at AOL's request,
utilize a dedicated high speed connection to maintain quick and reliable
transport of information to and from the InfoSpace data center and the Internet.
2.3.2 AOL will have the option to host the AOL White Pages at a location
of its choosing if (i) performance of the AOL White Pages is not among the top
two sites in the white pages industry measured by security, speed and
scalability or (ii) the AOL White Pages are otherwise not in conformance with
the Operating Standards set out in Exhibit D. [*]
2.3.3 AOL may determine to host the AOL white pages in its discretion,
other than for reasons provided for in Section 2.3.2 above. [*].
2.3.4 In the event that AOL determines to host the AOL White Pages
pursuant to Section 2.3.2 or 2.3.3 above, InfoSpace will work with AOL to effect
a quick and orderly hosting transition and, in the event that InfoSpace is not
in material breach of this Agreement, AOL will make reasonable accommodation to
InfoSpace in light of InfoSpace's contractual commitments in accomplishing a
hosting transition hereunder (provided that InfoSpace will use best efforts to
accomplish a quick and orderly transition and provided further that InfoSpace
will not enter into arrangements preventing a quick and orderly transition.)
2.3.5 Regardless of the hosting arrangement for the AOL White Pages, all
pages of the AOL White Pages shall be resident on the "AOL.com" domain or other
domain of AOL's choosing. The parties agree to cooperate in communicating with
the Internet ratings agencies (e.g. Media Metrix) to facilitate appropriate
"reach" recognition for InfoSpace from such agencies in light of its role in the
AOL White Pages hereunder.
2.4 USER INTERFACE.
AOL shall control the user interface and Look and Feel of the AOL White
Pages screens as provided in Section 2.1 above. The screens of the AOL White
Pages shall be AOL branded, with InfoSpace Ingredient Branding reasonably
acceptable to InfoSpace. AOL shall own all right, title, and interest in and to
the Look and Feel of the AOL White Pages and any other copyrightable or
trademarkable elements of the user interface of the AOL White Pages except for
any elements thereof in which InfoSpace has prior rights. InfoSpace shall
provide AOL with (a) a sample of the artwork necessary for the InfoSpace
Ingredient Branding, and (b) a royalty-free, non-exclusive
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license to use such artwork and any trade names or trademarks incorporated
therein in accordance with this Agreement for the duration of the Term, provided
that such use shall be consistent with, and shall in no way diminish,
InfoSpace's rights therein. AOL agrees to comply with any reasonable written
InfoSpace policies and procedures on use of any such trade names or trademarks
as InfoSpace may periodically provide. Any additional branding on the AOL White
Pages, such as branding related to distribution partners, shall be in the
discretion of AOL.
2.5 INTEGRATION OF AOL NETWORK CONTENT.
AOL shall have the exclusive right to place navigation links and dynamic
links to AOL Network areas and/or content, and to integrate AOL Network content
and programming (the above collectively, "AOL Programming") into the AOL White
Pages. InfoSpace will provide a royalty-free, non-exclusive license to AOL
during the Term to use InfoSpace's existing tools and tools which InfoSpace will
develop, to facilitate management of the AOL Programming, including without
limitation any dynamic links. Such tools shall be sufficient to enable AOL
content producers to make remote changes to the programming links and other
Content of the AOL White Pages without the intervention of InfoSpace or any AOL
technical personnel. If conflicts arise between navigation and programming
links placed by AOL and advertisements sold by InfoSpace, AOL and InfoSpace will
cooperate to resolve such conflicts on a case by case basis.
2.6 INTEGRATION OF AOL WHITE PAGES INTO AOL NETWORK.
AOL shall have the right in its discretion to integrate the AOL White Pages
into any portion of the AOL Network and InfoSpace shall work with AOL to provide
for such integration. Such integration may include without limitation (i)
placement in discreet portions of the AOL Network such as particular content
brands of AOL; (ii) porting the AOL White Pages to additional platforms to which
the AOL Network may extend such as (and without limitation) web tv and personal
digital assistant operating systems and (iii) inclusion in third-party
distribution arrangements which may involve further co-branding with a
distribution partner as determined by AOL (and the parties understand that
certain links, programming, Advertising inventory and other elements of the AOL
White Pages may change according to the requirements and considerations in such
different locations and platforms).
2.7 TECHNOLOGY; FUNCTIONALITY.
2.7.1 InfoSpace will ensure that the AOL White Pages will have
performance, functionality and related tools consistent with Exhibit C and
Exhibit E attached hereto, and which are as good as or better than any other
White Pages or related directory site
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<PAGE>
and any other Interactive Site, including without limitation any other White
Pages site owned or operated by InfoSpace or which uses InfoSpace technology
(and such exhibits will be deemed amended accordingly). To the extent the AOL
White Pages Content or functionality will, in AOL's good faith judgment,
adversely affect in a technical way any operational aspect of the AOL Network,
InfoSpace will consult with AOL and will use best efforts to address any such
adverse affect. InfoSpace will regularly report to AOL technical staff regarding
all development and implementation relating to the AOL White Pages and will
provide no less than two weeks advance notice to AOL of any material change in
AOL White Pages technology (including without limitation any changes in HTML
technology) and will cooperate with AOL during such two week period so that AOL
may run QA testing prior to implementation of such changes. AOL reserves the
right to review and test the AOL White Pages from time to time (but no more than
twice in any 12 month period provided that additional reviews may occur in
connection with any significant change in InfoSpace technology or in connection
with a specific performance issue) to determine performance, functionality and
whether the site is compatible with AOL Service's then-available client and host
software and the AOL Network. At AOL's request, any such review and test may be
completed at InfoSpace's premises after reasonable advance notice by AOL, and
shall be conducted during reasonable business hours. InfoSpace will ensure that
the AOL White Pages will have the highest quality, comprehensive listings data
which shall be updated no less than once per month.
2.7.2 InfoSpace will provide AOL with substantial input into White Pages
product plans and AOL will have the right to direct reasonable additions and/or
changes to functionality and performance of the AOL White Pages. Without
limiting the generality of the foregoing and consistent with Exhibit E, at AOL's
option, InfoSpace will integrate AOL Member directory, AOL Instant Messenger,
AOL home page, and other AOL products, directories and functionalities into the
AOL White Pages (and the Specifications shall be deemed amended accordingly).
In addition, InfoSpace will provide AOL at its reasonable request additional
fields in the AOL White Pages database, which AOL may populate. To the extent
that the cost of any custom development at the direction of AOL (which shall not
include any functionality or development outlined in Exhibit C or the
Specifications, unless noted as custom development on the Specifications) is
beyond the reasonable costs associated with the day to day running, maintenance,
updating and upgrading (as may be required consistent with Section 2.7.1 above
or to maintain the Operating Standards outlined in Exhibit D) of the AOL White
Pages, AOL will reimburse InfoSpace for its direct costs of such development
(excluding allocations of general overhead). Also at AOL's direction, InfoSpace
will integrate into the AOL White Pages any white pages and related
functionality on any other Interactive Site (but excluding custom development
done for a particular Interactive Site which is cobranded with a third party and
which is deployed
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only on such site), without additional cost to AOL. In the event that InfoSpace
desires to use any third party with respect to the fulfillment of its custom
development obligations, InfoSpace must first receive AOL's written approval,
and further, InfoSpace will use best efforts to keep any third party costs to a
minimum. In no event shall AOL be required to share in development costs (i) in
connection with implementing an Advertising sale or other revenue opportunity
under which InfoSpace will receive revenue share, (ii) in implementing
development or functionality which will not be exclusive to the AOL White Pages
and (iii) in connection with the integration into the AOL White Pages of AOL
member directories, AOL Instant Messaging technology (or other similar
technology), or home pages and/or home page directories.
2.8 EMAIL DIRECTORY.
InfoSpace will continue to use commercially reasonable best efforts to
increase the quality and robustness of its Email directory product as soon as
reasonably practicable. Among other measures to accomplish such increase,
InfoSpace will integrate names and addresses from usenet groups and other
sources into its Email directory. InfoSpace will consult and work with AOL in
this process.
2.9 OPERATING STANDARDS.
InfoSpace will ensure that the AOL White Pages complies with the operating
standards set forth in Exhibit D. To the extent operating standards are not
established in Exhibit D with respect to any aspect or portion of the AOL White
Pages (or the Products or other Content contained therein), InfoSpace will
provide such aspect or portion at a level of accuracy, quality, completeness,
and timeliness which are consistent with prevailing interactive White Pages
industry standards.
2.10 USER DATA.
2.10.1 InfoSpace shall provide to AOL on at least a monthly basis with all
information collected by InfoSpace through and in relation to usage of the AOL
White Pages by AOL Users ("Usage Data") in a form as reasonably requested by
AOL. To the extent reasonably feasible, and at minimum with respect to basic
AOL White Pages traffic information, InfoSpace shall provide real time reporting
of Usage Data to AOL through an internet site accessible by AOL. InfoSpace
shall not use Usage Data, or communicate Usage Data to any third party, for any
purpose other than as specifically agreed to in writing by AOL.
2.10.2 InfoSpace acknowledges and agrees that AOL shall own all right,
title and interest in and to all User Data and InfoSpace shall keep any and all
User Data in a database separate and apart from any other data and shall ensure
that such data is not combined with any other data and does not appear on or in
conjunction with any other
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<PAGE>
Interactive Site. Further, InfoSpace will institute security measures to ensure
the integrity and safety of the User Data.
2.10.3 Upon any termination or expiration of this Agreement, AOL will have
the right to extract all User Data gained or obtained by InfoSpace and port it
to another database or third party vendor of AOL's choosing and InfoSpace will
work with AOL to facilitate such extraction and porting and InfoSpace will have
no further rights in and to such User Data. [*].
2.11 AOL WHITE PAGES PERFORMANCE.
2.11.1 For the purposes of this Section, an "Event of Suspension" shall
mean a suspension or significant reduction by AOL in the promotion of the AOL
White Pages hereunder due to the fault of InfoSpace resulting in the
unavailability of the AOL White Pages or as AOL otherwise is entitled to effect
due to a material breach of a provision of the Agreement by InfoSpace. After
initial commercial launch of the AOL White Pages on the AOL Service, if during a
Quarter there are Event(s) of Suspension for an aggregate period exceeding
eighteen (18) hours, thereafter in such Quarter, for each additional twenty-four
(24) hour period in the aggregate for which there is an Event of Suspension (as
notified by AOL in writing to InfoSpace), AOL will be deemed for the purposes of
this Agreement (and specifically for the purposes of calculating Searches which
count toward the Targets in Sections 6.1.3, 6.10.2, and 7.9 below) to have
provided [*] Searches for the AOL White Pages for each such twenty-four (24)
hour period, or a prorated portion of such amount of Searches for any lesser
such period in the aggregate.
2.11.2 In the event that AOL terminates this Agreement due to a material
breach by InfoSpace, for the purposes of Section 7.9 below AOL will be deemed as
of such termination to have provided [*]. Searches for the AOL White Pages,
whether or not such number of Searches has actually been achieved to that point.
3. DELIVERY AND TESTING.
3.1 DEVELOPMENT.
InfoSpace will develop and test the AOL White Pages according to the
specifications attached hereto as Exhibit E (the "Specifications"). InfoSpace
shall bear all costs related to any development and testing conducted by
InfoSpace.
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3.2 DELIVERY AND TESTING.
InfoSpace shall deliver the AOL White Pages meeting the Specifications no
later than two weeks following the Effective Date hereof. Such delivered AOL
White Pages (the "Delivered Site") shall be subject to acceptance by AOL based
on satisfaction of such tests performed and as AOL will reasonably construct in
order to determine whether the Delivered Site meets the Specifications. AOL
shall perform such tests, and in the event the Delivered Site fails such
acceptance testing, AOL will provide InfoSpace with a reasonably detailed
written description of such failure within 15 business days of its receipt of
the Delivered Site. The Delivered Site will be deemed accepted by AOL if AOL
does not timely provide such notice of failure under this Section 3.2.
InfoSpace will correct any such failure and submit the AOL White Pages to AOL
for re-testing within 10 business days after receipt of AOL's description of
testing failure. This process will be repeated until the Delivered Site is
accepted in writing by AOL (the date of such acceptance referred to at the
"Acceptance Date"). The failure by InfoSpace to deliver the AOL White Pages
according to the Specifications and accepted by AOL after three submissions of
the Delivered Site under the procedure above may be treated by AOL as a material
breach of this Agreement.
4. ADVERTISING
4.1 SALES.
As between the Parties, except as provided in Sections 4.2, 4.3, and 4.4
below, InfoSpace shall have the first right to sell Advertisements within the
AOL White Pages; provided however, that the parties will meet periodically in
good faith to determine an Advertising plan acceptable to both parties and
InfoSpace will use reasonable efforts otherwise to coordinate with AOL on the
sale of Advertisements and the selection of partners and provided further that
AOL shall have the right to approve in its discretion any third party InfoSpace
desires to use to sell ads into the AOL White Pages. For the purposes of this
Agreement, "Advertisements" shall mean banner advertisements, anchor tenancies,
sponsorships, e-commerce promotion and all other types of advertisements and
other revenue generating partnerships and/or relationships with third parties
directly on the AOL White Pages. All Advertisements sold by InfoSpace shall
comply with AOL's then standard advertising policies and reasonable updates
thereto which shall be made available by AOL to InfoSpace. In addition, the
inventory and layout of Advertisements on the AOL White Pages will be in AOL's
discretion consistent with the user interface and look and feel of the AOL White
Pages; provided however that AOL will consult with InfoSpace regarding such
inventory and layout which will be consistent with the goal of providing
significant Advertisement opportunities through the AOL White Pages. Currently
(and subject to change consistent with this Agreement), the parties expect the
Advertisement inventory on the search screen and
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results pages of the AOL White Pages to approximate that appearing on Exhibit F
attached hereto. All Advertisement sales by InfoSpace on the AOL White Pages
shall adhere to a rate card to be mutually agreed to by the Parties. With
respect to ads sold by AOL hereunder, AOL shall have the right to serve such ads
through AOL's ad servers or other ad servers as determined by AOL.
4.2 PREFERRED CATEGORIES.
Anything contained in this Agreement to the contrary notwithstanding, AOL
shall have the first right to sell into the "Preferred" categories listed on
Exhibit G hereto. In the event that InfoSpace informs AOL in writing that it
wishes to sell Advertisements in a Preferred category, AOL will have 60 days
from receipt of such notice to negotiate the sale of Advertisements to a partner
of its choice in the named category. If AOL does not enter into such an
Agreement within the 60 day period, InfoSpace shall have the right to sell
Advertisements to a third party on the AOL White Pages in the named Preferred
category; provided however, that InfoSpace will use reasonable efforts to
accommodate any concerns expressed by AOL regarding Preferred category partners
InfoSpace may be considering and will work with AOL in the event that AOL
informs InfoSpace of the potential to sell Advertising in the Preferred category
to an existing AOL partner or other partner preferred by AOL. AOL may remove
categories from the list of Preferred categories by written notice to InfoSpace,
in which case such categories will then become subject to the provisions of
Section 4.1 above. AOL shall have the right to add a reasonable number of
additional categories to be included in the Preferred categories by written
notice to InfoSpace (provided that an addition of a Preferred category shall not
effect contractual advertising obligations entered into by InfoSpace in such
category prior to its designation by AOL as Preferred, except that InfoSpace
will thereafter use reasonable efforts to honor such Preferred designation as
soon after such designation as reasonably possible).
4.3 EXCLUSIVE CATEGORIES.
Anything contained in this Agreement to the contrary notwithstanding, AOL
shall have the exclusive right, and will use commercially reasonable efforts to
sell in the "Exclusive" categories listed on Exhibit G hereto in the AOL White
Pages. InfoSpace shall not, without the prior written approval of AOL, sell any
Advertisement on the AOL White Pages in any of the Exclusive categories. AOL
may remove categories from the list of Exclusive categories by written notice to
InfoSpace, in which case such categories will then become subject to the
provisions of Section 4.1 above. AOL shall have the right to add a reasonable
number of additional categories to be included in the Exclusive categories by
written notice to InfoSpace (provided that an addition of an Exclusive category
shall not effect contractual advertising obligations entered into by InfoSpace
in such category prior to its designation by AOL as Exclusive, except that
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InfoSpace will thereafter use reasonable efforts to honor such Exclusive
designation as soon after such designation as reasonably possible).
4.4 LOCAL BANNER.
At AOL's discretion, a local advertising banner will appear on each search
and results screen of the AOL White Pages. Such local banner will be controlled
and sold exclusively by DCI. By mutual agreement, the Parties may determine to
place a local ad banner to be sold exclusively by DCI on other Interactive
Sites.
4.5 PROHIBITED ADVERTISEMENTS.
In no event shall InfoSpace make any Advertisement in the AOL White Pages
for any Internet Service Provider, yellow pages or white pages service,
classifieds service, newspaper (whether or not a newspaper has an online
presence), search engine or other online search or directory service, online
communications product such as instant messaging, e-mail, or chat, or a
horizontal aggregator of third party interactive content or services (which
shall not include an aggregator of content in a single subject area). Further,
InfoSpace shall not display on the AOL White Pages any Advertisements or other
promotions for any product or service which offers the ability to create or host
web pages (such as GeoCities or Primehost). In addition, InfoSpace shall not
sell exclusivities in the AOL White Pages without the prior approval of AOL.
4.6 HOUSE AND BARTER ADVERTISEMENTS.
The Parties agree that no more than [*] percent of the Advertising
inventory on the AOL White Pages may be taken up by barter advertising. In any
Year of the Term, AOL shall be entitled to [*] percent of any Unsold Advertising
Inventory (including all house ads and barter inventory). For the purposes
hereof, "Unsold Advertising Inventory" shall mean advertising inventory that is
not sold to a third party. InfoSpace may use its [*]% of Unsold Advertising
Inventory for house ads as long as the house ads are consistent with the other
terms of this agreement, including without limitation Section 1.2, the
provisions relating to prohibited advertisements in Section 4.5, and the
provisions regarding Exclusive and Preferred Categories in Sections 4.2 and 4.3.
5. AOL EXCLUSIVITY OBLIGATIONS.
Beginning on the later of the Commercial Launch Date and the actual date of
commercial launch of the AOL White Pages on the AOL Service (such later date,
the
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"Exclusivity Date"), the AOL White Pages will be the exclusive
comprehensive, national White Pages (the "Exclusive Product") which is expressly
promoted and integrated by AOL within the AOL Service, AOL.com and the Digital
City Service during the Initial Term and the Extension, if applicable. [*]
6. PAYMENTS; REPORTS.
6.1 CASH PAYMENTS BY INFOSPACE.
6.1.1 For the Initial Term, InfoSpace shall make cash payments to AOL as
follows (which payments shall be subject to vesting as provided in Section 6.1.3
below):
(a) In the first Year of the Term, [*] Dollars ($[*]) payable in
equal quarterly installments in advance within 5 business days of
the beginning of each Quarter in such Year; provided that the
payment for the first such Quarter shall be made in two equal
installments with the first installment due and payable within 5
business days of the Effective Date and the second installment
due and payable on November 1, 1998 (or on the date of commercial
launch of the AOL White Pages on the AOL Service if such launch
is delayed due to the fault of AOL);
(b) In the second Year of the Term, [*] Dollars ($[*]) payable in
equal quarterly installments in advance within 5 business days of
the beginning of each Quarter in such Year.
(c) In the third Year of the Term, [*] Dollars ($[*]) payable in
equal quarterly installments in advance within 5 business days of
the beginning of each Quarter in such Year.
6.1.2 In the event that AOL exercises its option to renew this Agreement
for the Extension as provided in Section 7.2 below, InfoSpace shall pay to AOL
an additional cash payment of [*] Dollars ($[*]) payable in equal quarterly
installments in advance within 5 business days of the beginning of each Quarter
in such Year.
6.1.3 The quarterly payments under this Section 6.1 above shall be subject
to vesting as follows: In each Quarter the entire amount of the quarterly
payment pursuant to this Section 6.1 above shall vest immediately upon the
achievement of the AOL White Pages of at least [*] Searches (for the purposes of
this Section 6.1.3, the
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"Target") for such Quarter (which calculation shall be subject to the provisions
of Section 1.4.2 above, if applicable). In the event that AOL does not reach the
Target in a given Quarter, AOL shall refund to InfoSpace the entire amount of
the quarterly payment for such quarter (paid in advance by InfoSpace to AOL) and
such quarterly payment for such Quarter shall be forfeited.
6.1.4 In the event of a termination by AOL due to a material breach by
InfoSpace under Section 2.11.2, if applicable AOL will return portions of the
aggregate cash payments actually made by InfoSpace to AOL under this Section 6.1
so that InfoSpace will have effectively paid AOL $[*] per Year for the Term
under Section 6.1, prorated for any partial Year in the Year of termination.
6.2 REVENUE SHARE.
The Parties will share Revenues as follows:
6.2.1 In the first Year of the Term: (i) for so long as amounts to
InfoSpace in respect of Revenues hereunder are less than $[*], InfoSpace shall
receive [*] percent and AOL shall receive [*] percent of such Revenues; (ii)
after amounts to InfoSpace in respect of Revenues hereunder reach $[*],
InfoSpace shall receive [*] percent and AOL shall receive [*] percent of such
Revenues.
6.2.2 In the second Year of the Term: (i) for so long as amounts to
InfoSpace in respect of Revenues hereunder in the second Year of the Term are
less than $[*] and total amounts to InfoSpace in respect of Revenues hereunder
are less than $[*], InfoSpace shall receive [*] percent and AOL shall receive
[*] percent of Revenues; (ii) after either amounts to InfoSpace in respect of
Revenues hereunder in the second Year of the Term reach $[*] or total amounts to
InfoSpace in respect of Revenues hereunder reach $[*], InfoSpace shall receive
[*] percent and AOL shall receive [*] percent of such Revenues.
6.2.3 In the third Year of the Term: (i) for so long as amounts to
InfoSpace in respect of Revenues hereunder in the second Year of the Term are
less than $[*] and total amounts to InfoSpace in respect of Revenues hereunder
are less than $[*], InfoSpace shall receive [*] percent and AOL shall receive
[*] percent of Revenues; (ii) after either amounts to InfoSpace in respect of
Revenues hereunder in the third Year of the Term reach $[*] or total amounts to
InfoSpace in respect of Revenues hereunder reach $[*], InfoSpace shall receive
[*] percent and AOL shall receive [*] percent of such Revenues.
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6.2.4 In the event that AOL exercises its option to extent the Agreement
through the Extension, in the Extension Year: (i) for so long as amounts to
InfoSpace in respect of Revenues hereunder in the Renewal Term are less than
$[*] and total amounts to InfoSpace in respect of Revenues hereunder are less
than $[*], InfoSpace shall receive [*] percent and AOL shall receive [*] percent
of Revenues; (ii) after either amounts to InfoSpace in respect of Revenues
hereunder in the Renewal Term reach $[*] or total amounts to InfoSpace in
respect of Revenues hereunder reach $[*], InfoSpace shall receive [*] percent
and AOL shall receive [*] percent of such Revenues.
6.2.5 During any Renewal Term, if any, InfoSpace shall receive [*] percent
and AOL shall receive [*] percent of Revenues hereunder.
6.3 LOCAL BANNER REVENUE.
Notwithstanding anything in this Section 6 above to the contrary, during
the Term any Revenue from the sale of the Local Banner described in Section 4.4
will be divided [*] by the parties without regard to any revenue targets or
hurdles. With respect to local advertising inventory under this Agreement, the
Parties agree that with respect to such local inventory only, in the event that
DCI reasonably determines that it is operationally too difficult to work based
on the advertising revenue splits described in Sections 6.2 and 6.3 above, then
the Parties will determine a reasonable advertising inventory split to replace
the applicable advertising revenue split which approximates the results from
such advertising revenue split.
6.4 SALES BY AOL IN PREFERRED AND EXCLUSIVE CATEGORIES.
Notwithstanding anything in this Section 6 above to the contrary, during
the Term any Revenue from the sale by AOL of advertisements on the AOL White
Pages in the Preferred and Exclusive categories described in Sections 4.2 and
4.3 above will be divided [*] by the parties without regard to any revenue
targets or hurdles.
6.5 ALTERNATIVE REVENUE STREAMS.
In the event InfoSpace desires to receive, directly or indirectly, any
compensation in connection with the AOL White Pages other than advertising
revenues or transaction revenues obtained through Advertisements (including
without limitation any premium service charges) (collectively, "Alternative
Revenue Streams"), InfoSpace will promptly inform AOL, and the Parties will
negotiate in good faith regarding whether InfoSpace will be permitted to
establish such Alternative Revenue Stream through the AOL White
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Pages. In the event that AOL amounts owed hereunder not paid within thirty (30)
days of the date when due and payable will bear interest from such later date at
the rate of 15% per year, or the highest legally permissible rate below 15%.
6.7 INFOSPACE REPORTS.
InfoSpace shall provide on a regular basis (at least monthly overall, and
at least weekly with respect to Searches achieved by the AOL White Pages)
detailed click-through, CPM, page view, search, visit, registration, unique
user, and other usage information and analysis for the AOL White Pages in such
form as may be reasonably agreed to by the Parties. InfoSpace shall provide AOL
with access to such data in electronic form. In addition, InfoSpace will
provide to AOL at least quarterly a detailed revenue report regarding the AOL
White Pages and a detailed advertising report with respect to the AOL White
Pages showing the number of advertisers, a full accounting of sold and unsold
inventory including without limitation house and barter ads, consideration
received from advertisers and, if part of a larger InfoSpace deal involving the
AOL White Pages and other sites, how the total revenue in such deal was
allocated. InfoSpace will also provide AOL in a timely manner information
regarding InfoSpace requested by AOL (which requests shall be occur no more than
once per Quarter) which is reasonably necessary to value the Warrants which vest
quarterly during the Term as provided under Section 6.10 below.
6.8 AOL REPORTS.
AOL and DCI will provide InfoSpace with at least a quarterly revenue report
regarding the sale of Advertising by AOL on the AOL White Pages hereunder in
form to be reasonably agreed to by the Parties such that such reports are
sufficient to determine AOL's Revenue obligations hereunder.
6.9 AUDITING RIGHTS.
InfoSpace and AOL will each maintain complete, clear and accurate records
of all expenses, revenues and fees in connection with the performance of this
Agreement. For the sole purpose of ensuring compliance with this Agreement,
each of AOL and InfoSpace will have the right, at its expense, to direct an
independent certified public accounting firm to conduct a reasonable and
necessary inspection solely of portions of the books and records of the other
Party which are relevant to such Party's performance pursuant to this Agreement;
provided, however, that neither Party shall not have the right to perform more
than one (1) such audit in any six month period. Any such audit may be
conducted after twenty (20) business days prior written notice
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6.10 WARRANTS.
6.10.1 GRANT AND VESTING OF WARRANTS. InfoSpace shall, within 30 days of
the Effective Date, grant to AOL warrants (the "Warrants") for the right to
purchase shares of Stock representing [*] Percent ([*]%) of the fully diluted
equity securities of InfoSpace (including without limitation all warrants, debt
and other instruments convertible into equity of InfoSpace, and all options,
including any options reserved for grant whether or not currently granted), on
an as converted basis as of the Effective Date. The Warrants shall be at a
price per share which is equal to [*] Dollars ($[*]) per share (the "Warrant
Price") (as may be split or reverse split adjusted as appropriate). For the
purposes of this Agreement, the term "Stock" shall mean the common or preferred
stock of InfoSpace carrying the most preferential rights, preferences and
privileges of any stock issued by InfoSpace in the last prior round of InfoSpace
financing (including without limitation, voting, registration and conversion
rights).
6.10.2 VESTING. The Warrants shall vest quarterly as follows: Warrants to
purchase [*]% of the Stock of InfoSpace shall vest in each Quarter of the
Initial Term and the Extension in which the AOL White Pages achieves at least
[*] ([*]) Searches (for the purposes of this Section 6.10.2, the "Target"),
which Warrants shall vest immediately upon reaching such Target (the calculation
of which shall be subject to the provisions of Section 1.4.2 above, if
applicable). In the event that AOL does not reach the Target in a given
Quarter, such Warrants for [*]% of the Stock of InfoSpace shall not vest and
shall be forfeited by AOL.
6.10.3 CONVERSION OF WARRANTS. If InfoSpace engages in a merger or
consolidation of InfoSpace into or with, or sale of all or substantially all of
its assets to, another entity (the "Acquiring Entity"), then immediately upon
the occurrence of such event (of which InfoSpace will give AOL at least 30 days
written notice), AOL will be entitled to exchange the Warrants (whether vested
or unvested at the time of such occurrence) for equivalent Warrants in the
Acquiring Entity subject to the same terms and conditions (including without
limitation the provisions regarding vesting) of the Warrants hereunder.
6.10.4 EXPIRATION OF WARRANTS. The Warrants shall expire on the date [*]
years from the Effective Date.
6.10.5 OTHER TERMS AND CONDITIONS. In addition to other standard rights
and privileges for the Warrants (and the corresponding Stock), AOL shall be
entitled to the most favorable antidilution protection and registration rights
granted to any shareholder
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or warrant holder of InfoSpace in the last prior round of InfoSpace financing,
up to four (4) S-3 registrations of Stock at AOL's request and to exercise the
Warrants through a cashless net issuance of shares.
6.10.6 PRINCIPAL TERMS. The provisions of this Section 6.7 contain all of
the principal and essential terms and conditions of the Warrants and the
Warrants shall be issued consistent with such terms in a final form reasonably
acceptable to both Parties.
7. TERM; RENEWAL; TERMINATION.
7.1 TERM.
Unless earlier terminated as set forth herein, the initial term of this
Agreement will run from the Effective Date through the date which is three (3)
years from November 1, 1998 (the "Initial Term").
7.2 EXTENSION OPTION.
AOL shall have the right, in its discretion, to renew this Agreement on the
terms provided for herein for an additional one-year period (the "Extension") by
giving written notice to InfoSpace thirty (30) days prior to the end of the
Initial Term.
7.3 RENEWAL.
Upon conclusion of the Initial Term and, if applicable, the Extension, AOL
will have the right to renew the Agreement for up to three successive one-year
renewal terms (each a "Renewal Term" and together with the Initial Term and, if
applicable, the Extension, the "Term") by providing InfoSpace with notice of
AOL's intention to renew the Agreement for a subsequent Renewal Term no later
than thirty (30) days prior to the commencement of such Renewal Term. During
any such Renewal Term: (i) InfoSpace will not be required to pay any guaranteed,
fixed payment or perform any cross-promotional obligations other than those
determined by AOL on the AOL White Pages itself; (ii) AOL can, at its election,
sell all advertising inventory on the AOL White Pages; and (iii) AOL will be
released from any exclusivity obligations and promotional/placement obligations
herein; provided that (iv) for so long as AOL may elect to maintain the
exclusivity commitments contained herein during a Renewal Term, InfoSpace will
continue to perform all of its cross promotional obligations hereunder. AOL's
right to renew will apply in connection with (a) an expiration of the Initial
Term, the Extension, or any Renewal Term and (b) any other termination of the
Agreement. Except as specifically set forth in this Section 7.3 above, all
terms and conditions of this Agreement shall remain in full force and effect
during each Renewal Term.
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7.4 AOL TERMINATION OPTION.
AOL shall have the right in its discretion (i) at any time after the date
which is 18 months from the Effective Date and/or (ii) at any time within thirty
days of any purchase by AOL of any third party provider of interactive White
Pages services, to terminate this Agreement by providing 30 days written notice
to InfoSpace of such termination and paying to InfoSpace a [*] Dollar ($[*])
termination fee. In the event of any such termination, in addition to any other
amounts payable hereunder, AOL will also refund to InfoSpace a pro-rata portion
of the guaranteed payment made by InfoSpace to AOL under Section 6.1 above for
the Quarter in which the termination occurs (to the extent that such payment has
already been made to AOL by InfoSpace).
7.5 TERMINATION FOR BREACH.
Either Party may terminate this Agreement at any time in the event of a
material breach of the Agreement by the other Party which remains uncured after
thirty (30) days written notice thereof to the breaching Party (or such shorter
period as may be specified elsewhere in this Agreement).
7.6 TERMINATION FOR BANKRUPTCY/INSOLVENCY.
Either Party may terminate this Agreement immediately following written
notice to the other Party if the other Party (i) ceases to do business in the
normal course, (ii) becomes or is declared insolvent or bankrupt, (iii) is the
subject of any proceeding related to its liquidation or insolvency (whether
voluntary or involuntary) which is not dismissed within ninety (90) calendar
days or (iv) makes an assignment for the benefit of creditors.
7.7 CONSEQUENCES OF TERMINATION.
Upon any termination of this Agreement, (i) each Party will pay to the
other any fees, reimbursable expenses, compensation or other amounts payable to
such Party (provided such amounts are not otherwise in dispute), prior to the
date of termination of this Agreement; and (ii) any and all liabilities accrued
by either Party prior to the date of termination of this Agreement will survive.
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7.8 RIGHT OF FIRST NEGOTIATION; CHANGE OF CONTROL.
AOL shall have the right of first negotiation on any sale of a controlling
interest in InfoSpace or other merger, asset sale or other disposition which
effectively results in such a change of control in InfoSpace (each a
"Disposition") as follows: In the event that InfoSpace receives an unsolicited
proposal, or InfoSpace determines to solicit proposals or otherwise enter into
discussions which would result in a Disposition, then InfoSpace shall give
written notice to AOL of such occurrence (a "Disposition Notice"), AOL shall
have seven (7) days after receipt of such Disposition Notice to provide notice
to InfoSpace in writing (a "Negotiation Notice") of its desire to negotiate in
good faith with InfoSpace regarding a Disposition involving AOL. In the event
that AOL does not deliver such Negotiation Notice within 7 days of receipt of a
Disposition Notice, InfoSpace will be free to negotiate with a third party
regarding a Disposition. In the event that AOL delivers a Negotiation Notice to
InfoSpace within 7 days of AOL's receipt of Disposition Notice, then InfoSpace
will negotiate exclusively and in good faith with AOL regarding a Disposition
for the 30 day period ending 30 days from the date of receipt by AOL of the
Disposition Notice. If after such 30 day period, AOL and InfoSpace cannot in
good faith come to terms regarding a Disposition of InfoSpace, InfoSpace will be
free to negotiate with a third party regarding a Disposition. In the event that
a Disposition does not occur within five (5) months from the date of a
Negotiation Notice delivered by InfoSpace to AOL, then the right of first
negotiation process described in this Section 7.8 above will again apply as if
no such original Negotiation Notice had been delivered to AOL. No Disposition
which occurs in violation of the process outlined above shall be valid. Upon
any Disposition other than to AOL, InfoSpace shall provide written notice to AOL
of such Disposition and AOL shall have the right within 30 days of receipt of
such notice, in AOL's sole discretion, to terminate this Agreement upon thirty
(30) days written notice to InfoSpace. For purposes of Section 2.11.2 only,
such termination shall be deemed to be a termination due to a material breach by
InfoSpace.
7.9 PENALTY FOR NONPERFORMANCE.
Subject to the terms of Section 2.11.2, in the event that the AOL White
Pages has not achieved a total of [*] million ([*]) Searches (the calculation of
which shall be subject to the provisions of Section 2.11 above, if applicable)
prior to (i) the expiration of the Term (including, if applicable, the
Extension) or (ii) any earlier termination of this Agreement by AOL, then AOL
will make a cash penalty payment to InfoSpace equal to [*] Dollars ($[*]).
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8. LOCAL DISTRIBUTION
The parties have discussed an arrangement under which InfoSpace would
provide certain distribution to CDI city guides on the Public InfoSpace Site and
certain other Interactive Sites and DCI would provide certain distribution to
InfoSpace city guides on the Digital City Service. The Parties shall not be
bound to specific terms of such an arrangement under this Section 8, but agree
to negotiate in good faith to work out an agreement on specific terms within 60
days of the Effective Date. InfoSpace agrees not to enter serious and ongoing
negotiations with other city guide providers for distribution on Interactive
Sites during such 60-day period.
9. STANDARD TERMS
The Standard Online Commerce Terms & Conditions set forth in Exhibit H
attached hereto and Standard Legal Terms & Conditions set forth on Exhibit I
attached hereto are each hereby made a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the Effective Date.
AMERICA ONLINE, INC. INFOSPACE, INC.
By: /s/ David M. Colburn By: /s/ Naveen Jain
------------------------------- -------------------------------
Print Name: David M. Colburn Print Name: Naveen Jain
----------------------- ------------------------
Title: SVP, Business Affairs Title: President & CEO
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DIGITAL CITY, INC.
By: /s/ Paul Di Benedictis
-------------------------------
Print Name: Paul Di Benedictis
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Title: President
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EXHIBIT A
DEFINITIONS
The following definitions will apply to this Agreement:
ADDITIONAL INFOSPACE CHANNEL. Any third-party distribution channel (e.g.,
an Interactive Service) through which a version or portion of the AOL White
Pages or any Interactive Site (or, in each case, any of the Products or other
Content contained therein) is made available.
ADVERTISEMENTS. See Section 3.1.
AOL. "AOL" shall have the meaning indicated in the introductory paragraph
of this Agreement, provided however that where "AOL" is referenced with respect
to provisions of this Agreement outlining, privileges, rights and duties, "AOL"
shall refer to America Online, Inc. with respect to the AOL Network and DCI
with respect to the Digital City Service.
AOL WHITE PAGES. A White Pages site which shall include the Content and
functionality which is the subject of this Agreement pursuant to Section 2 of
this Agreement.
AOL LOOK AND FEEL. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with Interactive Sites within the AOL Service or AOL.com.
AOL MEMBER. Any authorized user of the AOL Network, including any sub-
accounts using the AOL Network under an authorized master account.
AOL NETWORK. (i) The AOL Service, (ii) AOL.com and (iii) any other product
or service owned, operated, distributed or authorized to be distributed by or
through AOL or its affiliates or distribution partners worldwide (including
without limitation those properties excluded from the definitions of the AOL
Service or AOL.com).
AOL SERVICE. The standard, narrow-band U.S. version of the America Onlinea
brand service [*].
AOL USER. Any person or entity who enters the AOL White Pages.
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AOL.COM. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM(TM)" brand [*].
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not limited
to, the terms of this Agreement, information about AOL Members and InfoSpace's
business relationships with third parties including, without limitation,
advertisers, suppliers and users, technical processes and formulas, source
codes, product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from any
third party.
CONTENT. Information, materials, features, Products, advertisements,
promotions, links, pointers and software, including any modifications, upgrades,
updates, enhancements and related documentation.
DIGITAL CITY SERVICE. The standard, narrow-band U.S. version of the
Digital City brand service on the World Wide Web and on the AOL Service,
specifically excluding (a) Any other DCI Interactive Site, (b) any international
versions of the Digital City brand service, (c) any independent product or
service offered by or through the U.S. version of the Digital City brand
service, (d) any programming or Content area offered by or through the U.S.
version of the Digital City brand service over which DCI does not exercise
complete operational control (including, without limitation, content areas
controlled by other parties and member-created content areas), (e) any
programming or Content area offered by or through the U.S. version of the
Digital City brand service which is a branded subservice of such service, (f)
any yellow pages, white pages, classifieds or other search, directory or review
services or content offered by or through the U.S. version of the Digital City
brand service, (g) any property, feature, product or service which DCI or its
affiliates may acquire subsequent to the Effective Date and (h) any other
version of a Digital City service which is materially different from the narrow-
band U.S. version of the Digital City brand service, by virtue of its branding,
distribution, functionality, Content and services, including, without
limitation, any cobranded versions and any version distributed through any
broadband distribution platform or through any platform or device other than a
desktop personal computer.
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INFOSPACE'S INGREDIENT BRANDING. Ingredient branding consisting of
"powered by InfoSpace", or some equivalent branding, in a secondary position to
the AOL branding.
INTERACTIVE SERVICE. Any entity that offers online or Internet
connectivity (or any successor form of connectivity), aggregates and/or
distributes a broad selection of third-party interactive Content, or provides
interactive navigational services [*].
INTERACTIVE SITE. Any interactive site or area (other than the AOL White
Pages) which is managed, maintained or owned by InfoSpace or its agents or to
which InfoSpace provides and/or licenses information, content or other materials
(the "Licensed Material") and the Uncensored Material represents a significant
portion of the content of such site, including, by way of example and without
limitation, (i) an InfoSpace site on the World Wide Web portion of the Internet
or (ii) a channel or area delivered through a "push" product such as the
Pointcast Network or interactive environment such as Microsoft's proposed
"Active Desktop."
LOOK AND FEEL. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with interactive sites or areas.
PRODUCT. Any product, good or service which InfoSpace offers, sells or
licenses to AOL Members through (i) the AOL White Pages (including through any
Interactive Site linked thereto) or (ii) an "offline" means (e.g., toll-free
number) for receiving orders related to specific offers within the AOL White
Pages requiring purchasers to reference a specific promotional identifier or
tracking code, including, without limitation, products sold through surcharged
downloads (to the extent expressly permitted hereunder). "Product" shall not be
deemed to include products, goods or services that are offered, sold or licensed
by a third party through Advertisements.
PUBLIC INFOSPACE SITE. The site found on the World Wide Web at
http://www.InfoSpace.com (or any successor site to the foregoing).
QUARTER. In referring to "Quarters" of the Term in the Agreement, the
first such Quarter shall be deemed to be the period from the Effective Date
through January 31, 1999. Subsequent Quarters of the Term will be the
subsequent three (3) month periods thereafter.
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REVENUES. (a) All revenues in respect of sales of Advertisements on the
AOL White Pages (plus the fair market value of any other compensation received)
and any other revenue derived through the AOL White Pages, less actual
reasonable third party commissions; and
(b) Revenue from Advertisements appearing in the AOL White Pages and in
other Interactive Sites or areas thereof, shall be counted as Revenue for
purposes of this Agreement pro rata based on the relative traffic on all the
sites on which each such Advertisement appears.
SEARCH. Any search conducted within the AOL White Pages (including, but
not limited to, searches on the main screen, results screen, e-mail directory,
government directory, celebrity directory, etc.). A Search occurs when an AOL
User enters a search term or terms into a search form and clicks a search button
or its equivalent (whether or not the search actually is completed).
SEARCH SCREEN. The custom designed screen which is the front end of the
AOL White Pages and which prompts a user to perform a search for listings by
name, address and/or other criteria.
USER DATA. All data submitted or otherwise revealed through the AOL White
Pages or Public InfoSpace Site by AOL Users, including without limitation,
names, addresses, telephone numbers, screennames or interests.
WHITE PAGES. (i) An online, interactive directory generally available to
the public containing comprehensive national listings of addresses and telephone
numbers for individuals organized and searchable by name, address, telephone
number, e-mail address and other. As defined White Pages shall expressly not
include business white pages or other business listings.
YEAR. In referring to "Years" of the Term in the Agreement, the first such
Year shall be deemed to be the period from the Effective Date through October
31, 1999. Subsequent Years of the Term will be the subsequent 12 month periods
thereafter.
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EXHIBIT B
INFOSPACE CROSS-PROMOTION
ONLINE
To the extent that InfoSpace provides a promotional banner, button, link or
other promotional presence (a "Promotional Presence") to any other Interactive
Service in the Public InfoSpace Site or other Interactive Site, InfoSpace shall
also provide at least an equivalent Promotional Presence to AOL in such
Interactive Site linking to such areas of the AOL Network as determined by AOL
and on terms and conditions (including, without limitation, scope, purpose,
amount, prominence or regularity) that are no less favorable than the terms and
conditions provided to such other Interactive Service. To the extent that
InfoSpace provides promotional information about the products of any other
Interactive Service on any Interactive Site, InfoSpace shall provide a prominent
"Try AOL" feature where users can obtain promotional information about AOL
products and services and, at AOL's option, download or order AOL's then-current
version of client software for the AOL Service or software for any other AOL
products or services (e.g., AOL's Instant Messenger service) on terms and
conditions (including, without limitation, scope, purpose, amount, prominence or
regularity) that are no less favorable than the terms and conditions provided to
such other Interactive Service.
. Effective as of October 14, 1998, and during the Term, prominent
carriage and Integration of the AOL Instant Messenger and/or ICQ
instant messaging (at AOL's option) products as the exclusive instant
messaging and status monitoring products on the Public InfoSpace Site
pursuant to the terms of AOL's standard licensing agreement for such
products in final form as is reasonably agreed to by both parties.
AOL will provide for the listing where reasonably appropriate of the
AOL White Pages or InfoSpace (in AOL's discretion) in ICQ's listing of
directories for conducting people searches, if any. With respect to
ICQ, such integration will include, in addition to carriage of the ICQ
client, at ICQ's request: (i) incorporation of the ICQ online
indicator in the InfoSpace e-mail directory, personal home page
directory, and white pages directory on the Public InfoSpace Site and
related InfoSpace sites (and InfoSpace agrees to use reasonable
efforts to incorporate the ICQ online indicator in such areas on other
Interactive Sites); and (ii) incorporation of the ICQ community
enabling panels into InfoSpace's personal web publishing tool.
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OFFLINE
To the extent that InfoSpace shall promote any other Interactive Service,
InfoSpace shall prominently promote AOL in InfoSpace's television, radio and
print advertisements and in any publications, programs, features or other forms
of media over which InfoSpace exercises editorial control on terms and
conditions (including, without limitation, scope, purpose, amount, prominence or
regularity) that are no less favorable than the terms and conditions provided to
such other Interactive Service. InfoSpace will include specific references or
mentions (verbally where possible) of the AOL White Page's availability through
America Online(R) and Digital City at least as prominent as any reference to any
third party Interactive Service; for instance, a listing of the "URL(s)" of an
Interactive Site will be accompanied by the AOL "keyword" for the AOL White
Pages. This Section shall not apply to press releases or other promotional
activities primarily dedicated to the announcement of the establishment or
enhancement of any specific relationship between InfoSpace and a third party.
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EXHIBIT C
DESCRIPTION OF AOL WHITE PAGES CONTENT AND SERVICES
. national White Pages, including appropriate search and results.
. an online, interactive directory generally available to the public
containing listings of e-mail addresses for individuals organized and
searchable by name and address.
. features integrating mapping and driving instructions into each listing
(which features shall not be subject to the exclusivity provisions of
Section 5). At AOL's option, InfoSpace will integrate a mapping provider of
AOL's choosing and AOL and InfoSpace shall mutually agree on Revenue and
inventory sharing for the mapping service within the AOL White Pages.
InfoSpace will not use Expedia mapping on the AOL White Pages without the
express written consent of AOL (which may be given or withheld in AOL's
complete discretion) unless Microsoft branding is removed.
. at AOL's option, civic/government listings will be included.
. at AOL's option, celebrity listings will be included (similar to such
listings as have been provided on the Public InfoSpace Site).
. other content and functionalities as listed in the Specifications or
otherwise specified by AOL under the Agreement.
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EXHIBIT D
OPERATING STANDARDS
1. General. The AOL White Pages (including the Products and other
Content contained therein) will be in the top two (2) in the white pages
category, as determined by each of the following methods: (a) based on a cross-
section of third-party reviewers who are recognized authorities in such industry
and (b) with respect to all material quality averages or standards in such
industry, including each of the following: (i) pricing of Products, (ii) scope
and selection of Products, (iii) quality of Products, (iv) customer service and
fulfillment associated with the marketing and sale of Products and (v) ease of
use. In addition, the AOL White Pages will, with respect to each of the measures
listed above, be competitive in all respects with that which is offered by any
Interactive Site.
2. Hosting; Capacity. InfoSpace will provide all computer hardware
(e.g., servers, routers, network devices, switches and associated hardware) in
an amount necessary to meet anticipated traffic demands, adequate power supply
(including generator back-up) and HVAC, adequate insurance, adequate service
contracts and all necessary equipment racks, floor space, network cabling and
power distribution to support the AOL White Pages. Should AOL exercise its
option to host the AOL White Pages pursuant to Section 2.3, InfoSpace will
provide all computer hardware (e.g., servers, network devices, and associated
hardware) in an amount necessary to meet anticipated traffic demands, adequate
insurance, and adequate service contracts. AOL will provide adequate power
supply (including generator back-up) and HVAC, adequate insurance, adequate
service contracts and all necessary equipment racks, floor space, network
cabling and power distribution to support the computer hardware. As long as
InfoSpace is hosting the AOL White Pages under Section 2.3, InfoSpace will be
fully responsible for the maintenance and the day-today operation of the AOL
White Pages implementation. InfoSpace will provide AOL with a reasonably
detailed network diagram. In addition, InfoSpace will provide AOL with detailed
information regarding separate file downloads available from the AOL White
Pages, including file size, type and download/installation procedures.
3. Speed; Accessibility. InfoSpace will ensure that the performance and
availability of the AOL White Pages (a) is monitored on a continuous, 24/7 basis
and (b) remains competitive in all material respects with the performance and
availability of other similar sites based on similar form technology. InfoSpace
will use commercially reasonable efforts to ensure that: (a) the functionality
and features within the AOL White Pages are optimized for the client software
then in use by AOL Users; and (b) the AOL White Pages is designed and populated
in a manner that minimizes delays when AOL Users attempt to access such site.
At a minimum, InfoSpace will design the AOL
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White Pages in a manner that data transfer initiates within fewer than five (5)
seconds on average during normal use. Prior to launch of any promotions
described herein, InfoSpace will permit AOL to conduct performance and/or load
testing of the AOL White Pages (in person or through remote communications)
until AOL is reasonably satisfied that launch can occur, to include but not be
limited to the following:
. AOL Compatibility Testing
. AOL Client V3.0, Windows 95/Macintosh, Browser: MSIE 3.X/MSIE 2.1
. AOL Client V4.0, Windows 95/Macintosh, Browser: MSIE 3.X
. Caching Implementation
. Graphics Quality
. User Interface and Functional Testing
. Review of Advanced Web Technologies
. Load Testing
. Website Architecture
. Hardware
. Network Configuration
. Software (Web Servers, Databases, etc.)
. Network Redundancy and Reliability
. Performance Thresholds
. Network Bandwidth
. Web Server Capacity
. Simultaneous Users
. Electronic Commerce Encryption Validation
. Encryption Technology (SSL V2/V3, PCT)
. Commerce Implementation Review (Cookies, iCat, Webforce, etc.)
. Review Facility Physical Security
. Review Safeguards Related to Private Customer Information
4. User Interface. InfoSpace will maintain a graphical user interface
within the AOL White Pages that is competitive in all material respects with
interfaces of other similar sites based on similar form technology. AOL
reserves the right to review and approve the user interface and site design
prior to launch of the Promotions and to conduct focus group testing to assess
compliance with respect to such consultation and with respect to InfoSpace's
compliance with the preceding sentence.
5. Service Level Response. InfoSpace agrees to use commercially
reasonable efforts to provide the following service levels in response to
problems with or improvements to the AOL White Pages:
. For material functions of the AOL White Pages that are or have become
substantially inoperable (e.g., inability to access website or conduct
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transactions), InfoSpace will provide a bug fix or workaround within
four (4) hours after the first report of such error to InfoSpace.
. For functions of the AOL White Pages that are impaired or otherwise
fail to operate in accordance with agreed upon specifications (e.g.,
search engine), InfoSpace will provide a bug fix or workaround within
twenty-four (24) hours after the first report of such error to
InfoSpace.
. For errors disabling only certain non-essential functions (e.g.,
particular broken links or noncritical applications), InfoSpace will
provide a bug fix or workaround within fourteen (14) days after the
first report of such error to InfoSpace.
. For all other errors, InfoSpace will address these requests on a case-
by-case basis as soon as reasonably feasible.
6. Monitoring. InfoSpace will provide AOL with InfoSpace's detailed
escalation procedures (e.g., contact names and notification mechanisms such as
e-mail, phone, page, etc.) and notification of any scheduled or unscheduled
downtimes. AOL Network Operations Center will work with InfoSpace's designated
technical contacts in the event of any performance malfunction or other
emergency related to the AOL White Pages and will either assist or work in
parallel with InfoSpace's contact using InfoSpace tools and procedures, as
applicable. The Parties will develop a process to monitor performance and
member behavior with respect to access, capacity, security and related issues
both during normal operations and during special promotions/events.
7. Telecommunications. The Parties agree to explore encryption
methodology to secure data communications between the Parties' data centers such
that no private member information requested by the InfoSpace will be
transferred unencrypted. The network between the Parties will be configured
such that no single component failure will significantly impact AOL Users. The
network will be sized such that no single line runs at more than 70% average
utilization for a 5-minute peak in a daily period. Should AOL exercise its
option to host AOL White Pages at an AOL data center, pursuant to Section 2.3,
AOL will be responsible for appropriate sizing on the network to ensure AOL
member access to the AOL White Pages.
8. Security Review. InfoSpace and AOL will work together to perform an
initial security review of, and to perform tests of, the InfoSpace system,
network, and service security in order to evaluate the security risks and
provide recommendations to InfoSpace, including periodic follow-up reviews as
reasonably required by InfoSpace or AOL. InfoSpace will use commercially
reasonable best efforts to fix any security risks or breaches of security as may
be identified by AOL's Operations Security. Specific
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services to be performed on behalf of AOL's Operations Security team will be as
determined by AOL in its sole discretion.
9. Technical Performance. InfoSpace will perform the following technical
obligations (and any reasonable updates thereto from time to time by AOL):
. InfoSpace will design the AOL White Pages to support the Windows
version of the Microsoft Internet Explorer 3.0 and 4.0 browser, the
Macintosh version of the Microsoft Internet Explorer 2.1 and 3.0, and
make commercially reasonable efforts to support all other AOL browsers
listed at: "http://webmaster.info.aol.com/BrowTable.html."
. InfoSpace will configure the server from which it serves the site to
examine the HTTP User-Agent field in order to identify the "AOL
Member-Agents" listed at:
"http://webmaster.info.aol.com/Brow2Text.html."
. InfoSpace will design its site to support HTTP 1.0 or later protocol
as defined in RFC 1945 (available at
"http://ds.internic.net/rfc/rfc1945.text." and to adhere to AOL's
parameters for refreshing cached information listed at
http://webmaster.info.aol.com/CacheText.html.
10. AOL Internet Services Partner Support. AOL will provide InfoSpace
with access to the standard online resources, standards and guidelines
documentation, technical phone support, monitoring and after-hours assistance
that AOL makes generally available to similarly situated web-based partners.
AOL support will not, in any case, be involved with content creation on behalf
of InfoSpace or support for any technologies, databases, software or other
applications which are not supported by AOL or are related to any InfoSpace area
other than the AOL White Pages. Support to be provided by AOL is contingent on
InfoSpace providing to AOL demo account information (where applicable), a
detailed description of the AOL White Pages' software, hardware and network
architecture and access to the AOL White Pages for purposes of such performance
and load testing as AOL elects to conduct. As described elsewhere in
InfoSpace's principal agreement with AOL, InfoSpace is fully responsible for all
aspects of hosting and administration of the AOL White Pages and must ensure
that the site satisfies the specified access and performance requirements as
outlined in this Exhibit.
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EXHIBIT E
WHITE PAGES SPECIFICATIONS
As noted below, Priority 1 items must be completed and fully functional for
launch of the AOL White Pages, with Priority 2 and 3 items to be completed by
launch or as soon as practicable thereafter (or as directed by AOL otherwise).
[*]
- --------------------
/*/ Confidential Treatment Requested.
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EXHIBIT F
SAMPLE WHITE PAGES SCHEMATICS - SUBJECT TO CHANGE
[*]
- --------------------
/*/ Confidential Treatment Requested.
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EXHIBIT G
[*]
- --------------------
/*/ Confidential Treatment Requested.
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EXHIBIT H
STANDARD ONLINE COMMERCE TERMS & CONDITIONS
1. AOL Network Distribution. InfoSpace will not authorize or permit any
third party to distribute or promote the Content provided by InfoSpace to the
AOL White Pages or any InfoSpace Interactive Site through the AOL Network absent
AOL's prior written approval. The promotions and any other promotional or
advertising rights or space purchased from or provided by AOL will link only to
the AOL White Pages, will be used by InfoSpace solely for its own benefit and
will not be resold, traded, exchanged, bartered, brokered or otherwise offered
to any third party except at otherwise provided in the Agreement.
2. Provision of Other Content. In the event that AOL notifies InfoSpace
that (i) as reasonably determined by AOL, any Content provided by InfoSpace to
the AOL White Pages violates AOL's then-standard Terms of Service (as set forth
on the America Onlinea brand service), the terms of this Agreement or any other
standard, written AOL policy or (ii) AOL reasonably objects to the inclusion of
any Content provided by InfoSpace to the AOL White Pages, then InfoSpace will
take commercially reasonable steps to block access by AOL Users to such Content
using InfoSpace's then-available technology. In the event that InfoSpace
cannot, through its commercially reasonable efforts, block access by AOL Users
to the Content in question, then InfoSpace will provide AOL prompt written
notice of such fact. AOL may then, at its option, restrict access from the AOL
Network to the Content in question using technology available to AOL. InfoSpace
will cooperate with AOL's reasonable requests to the extent AOL elects to
implement any such access restrictions.
3. Contests. InfoSpace will take all steps necessary to ensure that any
contest, sweepstakes or similar promotion conducted or promoted through the AOL
White Pages (a "Contest") complies with all applicable federal, state and local
laws and regulations.
4. AOL Look and Feel. InfoSpace acknowledges and agrees that AOL will
own all right, title and interest in and to the elements of graphics, design,
organization, presentation, layout, user interface, navigation and stylistic
convention (including the digital implementations thereof) which are associated
with the AOL White Pages, subject to InfoSpace's ownership rights in any
materials licensed by InfoSpace to AOL under this Agreement.
5. Management of the AOL White Pages. InfoSpace will manage, review,
delete, edit, create, update and otherwise manage all Content available on or
through the AOL White Pages, in a timely and professional manner and in
accordance with the
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terms of this Agreement. InfoSpace will use best efforts to ensure that each AOL
White Pages is current, accurate and well-organized at all times. InfoSpace
warrants that the content provided by InfoSpace: (i) will not infringe on or
violate any copyright, trademark, U.S. patent or any other third party right,
including without limitation, any music performance or other music-related
rights; (ii) will not violate AOL's then-applicable Terms of Service (as
provided on the AOL Service at keyword "TOS"); and (iii) will not violate any
applicable law or regulation, including those relating to contests, sweepstakes
or similar promotions. Additionally, InfoSpace represents and warrants that it
owns or has a valid license to all rights to any Content used in AOL "slideshow"
or other formats embodying elements such as graphics, animation and sound, free
and clear of all encumbrances and without violating the rights of any other
person or entity. InfoSpace shall not in any manner, including, without
limitation in any promotion, the Content or other materials state or imply that
AOL recommends or endorses InfoSpace or InfoSpace's products or services (e.g.,
no statements that InfoSpace is an "official" or "preferred" provider of
products or services for AOL).
6. Duty to Inform. InfoSpace will promptly inform AOL of any information
related to the AOL White Pages of which InfoSpace is or should reasonably be
aware which could reasonably lead to a claim, demand, or liability of or against
AOL and/or its affiliates by any third party.
7. Customer Service. It is the sole responsibility of InfoSpace to
provide customer service to persons or entities accessing information, products,
or services provided by InfoSpace through the AOL Network ("Customers").
InfoSpace will receive all e-mails from Customers via a computer available to
InfoSpace's customer service staff and generally respond to such e-mails within
one business day of receipt. InfoSpace will bear all responsibility for
compliance with federal, state and local laws related to the Content provided by
InfoSpace to Customers.
8. Production Work. In the event that InfoSpace requests AOL's
production assistance in connection with (i) ongoing programming and maintenance
refuted to the AOL White Pages, (ii) a redesign of or addition to the AOL White
Pages (e.g., a change to an existing screen format or construction of a new
custom form), (iii) production to modify work performed by a third party
provider or (iv) any other type of production work, InfoSpace will work with AOL
to develop a detailed production plan for the requested production assistance
(the "Production Plan"). Following receipt of the final Production Plan, AOL
will notify InfoSpace of (i) AOL's availability to perform the requested
production work, (ii) the proposed fee or fee structure for the requested
production and maintenance work and (iii) the estimated development schedule for
such work. To the extent the Parties reach agreement regarding implementation of
agreed-upon Production Plan, such agreement will be reflected in a separate work
order signed by the Parties. To the extent InfoSpace elects to retain a third
party provider to
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perform any such production work, work produced by such third party provider
must generally conform to AOL's production Standards & Practices (a copy of
which will be supplied by AOL to InfoSpace upon request). The specific
production resources which AOL allocates to any production work to be performed
on behalf of InfoSpace will be as determined by AOL in its sole discretion.
9. Overhead Accounts. To the extent AOL has granted InfoSpace any
overhead accounts on the AOL Service, InfoSpace will be responsible for the
actions taken under or through its overhead accounts, which actions are subject
to AOL's applicable Terms of Service and for any surcharges, including, without
limitation, all premium charges, transaction charges, and any applicable
communication surcharges incurred by any overhead account issued to InfoSpace,
but InfoSpace will not be liable for charges incurred by any overhead account
relating to AOL's standard monthly usage fees and standard hourly charges, which
charges AOL will bear. Upon the termination of this Agreement, all overhead
accounts, related screen names and any associated usage credits or similar
rights, will automatically terminate. AOL will have no liability for loss of
any data or content related to the proper termination of any overhead account.
10. Navigation Tools. To the extent AOL grants InfoSpace any "keywords"
on the AOL Service or "search terms" on AOL.com (collectively, "Keywords"), the
Keywords will be subject to availability and will consist only of InfoSpace's
registered trademarks. AOL reserves the right at any time to revoke InfoSpace's
use of any Keywords that are not registered trademarks of InfoSpace. To the
extent AOL allows AOL Users to "bookmark" the URL or other locator for the AOL
White Pages, such bookmarks will be subject to AOL's control at all times. Upon
the termination of this Agreement, InfoSpace's rights to any Keywords and
bookmarking will terminate.
11. AOL User Communications. To the extent InfoSpace sends any form of
communications targeting AOL Users, InfoSpace will promote the AOL White Pages
as the location at which to access InfoSpace's content (as compared to any more
general or other site or location). In addition, in any communication targeting
AOL Users or on the AOL White Pages, InfoSpace will not encourage AOL Users to
take any action inconsistent with the scope and purpose of this Agreement,
including without limitation, the following actions: (a) using content other
than the Content; (b) bookmarking of Interactive Sites; (c) using Interactive
Sites other than those covered by this Agreement; (d) changing the default home
page on the AOL browser; or (e) using any Interactive Service other than AOL.
Any e-mail newsletters sent to AOL Users by InfoSpace or its agents will (i) be
subject to AOL's policies on use of the e-mail functionality, including but not
limited to AOL's policy on unsolicited bulk e-mail, (ii) be sent only to AOL
Users requesting to receive such newsletters, (iii) not contain Content which
violates AOL's Terms of Service (as provided on the AOL Service at keyword
"TOS"), and (iv) not contain any advertisements, marketing or promotion for any
other Interactive
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Service. In any commercial e-mail communications to AOL Users which are
otherwise permitted hereunder, InfoSpace will provide the recipient with a
prominent and easy means to "opt-out" of receiving any future commercial e-mail
communications from InfoSpace.
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EXHIBIT I
STANDARD LEGAL TERMS & CONDITIONS
1. Promotional Materials/Press Releases. Each Party will submit to the
other Party, for its prior written approval, which will not be unreasonably
withheld or delayed, any marketing, advertising, press releases, and all other
promotional materials related to the AOL White Pages and/or referencing the
other Party and/or its trade names, trademarks, and service marks (the
"Materials"); provided, however, that either Party's use of screen shots of the
AOL White Pages for promotional purposes will not require the approval of the
other Party so long as America Online(R) is clearly identified as the source of
such screen shots; and provided further, however, that, following the initial
public announcement of the business relationship between the Parties in
accordance with the approval and other requirements contained herein, either
Party's subsequent factual reference to the existence of a business relationship
between the Parties will not require the approval of the other Party. Each
Party will solicit and reasonably consider the views of the other Party in
designing and implementing such Materials. Once approved, the Materials may be
used by a Party and its affiliates for the purpose of promoting the AOL White
Pages and the content contained therein and reused for such purpose until such
approval is withdrawn with reasonable prior notice. In the event such approval
is withdrawn, existing inventories of Materials may be depleted.
Notwithstanding the foregoing, either Party may issue press releases and other
disclosures as required by law or as reasonably advised by legal counsel without
the consent of the other Party and in such event, prompt notice thereof will be
provided to the other Party.
2. License. InfoSpace hereby grants AOL a nonexclusive worldwide license
to market, license, distribute, reproduce, display, perform, transmit and
promote the AOL White Pages and all Content (or any portion thereof) through
such areas or features of the AOL Network as AOL deems appropriate. InfoSpace
acknowledges and agrees that the foregoing license permits AOL to distribute
portions of the Content in synchronism or timed relation with visual displays
prepared by InfoSpace or AOL (e.g., as part of an AOL "slideshow"). In
addition, AOL Users will have the right to access and use the AOL White Pages.
3. Trademark License. In designing and implementing the Materials and
subject to the other provisions contained herein, InfoSpace will be enticed to
use the following trade names, trademarks, and service marks of AOL: the
"America Online a" brand service, "AOL" service/software and AOL's triangle
logo; and AOL and its affiliates will be entitled to use the trade names,
trademarks, and service marks of InfoSpace for which InfoSpace holds all rights
necessary for use in connection with this agreement (collectively, together with
the AOL marks listed above, the "Marks");
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provided that each Party: (i) does not create a unitary composite mark involving
a Mark of the other Party without the prior written approval of such other
Party; and (ii) displays symbols and notices clearly and sufficiently indicating
the trademark status and ownership of the other Party's Marks in accordance with
applicable trademark law and practice.
4. Ownership of Trademarks. Each Party acknowledges the ownership of the
other Party in the Marks of the other Party and agrees that all use of the other
Party's Marks will inure to the benefit, and be on behalf, of the other Party.
Each Party acknowledges that its utilization of the other Party's Marks will not
create in it, nor will it represent it has, any right, title, or interest in or
to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
5. Quality Standards. Each Party agrees that the nature and quality of
its products and services supplied in connection with the other Party's Marks
will conform to quality standards set by the other Party. Each Party agrees to
supply the other Party, upon request, with a reasonable number of samples of any
Materials publicly disseminated by such Party which utilize the other Party's
Marks. Each Party will comply with all applicable laws, regulations, and
customs and obtain any required government approvals pertaining to use of the
other Party's marks.
6. Infringement Proceedings. Each Party agrees to promptly notify the
other Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7. Representations and Warranties. Each Party represents and warrants to
the other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in this Agreement.
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8. Confidentiality. Each Party acknowledges that Confidential
Information may be disclosed to the other Party during the course of this
Agreement. Each Party agrees that it will take reasonable steps, at least
substantially equivalent to the steps it takes to protect its own proprietary
information, during the term of this Agreement, and for a period of three years
following expiration or termination of this Agreement, to prevent the
duplication or disclosure of Confidential Information of the other Party, other
than by or to its employees or agents who must have access to such Confidential
Information to perform such Party's obligations hereunder, who will each agree
to comply with this section. Notwithstanding the foregoing, either Party may
issue a press release or other disclosure containing Confidential Information
without the consent of the other Party, to the extent such disclosure is
required by law, rule, regulation or government or court order. In such event,
the disclosing Party will provide at least five (5) business days prior written
notice of such proposed disclosure to the other Party (and will allow the other
party to review and comment on such disclosure prior to its release to the
extent reasonably possible). Further, in the event such disclosure is required
of either Party under the laws, rules or regulations of the Securities and
Exchange Commission or any other applicable governing body, such Party will (i)
redact mutually agreed-upon portions of this Agreement to the fullest extent
permitted under applicable laws, rules and regulations and (ii) submit a request
to such governing body that such portions and other provisions of this Agreement
receive confidential treatment under the laws, rules and regulations of the
Securities and Exchange Commission or otherwise be held in the strictest
confidence to the fullest extent permitted under the laws, rules or regulations
of any other applicable governing body.
9. Limitation of Liability; Disclaimer; Indemnification.
9.1. LIABILITY. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE OR
INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE AOL WHITE
PAGES, OR ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT
LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS
(COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY WILL REMAIN
LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A
THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION 9.3. EXCEPT
AS PROVIDED IN SECTION 9.3, (I) LIABILITY
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ARISING UNDER THIS AGREEMENT WILL BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE
DAMAGES, AND (II) THE MAXIMUM LIABILITY OF ONE PARTY TO THE OTHER PARTY FOR ANY
CLAIMS ARISING IN CONNECTION WITH THIS AGREEMENT WILL NOT EXCEED THE AGGREGATE
AMOUNT OF PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY HEREUNDER IN THE YEAR IN
WHICH LIABILITY ACCRUES; PROVIDED THAT EACH PARTY WILL REMAIN LIABLE FOR THE
AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO
THE AGREEMENT.
9.2. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS
ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL
NETWORK, THE AOL SERVICE, AOL.COM OR THE AOL WHITE PAGES, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED
WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY
WARRANTY REGARDING THE PROFITABILITY OF THE AOL WHITE PAGES.
9.3. Indemnity. Either Party will defend, indemnify, save and hold
harmless the other Party and the officers, directors, agents, affiliates,
distributors, franchisees and employees of the other Party from any and all
third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying
Party's material breach of any duty, representation, or warranty of this
Agreement.
9.4. Claims. If a Party entitled to indemnification hereunder (the
"Indemnified Party") becomes aware of any matter it believes is indemnifiable
hereunder involving any claim, action, suit, investigation, arbitration or other
proceeding against the Indemnified Party by any third party (each an "Action"),
the Indemnified Party will give the other Party (the "Indemnifying Party")
prompt written notice of such Action. Such notice will (i) provide the basis on
which indemnification is being asserted and (ii) be accompanied by copies of all
relevant pleadings, demands, and other papers related to the Action and in the
possession of the Indemnified Party. The Indemnifying Party will have a period
of ten (10) days after delivery of such notice to respond. If the Indemnifying
Party elects to defend the Action or does not respond within the requisite ten
(10) day period, the Indemnifying Party will be obligated to defend the Action,
at its own expense, and by counsel reasonably satisfactory to the Indemnified
Party. The
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Indemnified Party will cooperate, at the expense of the Indemnifying Party, with
the Indemnifying Party and its counsel in the defense and the Indemnified Party
will have the right to participate fully, at its own expense, in the defense of
such Action. If the Indemnifying Party responds within the required ten (10) day
period and elects not to defend such Action, the Indemnified Party will be free,
without prejudice to any of the Indemnified Party's rights hereunder, to
compromise or defend (and control the defense of) such Action. In such case, the
Indemnifying Party will cooperate, at its own expense, with the Indemnified
Party and its counsel in the defense against such Action and the Indemnifying
Party will have the right to participate fully, at its own expense, in the
defense of such Action. Any compromise or settlement of an Action will require
the prior written consent of both Parties hereunder, such consent not to be
unreasonably withheld or delayed.
9.5. Acknowledgment. AOL and InfoSpace each acknowledges that the
provisions of this Agreement were negotiated to reflect an informed, voluntary
allocation between them of all risks (both known and unknown) associated with
the transactions contemplated hereunder. The limitations and disclaimers
related to warranties and liability contained in this Agreement are intended to
limit the circumstances and extent of liability. The provisions of this Section
9 will be enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
10. Solicitation of AOL Users. During the term of this Agreement, and for
the two-year period following the expiration or termination of this agreement,
neither InfoSpace nor its agents will use the AOL Network to (i) solicit, or
participate in the solicitation of AOL Users when that solicitation is for the
benefit of any entity (including InfoSpace) which could reasonably be construed
to be or become in competition with AOL or (ii) promote any services which could
reasonably be construed to be in competition with AOL including, but not limited
to, services available through the Internet. In addition, InfoSpace may not
send AOL Users e-mail communications promoting InfoSpace's Products through the
AOL Network without a "Prior Business Relationship." For purposes of this
Agreement, a "Prior Business Relationship" will mean that the AOL User has
either (i) engaged in a transaction with InfoSpace through the AOL Network or
(ii) voluntarily provided information to InfoSpace through a contest,
registration, or other communication, which included notice to the AOL User that
the information provided by the AOL User could result in an e-mail being sent to
that AOL User by InfoSpace or its agents. A Prior Business Relationship does
not exist by virtue of an AOL User's visit to the AOL White Pages or any
Interactive Site (absent the elements above). More generally, InfoSpace will be
subject to any standard policies regarding e-mail distribution through the AOL
Network which AOL may implement.
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11. Collection of User Information. InfoSpace is prohibited from
collecting AOL User screennames from public or private areas within the AOL
Service or AOL.com, except as specifically provided below. InfoSpace will
ensure that any survey, questionnaire or other means of collecting User
Information including, without limitation, requests directed to specific AOL
User screennames or e-mail addresses and automated methods of collecting
screennames (an "Information Request") complies with (i) all applicable laws and
regulations, (ii) AOL's applicable Terms of Service, and (iii) any privacy
policies which have been issued by AOL in writing during the term (or in the
case of the AOL White Pages, InfoSpace's standard privacy policies, to the
extent such policies are prominently published on the site and provide adequate
notice and disclosure to users regarding InfoSpace's collection, use and
disclosure of any user information) (collectively, the "Applicable Privacy
Policies"). Each Information Request will clearly and conspicuously specify to
the AOL Users at issue the purpose for which User Information collected through
the Information Request will be used (the "Specified Purpose").
12. Use of User Information. InfoSpace will restrict use of the User
Information collected through an Information Request to the Specified Purpose.
In no event will InfoSpace (i) provide User Information to any third party
(except to the extent specifically (a) permitted under the AOL Privacy Policies
or (b) authorized by the members in question), (ii) rent, sell or barter User
Information, (iii) identify, promote or otherwise disclose such User Information
in a manner that identifies AOL Users as end-users of the AOL Service, AOL.com
or the AOL Network or (iv) otherwise use any User Information in contravention
of Section 10 above. Notwithstanding the foregoing, in the case of AOL Members
who purchase Products from InfoSpace, InfoSpace will be entitled to use User
Information from such AOL Members as part of InfoSpace's aggregate list of
Customers; provided that InfoSpace's use does not in any way identify, promote
or otherwise disclose such User Information in a manner that identifies such AOL
Members as end-users of the AOL Service, AOL.com or the AOL Network. In
addition, InfoSpace will not use any User Information for any purpose (including
any Specified Purpose) not directly related to the business purpose of the AOL
White Pages.
13. Excuse. Neither Party will be liable for, or be considered in breach
of or default under this Agreement on account of, any delay or failure to
perform as required by this Agreement as a result of any causes or conditions
which are beyond such Party's reasonable control and which such Party is unable
to overcome by the exercise of reasonable diligence.
14. Independent Contractors. The Parties to this Agreement are
independent contractors. Neither Party is an agent, representative or partner
of the other Party. Neither Party will have any right, power or authority to
enter into any agreement for or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other Party.
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This Agreement will not be interpreted or construed to create an association,
agency, joint venture or partnership between the Parties or to impose any
liability attributable to such a relationship upon either Party.
15. Notice. Any notice, approval, request, authorization, direction or
other communication under this agreement will be given in writing and will be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered by electronic mail on the AOL Network (to screenname
"[email protected]" in the case of AOL) or by confirmed facsimile; (ii) on the
delivery date if delivered personally to the Party to whom the same is directed;
(iii) one business day after deposit with a commercial overnight carrier, with
written verification of receipt; or (iv) five business days after the mailing
date, whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available. In the case of AOL, such notice will
be provided to both the Senior Vice President for Business Affairs (fax no.
703-265-1206) and the Deputy General Counsel (fax no. 703-265-1105), each at
the address of AOL set forth in the first paragraph of this Agreement. In the
case of InfoSpace, except as otherwise specified herein, the notice address will
be the address for InfoSpace set forth in the first paragraph of this Agreement,
with the other relevant notice information, including the recipient for notice
and, as applicable, such recipient's fax number or AOL e-mail address, to be as
reasonably identified by AOL.
16. Launch Dates. In the event that any terms contained herein relate to
or depend on the commercial launch date of AOL White Pages contemplated by this
Agreement (the "Launch Date"), then it is the intention of the Parties to record
such Launch Date in a written instrument signed by both Parties promptly
following such Launch Date; provided that, in the absence of such a written
instrument, the Launch Date will be as reasonably determined by AOL based on the
information available to AOL.
17. No Waiver. The failure of either Party to insist upon or enforce
strict performance by the other Party of any provision of this Agreement or to
exercise any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect.
18. Return of Information. Upon the expiration or termination of this
Agreement, each Party will, upon the written request of the other Party, return
or destroy (at the option of the Party receiving the request) all confidential
information, documents, manuals and other materials specified the other Party.
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19. Survival. Sections 2.10.2, 2.10.3, 6.9, 6.10, 7.4, and 7.7 of the
body of the Agreement; Section 4 of Exhibit H; and Sections 4 and 8 through 29
of this Exhibit, will survive the completion, expiration, termination or
cancellation of this Agreement.
20. Entire Agreement. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
21. Amendment. No change, amendment or modification of any provision of
this agreement will be valid unless set forth in a written instrument signed by
the Party subject to enforcement of such amendment, and in the case of AOL, by
an executive of at least the same standing to the executive who signed the
Agreement.
22. Further Assurances. Each Party will take such action (including, but
not limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
23. Assignment. InfoSpace will not assign this Agreement or any right,
interest or benefit under this Agreement without the prior written consent of
AOL. Assumption of the Agreement by any successor to InfoSpace (including,
without limitation, by way of merger or consolidation) will be subject to AOL's
prior written approval. The Parties expressly agree that sale of less than
fifty percent (50%) of the capita stock of InfoSpace in any public or private
offering will not constitute an assignment for purposes of this Agreement.
Subject to the foregoing, this Agreement will be fully binding upon, inure to
the benefit of and be enforceable by the Parties hereto and their respective
successors and assigns.
24. Construction; Severability. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision will be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
effect.
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25. Remedies. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to, and
not in lieu of, any other rights or remedies which the Party may possess at law
or in equity; provided that, in connection with any dispute hereunder, InfoSpace
will be not entitled to offset any amounts that it claims to be due and payable
from AOL against amounts otherwise payable by InfoSpace to AOL.
26. Applicable Law. Except as otherwise expressly provided herein, this
Agreement will be interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia except for its
conflicts of laws principles.
27. Export Controls. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
28. Headings. The captions and headings used in this Agreement are
inserted for convenience only and will not affect the meaning or interpretation
of this Agreement.
29. Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute one
and the same document.
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EXHIBIT 10.17
[REDACTED VERSION]
CONFIDENTIAL
DEVELOPMENT AND MANAGEMENT AGREEMENT
This DEVELOPMENT AGREEMENT (the "Agreement") is effective as of August 24,
1998 (the "Effective Date"), by and between INFOSPACE, INC., a Delaware
corporation, with its principal offices at 15375 90th Avenue, Redmond,
Washington 98052 ("InfoSpace"), and AMERICA ONLINE, INC., a Delaware
corporation, with its principal offices at 22000 AOL Way, Dulles, Virginia 20166
("AOL") (each individually a "Party" and together the "Parties").
RECITALS
WHEREAS, AOL owns, licenses, operates and distributes online and
interactive information, communications, and transaction services, through the
America Online(R) brand service and other services;
WHEREAS, InfoSpace has developed and operates certain electronic
classifieds software and services; and
WHEREAS, AOL and InfoSpace desire to enter into an arrangement under which
InfoSpace will provide to AOL customized classifieds software, tools and
services.
NOW, THEREFORE, in consideration of the promises, terms and conditions
contained herein, and other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged by the parties InfoSpace and AOL
agree as follows:
AGREEMENT
1. DEFINITIONS
Any defined terms not otherwise defined herein shall have the following
meanings:
1.1 An "Affiliate" of an entity shall mean any entity which, directly
or indirectly, is controlled by, controls or is under common control with such
entity (with control meaning ownership of 50 percent or more of an entity and/or
otherwise having effective control of an entity).
1.2 "AOL Classifieds" shall mean the AOL classifieds service to be
developed by InfoSpace hereunder, as such classifieds may be updated or modified
pursuant to the terms of this Agreement.
"[*]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE>
1.3 "AOL Network" shall mean (i) The AOL Service, (ii) AOL.com and
(iii) any other product or service owned, operated, distributed or authorized to
be distributed by or through AOL, its affiliates and/or partners worldwide
(including without limitation those properties excluded from the definitions of
the AOL Service).
1.4 "AOL Property" means any and all software, tools, technology,
documentation or other materials provided by AOL to InfoSpace in connection with
this Agreement or in which AOL had ownership rights prior to the Effective Date,
or any other element of the AOL Classifieds in which AOL has ownership as may be
expressly provided under this Agreement (including without limitation the
Proofing Tool).
1.5 "AOL Service" shall mean the U.S. version of the America Online
brand service.
1.6 "AOL User" shall mean any person or entity that enters the AOL
Classifieds.
1.7 "Custom Development Deliverable" means any software (object code
version), tool or other technology or materials developed by InfoSpace and
delivered to AOL pursuant to Section 2.5.
1.8 "Delivery Schedule" shall mean the delivery schedule for the AOL
Classifieds set forth in Exhibit A.
1.9 "Direct Costs" shall mean the reasonable direct costs of
InfoSpace which shall not include any allocation of overhead, technology and
software licensing costs or other third party costs, or hardware costs; provided
that in the event that any Custom Development directed by AOL requires InfoSpace
to obtain technology, software licenses or other third party resources which
will not be used for any other purpose, the direct cost of such licenses or
other third party resources (greater than $[*] in each instance and as
reasonably approved by AOL) will be included in as Direct Costs hereunder.
1.10 "InfoSpace Site" shall mean any interactive site owned,
controlled or operated by InfoSpace or to which InfoSpace provides significant
technology, including without limitation InfoSpace cobranded sites and sites
that make use of InfoSpace classifieds and related technology; provided that
test sites which are not yet accessible by the general public (or alternatively
not yet accessible by a significant portion of the end audience for which the
site is intended, as applicable) shall not be included as an "InfoSpace Site"
hereunder.
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1.11 "Licensed Products" shall mean any InfoSpace property or other
property supplied by InfoSpace which is incorporated into the AOL Classifieds or
otherwise supplied to AOL under this Agreement.
1.12 "Listings Revenue" shall mean that portion of any fees paid to
AOL (i) by individuals who post listings in the AOL Classifieds and (ii) by
commercial listings providers in respect of commercial listings in the AOL
Classifieds which are attributable to such commercial listings, each net of any
taxes (excluding income taxes), refunds, bad debt, third party sales commissions
and third party billing costs.
1.13 "Proofing Tool" shall have the meaning assigned to that term in
Section 2.9.
1.14 "Specifications" shall mean all the specifications for the AOL
Classifieds set forth in Exhibit A, or as may be revised pursuant to Section
2.4.
2. DEVELOPMENT
2.1 Development. InfoSpace shall develop and deliver to AOL the AOL
Classifieds in accordance with the Specifications and the Delivery Schedule.
Delivery of the AOL Classifieds shall be deemed to occur when the AOL
Classifieds is made available by InfoSpace to AOL for testing according to
Section 2.2. InfoSpace shall provide AOL with at least weekly reports of its
progress in the development of the AOL Classifieds which shall include without
limitation regular consultation and reporting to AOL technical staff.
2.2 Testing. The AOL Classifieds will be subject to acceptance by AOL on
satisfaction of such tests as AOL will reasonably construct in order to
determine whether such product operates in accordance with the Specifications.
Prior to any delivery to AOL of the AOL Classifieds, InfoSpace shall (i) test
the AOL Classifieds in accordance with standard diagnostic practices to test its
conformity to the Specifications, (ii) work with AOL personnel to achieve smooth
integration of the AOL Classifieds into the AOL Service, AOL.com and other
designated portions of the AOL Network and (iii) provide any assistance to AOL
personnel reasonably necessary for such integration.
2.3 Acceptance. AOL will complete testing of the AOL Classifieds
delivered by InfoSpace within 30 days of such delivery and if AOL does not
notify InfoSpace in writing of any deficiencies within such period, the AOL
Classifieds will be deemed accepted by AOL. In the event that AOL finds that
the AOL Classifieds delivered by InfoSpace does not conform to the
Specifications, AOL will notify InfoSpace and InfoSpace will correct such
deficiency and re-deliver the AOL Classified to AOL within 10 business days of
receiving such notice or as otherwise reasonably requested which product shall
then be subject to the same testing procedure outlined above. Such process will
be repeated until the AOL Classifieds has been accepted by AOL in accordance
with
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this Section 2.3. In the event that AOL determines to accept the AOL Classifieds
hereunder notwithstanding the fact that the product does not meet certain of the
Specifications, InfoSpace will not be considered in breach of this Agreement as
a result of such deficiency, however, InfoSpace will remain subject to any
reservation of rights by AOL in respect of such deficiency in its written notice
of acceptance.
2.4 Change Requests. AOL may, from time to time prior to delivery of the
AOL Classifieds, adjust the Specifications (consisting of additions,
modifications, deletions or other revisions) consistent with the purpose and
general functionality of the AOL Classifieds and/or in response to programming
requirements or developments in the market. Each such change must be reflected
in a written document signed by AOL that includes a detailed description of the
specific change, along with any modified specifications. In addition, (i) in
the event that any such change directed by AOL entails a significant change to
the character of the development work necessary to meet the Specifications, the
Parties will agree on a reasonable revision to the Delivery Schedule if
necessary; and (ii) if in addition to constituting a significant change as
outlined in (i) above, such change entails material (greater than $[*] in each
instance) additional Direct Costs to InfoSpace, AOL will reimburse InfoSpace for
its additional reasonable Direct Costs for implementing such change.
2.5 Custom Development Services.
(i) In addition to development of the AOL Classifieds in accordance
with the Specifications, AOL may from time to time request modifications
and enhancements to the AOL Classifieds (a) which are not part of
InfoSpace's ongoing management duties with regard to the AOL Classifieds as
outlined in Section 3 below, (b) which involve material additional effort
and Direct Cost (greater than $[*] in each instance) to InfoSpace, and (c)
the results of which are not deployed on any InfoSpace Site or other non-
AOL Network site (development services falling under the above description
referred to as "Requested Services"). Where it would otherwise have
sufficient rights to use the resulting Custom Development Deliverable other
than on the AOL Classifieds, InfoSpace will have the right to decide
whether to undertake such Requested Services at no charge to AOL, in which
case the resulting Custom Development Deliverable will be non-exclusive to
AOL ("Non-Exclusive Development Services"), or to undertake such Requested
Services as "Custom Development Services," in which case the resulting
Custom Development Deliverable will be exclusive to the AOL Classifieds
(and any other property designated by AOL).
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(ii) AOL will consult with InfoSpace regarding the structure and
implementation of, and the parties will agree on reasonable development and
delivery schedules for, any Requested Services (provided however, that
InfoSpace will use best efforts to give priority to Requested Services
hereunder). Requested Services will be subject to the same delivery (based
on the agreed upon delivery schedule for such development) and testing
requirements as are required for initial delivery of the AOL Classifieds
under Sections 2.2 and 2.3 above.
(iii) InfoSpace may use third parties in performing Requested
Services, provided that any such third party will be subject to AOL's
approval and InfoSpace will remain responsible for such services and any
resulting Custom Development Deliverables.
(iv) In the event that InfoSpace wishes, at any point after making an
original designation of Requested Services as Custom Development Services,
to treat such Custom Development Services hereunder as Non-Exclusive
Development Services (for example, InfoSpace wishes to deploy a feature
developed exclusively for AOL on the Public InfoSpace Site or an
Interactive Site), InfoSpace may do so with AOL's approval which will not
be unreasonably withheld and subject to the refund provisions of Section
2.7 below.
2.6 Porting Services. AOL may request that InfoSpace perform services
hereunder to port the AOL Classifieds to new AOL Network platforms (such
services which otherwise meet the definition of Requested Services above,
referred to as "Porting Services"). Porting Services will be subject to the same
delivery (based on the agreed upon completion schedule for such porting) and
testing requirements as are required for initial delivery of the AOL Classifieds
under Sections 2.2 and 2.3 above
2.7 Development Costs. InfoSpace will bear all costs in connection with
the development, Delivery and testing of the AOL Classifieds; provided, however,
that (i) in the case of any Custom Development Services and Porting Services,
AOL will pay InfoSpace's reasonable Direct Costs for such development and/or
porting (provided that InfoSpace will use best efforts to minimize such costs)
and (ii) AOL will pay the costs of AOL's testing of the AOL Classifieds, Custom
Development Services and Porting Services unless such testing is a repeat
testing resulting from at least two consecutive previous rejections by AOL as a
result of testing failure in which case InfoSpace will pay the Direct Costs of
AOL for further such testing in each instance in excess of [*] Dollars ($[*]).
In the event that at any time after payment by AOL to InfoSpace for any Custom
Development Services, whether during or after the Term, InfoSpace determines to
treat such services as Non-Exclusive Development Services or InfoSpace otherwise
provides
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or in any way integrates or uses the corresponding Custom Development
Deliverables, or any upgrade or derivative work thereof, to or on any InfoSpace
Site, InfoSpace will report such occurrence to AOL and refund to AOL the payment
received from AOL for such services in connection with the relevant Custom
Development Deliverable.
2.8 Cooperation and Review of Development Services. AOL will cooperate
with InfoSpace and provide such assistance for the performance of the Custom
Development Services as InfoSpace may reasonably request. Without limiting the
generality of the foregoing, AOL will provide InfoSpace with access to such
information and other assistance as InfoSpace may reasonably require in
performance of the Custom Development Services.
2.9 Proofing Tool. InfoSpace will develop for use on the AOL Network a
proofing tool as more specifically provided in the Specifications (the "Proofing
Tool"). The development of such tool will be a work made for hire with all
right, title and interest in the results of such development being in AOL (with
payment for such tool as provided in Section 5.1(iii) below). The Proofing Tool
will be subject to the delivery and acceptance testing requirements provided for
the AOL Classifieds in general in this Section 2 above. During the term of the
Agreement, InfoSpace will provide upgrades to the Proofing Tool so that it
continues to take advantage of improvements in technology with respect to such
tools. InfoSpace will apply the Proofing Tool to the AOL Classifieds, provided
that at its request, AOL will have access to and use of the Proofing Tool for
use in AOL's discretion.
3. MANAGEMENT
3.1 AOL Control. AOL will have full and ongoing final approval in its
discretion of the design, layout, look and feel, content, advertising inventory,
commerce inventory, user interface, functionalities and all other aspects of the
AOL Classifieds. Without limiting the foregoing, AOL shall have the right (i) to
approve any material alterations of the AOL Classifieds InfoSpace desires to
make, (ii) to review any InfoSpace plans, reports, operations and technology
(provided that AOL shall not have the right under this Section 3.1 to review or
copy any source code) related to the AOL Classifieds, (iii) to control all third
party advertising and sales relationships with commercial and individual
listings sources to the AOL Classifieds. AOL will have no obligation to launch,
carry or promote the AOL Classifieds on the AOL Network. Without limiting the
generality of the foregoing, InfoSpace will regularly report to AOL technical
staff regarding all development and implementation relating to the AOL
Classifieds and will provide no less than two weeks advance notice to AOL of any
material change in AOL Classifieds technology (including without limitation any
changes in HTML technology) and will cooperate with AOL during such two week
period so that AOL may run QA testing prior to implementation of such changes;
provided that (i) such notice and approval rights of AOL shall not prevent
InfoSpace from implementing any
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material change in technology on other InfoSpace Sites and (ii) unless AOL in
its reasonable discretion determines otherwise, AOL will accommodate InfoSpace's
reasonable requests to give expedited approval to any such material change.
3.2 InfoSpace Management. Subject to AOL's rights outlined in Section 3.1
above, InfoSpace will operate and manage the AOL Classifieds in accordance with
the Specifications and other direction provided by AOL, using high industry
standards of workmanship and service, and according to the operating standards
detailed in Exhibit B attached hereto ("Operating Standards"). Without limiting
the generality of the foregoing, some specific duties of InfoSpace shall be:
(i) to produce, manage, update, and upgrade in a timely manner (and in
no event later than updates and/or upgrades to any other InfoSpace Site with
similar functionality and purpose to the AOL Classifieds) the user interface,
content, technology, performance and functionality of the AOL Classifieds
(consistent with AOL direction in such areas and the Operating Standards).
(ii) to import commercial listings from multiple providers into the
AOL Classifieds subject to AOL requirements (as specified in writing to
InfoSpace). InfoSpace will work directly with classified advertisers,
aggregators, and sales forces (including Digital City) selected by AOL to
upload, update, de-duplicate, track, insert, and delete commercial listings in a
timely manner and subject to written operating guidelines provided by AOL to
InfoSpace. InfoSpace will provide a bulk uploading process and file feed format
for listings based on AOL specifications to commercial listing providers.
(iii) to provide robust member post capability, including customer
service and administration tools, subject to AOL requirements (as specified in
writing to InfoSpace). At AOL's option, InfoSpace will integrate, and if
necessary modify, AOL sourced member post, customer service, and administration
tools into the AOL Classifieds.
(iv) to integrate commercial and member posted listings into a unified
AOL Classifieds database and track all relevant data regarding use of and
activity in the AOL Classifieds (which data shall be owned by AOL and shall be
maintained separately from any other InfoSpace database and information as
provided herein).
(v) to develop and implement classified listing management processes
and tools, subject to AOL requirements (as specified in writing to InfoSpace),
including ad review, ad editing, image handling and modification capabilities.
InfoSpace will implement procedures to screen all ads and photos before they are
placed into the AOL Classifieds in order to prevent the posting of classifieds
content that does not comply with AOL's Terms of Service, Privacy Policy and any
other written guidelines provided by AOL to InfoSpace.
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(vi) unless otherwise indicated by AOL, to provide high quality
customer service for the AOL Classifieds which will be compliant with AOL
requirements (as specified in writing to InfoSpace).
(vii) to provide billing capabilities subject to AOL's billing
requirements (as specified in writing to InfoSpace)[*].
(viii) to manage and update the AOL Classifieds user interface and
design and make changes to the user interface and design at AOL's request.
(ix) to integrate additional features and functionality into the AOL
Classifieds[*].
(x) to provide reporting to AOL on a regular basis on the operations
and performance of the AOL Classifieds and on usage, data and other information
obtained through the AOL Classifieds, including, to the extent reasonably
possible, real time reporting through a web site. In addition InfoSpace shall
report on (and supply any plans related to) any significant modifications it
will make in the AOL Classifieds. The Parties will meet regularly to review
InfoSpace management and product plans.
(xi) in the event that AOL reasonably determines that there are
revenue opportunities from the use of the InfoSpace website scraper (as
currently in use by InfoSpace and providing the ability to extract listings data
from websites, referred to as the "WebSite Scraper"), or other tools in use by
InfoSpace on any InfoSpace Site or which InfoSpace has licensed to any third
parties, which AOL reasonably determines provide revenue opportunities in
conjunction with the AOL Classifieds, InfoSpace will integrate theWebsite
Scraper or such other tools for this purpose upon mutual agreement by the
parties of the reasonable additional compensation to be paid to InfoSpace for
the use of such tools in light of the revenue opportunities (provided that
InfoSpace will not be required to integrate a tool licensed to a third party
which is custom development for such third party and which is in use only by
such third party).
3.3 Ongoing Modifications. In performing its management duties on the AOL
Classifieds as oulined above, and without limiting the foregoing, InfoSpace will
modify the AOL Classifieds to ensure that the AOL Classifieds remain competitive
in the classifieds marketplace and takes advantage of new technologies,
operating systems and other developments, to the extent relevant to the AOL
Classifieds and technically feasible.
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3.4 Integration. InfoSpace will (i) provide AOL personnel with the
ongoing documentation, training and instruction reasonably necessary to
understand, use and evaluate (as necessary hereunder) the operation of the AOL
Classifieds and the integration of the AOL Classifieds with AOL Network areas
and services and (ii) license for AOL's use, or otherwise make available to AOL,
web-based tools to facilitate management of dynamic programming, content,
advertising and commerce links within the AOL Classifieds by non-technical AOL
personnel. AOL agrees to reimburse InfoSpace for all reasonable Direct Costs
incurred by InfoSpace in connection with any training and instruction rendered
by InfoSpace pursuant to this Section 3.4 (including, without limitation,
InfoSpace's reasonable traveling and lodging expenses).
3.5 Hosting.
(i) Except as provided otherwise in this Section 3.5 below, InfoSpace
will host all of the AOL Classifieds [*]. AOL will have the right to review and
reasonably approve InfoSpace's hosting operations and capabilities for the AOL
Classifieds, including the hardware involved in such hosting.
(ii) AOL will have the option to host the AOL Classifieds at a
location of its choosing if (a) performance of the AOL Classifieds is not
industry standard in the classifieds industry as measured by security, uptime,
speed and scalability or (b) the AOL Classifieds are otherwise not in
conformance with the Operating Standards set out in Exhibit B. [*].
(iii) AOL may determine to host the AOL Classifieds in its
discretion, other than for reasons provided for in Section 3.5(ii) above. [*].
Notwithstanding any provision of this Section 3.5(iii) to the contrary, in the
event that within the first 30 days from the Effective Date AOL determines to
host the AOL Classifieds pursuant to this Section (iii), by written notice to
InfoSpace, AOL may open discussions regarding an alternate cost sharing
arrangement between the Parties for such hosting. If the Parties cannot
reasonably agree on such alternative cost sharing arrangement within two weeks
of such notice, then AOL may terminate this Agreement in its discretion.
(iv) In the event that AOL determines to host the AOL Classifieds
pursuant to this Section 3.5, InfoSpace will work with AOL to effect a quick and
orderly hosting transition and, in the event that InfoSpace is not in material
breach of this Agreement, AOL will make reasonable accommodation to InfoSpace in
light of InfoSpace's contractual commitments in accomplishing a hosting
transition hereunder (provided that InfoSpace will use best efforts to
accomplish a quick and orderly transition
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and provided further that InfoSpace will not enter into arrangements preventing
a quick and orderly transition).
3.6 Costs. Except where specifically provided otherwise, InfoSpace will
bear all costs related to operating, managing and hosting the AOL Classifieds
hereunder. Without limiting the foregoing, should AOL, in its discretion,
determine that dedicated bandwidth is required to provide a reliable connection
between AOL and InfoSpace for uploads and data transfers, InfoSpace will assume
all related telecommunications costs for such dedicated bandwidth.
3.7 Domain. Notwithstanding anything herein to the contrary (and
notwithstanding which party is hosting the AOL Classifieds pursuant to Section
3.5 above), all of the pages of the AOL Classifieds shall reside on the
"aol.com" domain (or any other domain designated by AOL in its discretion)
4. OWNERSHIP AND LICENSE
4.1 InfoSpace Ownership. The Licensed Products and Custom Development
Deliverables are licensed to AOL hereunder. Except for the license granted AOL
in Section 4.2, InfoSpace reserves all right, title and interest to the Licensed
Products and Custom Development Deliverables (including, without limitation, all
intellectual and proprietary rights therein), including, without limitation, any
upgrades, documentation and derivative works related thereto delivered to AOL
under this Agreement. AOL agrees to assign any interest AOL has or may acquire
(other than the license set forth in Section 4.2) in the Licensed Products and
the Custom Development Deliverables to InfoSpace and otherwise reasonably assist
InfoSpace, at InfoSpace's expense, in obtaining, securing, perfecting,
maintaining, defending and enforcing for InfoSpace's benefit all rights with
respect to the Licensed Products and the Custom Development Deliverables.
4.2 AOL Ownership. Title and rights of ownership to the AOL Property and
any derivative works thereto, and all documentation related thereto created by
either Party will be in AOL. Notwithstanding anything in this Agreement to the
contrary, all right, title and interest in and to the look and feel and the user
interface of the AOL Classifieds shall be part of the AOL Property hereunder.
InfoSpace agrees to assign any interest in the AOL Property to AOL and otherwise
reasonably assist AOL, at AOL's expense, in obtaining, securing, perfecting,
maintaining, defending and enforcing for AOL's benefit all rights with respect
to the AOL Property.
4.3 Licensed Product and Custom Development Deliverable License.
InfoSpace hereby grants to AOL and any AOL Affiliates, a non-exclusive,
worldwide, royalty free right to use, transmit, perform, display and otherwise
utilize the Licensed Products, the Proofing Tool (to the extent that AOL does
not otherwise have rights to any part of such tool under Section 2.9 above), and
Custom Development Deliverables solely
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in connection with the AOL Classifieds and consistent with this Agreement,
provided that AOL shall also have the right to reproduce the Custom Development
Deliverables and the Proofing Tool and to use such deliverables on the AOL
Network outside of the AOL Classifieds. To the extent any software is licensed
to AOL by InfoSpace under this Agreement, unless specifically provided
otherwise, all such licenses shall be to software in object code form only.
4.4 AOL Property License. AOL hereby grants to InfoSpace and its
affiliates, a non-exclusive, worldwide, royalty free right to use, reproduce,
transmit, perform, display, and otherwise utilize the AOL Property in connection
with completing its obligations hereunder with respect to the AOL Classifieds
and consistent with this Agreement.
4.5 Restrictions. The licenses granted to the Parties in Sections 4.3 and
4.4 above set forth the entirety of each of the parties' rights as licensees to
use the Licensed Products, Custom Development Deliverables, the Proofing Tool
(unless AOL otherwise has rights to such tool pursuant to Section 2.9 above) and
AOL Property (as applicable and collectively the "Products"). Without limiting
the generality of the foregoing, each of the Parties will:
(i) not modify or prepare any derivative work based upon the Products
of the other Party;
(ii) ensure that each copy made of all or any portion of the Products
of the other Party and any related documentation include a notice of
copyright and other proprietary rights legends appearing in or on the
Products and related documentation delivered to a licensee;
(iii) not directly or indirectly reverse engineer, disassemble or
decompile the Products of the other Party or any portion thereof or attempt
to discover or disclose the source code of any of such Products or any
portion thereof;
(iv) not remove, obscure, or alter any notice of intellectual property
right present on or in any of the Products or any related documentation;
(v) not sublicense, sell, lend, rent, lease, or otherwise transfer all
or any portion of the Products of the other Party or any related
documentation to any third party.
4.6 Data and Listings Ownership and Control. AOL shall own any and all
listings in the AOL Classifieds (the "Listings") and all customer and advertiser
data and information which is sourced through the AOL Classifieds including
without limitation advertising and usage data and analysis, user registration
data, and any other user information (the "Data") (which Data and Listings will
be part of the AOL Property) and InfoSpace shall not use or reveal such Listings
or Data for any purpose without the
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written consent of AOL and will regularly report on such information to AOL.
InfoSpace will maintain the Listings and Data in a database separate from any
other InfoSpace Site listings and data, and in no event will any of the Listings
or Data appear in or through any other InfoSpace Site. InfoSpace will implement
reasonable security measures to ensure the integrity of the Data and Listings
and the maintenance of the Data and Listings as separate AOL Property.
4.7 Successor Products. The Parties understand that in the event of any
termination or expiration of this Agreement, or any discontinuance of the AOL
Classifieds, AOL may continue to provide an AOL classifieds product with similar
functionalities to the AOL Classifieds. Nothing hereunder shall be construed to
prevent AOL from using the look and feel and/or user interface which is part of
the AOL Classifieds in any future AOL classifieds offering and providing for the
same or similar functionalities for such future offering as is present in the
AOL Classifieds, provided such offering does not otherwise violate InfoSpace's
intellectual property rights hereunder.
5. PAYMENTS
5.1 Payment Schedule. Subject to the terms and conditions of this
Agreement, AOL shall pay InfoSpace as follows:
(i) a [*] fee of [*] Dollars ($[*]) ("[*] Fee"), in [*] Dollar ($[*])
quarterly installments payable, beginning on the Effective Date and on the
first day of each quarter thereafter (with the first quarter deemed to
consist of the period from the Effective Date through November 30, 1998;
(ii) A percentage of Listings Revenues, payable quarterly within 30
days of the end of the quarter (with the first quarter deemed to consist of
the period from the Effective Date through November 30, 1998), as follows:
(a) In the first year of the Term, [*] percent of Listings
Revenues;
(b) In the second year of the Term, [*] percent of Listings
Revenues
(c) In the third year of the Term, if any, and in any subsequent
year of the Term, [*] percent of Listings Revenue.
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(iii) A one time [*] Dollar ($[*]) payment for development, testing
and upgrading of the Proofing Tool as provided in Section 2.8 above. Such
payment shall be due upon acceptance of such tool by AOL.
5.2 Adjustments.
(i) In the event that the AOL Classifieds are not accepted by AOL by
the date provided in Exhibit A, the [*] fee for the first year of the Term
shall be reduced by [*] Dollars ($[*]) for each full week that such
acceptance does not occur thereafter. In the event that any Custom
Development is not accepted by AOL by the date provided for in the schedule
agreed to for such Custom Development, the fee for such Custom Development
shall be reduced by [*] percent for each full week that such acceptance
does not occur thereafter.
(ii) In the event that InfoSpace does not provide a fix or workaround
to problems listed in Section 5 of Exhibit B in the time frames indicated
in those respective sections, the Annual Fee for the relevant payment
period shall be reduced by [*] Dollars ($[*]) for every hour beyond such
relevant time frame that the problem persists.
5.3 Audit. During the Term and two (2) years thereafter, AOL agrees to
maintain adequate books and records relating to Listing Revenue. Upon at least
ten (10) days written notice, InfoSpace or its representatives may gain access
during AOL's normal business hours to all relevant accounting records in order
to verify the accuracy of AOL's Listing Revenue computations. AOL will promptly
pay to InfoSpace any underpayment of such fees made to InfoSpace under this
Agreement. All expenses incurred in connection with any such audit will be
borne by InfoSpace; provided, however, that if any such audit reveals an
underpayment of royalties by AOL of more than [*] percent ([*]%) for the period
covered by the audit, AOL will also pay the reasonable fees associated with such
audit.
5.4 Taxes. The fees, reimbursable expenses, compensation and other
amounts payable to InfoSpace under this Agreement do not include any taxes,
customs, duties, fees or other amounts assessed or imposed by any governmental
authority, other than any taxes imposed on InfoSpace's net income. AOL will pay
before delinquency or reimburse InfoSpace for all such amounts upon demand
and/or provide certificates or other evidence of exemption to InfoSpace for such
amounts.
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6 TERM; TERMINATION
6.1 Term. Unless earlier terminated as provided below, the initial term
of this Agreement will run for the period from the Effective Date through August
31, 2000 (the "Initial Term").
6.2 Extension. AOL may extend the term of this Agreement beyond the
Initial Term for up to three additional one year extension terms (each an
"Extension Term") by providing written notice to InfoSpace thirty (30) days
prior to the end of the Initial Term or then current Extension Term as
applicable (the Initial Term together with any Extension Terms, constitute the
"Term").
6.3 Termination for Breach. Either Party may terminate this Agreement at
any time in the event of a material breach of the Agreement by the other Party
which remains uncured after thirty (30) days written notice thereof to the other
Party.
6.4 Termination for Bankruptcy/Insolvency. Either Party may terminate
this Agreement immediately following written notice to the other Party if the
other Party (i) ceases to do business in the normal course, (ii) becomes or is
declared insolvent or bankrupt, (iii) is the subject of any proceeding related
to its liquidation or insolvency (whether voluntary or involuntary) which is not
dismissed within ninety (90) calendar days or (iv) makes an assignment for the
benefit of creditors.
6.5 Right of First Negotiation; Change of Control. AOL shall have the
right of first negotiation on any sale of a controlling interest in InfoSpace or
other merger, asset sale or other disposition which effectively results in such
a change of control in InfoSpace (each a "Disposition") as follows: In the
event that InfoSpace receives an unsolicited proposal, or InfoSpace determines
to solicit proposals or otherwise enter into discussions which would result in a
Disposition, then InfoSpace shall give written notice to AOL of such occurrence
(a "Disposition Notice"), AOL shall have seven (7) days after receipt of such
Disposition Notice to provide notice to InfoSpace in writing (a "Negotiation
Notice") of its desire to negotiate in good faith with InfoSpace regarding a
Disposition involving AOL. In the event that AOL does not deliver such
Negotiation Notice within 7 days of receipt of a Disposition Notice, InfoSpace
will be free to negotiate with a third party regarding a Disposition. In the
event that AOL delivers a Negotiation Notice to InfoSpace within 7 days of AOL's
receipt of Disposition Notice, then InfoSpace will negotiate exclusively and in
good faith with AOL regarding a Disposition for the 30 day period ending 30 days
from the date of receipt by AOL of the Disposition Notice. If after such 30 day
period, AOL and InfoSpace cannot in good faith come to terms regarding a
Disposition of InfoSpace, InfoSpace will be free to negotiate with a third party
regarding a Disposition. In the event that a Disposition does not occur within
five (5) months from the date of a Negotiation Notice delivered by InfoSpace to
AOL, then the right of first negotiation process described in this Section 6.5
above will again apply as if no such
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original Negotiation Notice had been delivered to AOL. No Disposition which
occurs in violation of the process outlined above shall be valid. Upon any
Disposition other than to AOL, InfoSpace shall provide written notice to AOL of
such Disposition and AOL shall have the right within 30 days of receipt of such
notice, in AOL's sole discretion, to terminate this Agreement upon thirty (30)
days written notice to InfoSpace.
6.6 Termination for Testing Failure. AOL shall have the right to
terminate this Agreement on 30 days written notice to InfoSpace in the event the
AOL Classifieds are not accepted by AOL pursuant to Section 2.3 above, and it is
the third such failure of the AOL Classifieds to conform with the
Specifications.
6.7 Consequences of Termination.
6.7.1 Upon termination of the Agreement by AOL in the event of a
material breach by InfoSpace or upon a change of control of InfoSpace:
(i) InfoSpace will deliver the AOL Classifieds, and all Data,
Listings, records and all other materials relating thereto, to a database
or other location, and in form, as is reasonably requested by AOL so that
AOL (or a third party designated by AOL) may perform InfoSpace's functions
hereunder in operating the AOL Classifieds. Additionally, InfoSpace will
deliver to AOL the source code of any Custom Development Deliverables.
(ii) The license granted in Section 4.3 will remain in full force and
effect and will continue to survive the termination of this Agreement for a
period of 90 days after which time AOL will return to InfoSpace and
otherwise cease using any materials and/or property which AOL does not own
the rights to or otherwise have the right to use.
(iii) InfoSpace will provide AOL with support and service as may be
reasonably requested by AOL to allow AOL to manage and operate the AOL
classifieds as provided for under this Section.
(iv) At AOL's option, InfoSpace will continue to manage and operate
the AOL Classifieds in accordance with Section 3 above for forty-five (45)
days following the termination of this Agreement so that the transfers and
processes described in this Section 6.7.1 are completed.
(v) AOL will not be required to pay to InfoSpace any further amounts
in respect of the AOL Classifieds, provided, however, that in the event of
a termination by AOL for a change of control of InfoSpace, for so long as
InfoSpace continues to operate the AOL Classifieds as provided for in this
Section 6.7.1(iv), AOL will continue to pay InfoSpace a pro rata amount of
the Annual Fee payable
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under Section 5.1(i) and a percentage of Listings Revenues as provided in
Section 5.1(ii).
6.7.2 Upon cancellation, termination or expiration of this Agreement other
than as provided under Section 6.7.1 above:
(i) InfoSpace will deliver all Data, Listings, records and all other
materials relating thereto, to a database or other location, and in form,
as is reasonably requested by AOL. InfoSpace will also deliver to AOL any
Custom Development Deliverable and AOL will have a perpetual, non-
exclusive, worldwide, royalty free, right to use, reproduce, transmit,
perform, display, sublicense and otherwise utilize the Custom Development
Deliverables, or any modification or derivative product thereof, in
connection with an AOL classifieds product. All such licenses granted under
this paragraph will survive the termination of this Agreement.
(ii) for a transition period of forty-five (45) days after any such
cancellation, termination, or expiration, InfoSpace will, at AOL's option,
continue to manage the AOL Classifieds in accordance with the provisions of
Section 3 above; provided that AOL will pay a management fee to InfoSpace
which shall be equal to a prorated amount of the annual fee otherwise
payable by AOL to InfoSpace under Section 5.1(i) above for such period.
(iii) AOL will pay to InfoSpace any fees, reimbursable expenses,
compensation or other amounts payable to InfoSpace prior to the date of
termination of this Agreement;
(iv) unless otherwise noted herein, and after any applicable
transition period, the license granted in Section 4.3 and any other rights
granted to AOL with respect to any of the Licensed Products or Custom
Development Deliverables and any related documentation will terminate
effective as of the date of termination of this Agreement;
(v) unless otherwise noted herein, and after any applicable transition
period, AOL will cease use of the Licensed Products and all related
documentation, and, at InfoSpace's election, return or destroy (and so
certify in a written certification of such destruction to InfoSpace) any
and all copies of the Licensed Products and related documentation in AOL's
possession or control; and
(vi) any and all liabilities accrued under the terms of this Agreement
by either Party prior to the date of termination of this Agreement will
survive such termination.
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6.7.3 Upon any termination or cancellation of this Agreement,
InfoSpace will deliver to AOL the source code and any other code,
documentation and other information with respect to the Proofing Tool
necessary to transfer control and operation of such tool to AOL (if such
delivery has not otherwise already taken place hereunder at the request of
AOL).
7. OTHER TERMS
The Standard Legal Terms and Conditions set for on Exhibit C hereto are
hereby incorporated in and made a part of this Agreement.
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IN WITNESS WHEREOF, the parties to this Agreement by their duly authorized
representatives have executed this Agreement as of the date first above written.
AMERICA ONLINE, INC. INFOSPACE, INC.
By: /s/ David M. Colburn By: /s/ Naveen Jain
--------------------------------- ----------------------------------
Print Name: David M. Colburn Print Name: Naveen Jain
------------------------- --------------------------
Title: SVP, Business Affairs Title: President & CEO
------------------------------ -------------------------------
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EXHIBIT A
SPECIFICATIONS
[*]
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EXHIBIT B
OPERATING STANDARDS
1. General. The AOL Classifieds (including the Products and other Content
contained therein) will be in the top three (3) in the classifieds
category, as determined by each of the following methods: (a) based on a
cross-section of third-party reviewers who are recognized authorities in
such industry and (b) with respect to all material quality averages or
standards in such industry, including each of the following: (i) pricing
of Products, (ii) scope and selection of Products, (iii) quality of
Products, (iv) customer service and fulfillment associated with the
marketing and sale of Products and (v) ease of use. In addition, the AOL
Classifieds will, with respect to each of the measures listed above, be
competitive in all respects with that which is offered by any InfoSpace
competitors in the classifieds industry.
2. Hosting; Capacity. InfoSpace will provide all computer hardware (e.g.,
servers, routers, network devices, switches and associated hardware) in an
amount necessary to meet anticipated traffic demands, adequate power supply
(including generator back-up) and HVAC, adequate insurance, adequate
service contracts and all necessary equipment racks, floor space, network
cabling and power distribution to support the AOL Classifieds. Should AOL
exercise its option to host AOL Classifieds at an AOL data center, pursuant
to Section 3.5, InfoSpace will provide all computer hardware (e.g.,
servers, network devices, and associated hardware) in an amount necessary
to meet anticipated traffic demands, adequate insurance, and adequate
service contracts. AOL will provide adequate power supply (including
generator back-up) and HVAC, adequate insurance, adequate service contracts
and all necessary equipment racks, floor space, network cabling and power
distribution to support the computer hardware. InfoSpace is fully
responsible for the maintenance and the day-to-day operation of the AOL
Classifieds implementation; provided that in the event that AOL is hosting
the AOL Classifieds, InfoSpace will not be responsible for the hosting and
operations of the AOL Classifieds taken over by AOL as a result of such
hosting hereunder. InfoSpace will provide AOL with a detailed Network
diagram. In addition, InfoSpace will provide AOL with detailed information
regarding separate file downloads available from the AOL Classifieds,
including file size, type and download/installation procedures.
3. Speed; Accessibility. InfoSpace will ensure that the performance and
availability of the AOL Classifieds (a) is monitored on a continuous, 24/7
basis and (b) remains competitive in all material respects with the
performance and availability of other similar sites based on similar form
technology. InfoSpace will use commercially reasonable efforts to ensure
that: (a) the functionality and features within the AOL Classifieds are
optimized for the client software then in use by AOL Users; and (b) the AOL
Classifieds is designed and populated in a manner that minimizes delays
when AOL Users attempt to access such site. At a minimum, InfoSpace will
ensure that AOL Classifieds data transfer initiates within fewer than five
(5) seconds on average. Prior to launch of any promotions described
herein, InfoSpace will permit AOL to conduct performance and/or load
testing of the AOL Classifieds (in person or through remote communications)
until AOL is reasonably satisfied that launch can occur, to include but not
be limited to the following:
. AOL Compatibility Testing
. AOL Client V3.0, Windows 95/Macintosh, Browser: MSIE 3.X/MSIE 2.1
. AOL Client V4.0, Windows 95/Macintosh, Browser: MSIE 3.X
. Caching Implementation
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. Graphics Quality
. User Interface and Functional Testing
. Review of Advanced Web Technologies
. Load Testing
. Website Architecture
. Hardware
. Network Configuration
. Software (Web Servers, Databases, etc.)
. Network Redundancy and Reliability
. Performance Thresholds
. Network Bandwidth
. Web Server Capacity
. Simultaneous Users
. Electronic CommerceEncryption Validation
. Encryption Technology (SSL V2/V3, PCT )
. Commerce Implementation Review (Cookies, iCat, Webforce, etc.)
. Review Facility Physical Security
. Review Safeguards Related to Private Customer Information.
4. User Interface. InfoSpace will maintain a graphical user interface within
the AOL Classifieds that is competitive in all material respects with
interfaces of other similar sites based on similar form technology. AOL
reserves the right to review and approve the user interface and site design
prior to launch of the Promotions and to conduct focus group testing to
assess compliance with respect to such consultation and with respect to
InfoSpace's compliance with the preceding sentence.
5. Service Level Response. InfoSpace agrees to use commercially reasonable
efforts to provide the following service levels in response to problems
with or improvements to the AOL Classifieds:
. For material functions of software that are or have become
substantially inoperable (e.g., inability to access website or conduct
transactions), InfoSpace will provide a bug fix or workaround within
four (4) hours after the first report of such error to AOL and
InfoSpace.
. For functions of the software that are impaired or otherwise fail to
operate in accordance with agreed upon specifications (e.g., search
engine), InfoSpace will provide a bug fix or workaround within twenty-
four (24) hours after the first report of such error to AOL and
InfoSpace.
. For errors disabling only certain non-essential functions (e.g.,
broken links or noncritical applications), InfoSpace will provide a
bug fix or workaround within fourteen (14) days after the first report
of such error to AOL and InfoSpace.
. For all other errors, InfoSpace will address these requests on a case-
by-case basis as soon as reasonably feasible.
6. Monitoring. InfoSpace will provide AOL with InfoSpace's detailed
escalation procedures (e.g., contact names and notification mechanisms such
as email, phone, page, etc.) and notification of any scheduled or
unscheduled downtimes. AOL Network Operations Center will work with
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InfoSpace's designated technical contacts in the event of any performance
malfunction or other emergency related to the AOL Classifieds and will
either assist or work in parallel with InfoSpace's contact using InfoSpace
tools and procedures, as applicable. The Parties will develop a process to
monitor performance and member behavior with respect to access, capacity,
security and related issues both during normal operations and during
special promotions/events.
7. Telecommunications. The Parties agree to explore encryption methodology to
secure data communications between the Parties' data centers such that no
private member information requested by the InfoSpace will be transferred
unencrypted. The network between the Parties will be configured such that
no single component failure will significantly impact AOL Users. The
network will be sized such that no single line runs at more than 70%
average utilization for a 5-minute peak in a daily period. Should AOL
exercise its option to host AOL Classifieds at an AOL data center, pursuant
to Section 3.5, AOL will be responsible for appropriate sizing on the
network to ensure AOL member access to the AOL Classifieds.
8. Security Review. InfoSpace and AOL will work together to perform an
initial security review of, and to perform tests of, the InfoSpace system,
network, and service security in order to evaluate the security risks and
provide recommendations to InfoSpace, including periodic follow-up reviews
as reasonably required by InfoSpace or AOL. InfoSpace will use
commercially reasonable best efforts to fix any security risks or breaches
of security as may be identified by AOL's Operations Security. Specific
services to be performed on behalf of AOL's Operations Security team will
be as determined by AOL in its sole discretion.
9. Technical Performance. InfoSpace will perform the following technical
obligations (and any reasonable updates thereto from time to time by AOL):
. InfoSpace will design the AOL Classifieds to support the Windows
version of the Microsoft Internet Explorer 3.0 and 4.0 browser, the
Macintosh version of the Microsoft Internet Explorer 2.1 and 3.0, and
make commercially reasonable efforts to support all other AOL browsers
listed at: "http://webmaster.info.aol.com/BrowTable.html."
. InfoSpace will configure the server from which it serves the site to
examine the HTTP User-Agent field in order to identify the "AOL
Member-Agents" listed at:
"http://webmaster.info.aol.com/Brow2Text.html."
. InfoSpace will design its site to support HTTP 1.0 or later protocol
as defined in RFC 1945 (available at
"http://ds.internic.net/rfc/rfc1945.text") and to adhere to AOL's
parameters for refreshing cached information listed at
http://webmaster.info.aol.com/CacheText.html.
10. AOL Internet Services Partner Support. AOL will provide InfoSpace with
access to the standard online resources, standards and guidelines
documentation, technical phone support, monitoring and after-hours
assistance that AOL makes generally available to similarly situated web-
based partners. AOL support will not, in any case, be involved with
content creation on behalf of InfoSpace or support for any technologies,
databases, software or other applications which are not supported by AOL or
are related to any InfoSpace area other than the AOL Classifieds. Support
to be provided by AOL is contingent on InfoSpace providing to AOL demo
account information (where applicable), a detailed description of the AOL
Classifieds software, hardware and network architecture and access to the
AOL Classifieds for purposes of such performance and load testing
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as AOL elects to conduct. As described elsewhere in InfoSpace's principal
agreement with AOL, InfoSpace is fully responsible for all aspects of
hosting and administration of the AOL Classifieds and must ensure that the
site satisfies the specified access and performance requirements as
outlined in this Exhibit.
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EXHIBIT C
STANDARD LEGAL TERMS & CONDITIONS
1. Promotional Materials/Press Releases. InfoSpace will not release any
marketing, advertising, press releases, or any other promotional materials
related to the AOL Classifieds and/or referencing the AOL and/or its trade
names, trademarks, and service marks (the "Materials") without the express
written consent of AOL, provided, however, that, following the initial public
announcement of the business relationship between the Parties in accordance with
the approval and other requirements contained herein, InfoSpace's subsequent
factual reference to the existence of a business relationship between the
Parties will not require the approval of AOL. Once approved, the Materials may
be used by InfoSpace for the purpose of promoting the AOL Classifieds and reused
for such purpose until such approval is withdrawn with reasonable prior notice.
Notwithstanding the foregoing, InfoSpace may issue press releases and other
disclosures as required by law or as reasonably advised by legal counsel without
the consent of AOL and in such event, prompt notice thereof will be provided to
AOL.
2. Trademark License. In designing and implementing any Materials and
subject to the other provisions contained herein, InfoSpace will be entitled to
use the following trade names, trademarks, and service marks of AOL: the
"America Online" brand service, "AOL" service/software and AOL's triangle logo;
and AOL and its affiliates will be entitled to use the trade names, trademarks,
and service marks of InfoSpace for which InfoSpace holds all rights necessary
for use in connection with this Agreement (collectively, together with the AOL
marks listed above, the "Marks"); provided that each Party: (i) does not create
a unitary composite mark involving a Mark of the other Party without the prior
written approval of such other Party; and (ii) displays symbols and notices
clearly and sufficiently indicating the trademark status and ownership of the
other Party's Marks in accordance with applicable trademark law and practice.
3. Ownership of Trademarks. Each Party acknowledges the ownership of the
other Party in the Marks of the other Party and agrees that all use of the other
Party's Marks will inure to the benefit, and be on behalf, of the other Party.
Each Party acknowledges that its utilization of the other Party's Marks will not
create in it, nor will it represent it has, any right, title, or interest in or
to such Marks other than the licenses expressly granted herein. Each Party
agrees not to do anything contesting or impairing the trademark rights of the
other Party.
4. Quality Standards. Each Party agrees that the nature and quality of
its products and services supplied in connection with the other Party's Marks
will conform to quality standards set by the other Party. Each Party agrees to
supply the other Party, upon request, with a reasonable number of samples of any
Materials publicly disseminated by such Party which utilize the other Party's
Marks. Each Party will comply with all applicable laws, regulations, and
customs and obtain any required government approvals pertaining to use of the
other Party's marks.
5. Infringement Proceedings. Each Party agrees to promptly notify the
other Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
6. Representations and Warranties. Each Party represents and warrants to
the other Party that: (i) such Party has the full corporate
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right, power and authority to enter into this Agreement and to perform the acts
required of it hereunder; (ii) the execution of this Agreement by such Party,
and the performance by such Party of its obligations and duties hereunder, do
not and will not violate any agreement to which such Party is a party or by
which it is otherwise bound; (iii) when executed and delivered by such Party,
this Agreement will constitute the legal, valid and binding obligation of such
Party, enforceable against such Party in accordance with its terms; and (iv)
such Party acknowledges that the other Party makes no representations,
warranties or agreements related to the subject matter hereof that are not
expressly provided for in this Agreement.
7. Confidentiality. Each Party acknowledges that Confidential
Information may be disclosed to the other Party during the course of this
Agreement. Each Party agrees that it will take reasonable steps, at least
substantially equivalent to the steps it takes to protect its own proprietary
information, during the term of this Agreement, and for a period of three years
following expiration or termination of this Agreement, to prevent the
duplication or disclosure of Confidential Information of the other Party, other
than by or to its employees or agents who must have access to such Confidential
Information to perform such Party's obligations hereunder, who will each agree
to comply with this section. Notwithstanding the foregoing, either Party may
issue a press release or other disclosure containing Confidential Information
without the consent of the other Party, to the extent such disclosure is
required by law, rule, regulation or government or court order. In such event,
the disclosing Party will provide at least five (5) business days prior written
notice of such proposed disclosure to the other Party. Further, in the event
such disclosure is required of either Party under the laws, rules or regulations
of the Securities and Exchange Commission or any other applicable governing
body, such Party will (i) redact mutually agreed-upon portions of this Agreement
to the fullest extent permitted under applicable laws, rules and regulations and
(ii) submit a request to such governing body that such portions and other
provisions of this Agreement receive confidential treatment under the laws,
rules and regulations of the Securities and Exchange Commission or otherwise be
held in the strictest confidence to the fullest extent permitted under the laws,
rules or regulations of any other applicable governing body.
8.1. No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS
ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL
NETWORK, THE AOL SERVICE, AOL.COM OR THE AOL CLASSIFIEDS, THE AOL PROPERTY, THE
LICENSED PRODUCTS AND THE CUSTOM DEVELOPMENT DELIVERABLES, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED
WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
8.2. Indemnity. Either Party will defend, indemnify, save and hold
harmless the other Party and the officers, directors, agents, affiliates,
distributors, franchisees and employees of the other Party from any and all
third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from (i) the indemnifying
Party's material breach of any duty, representation, or warranty of this
Agreement and (ii) the supply by the indemnifying Party for use on the AOL
Classified, or the integration by the indemnifying Party into the AOL
Classifieds of any software, design materials, content or other materials which
breach any third party intellectual property right.
8.3. Claims. If a Party entitled to indemnification hereunder (the
"Indemnified Party") becomes aware of any matter it believes is indemnifiable
hereunder involving any claim, action, suit, investigation, arbitration or other
proceeding against the Indemnified Party by any third party (each an "Action"),
the Indemnified Party will give the other Party (the "Indemnifying Party")
prompt written notice of such Action. Such notice will (i) provide the basis on
which indemnification is being asserted and (ii) be accompanied by copies of all
relevant pleadings,
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demands, and other papers related to the Action and in the possession of the
Indemnified Party. The Indemnifying Party will have a period of ten (10) days
after delivery of such notice to respond. If the Indemnifying Party elects to
defend the Action or does not respond within the requisite ten (10) day period,
the Indemnifying Party will be obligated to defend the Action, at its own
expense, and by counsel reasonably satisfactory to the Indemnified Party. The
Indemnified Party will cooperate, at the expense of the Indemnifying Party, with
the Indemnifying Party and its counsel in the defense and the Indemnified Party
will have the right to participate fully, at its own expense, in the defense of
such Action. If the Indemnifying Party responds within the required ten (10) day
period and elects not to defend such Action, the Indemnified Party will be free,
without prejudice to any of the Indemnified Party's rights hereunder, to
compromise or defend (and control the defense of) such Action. In such case, the
Indemnifying Party will cooperate, at its own expense, with the Indemnified
Party and its counsel in the defense against such Action and the Indemnifying
Party will have the right to participate fully, at its own expense, in the
defense of such Action. Any compromise or settlement of an Action will require
the prior written consent of both Parties hereunder, such consent not to be
unreasonably withheld or delayed.
8.4. Acknowledgment. AOL and InfoSpace each acknowledges that the
provisions of this Agreement were negotiated to reflect an informed, voluntary
allocation between them of all risks (both known and unknown) associated with
the transactions contemplated hereunder. The limitations and disclaimers
related to warranties and liability contained in this Agreement are intended to
limit the circumstances and extent of liability. The provisions of this Section
9 will be enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
9. Solicitation of AOL Users. During the term of this Agreement, and for
the two-year period following the expiration or termination of this Agreement,
neither InfoSpace nor its agents will use the AOL Network to (i) solicit, or
participate in the solicitation of AOL Users when that solicitation is for the
benefit of any entity (including InfoSpace) which could reasonably be construed
to be or become in competition with AOL or (ii) promote any services which could
reasonably be construed to be in competition with AOL including, but not limited
to, services available through the Internet. In addition, InfoSpace may not
send AOL Users e-mail communications promoting InfoSpace's products through the
AOL Network without a "Prior Business Relationship." For purposes of this
Agreement, a "Prior Business Relationship" will mean that the AOL User has
either (i) engaged in a transaction with InfoSpace through the AOL Network or
(ii) voluntarily provided information to InfoSpace through a contest,
registration, or other communication, which included notice to the AOL User that
the information provided by the AOL User could result in an e-mail being sent to
that AOL User by InfoSpace or its agents. A Prior Business Relationship does
not exist by virtue of an AOL User's visit to the AOL Classifieds or any
InfoSpace Site (absent the elements above). More generally, InfoSpace will be
subject to any standard policies regarding e-mail distribution through the AOL
Network which AOL may implement.
10. Collection and Use of User Information. InfoSpace is prohibited from
collecting AOL User screennames and any other AOL User data through the AOL
Classifieds and from public or private areas within the AOL Network ("User
Information"), except as specifically approved or directed by AOL. InfoSpace
will ensure that any survey, questionnaire or other means of collecting User
Information including, without limitation, requests directed to specific AOL
User screennames or email addresses and automated methods of collecting
screennames (an "Information Request") complies with (i) all applicable laws and
regulations, (ii) AOL's applicable Terms of Service, and (iii) any privacy
policies which have been issued by AOL in writing during the term (the
"Applicable Privacy Policies"). Each Information Request will clearly and
conspicuously specify to the AOL Users at issue the purpose for which User
Information collected
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through the Information Request will be used (the "Specified Purpose").
11. Use of User Information. InfoSpace will not use any User Information
for any purpose other than as specifically directed or approved in writing by
AOL. By way of example and without limitation, InfoSpace will not (i) provide
User Information to any third party, (ii) rent, sell or barter User Information,
(iii) identify, promote or otherwise disclose such User Information in a manner
that identifies AOL Users as end-users of the AOL Network or (iv) otherwise use
any User Information in contravention of Section 10 above.
12. Independent Contractors. The Parties to this Agreement are
independent contractors. Neither Party is an agent, representative or partner
of the other Party. Neither Party will have any right, power or authority to
enter into any agreement for or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other Party. This Agreement will not be
interpreted or construed to create an association, agency, joint venture or
partnership between the Parties or to impose any liability attributable to such
a relationship upon either Party.
13. Notice. Any notice, approval, request, authorization, direction or
other communication under this Agreement will be given in writing and will be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered by electronic mail on the AOL Network (to screenname
"[email protected]" in the case of AOL) or by confirmed facsimile; (ii) on the
delivery date if delivered personally to the Party to whom the same is directed;
(iii) one business day after deposit with a commercial overnight carrier, with
written verification of receipt; or (iv) five business days after the mailing
date, whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available. In the case of AOL, such notice will
be provided to both the Senior Vice President for Business Affairs (fax no. 703-
265-1206) and the Deputy General Counsel (fax no. 703-265-1105), each at the
address of AOL set forth in the first paragraph of this Agreement. In the case
of InfoSpace, except as otherwise specified herein, the notice address will be
the address for InfoSpace set forth in the first paragraph of this Agreement,
with the other relevant notice information, including the recipient for notice
and, as applicable, such recipient's fax number or AOL e-mail address, to be as
reasonably identified by AOL.
14. Launch Dates. In the event that any terms contained herein relate to
or depend on the commercial launch date of AOL Classifieds contemplated by this
Agreement (the "Launch Date"), then it is the intention of the Parties to record
such Launch Date in a written instrument signed by both Parties promptly
following such Launch Date; provided that, in the absence of such a written
instrument, the Launch Date will be as reasonably determined by AOL based on the
information available to AOL.
15. No Waiver. The failure of either Party to insist upon or enforce
strict performance by the other Party of any provision of this Agreement or to
exercise any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect.
16. Return of Information. Upon the expiration or termination of this
Agreement, each Party will, upon the written request of the other Party, return
or destroy (at the option of the Party receiving the request) all confidential
information, documents, manuals and other materials specified the other Party.
17. Survival. Sections 2.6, 4.4 and 5 of the body of the Agreement and
Sections 8 through 28 of this Exhibit, will survive the completion, expiration,
termination or cancellation of this Agreement.
18. Entire Agreement. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth
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herein. Neither Party will be bound by, and each Party specifically objects to,
any term, condition or other provision which is different from or in addition to
the provisions of this Agreement (whether or not it would materially alter this
Agreement) and which is proffered by the other Party in any correspondence or
other document, unless the Party to be bound thereby specifically agrees to such
provision in writing.
19. Amendment. No change, amendment or modification of any provision of
this Agreement will be valid unless set forth in a written instrument signed by
the Party subject to enforcement of such amendment, and in the case of AOL, by
an executive of at least the same standing to the executive who signed the
Agreement.
20. Further Assurances. Each Party will take such action (including, but
not limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
21. Assignment. InfoSpace will not assign this Agreement or any right,
interest or benefit under this Agreement without the prior written consent of
AOL. Assumption of the Agreement by any successor to InfoSpace (including,
without limitation, by way of merger or consolidation) will be subject to AOL's
prior written approval. Subject to the foregoing, this Agreement will be fully
binding upon, inure to the benefit of and be enforceable by the Parties hereto
and their respective successors and assigns.
22. Construction; Severability. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision will be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
effect.
23. Remedies. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to, and
not in lieu of, any other rights or remedies which the Party may possess at law
or in equity; provided that, in connection with any dispute hereunder, InfoSpace
will be not entitled to offset any amounts that it claims to be due and payable
from AOL against amounts otherwise payable by InfoSpace to AOL.
24. Applicable Law. Except as otherwise expressly provided herein, this
Agreement will be interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia except for its
conflicts of laws principles.
25. Export Controls. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
26. Headings. The captions and headings used in this Agreement are
inserted for convenience only and will not affect the meaning or interpretation
of this Agreement.
27. Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute one
and the same document.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
InfoSpace.com, Inc.
Redmond, Washington
We consent to the use in this Amendment No. 1 to the Registration Statement (No.
333-62323) of InfoSpace.com, Inc. on Form S-1 of our report dated August 25,
1998 on the financial statements of InfoSpace.com, Inc., appearing in the
Prospectus, which is a part of the Registration Statement, and to the
references to us under the headings "Selected Consolidated Financial Data" and
"Experts" in such Prospectus. We also consent to the use in this Amendment No. 1
to the Registration Statement of our report dated July 27, 1998 on the financial
statements of Outpost Network, Inc.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
October 5, 1998
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned, Carl Stork, hereby authorizes and appoints Naveen Jain and
Ellen B. Alben, and each of them, with full power of substitution and
resubstitution and full power to act without the other, as his true and lawful
attorney-in-fact and agent to act in his name, place and stead and to execute in
the name and on behalf of him, individually and in each capacity stated below,
and to file, any and all amendments to this Registration Statement, including
any and all post-effective amendments and amendments thereto and any
registration statement relating to the same offering as this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing, ratifying and confirming all that said attorneys-in-fact and agents or
any of them or their and his or her substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
/s/ Carl Stork
-----------------------------
Carl Stork
October 2, 1998
